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, 1998.     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 12, 1999 (based upon reports of beneficial  ownership  that  approximately
81%  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 $58 per share) was $69,034,000.

The number of shares  outstanding of the  Registrant's  common stock as of March
12, 1999 is 1,469,443 shares of no par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement dated March 22, 1999, for the Annual Meeting of
the  Shareholders  of the  Registrant  to be held  April  19,  1999  (the  Proxy
Statement) are incorporated by reference in Part III of this Form 10-K.

                                  EXHIBIT INDEX

The exhibits index is on Page __.


<PAGE>


Part I

Item 1.   Business

Hills  Bancorporation (the "Company") is a multibank holding company principally
engaged in the business of banking. Its three wholly-owned  subsidiary banks are
Hills Bank and Trust Company,  Hills, Iowa ("Hills Bank and Trust"); Hills Bank,
Lisbon, Iowa ("Hills Bank Lisbon");  and Hills Bank Kalona, Kalona, Iowa ("Hills
Bank Kalona") (hereinafter collectively referred to as the "Banks").

The Company was incorporated  December 12, 1982 and all operations are conducted
within the state of Iowa.  The Company  became owner of 100% of the  outstanding
stock of Hills Bank and Trust as of January 23, 1984 when  stockholders of Hills
Bank and Trust exchanged their shares for shares of the Company.  Effective July
1, 1996, the Company acquired for cash all the outstanding  shares of Hills Bank
Lisbon and on  September  20, 1996,  Hills Bank Kalona  acquired  cash,  certain
assets and assumed the  deposits of the Kalona,  Iowa office of  Boatmen's  Bank
Iowa, N.A.

The Banks are all  full-service  commercial  banks  extending  their services to
individuals, business, governmental units, and institutional customers primarily
in the communities of Hills, Iowa City, Coralville, North Liberty, Lisbon, Mount
Vernon and Kalona and the surrounding area. This area includes parts of Johnson,
Linn,  and  Washington  counties.  All of the Banks are 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.  Hills
Bank  and  Trust  administers   estates,   personal  trusts,   and  pension  and
profit-sharing funds and, in connection therewith,  provides for farm management
and investment advisory and custodial services for individuals, corporations and
nonprofit organizations.  At this time, trust services are available only at the
Hills Bank and Trust  locations.  The loan activity of the Banks 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 Banks  earn  substantial  fees  from  originating
mortgages that are sold in the secondary  residential real estate market without
mortgage servicing rights being maintained.

Each Bank has established formal loan origination policies. In general, the loan
origination  policies  require  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 payment.

The Banks'  business  is not  seasonal,  except that loan  origination  fees are
higher  during  the  spring and  summer  months.  The Banks have not  undertaken
significant new services during the current year that might exceed the limits of
their human resources and data processing capabilities.

Iowa City,  Coralville,  Hills and North Liberty are located near  Interstate 80
and  Interstate  380 in Eastern  Iowa.  The  communities  have a  population  of
approximately  80,000 and Johnson County, Iowa has a population of approximately
106,000.  The  University  of Iowa has over 27,000  students and 23,000 full and
part-time 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 economic growth in the past ten years. The area is known for its
educational  institutions,  health care facilities,  cultural and sports events,
and retail centers.

Hills Bank Lisbon is located in Lisbon,  Iowa (Linn  County),  approximately  25
miles  north  of Iowa  City  and does not  conduct  business  in the same  trade
territories  as Hills Bank and Trust.  Lisbon has a population of  approximately
1,500 and Mount Vernon,  located two miles away,  has a population of 3,700.  In
February 1998,  Hills Bank Lisbon opened a new office  location in Mount Vernon.
This 4,200 square foot one-story  full-service  location has four drive-up lanes
and  a  drive-up   automatic   teller  machine.   Both  communities  are  strong
economically  and are easy  commuting  distances  to Cedar Rapids and Iowa City,
Iowa.  In  addition,  Mount  Vernon is the home of  Cornell  College,  which has
approximately 1,200 students.

Hills Bank Kalona is located in Kalona, Iowa (Washington County),  approximately
20 miles south of Iowa City with a population  of  approximately  2,000  people.
Kalona is  primarily  an  agricultural  community,  but is located  within  easy
driving distance for employment in Iowa City and Washington, Iowa.
<PAGE>


The commercial banking business is highly competitive and the Banks compete with
other  commercial  banks,  credit unions,  brokerage firms,  finance  companies,
insurance companies, and other financial institutions.

Iowa's banking laws regarding  interstate  banking and interstate  branching are
currently more restrictive than many other states.  As a result of the enactment
of the Riegle-Neal  Interstate Banking and Branching Efficiency Act of 1994 many
of  the  state-imposed  geographic  limitations  on  bank  ownership  have  been
liberalized.  The  1994  Act  expanded  opportunities  for  interstate  banking,
interstate  mergers,  and  interstate  branching  in the United  States.  First,
subject to certain  limitations,  bank holding  companies  from  anywhere in the
United States are able to acquire Iowa banks with the  permission of the Federal
Reserve  Board.  Second,  the 1994 Act authorizes a national or state bank which
has its main office in another  state to merge with an Iowa bank and operate the
Iowa location as a branch office.  However,  out-of-state bank holding companies
cannot  acquire Iowa  commercial  banks unless such banks have been in existence
for at least five years. Hills Bank Kalona has been in existence since September
20, 1996.  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 Bank Iowa, N.A.,  Mercantile  Bancorporation,  Firstar
Corporation,  Commercial Federal Bank, and NationsBank have acquired a number of
independent   banks  and  smaller   multibank   holding   companies  in  various
metropolitan  areas of Iowa.  Each operates  under a single  charter in Iowa. In
September 1998, the Company's  largest  competing bank in Iowa City, with assets
of approximately $550 million, was acquired by Mercantile Bancorporation.

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. Effective July 1, 1998,
the number of bank branch offices  allowed within a municipal  corporation or an
urban  complex  is  unlimited.  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  or any  other
location  in Iowa 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."


Hills Bank and Trust Company is in direct  competition  for deposits,  loans and
other financial  related  business with other financial  institutions in Johnson
County,  Iowa.  The largest  competitor is believed to be a branch of Mercantile
Bancorporation,   which  does  not  disclose  local  assets.  Other  independent
financial institutions are:

                                                                     Approximate
                                                                    Assets As Of
                                                                    December 31,
                                                                        1998
                                                                   -------------
                                                                   (In Millions)

Largest competing bank ........................................         $359
Next largest competing bank ...................................          125
Largest competing credit union ................................          185

Hills Bank Kalona and Hills Bank Lisbon  compete with other banks in their trade
territories.  Management  estimates  that these  banks hold less than 40% of the
deposits in their respective communities.

No material  portion of the Banks'  deposits  have been  obtained  from a single
person or a few persons. Accordingly,  management of the Banks have no reason to
believe that the loss of the deposits of any person or few persons  would have a
materially  adverse  effect on the Banks'  operations or erode its deposit base.
Approximately 6.9% of the Banks' loans have been made for agricultural purposes.
The  agricultural  sector of the economy has been  cyclical with a general trend
toward fewer and larger farms. The Banks have not experienced a material adverse
effect on their  business  as a result of  defaults  on  agricultural  loans and
expects none in the future.
<PAGE>


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

As the Year 2000 approaches,  an important  business issue has emerged regarding
how existing  application  software and operating  systems can accommodate  this
date value.  Many  existing  application  software  products  were  developed to
accommodate a two-digit  year.  Due to the nature of the banking  industry,  the
subsidiary banks are heavily reliant on data processing, causing the "Year 2000"
issue to be a critical  issue for the  Company.  This issue is discussed in more
detail in Item 7, "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations."

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

The Company is regulated by the Federal Reserve Bank.

All the Banks are regulated by the Federal Deposit Insurance Corporation and the
State of Iowa Division of Banking.

The Company had no  employees  as of December  31,  1998,  and the Banks had 216
regular and 74 part-time employees.

The following  consolidated  statistical  information reflects selected balances
and operations of the Company and the Banks for the periods  indicated.  Average
refers to an average daily basis for the periods stated.

The following tables show (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
(Average Daily Basis)
<TABLE>

                                                                                     Year Ended December 31,
                                                                                  ----------------------------
                                                                                    1998      1997      1996
                                                                                  ----------------------------
<S>                                                                               <C>       <C>       <C>   
                                                                                        (In Thousands)
ASSETS
   Cash and due from banks .....................................................  $ 13,441  $ 12,689  $  9,987
   Taxable securities ..........................................................   111,099   110,542   107,106
   Nontaxable securities .......................................................    30,122    25,184    22,291
   Federal funds sold ..........................................................    23,279     3,032     9,159
   Loans, net ..................................................................   438,072   397,787   337,630
   Property and equipment, net .................................................    10,410     8,603     7,516
   Other assets ................................................................    16,098    14,829    11,091
                                                                                  ----------------------------
                                                                                  $642,521  $572,666  $504,780
                                                                                  ============================

LIABILITIES AND STOCKHOLDERS' EQUITY
   Noninterest-bearing demand deposits .........................................  $ 52,538  $ 48,330  $ 39,929
   Interest-bearing demand deposits ............................................    46,874    43,262    37,310
   Savings deposits ............................................................   131,988   119,282   102,849
   Time deposits ...............................................................   262,111   250,241   234,825
   Securities sold under agreements to repurchase
      and federal funds purchased ..............................................     7,974     8,740     7,607
   FHLB borrowings .............................................................    75,262    43,026    28,914
   Other liabilities ...........................................................     4,250     4,255     3,509
   Redeemable common stock held by
      Employee Stock Ownership Plan ............................................     8,491     7,049     5,844
   Stockholders' equity ........................................................    53,033    48,481    43,993
                                                                                  ----------------------------
                                                                                  $642,521  $572,666  $504,780
                                                                                  ============================
</TABLE>
<PAGE>


PART I

Item 1.   Business (Continued)

INTEREST INCOME AND EXPENSE

                                                    Year Ended December 31,
                                                  --------------------------
                                                    1998     1997     1996
                                                  --------------------------
                                                       (In Thousands)

Income:
   Loans (1) .................................... $ 38,039 $ 34,814 $ 29,966
   Taxable securities ...........................    6,832    6,769    6,190
   Nontaxable securities (1) ....................    2,112    1,845    1,692
   Federal funds sold ...........................    1,209      158      485
                                                  --------------------------
              Total interest income .............   48,192   43,586   38,333
                                                  --------------------------

Expense:
   Interest-bearing demand deposits .............      997      949      819
   Savings deposits .............................    4,648    4,183    3,668
   Time deposits ................................   14,813   14,162   13,275
   Securities sold under agreements to repurchase      417      426      326
   FHLB borrowings ..............................    4,379    2,782    1,863
                                                  --------------------------
              Total interest expense ............   25,254   22,502   19,951
                                                  --------------------------

              Net interest income ............... $ 22,938 $ 21,084 $ 18,382
                                                  ==========================

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






<PAGE>


PART I

Item 1.   Business (Continued)

INTEREST RATES AND INTEREST DIFFERENTIAL

                                                         Year Ended December 31,
                                                         -----------------------
                                                           1998    1997    1996
                                                         -----------------------

Average yields:
   Taxable securities ..................................   6.15%   6.12%   5.78%
   Nontaxable securities ...............................   4.63    4.84    5.01
   Nontaxable securities (tax equivalent basis) ........   7.01    7.33    7.59
   Loans (1) ...........................................   8.64    8.70    8.80
   Loans (tax equivalent basis) ........................   8.68    8.75    8.87
   Federal funds sold ..................................   5.19    5.21    5.30
   Interest-bearing demand deposits ....................   2.13    2.19    2.20
   Savings deposits ....................................   3.52    3.51    3.57
   Time deposits .......................................   5.65    5.66    5.65
   Securities sold under agreements to repurchase ......   5.23    4.87    4.29
   Interest on FHLB borrowings .........................   5.82    6.47    6.44
   Yield on average interest earning assets ............   8.00    8.12    8.05
   Rate on average interest-bearing liabilities ........   4.82    4.84    4.85
   Net interest spread (2) .............................   3.18    3.28    3.20
   Net interest margin (3) .............................   3.81    3.93    3.86

(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 and state tax
     rate of 34% and 5%, respectively, for the three years presented.

(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
<TABLE>

                                                             Change Due       Total
                                                         ------------------   -------
                                                         To Volume To Rates   Change
                                                         ----------------------------
                                                                 (In Thousands)
<S>                                                       <C>      <C>        <C>   
Year ended December 31, 1998: Change in interest income:
      Loans ............................................  $ 3,505  $   (280)  $ 3,225
      Taxable securities ...............................       32        31        63
      Nontaxable securities ............................      330       (63)      267
      Federal funds sold ...............................    1,052        (1)    1,051
                                                          ---------------------------
                                                            4,919      (313)    4,606
                                                          ---------------------------
   Change in interest expense:
      Interest-bearing demand deposits .................       75       (27)       48
      Savings deposits .................................      453        12       465
      Time deposits ....................................      676       (25)      651
      Securities sold under agreements to repurchase ...      (39)       30        (9)
      Interest on FHLB borrowings ......................    1,901      (304)    1,597
                                                          ---------------------------
                                                            3,066      (314)    2,752
                                                          ---------------------------
   Change in net interest income .......................  $ 1,853   $     1   $ 1,854
                                                          ===========================

Year ended December 31, 1997: Change in interest income:
      Loans ............................................  $ 5,259   $  (411)  $ 4,848
      Taxable securities ...............................      204       375       579
      Nontaxable securities ............................      213       (60)      153
      Federal funds sold ...............................     (319)       (8)     (327)
                                                          ---------------------------
                                                            5,357      (104)    5,253
                                                          ---------------------------
   Change in interest expense:
      Interest-bearing demand deposits .................      134        (4)      130
      Savings deposits .................................      578       (63)      515
      Time deposits ....................................      864        23       887
      Securities sold under agreements to repurchase ...       52        48       100
      Interest on FHLB borrowings ......................      910         9       919
                                                          ---------------------------
                                                            2,538        13     2,551
                                                          ---------------------------
   Change in net interest income .......................  $ 2,819  $   (117)  $ 2,702
                                                          ===========================
</TABLE>

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 for each of the last five years.

                                             December 31,
                           ------------------------------------------------
                             1998      1997       1996     1995      1994 
                           ------------------------------------------------
                                           (In Thousands)

Agricultural ............  $ 32,318  $ 27,636  $ 23,133  $ 19,000  $ 17,826
Commercial and financial     39,438    33,616    30,650    26,810    26,024
Real estate, construction    28,476     8,157     8,846     7,937     6,933
Real estate, mortgage ...   338,871   332,655   279,134   239,899   225,342
Loans to individuals ....    30,664    28,707    33,812    31,640    30,906
                           ------------------------------------------------
              Total .....  $469,767  $430,771  $375,575  $325,286  $307,031
                           ================================================

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,
1998:
<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 ........................   $ 71,756   $ 32,796  $ 29,608  $  9,352
Real estate, construction and mortgage ........................    367,347     69,312   153,064   144,971
Other .........................................................     30,664     10,421    19,700       543
                                                                  ---------------------------------------
                                                                  $469,767   $112,529  $202,372  $154,866
                                                                  =======================================

Interest rates on loans are as follows:

   Fixed rate .................................................   $308,578   $ 90,317  $194,682  $ 23,579
   Variable rate ..............................................    161,189     22,212     7,690   131,287
                                                                  ---------------------------------------
                                                                  $469,767   $112,529  $202,372  $154,866
                                                                  =======================================
<FN>
(1)  A significant portion of the commercial loans are 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 Company's nonaccrual,  past due, restructured
and impaired loans as of December 31 for each of the years presented:

                                           1998    1997    1996    1995    1994
                                          --------------------------------------
                                                     (In Thousands)

Nonaccrual loans .......................  $   12  $  - -  $  339  $  489 $   - -
Accruing loans past due 90 days
   or more .............................     945     954   1,092     417     822
Restructured loans                           - -     - -     - -     - -     - -
Impaired loans .........................   8,956   9,556   7,811   5,465     N/A

The Company 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  Company has no  individual  borrower  or  borrowers  engaged in the same or
similar  industry  exceeding  10% of  total  loans.  The  Company  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  partial
charge-offs have been taken to reduce the loan balances 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 Company's loan loss  experience for each of
the last five years:

                                               Year Ended December 31,
                                      ------------------------------------------
                                       1998     1997     1996    1995      1994
                                      ------------------------------------------
                                                  (In Thousands)

Amount of loan loss allowance at
   beginning of year ...............  $8,010   $7,311   $6,740   $6,210   $5,775
                                      ------------------------------------------
Charge-offs:
   Agriculture .....................       4      197      300      101      423
   Commercial and financial ........     431      326      236      387      334
   Real estate, mortgage ...........     132      215      127      180      172
   Loans to individuals ............     401      390      308      254      131
                                      ------------------------------------------
                                         968    1,128      971      922    1,060
                                      ------------------------------------------
Recoveries:
   Agriculture .....................     125       65       48      218      368
   Commercial and financial ........     256      195       95      226      206
   Real estate, mortgage ...........     100      377      215      149      154
   Loans to individuals ............     417      142       80      137      126
                                      ------------------------------------------
                                         898      779      438      730      854
                                      ------------------------------------------
Net charge-offs ....................      70      349      533      192      206
                                      ------------------------------------------
Allowances of acquired banks .......     - -      - -      350      - -      - -
                                      ------------------------------------------
Provision for loan losses (1) ......     916    1,048      754      722      641
                                      ------------------------------------------
Balance of loan loss allowance
   at end of year ..................  $8,856   $8,010   $7,311   $6,740   $6,210
                                      ==========================================

Ratio of net charge-offs during year
   to average loans outstanding ....   0.02%    0.09%    0.16%    0.06%    0.07%
                                      ==========================================

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  1999 that  would be  significantly
different than the years ended December 31, 1998, 1997, 1996, 1995 and 1994.

(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.

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The Banks review and place in risk categories  specific  borrowings.  Based upon
the risk category  assigned,  the Banks allocate a percentage,  as determined by
management,  for a required allowance needed. The 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
<PAGE>


In  addition,   each  bank's  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, 1998).

A summary of the components of the allowance for loan loss, by risk category, as
of December 31, 1998 and 1997 is as follows:

                                                      1998      1997
                                                    -----------------
                                                     (In Thousands)

Potential watch and watch loans ...............     $2,905     $2,850
Substandard ...................................      2,169      1,507
Specific borrowers (agricultural loans) .......      1,048      1,550
Constructed model real estate homes ...........        969        682

Anticipated charge-offs of the above categories are not determinable at December
31, 1998;  however,  it is possible that  agricultural loan charge-offs could be
higher in 1999 that the historical average due to lower farm commodity prices in
recent months.

INVESTMENT SECURITIES

The following tables show the carrying value of the investment  securities as of
December 31, 1998,  1997 and 1996 and the maturities and weighted  average yield
of the investment securities as of December 31, 1998:

<TABLE>

                                                                                                         December 31,
                                                                                                   ----------------------------
                                                                                                     1998      1997      1996
                                                                                                   ----------------------------
                                                                                                          (In Thousands)
<S>                                                                                                <C>       <C>       <C> 
Carrying value:
   U. S. Treasury securities ....................................................................  $ 33,340  $ 40,189  $ 45,213
   Obligations of other U. S. Government agencies and corporations ..............................    78,083    65,445    57,397
   Obligations of states and political subdivisions .............................................    33,580    27,692    23,447
   Other ........................................................................................       - -       - -     3,180
                                                                                                   ----------------------------
                                                                                                   $145,003  $133,326  $129,237
                                                                                                   ============================
</TABLE>
<TABLE>
                                                                                  December 31, 1998
                                                                                  ------------------
                                                                                            Weighted
                                                                                  Carrying   Average
                                                                                    Value     Yield
                                                                                  ------------------
                                                                               (In Thousands)
<S>                                                                                <C>      <C>
Type and maturity grouping:
   U. S. Treasury maturities:
      Within 1 year ...........................................................   $ 16,847     6.15%
      From 1 to 5 years .......................................................     16,493     6.19
                                                                                  --------
                                                                                    33,340
                                                                                  --------
   Obligations of other U. S. Government agencies and corporations, maturities:
      Within 1 year ...........................................................     11,369     6.36%
      From 1 to 5 years .......................................................     66,513     5.89
      From 5 to 10 years ......................................................        201     7.60
                                                                                  --------
                                                                                    78,083
                                                                                  --------
   Obligations of states and political subdivisions, maturities:
      Within 1 year ...........................................................      2,841     7.16%
      From 1 to 5 years .......................................................     17,263     6.78
      From 5 to 10 years ......................................................     13,170     6.71
      Over 10 years ...........................................................        306     8.02
                                                                                  --------
                                                                                    33,580
                                                                                  --------
              Total ...........................................................   $145,003
                                                                                  ========
</TABLE>
<PAGE>


INVESTMENT SECURITIES

As of December  31, 1998,  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.  The yields are computed on a  tax-equivalent  basis using a federal
tax rate of 34% and a state tax rate of 5%.

DEPOSITS

The following  tables show the average  deposits and rates paid on such deposits
for the years ended December 31, 1998,  1997 and 1996 and the composition of the
certificates  issued in  denominations  in excess of $100,000 as of December 31,
1998:

<TABLE>
                                                         December 31,
                                      -------------------------------------------------
                                        1998    Rate      1997   Rate     1996    Rate 
                                      -------------------------------------------------
<S>                                   <C>       <C>    <C>       <C>    <C>       <C>
Average noninterest-bearing deposit   $ 52,538  0.00%  $ 48,330  0.00%  $ 39,929  0.00%
Average interest-bearing demand ...     46,874  2.13
   deposits .......................                      43,262  2.19     37,310  2.20
Average savings deposits ..........    131,988  3.52    119,282  3.51    102,849  3.57
Average time deposits .............    262,111  5.65    250,241  5.66    234,825  5.65
                                      --------         --------         --------
                                      $493,511         $461,115         $414,913
                                      ========         ========         ========
</TABLE>

Time certificates issued in amounts
   of $100,000 or more as of
   December 31, 1998 with .........    Amount    Rate
                                      ----------------
   maturity in:
   3 months or less ...............   $  4,776   4.91%
   3 through 6 months .............      5,609   4.59
   6 through 12 months ............     11,828   5.55
   Over 12 months .................     11,444   5.93
                                      --------
                                      $ 33,657
                                      ========

There were no deposits in foreign banking offices.

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, 1998, 1997 and 1996:

                                                          December 31,
                                                  ------------------------------
                                                   1998        1997        1996
                                                  ------------------------------

Return on assets ...........................       1.17%       1.24%       1.22%
Return on stockholders' equity .............      14.12       14.62       13.97
Dividend payout ratio ......................      23.52       21.69       22.62
Stockholders' equity to assets ratio .......       8.25        8.47        8.72
<PAGE>


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 1998, 1997 and 1996:

                                               1998      1997       1996
                                              ---------------------------
                                                 (Amounts In Thousands)

Outstanding as of December 31 .............   $10,554   $ 9,008   $ 6,071
Weighted average interest rate at year end      4.40%     4.30%     4.31%
Maximum month-end balance .................    10,547    16,104     9,112
Average month-end balance .................     7,974     8,740     7,607
Weighted average interest rate for the year     5.23%     4.87%     4.29%

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  month-end
balances and weighted average interest rates during 1998, 1997 and 1996:

                                               1998       1997       1996
                                              -----------------------------

Outstanding as of December 31 .............   $75,732   $ 50,764   $ 25,795
Weighted average interest rate at year end      5.68%      6.42%      6.42%
Maximum month-end balance .................    85,764     50,764     30,826
Average month-end balance .................    75,262     43,026     28,914
Weighted average interest rate for the year     5.82%      6.47%      6.44%
<PAGE>


PART I

Item 2.   Properties

The Company's office and the main bank of Hills Bank and Trust is located at 131
Main Street,  Hills,  Iowa.  This is a brick building  containing  approximately
14,200  square feet, a portion of which was built in 1977 and remodeled in 1986.
A two-story addition was completed in 1984.

The branch offices of Hills Bank and Trust are as follows:

1.   Iowa City office located at 1401 South Gilbert Street is a one-story  brick
     building containing  approximately  15,400 square feet. The branch has five
     drive-up teller lanes and a drive-up 24-hour automatic teller machine.  The
     Bank's trust  department is located here.  This building was constructed in
     1982 and has been expanded several times, most recently in 1998.

2.   Coralville  office is a  two-story  building  built in 1972  that  contains
     approximately  16,700  square feet of space.  This office is equipped  with
     four drive-up teller lanes and one 24-hour automatic teller machine.

3.   A 2,800  square  foot  branch  bank in North  Liberty,  Iowa was opened for
     business  in  1986  after   substantial   remodeling.   That  office  is  a
     full-service  location including three drive-up teller lanes and a drive-up
     automatic teller machine.

4.   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 lease expires in 2001, but the Bank has an
     option for an additional five years.
<PAGE>


The main office of Hills Bank Lisbon is a  two-story  brick  building in Lisbon,
Iowa with approximately 3,000 square feet of banking retail space located on the
first floor. The building was extensively remodeled in 1996 and has one drive-up
lane  and  a  walk-up  24-hour  automatic  teller  machine.  Hills  Bank  Lisbon
constructed  and opened its Mount Vernon  office  location in February 1998 with
the completion of a full service,  4,200 square foot office,  with four drive-up
lanes and a drive-up automatic teller machine.

Hills Bank Kalona in Kalona is a 6,400  square  foot  building  that  contains a
walk-up 24-hour automatic teller machine and one drive-up lane. This is an older
building that has been remodeled a number of times including a major  renovation
in late 1998.

All of the above  properties,  with the exception of the East Washington  Street
branch,  which is being  leased,  are owned by the  Bank,  free and clear of any
mortgages or other encumbrances of any type.


Item 3.   Legal Proceedings

There are no material pending legal proceedings.

Neither the Company nor the Banks hold any  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, 1998.


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

There is no established trading market for the Company's 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 Company's stock is not
actively traded. As of December 31, 1998, the Company has 1,083 shareholders.

Based  on the  Company's  stock  transfer  records  and  information  informally
provided to the Company, its stock trading transactions have been as follows:

                     Number                         High              Low
                    Of Shares      Number Of       Selling          Selling
      Year           Traded       Transactions      Price            Price
----------------- -----------    -------------    --------          --------
      1998           2,320             12          $ 58.00         $ 48.00
      1997           7,314             12            48.00           40.00
      1996           5,716             15            40.00           33.34

The Company paid aggregate  annual cash dividends in 1998 and 1997 of $1,761,000
and $1,537,000,  respectively, or $1.20 per share in 1998 and $1.05 per share in
1997.  In January  1999,  the Company  declared and paid a dividend of $1.30 per
share  totaling  $1,910,000.  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 Banks,  and the future
earnings, capital requirements and financial condition of the Company.
<PAGE>


Item 6.   Selected Financial Data

CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
<TABLE>
                                         1998         1997         1996         1995         1994
                                       ------------------------------------------------------------
<S>                                    <C>          <C>          <C>          <C>          <C>   
YEAR-END TOTALS
   Total assets ....................   $689,787     $603,102     $539,452     $484,607     $444,912
   Investment securities ...........    149,350      138,064      132,635      121,536      110,050
   Federal funds sold ..............     36,811        2,447        1,107       16,080        7,500
   Loans, net ......................    460,911      422,761      368,264      318,546      300,821
   Deposits ........................    534,151      479,770      450,061      392,257      372,838
   Federal Home Loan Bank notes ....     75,732       50,764       25,795       30,727       20,758
   Redeemable common stock .........      9,301        7,682        6,416        5,271        5,210
   Stockholders' equity ............     56,452       51,500       47,335       43,277       36,447

EARNINGS
   Interest income .................   $ 47,289     $ 42,743     $ 37,516     $ 33,978     $ 29,583
   Interest expense ................     25,254       22,502       19,951       18,468       14,834
   Provision for loan losses .......        916        1,048          754          722          641
   Other income ....................      5,811        5,938        3,868        3,438        3,311
   Other expenses ..................     16,438       15,500       12,057       10,975       10,640
   Applicable income taxes .........      3,006        2,545        2,478        1,994        1,845
   Net income ......................      7,486        7,086        6,144        5,257        4,934

PER SHARE Net income:
      Basic ........................   $   5.10     $   4.83     $   4.19     $   3.59     $   3.37
      Diluted ......................       5.02         4.78         4.15         3.57         3.36
   Cash dividends ..................       1.20         1.05         0.95         0.87         0.80
   Book value as of December 31 ....      38.42        35.08        32.30        29.57        24.91
   Increase (decrease) in book value
      due to:
      ESOP obligation and debt .....      (6.33)       (5.23)       (4.38)       (3.60)       (3.56)
      Unrealized gains (losses) on
        debt securities ............       0.81         0.33         0.46         0.20        (1.77)

SELECTED RATIOS
   Return on average assets ........       1.17%        1.24%        1.22%        1.14%        1.15%
   Return on average equity ........      14.12        14.62        13.97        13.32        13.62
   Net interest margin .............       3.81         3.93         3.86         3.74         3.85
   Average stockholders' equity to
      average total assets .........       8.25         8.47         8.72         8.58         8.47
   Dividend payout ratio ...........      23.52        21.69        22.62        24.12        23.83
</TABLE>

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

Special Note Regarding Forward Looking Statements

The  discussion  following  contains  certain  forward-looking  statements  with
respect to the financial  condition,  the results of operations  and business of
the Company.  These statements involve certain risks and uncertainties which are
often inherent in the ongoing  operation of financial  institutions  such as the
Company's subsidiary banks.

Forward-looking  statements  are typically  identified  by the words  "believe,"
"expect," "anticipate," "target," "goal," "objective," "intend," "estimate," and
similar expressions.

The risks  involved in the  operations  and  strategies  of the Company  include
competition  from  other  financial  institutions,  changes in  interest  rates,
changes in economic or market  conditions as well as events and trends affecting
specific assets, the effect of credit quality and market perceptions of value on
the fair values of financial instruments,  regulatory factors, and unanticipated
costs  associated  with  Year  2000  compliance.  These  risks,  which  are  not
inclusive, cannot be accurately estimated.
<PAGE>


For  example,  a financial  institution  may accept  deposits at fixed  interest
rates,  at  different  times and for  different  terms,  and lend funds at fixed
interest  rates,  at different  times and for different  terms.  In doing so, it
accepts  the risk that its cost of funds may rise  while the use of those  funds
may be at a fixed  rate.  Similarly,  although  market  rates  of  interest  may
decline, the financial institution may have committed,  by virtue of the term of
a deposit, to pay what essentially becomes an above-market rate.

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

Because the business of banking is of a highly regulated  nature,  the decisions
of governmental entities can have a major effect on operating results.

All of these uncertainties, as well as others, are present in the operations and
business of the Company,  and  stockholders  are  cautioned  that the  Company's
actual results may differ materially from those included in the  forward-looking
statements.

Financial Position
<TABLE>

Year End Amounts (In Thousands)       1998      1997      1996     1995       1994
                                    ------------------------------------------------
<S>                                 <C>       <C>       <C>       <C>       <C>  
Loans, net of allowance for losses  $460,911  $422,761  $368,264  $318,546  $300,821
Investment securities ............   149,350   138,064   132,635   121,536   110,050
Deposits .........................   534,151   479,770   450,061   392,257   372,838
Federal Home Loan Bank notes .....    75,732    50,764    25,795    30,727    20,758
Stockholders' equity .............    56,452    51,500    47,335    43,277    36,447
Total assets .....................   689,787   603,102   539,452   484,607   444,912
</TABLE>

In 1998, net loans  increased  $38.2 million,  primarily in real estate mortgage
loans,  as demand  remained high and rates continue to be  attractive.  The 1997
loan growth of $54.5 million was the highest in the Company's history.

Total  assets  increased  14.37% in 1998,  compared  to an increase of 11.80% in
1997. The growth in assets in 1998 and 1997 was primarily attributable to strong
loan demand real estate mortgage loans.

Deposits  increased  11.33% in 1998  compared  to an  increase of 6.60% in 1997,
reflecting good economic  conditions.  Federal Home Loan Bank note borrowings in
1998 and in 1997  increased  by a net $25.0  million  each year and the advances
were used to fund the loan growth.

Components of Diluted Earnings Per Share

                                                  1998     1997     1996
                                                 ------------------------

Net interest income ..........................   $14.78  $ 13.64  $ 11.87
Provision for loan losses ....................    (0.61)   (0.71)   (0.51)
Noninterest income ...........................     3.90     4.00     2.61
Noninterest expense ..........................   (11.03)  (10.44)   (8.14)
                                                 ------------------------
              Income before income taxes .....     7.04     6.49     5.83
Income tax expense ...........................    (2.02)   (1.71)   (1.68)
                                                 ------------------------
              Net income .....................   $ 5.02  $  4.78  $  4.15
                                                 ========================
<PAGE>


In 1998,  the increase in net income was due primarily to increased net interest
income,  primarily  resulting from a large increase in earning assets.  The 1998
increase in  noninterest  income,  when  excluding  gains on sale of  investment
securities and student loans, totaled $967,000.

Higher net income per share in 1997  resulted  from  increases  in net  interest
income and noninterest  income,  but was partially offset by higher  noninterest
expense.  Both noninterest income and noninterest  expense for 1997 included the
recognition  of a $1,054,000  gain on the  contribution  of a marketable  equity
security to Hills Bancorporation Foundation, a private charitable foundation. As
a result of the stock contribution,  Hills Bancorporation received an income tax
benefit of approximately  $340,000,  which reduced income tax expense. In recent
years,  the Company has benefited from low provisions for loan losses,  a result
of a strong local  economy and a loan  portfolio  that is  concentrated  in well
secured real estate loans.

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 1998 as follows:

                                                INTEREST INCOME
                                -----------------------------------------------
                                                         Increase (Decrease)
                                Change In Change In  --------------------------
                                  Average   Average   Volume     Rate      Net
                                 Balance     Rate    Change   Changes   Changes
                                -----------------------------------------------
                                              (Amounts In Thousands)

Loans, net ....................  $ 40,285   (0.07)  $ 3,505   $  (280)  $ 3,225
Taxable securities ............       557    0.03        32        31        63
Nontaxable securities .........     4,938   (0.23)      330       (63)      267
Federal funds sold ............    20,247   (0.02)    1,052        (1)    1,051
                                 ----------------------------------------------
                                 $ 66,027           $ 4,919   $  (313)  $ 4,606
                                 ========           ===========================

                                                 INTEREST EXPENSE
                                 ----------------------------------------------

Interest-bearing demand deposits $  3,612   (0.06)  $    75   $   (27)  $    48
Savings deposits ...............   12,706    0.01       453        12       465
Time deposits ..................   11,870   (0.01)      676       (25)      651
Securities sold under agreements 
  to repurchase ................     (766)   0.36       (39)       30        (9)
FHLB borrowings ................   32,236   (0.65)    1,901      (304)    1,597
                                 --------           ---------------------------
                                 $ 59,658           $ 3,066   $  (314)  $ 2,752
                                 ========           ===========================
Change in net interest income ..                    $ 1,853   $     1   $ 1,854
                                                    ===========================

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

        (Tax Equivalent Basis)                             1998    1997    1996
--------------------------------------------------------------------------------

Yield on average interest-earning assets ...........       8.00%   8.12%   8.05%
Rate on average interest-bearing liabilities .......       4.82    4.84    4.85
                                                           ---------------------
Net interest spread ................................       3.18    3.28    3.20
Effect of noninterest-bearing funds ................       0.63    0.65    0.66
                                                           ---------------------
Net interest margin (tax equivalent interest income 
   divided by average interest-earning assets) .....       3.81%   3.93%   3.86%
                                                           =====================

Loan Losses

The provision for loan losses was  $916,000,  $1,048,000  and $754,000 for 1998,
1997 and 1996,  respectively.  Charge-offs,  net of recoveries  were $70,000 for
1998, $349,000 for 1997 and $533,000 for 1996.
<PAGE>


The allowance for loan losses  totaled  $8,856,000 at December 31, 1998 compared
to  $8,010,000  at  December  31,  1997.  The  percentage  of the  allowance  to
outstanding   loans  was  1.89%  and  1.86%  at  December  31,  1998  and  1997,
respectively.  Agricultural  loans  totaled  $32,318,000  at December  31, 1998.
Management has assessed the risks for  agricultural  loans higher than the other
loans due to unpredictable  commodity  prices,  the effects of weather on crops,
and  uncertainties  regarding  government  support  programs.   Therefore,   the
allowance  for loan losses  includes  general and  specific  reserves  for these
loans.

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

Other Income

Dollars Per Share, Based on Weighted 
Average Diluted Shares Outstanding                 1998     1997     1996
--------------------------------------------------------------------------

Real estate origination fees ..................   $ 0.54   $ 0.26   $ 0.22
Trust fees ....................................     1.17     0.92     0.61
Deposit account charges and fees ..............     1.23     1.28     1.11
Other fees and charges ........................     0.96     0.81     0.71
Other (sale of portfolio) .....................      - -     0.10      - -
Investment securities gains (losses) ..........      - -     0.63    (0.04)
                                                  ------------------------
                                                  $ 3.90   $ 4.00   $ 2.61
                                                  ========================

Total other income increased $2,070,000 or 53.5% in 1997, including net gains on
sale of investment  securities of $940,000,  which included a $1,054,000 gain on
the sale of a marketable equity security.  Additional increases were $455,000 in
trust fees, $248,000 in deposit account charges and fees, $153,000 in other fees
and  charges and  $154,000  gain on the sale of the student  loan  portfolio  of
approximately  $8 million.  Trust fees increased in 1997 and 1996 because of new
accounts  and  balances  under  management.  There were  $940,000 in  investment
securities gains in 1997 following losses of $57,000 in 1996.

In 1998,  total other income  increased  $967,000 on a comparable  basis to 1997
after adjusting for investment  securities gain in 1997 of $940,000 and $154,000
gain on the sale of  student  loan  portfolio.  Due to the lower  interest  rate
environment in 1998,  loan  origination  fees  increased  $412,000 over the 1997
amount of  $387,000.  In  addition,  trust fees  increased  $380,000  due to new
accounts and higher balances under management.

Other Expenses

Dollars Per Share, Based on Weighted 
Average Diluted Shares Outstanding                       1998     1997     1996
--------------------------------------------------------------------------------

Salaries and employees benefits .....................   $ 5.75   $ 4.79   $ 4.15
Occupancy ...........................................     0.76     0.68     0.60
Furniture and equipment .............................     1.13     0.96     0.75
Office supplies and postage .........................     0.79     0.60     0.55
Contributions .......................................     0.03     0.75     0.06
Other ...............................................     2.57     2.66     2.03
                                                        ------------------------
                                                        $11.03   $10.44   $ 8.14
                                                        ========================

Salaries and benefits  increased  $1,457,000 in 1998 compared to 1997. The Banks
have continued to add positions in the retail sector of the Banks, including the
Trust Department,  as a result of increased  business.  At the end of 1998, full
time  equivalent  employees  totaled  253, an increase of 30 since  December 31,
1997.  Included  in the 1998  increase  are new  personnel  located at the Mount
Vernon office of Hills Bank Lisbon, which opened in February 1998. Occupancy and
furniture and equipment expenses increased $378,000 in 1998, or 15.45% over 1997
due to depreciation on the new office in Mount Vernon,  a new computer  hardware
and software system installed in the first quarter of 1998, and expenses related
to the Year 2000 computer changes which totaled approximately $88,000.
<PAGE>


Total other expenses increased $938,000 or 6.05% in 1998 following  increases of
28.60%  for 1997 and  9.86%  for  1996.  Contributions  for  1997  includes  the
$1,054,000  contribution to the Hills  Bancorporation  Foundation.  Salaries and
employee benefits  increased $981,000 in 1997 due to a full year of salaries for
personnel  at the two banks  acquired  during  1996 and the number of  full-time
equivalent  employees  increasing  by 23  from  December  31,  1996.  In 1996 an
increase of $645,000 in salaries and employee benefits was partially offset by a
decrease of $416,000  in FDIC  insurance  after the first full year in which the
lower FDIC insurance  rates became  effective.  Salaries  increased  $487,000 in
1996, due partly to an increase of 28 full-time equivalent employees,  primarily
attributable to additional  positions added at the acquired banks.  The increase
in employees  occurred in early July and late September 1996.  Medical insurance
has had only modest  increases  in the past three years.  Occupancy  expense and
furniture and equipment  expense increased by $438,000 in 1997 due to this being
the  first  full  year of  operations  for the  banks  acquired  in 1996 and the
acquisition of new data processing equipment.

Income Taxes

Income tax expense was $3,006,000, $2,545,000 and $2,478,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.  The corresponding percentage of
tax expense compared to income before income taxes is 28.65% in 1998,  26.40% in
1997 and 28.70% in 1996. Income tax expense for 1997 was 26.4% of pretax income,
compared to an average of 28.6% for other years, due to contributions.

Impact of Recently Issued Accounting Standards

During 1998 and for the next few years, new accounting  pronouncements that have
been  issued  will take  effect and others are  expected.  These are  summarized
below.

Statement  No. 130,  which was adopted in 1998,  requires  "other  comprehensive
income" and "comprehensive  income" to be displayed along with net income. Other
comprehensive  income  includes  changes  in  unrealized  gains  and  losses  on
available for sale securities,  the offset of some pension liabilities currently
recorded as  reductions  in equity,  foreign  currency  translation,  and in the
future will also include deferred hedging gains and losses. Comprehensive income
is net income plus other comprehensive income.

Statement No. 131 for public companies redefines segment reporting to follow how
each company's chief operating  decision maker gets  information  about business
segments to make  operating  decisions.  Since the Company does  business in one
segment, this standard had no effect on the Company's financial statements.

Statement  No. 132  increases and revises  pension plan  disclosures  for public
companies,  and  simplifies  such  disclosures  for  nonpublic  companies.  This
statement had no effect on the Company's financial statements in 1998.

Statement No. 133 on derivatives  will, in 2000,  require all  derivatives to be
recorded  at fair value in the  balance  sheet,  with  changes in fair value run
through  income.  If derivatives  are  documented  and effective as hedges,  the
change in the  derivative  fair value  will be offset by an equal  change in the
fair value of the hedged item.

Statement No. 134 on mortgage  banking will, in 1999,  allow mortgage loans that
are  securitized to be classified as trading,  available for sale, or in certain
circumstances held to maturity. Currently these must be classified as trading.

Interest Rate Sensitivity and Liquidity Analysis
<PAGE>


At December 31, 1998,  the  Company's  interest  rate  sensitivity  report is as
follows (in thousands):
<TABLE>
                        Repricing                    Days
                        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    $ 36,811   $    - -   $    - -   $    - -   $    - -   $    - -   $ 36,811
   Investment
      securities .....        - -      2,295      5,600      9,590     13,249    118,616    149,350
   Loans .............        - -     43,409     24,218     31,101     53,463    317,576    469,767
                         --------------------------------------------------------------------------
        Total earning
           assets ....     36,811     45,704     29,818     40,691     66,712    436,192    655,928
                         --------------------------------------------------------------------------
Sources of funds:
   Interest-bearing
      checking and
      savings accounts     66,708        - -        - -        - -        - -    130,765    197,473
   Certificates of
      deposit ........        - -     15,106     16,033     24,034     94,555    118,850    268,578
   Other borrowings -
      FHLB ...........        - -        - -        - -      7,000     15,000     53,732     75,732
   Repurchase
      agreements .....     10,554        - -        - -        - -        - -        - -     10,554
                         --------------------------------------------------------------------------
                           77,262     15,106     16,033     31,034    109,555    303,347    552,337
   Other sources,
      primarily
      noninterest-
      bearing ........        - -        - -        - -        - -        - -    103,591    103,591
                         --------------------------------------------------------------------------
        Total sources      77,262     15,106     16,033     31,034    109,555    406,938    655,928
                         --------------------------------------------------------------------------
   Repricing
      differences ....   $(40,451)  $ 30,598   $ 13,785   $  9,657   $(42,843)  $ 29,254   $    - -
                         ==========================================================================
</TABLE>


A portion of the interest-bearing  checking,  savings, and money market accounts
has  been  included  in the  above  table as  maturing  immediately  based  upon
management's estimate using a financial model and the rest of these deposits are
shown as more than one year.  The  classifications  are used  because the Banks'
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.

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.

Liquidity and Capital Resources

On an unconsolidated  basis, Hills Bancorporation (the holding company) had cash
balances of  $698,000 as of December  31,  1998.  In 1998,  the holding  company
received  dividends of $2,762,000 from its subsidiary banks and used those funds
to make a  $1,000,000  capital  contribution  to a  subsidiary  bank  and to pay
dividends to its stockholders of $1,761,000.

As of December 31, 1998 and 1997,  stockholders' equity before deducting for the
maximum  cash  obligation  related  to ESOP  was  $65,753,000  and  $59,182,000,
respectively.  This  measure of equity as a percent of total assets was 9.53% at
December 31, 1998 and 9.81% at December 31,  1997.  These ratios are  comparable
with the  Company's  peers.  As of December 31, 1998,  total equity was 8.18% of
assets  compared  to 8.54% 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 subsidiaries  banks,  which affects the Banks' dividends
to the  Company.  The Banks are  subject to  certain  statutory  and  regulatory
restrictions  on the  amount  they may pay in  dividends.  In order to  maintain
acceptable  capital  ratios in the subsidiary  banks,  certain of their retained
earnings  are not  available  for the payment of  dividends.  Retained  earnings
available  for the  payment of  dividends  to the  Company  total  approximately
$3,632,000 as of December 31, 1998.
<PAGE>


The  Company  and  the  Banks  are  subject  to the  Federal  Deposit  Insurance
Corporation  Improvement  Act of 1991  and  the  Banks  are  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,  1998,   risk-based   capital   standards  require  8%  of
risk-weighted  assets.  At  least  half of that 8% must  consist  of Tier I core
capital (common stockholders' 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 the  Company's  capital as of December  31, 1998 with  minimum
requirements is presented below:

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

Tier I Risk-Based Capital ........................        13.87%          4%
Total Risk-Based Capital .........................        15.13           8
Leverage Ratio ...................................         9.15           3

Each  of  the  Banks  is  classified  as  "well  capitalized"  by  FDIC  capital
guidelines.

On a consolidated  basis, 1998 cash flows from operations  provided  $8,693,000,
net  increases  in deposits  provided  $54,381,000  and  Federal  Home Loan Bank
borrowings provided $24,968,000.  These cash flows were invested in net loans of
$39,066,000,  net  securities  of  $10,473,000  and net  federal  funds  sold of
$34,364,000.  In  addition,   $3,081,000  was  used  to  purchase  property  and
equipment.

At December 31, 1998,  the Company had total  outstanding  loan  commitments  of
$93,920,000.  Management  believes that its liquidity levels are appropriate and
that it has  borrowing  capacity  from the  Federal  Home  Loan  Bank and  other
sources.

Commitments and Trends

The Company has no material  commitments or plans which will  materially  affect
its  liquidity or capital  resources.  Property and equipment may be acquired in
cash purchases, or they may be financed if favorable terms are available.

Year 2000

The  Year  2000  poses  an  important  business  issue  regarding  how  existing
application  software  programs and operating  systems can accommodate this date
value.  Many computer programs that can only distinguish the final two digits of
the year  entered  are  expected  to read  entries for the Year 2000 as the Year
1900. Like most financial  service  providers,  the Company may be significantly
affected  by the Year 2000  issue due to the  nature of  financial  information.
Software,  hardware and equipment  both within and outside the Company's  direct
control and with whom the Company electronically or operationally interfaces are
likely to be  affected.  If  computer  systems  are not  adequately  changed  to
identify  the  Year  2000,  many  computer  applications  could  fail or  create
erroneous  results.  As a result,  many calculations that rely on the data field
information,  such  as  interest,  payment  or due  dates  and  other  operating
functions,  may generate results that could be significantly  misstated, and the
Company  could  experience  a temporary  inability to process  transactions  and
engage in normal business activities.
<PAGE>


All of the significant  computer  programs of the Company that could be affected
by this issue are provided by major  third-party  vendors.  In 1998, the Company
completed  the  replacement/upgrading  of  most  of  its  computer  systems  and
programs,  as well as most  equipment,  in order to provide  cost-effective  and
efficient delivery of services to its customers,  information to management, and
to provide additional  capacity for processing  information and transactions due
to acquisitions.  The third-party vendors have advised the Company that all such
computer systems and programs either are or shortly will be Year 2000 compliant.
The Company completed off-site testing of its major applications in 1998.

The total cost of the Year 2000 project in 1998 was approximately $1,180,000 for
capitalized  hardware and software and an additional $88,000 in expenses charged
to earnings in 1998.  Management estimates the cost of the remediation effort to
make the Company's  systems Year 2000 ready will be approximately  $40,000 to be
charged to expense in 1999 and $105,000 to be  capitalized in 1999. In addition,
it is  estimated  that 2,000 man hours  will be  incurred  by Company  personnel
related to Year 2000 issues at an approximate  cost of $40,000.  Such costs will
be charged to expense as they are incurred.

The Company is developing a Year 2000  contingency  plan that  addresses,  among
other issues, critical operations and potential failures thereof, and strategies
for business continuation.  The contingency plan includes back up power sources,
off-site  processing of data and a detailed  listing of  responsibilities  among
various employees of their  contingency plan duties.  The plan is expected to be
finalized during the third quarter of 1999.

The Company  could incur  losses if loan  payments  are delayed due to Year 2000
problems affecting significant borrowers. The Company is communicating with such
parties to assess their progress is evaluating and  implementing  any corrective
measures  required by them to be Year 2000 ready.  To date, the Company has been
advised by such parties that they have plans in place to address and correct the
issues associated with the Year 2000 problem; however, no assurance can be given
as to the adequacy of such plans or to the  timeliness of their  implementation.
As part of the  current  credit  approval  process,  new and  renewed  loans are
evaluated  as to  the  borrower's  Year  2000  readiness.  Management  does  not
anticipate significant loan losses related to this issue.

Although   management  believes  the  Company's  computer  systems  and  service
providers will be Year 2000 ready, there can be no assurance that these systems,
or those systems of other companies on which the Company's systems rely, will be
fully functional in the Year 2000. Such failure could have a significant adverse
impact on the financial  condition and results of operations of the Company.  In
addition,  there could be a material effect to the financial statements if there
are  significant  interruptions  in basic  services,  such as the electric power
grid, telephone services or the banking system. These risks cannot be estimated.


Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

Market Risk Exposures

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

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


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

Based  on  the  data   following,   net  interest  income  should  decline  with
instantaneous  increases  in interest  rates while net  interest  income  should
increase  with  instantaneous  declines in  interest  rates.  Generally,  during
periods of increasing  interest  rates,  the Company's  interest rate  sensitive
liabilities would reprice faster than its interest rate sensitive assets causing
a decline in the Company's  interest  rate spread and margin.  This would result
from an increase in the  Company's  cost of funds that would not be  immediately
offset by an increase in its yield on earning  assets which would tend to reduce
net interest income.  In times of decreasing  interest rates,  fixed rate assets
could  increase in value and the lag in  repricing  of interest  rate  sensitive
assets could be expected to have a positive effect on the Company's net interest
income.

The following table provides  quantitative  information with respect to interest
sensitive assets and liabilities.

The following table provides  information about the Company's loans,  investment
securities  and deposits  that are sensitive to changes in interest  rates.  The
table presents  principal cash flows and related weighted average interest rates
by expected maturity dates.
<TABLE>
                         1999       2000     2001      2002      2003  Thereafter   Total  Fair Value
                       ------------------------------------------------------------------------------
<S>                    <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Assets:
   Loans, fixed:
      Balance          $ 90,317  $ 42,903  $ 53,879  $ 33,238  $ 64,662  $ 23,579  $308,578  $316,248
      Average
        interest rate      8.18      8.32      8.27      8.39      7.85      7.09      8.08

   Loans, variable:
      Balance          $ 22,212  $  1,819  $  1,587  $  2,763  $  1,521  $131,287  $161,189  $161,189
      Average
        interest rate      9.39      9.06      9.11      8.72      8.84      8.02      8.25

   Investments (1):
      Balance          $ 67,277  $ 32,893  $ 45,521  $ 11,282  $  9,870  $ 19,318  $186,161  $186,733
      Average
        interest rate      5.86      6.20      5.97      6.24      6.39      6.75      6.09

Liabilities:
   Liquid
      deposits (2):
      Balance          $197,473  $    - -  $    - -  $    - -  $    - -  $    - -  $197,473  $197,473
      Average
        interest rate      2.94       - -       - -       - -       - -       - -      2.94

   Deposits,
      certificates:
      Balance          $149,728  $ 86,470  $ 15,537  $  6,976  $  9,867  $    - -   $268,578  $271,231
      Average
        interest rate      5.44      5.71      5.62      5.70      5.75       - -       5.56
<FN>
(1)  Includes all available-for-sale investments,  held-to-maturity investments,
     and federal funds.
(2)  Includes passbook  accounts,  NOW accounts,  Super NOW accounts,  and money
     market funds.
</FN>
</TABLE>
<PAGE>


Item 8.   Financial Statements and Supplementary Data

The financial  statements  are included on Pages 34 through 62. The Company 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  subsidiaries  as of  December  31,  1998 and 1997,  and the
related consolidated statements of income,  comprehensive income,  stockholders'
equity,  and cash flows for the years ended  December 31,  1998,  1997 and 1996.
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  subsidiaries  as of December  31,  1998 and 1997,  and the results of their
operations and their cash flows for the years ended December 31, 1998,  1997 and
1996 in conformity with generally accepted accounting principles.

                                         /s/ McGladrey & Pullen, LLP

Iowa City, Iowa
February 3, 1999




<PAGE>


Hills Bancorporation


Consolidated Balance Sheets
December 31, 1998 and 1997
(In Thousands, Except Shares)
<TABLE>

ASSETS                                                                                         1998      1997
---------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>       <C>   

Cash and due from banks (Note 9) ..........................................................  $ 16,427  $ 15,508
Investment securities (Note 2):
   Available for sale (amortized cost 1998 $121,954; 1997 $108,718) .......................   123,835   109,486
   Held to maturity (fair value 1998 $21,740; 1997 $24,230) ...............................    21,168    23,840
   Stock of Federal Home Loan Bank ........................................................     4,347     4,738
Federal funds sold ........................................................................    36,811     2,447
Loans, net (Notes 3 and 10) ...............................................................   460,911   422,761
Property and equipment, net (Note 4) ......................................................    11,193     9,437
Accrued interest receivable ...............................................................     5,885     5,441
Deferred income taxes, net (Note 8) .......................................................     1,838     1,859
Other assets ..............................................................................     7,372     7,585
                                                                                             ------------------
                                                                                             $689,787  $603,102
                                                                                             ==================

LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------

Liabilities
   Noninterest-bearing deposits ...........................................................  $ 68,100  $ 52,174
   Interest-bearing deposits (Note 5) .....................................................   466,051   427,596
                                                                                             ------------------
              Total deposits ..............................................................   534,151   479,770
   Securities sold under agreements to repurchase .........................................    10,554     9,008
   Federal Home Loan Bank notes (Note 6) ..................................................    75,732    50,764
   Accrued interest payable ...............................................................     2,048     2,060
   Other liabilities ......................................................................     1,549     2,318
                                                                                             ------------------
                                                                                              624,034   543,920
                                                                                             ------------------
Commitments and Contingencies (Notes 7 and 13)

Redeemable Common Stock Held By Employee Stock
   Ownership Plan (ESOP) (Note 7) .........................................................     9,301     7,682
                                                                                             ------------------

Stockholders' Equity (Note 9)
   Capital stock, no par value; authorized 10,000,000 shares;
      issued 1998 1,469,443 shares; 1997 1,467,754 shares .................................     9,140     9,070
   Retained earnings ......................................................................    55,428    49,627
   Accumulated other comprehensive income, unrealized gains
      on  debt securities, net ............................................................     1,185       485
                                                                                             ------------------
                                                                                               65,753    59,182
   Less maximum cash obligation related to ESOP shares (Note 7)                                 9,301     7,682
                                                                                             ------------------
                                                                                               56,452    51,500
                                                                                             ------------------
                                                                                             $689,787  $603,102
                                                                                             ==================
</TABLE>
See Notes to Financial Statements.
<PAGE>


Hills Bancorporation


Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
(In Thousands, Except Per Share Amounts)
<TABLE>
                                                                     1998      1997       1996
------------------------------------------------------------------------------------------------
<S>                                                                <C>       <C>        <C>   
   Interest and fees on loans ...................................  $ 37,854  $ 34,598   $ 29,724
   Interest on investment securities:
      Taxable ...................................................     6,832     6,769      6,190
      Nontaxable ................................................     1,394     1,218      1,117
   Interest on federal funds sold ...............................     1,209       158        485
                                                                   -----------------------------
              Total interest income .............................    47,289    42,743     37,516
                                                                   ------------------------------
Interest expense:
   Interest on deposits .........................................    20,458    19,294     17,762
   Interest on securities sold under agreements to repurchase ...       417       426        326
   Interest on FHLB borrowings ..................................     4,379     2,782      1,863
                                                                   -----------------------------
              Total interest expense ............................    25,254    22,502     19,951
                                                                   -----------------------------
              Net interest income ...............................    22,035    20,241     17,565
Provision for loan losses (Note 3) ..............................       916     1,048        754
                                                                   -----------------------------

              Net interest income after provision for loan losses    21,119    19,193     16,811
                                                                   -----------------------------
Other income:
   Loan origination fees ........................................       799       387        324
   Trust fees ...................................................     1,743     1,363        908
   Deposit account charges and fees .............................     1,828     1,893      1,645
   Other fees and charges .......................................     1,441     1,201      1,048
   Net gains (losses) on sale of  investment securities (Note 2)        - -       940       (57)
   Other ........................................................       - -       154       - -
                                                                   ----------------------------
                                                                      5,811     5,938     3,868
                                                                   ----------------------------
Other expenses:
   Salaries and employee benefits ...............................     8,575     7,118     6,137
   Occupancy ....................................................     1,137     1,017       891
   Furniture and equipment ......................................     1,687     1,429     1,117
   Office supplies and postage ..................................     1,178       889       819
   Contributions ................................................        39     1,118        88
   Other ........................................................     3,822     3,929     3,005
                                                                   ----------------------------
                                                                     16,438    15,500    12,057
                                                                   ----------------------------
              Income before income taxes ........................    10,492     9,631     8,622
Federal and state income taxes (Note 8) .........................     3,006     2,545     2,478
                                                                   ----------------------------
              Net income ........................................  $  7,486  $  7,086  $  6,144
                                                                   ============================

Earnings per share:
   Basic ........................................................  $   5.10  $   4.83  $   4.19
   Diluted ......................................................      5.02      4.78      4.15
</TABLE>

See Notes to Financial Statements.
<PAGE>


Hills Bancorporation


Consolidated Statements of comprehensive income
Years Ended December 31, 1998, 1997 and 1996
(In Thousands)
<TABLE>

                                                                        1998      1997     1996
------------------------------------------------------------------------------------------------
<S>                                                                    <C>      <C>      <C>    

Net income ........................................................... $ 7,486  $ 7,086  $ 6,144
                                                                       -------------------------

Other comprehensive income, net of income taxes:
   Unrealized holding gains arising during the year,
      net of income taxes 1998 $413; 1997 $202; 1996 $173 ............     700      464      340
   Reclassification adjustments for net (gains) losses realized in net
      income, net of income taxes 1998 none; 1997 $(285); 1996 $19 ...     - -     (655)      38
                                                                       -------------------------
              Other comprehensive income (loss) ......................     700     (191)     378
                                                                       -------------------------

              Comprehensive income ................................... $ 8,186  $ 6,895  $ 6,522
                                                                       =========================
</TABLE>
See Notes to Financial Statements.
<PAGE>


Hills Bancorporation


Consolidated Statements of
stockholders' equity (Notes 7 and 9)
Years Ended December 31, 1998, 1997 and
1996
(In Thousands, Except Share Amounts)
<TABLE>
                                                                            Less
                                                                           Maximum
                                                           Accumulated       Cash
                                                              Other       Obligation
                                      Capital   Retained  Comprehensive     To ESOP
                                       Stock    Earnings      Income        Shares     Total
---------------------------------------------------------------------------------------------
<S>                                   <C>        <C>       <C>           <C>          <C>
Balance, December 31, 1995 ........   $ 8,925    $39,325   $   298         $(5,271)   $43,277
   Issuance of 1,936 shares of
      common stock ................        77        - -       - -             - -         77
   Redemption of 156 shares
      of common stock .............        (5)       - -       - -             - -         (5)
   Change related to ESOP shares ..       - -        - -       - -          (1,145)    (1,145)
   Net income .....................       - -      6,144       - -             - -      6,144
   Cash dividends ($.95 per share)        - -     (1,391)      - -             - -     (1,391)
   Other comprehensive income .....       - -        - -       378             - -        378
                                      -------------------------------------------------------
Balance, December 31, 1996 ........     8,997     44,078       676          (6,416)    47,335
   Issuance of 2,993 shares of
      common stock ................        97        - -       - -             - -         97
   Redemption of 623 shares
      of common stock .............       (24)       - -       - -             - -        (24)
   Change related to ESOP shares ..       - -        - -       - -          (1,266)    (1,266)
   Net income .....................       - -      7,086       - -             - -      7,086
   Cash dividends ($1.05 per share)       - -     (1,537)      - -             - -     (1,537)
   Other comprehensive income .....       - -        - -      (191)            - -       (191)
                                      -------------------------------------------------------
Balance, December 31, 1997 ........     9,070     49,627       485          (7,682)    51,500
   Issuance of 1,931 shares of
      common stock ................        78        - -       - -             - -         78
   Redemption of 242 shares
      of common stock .............        (8)       - -       - -             - -         (8)
   Change related to ESOP shares ..       - -        - -       - -          (1,619)    (1,619)
   Net income .....................       - -      7,486       - -             - -      7,486
   Income tax benefit related to
      stock based compensation ....       - -         76       - -             - -         76
   Cash dividends ($1.20 per share)       - -     (1,761)      - -             - -     (1,761)
   Other comprehensive income .....       - -        - -       700             - -        700
                                      -------------------------------------------------------
Balance, December 31, 1998 ........   $ 9,140    $55,428   $ 1,185         $(9,301)   $56,452
                                      =======================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>


Hills Bancorporation


Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
(In Thousands)
<TABLE>
                                                                                    1998       1997       1996
----------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>        <C>        <C>    
Cash Flows from Operating Activities
   Net income ..................................................................  $  7,486   $  7,086   $  6,144
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Depreciation .............................................................     1,325      1,143        884
      Amortization .............................................................       261        261        133
      Provision for loan losses ................................................       916      1,048        754
      Net (gains) losses on disposition of investment securities ...............      (940)        57
      Compensation paid by issuance of common stock ............................        70         73         72
      Contribution of investment securities ....................................     1,054
      Deferred income taxes ....................................................       (15)      (417)       (77)
      (Increase) in accrued interest receivable ................................      (444)      (557)      (121)
      Amortization of bond discount ............................................       300        378        454
      (Increase) decrease in other assets ......................................      (425)       (88)     1,589
      Increase (decrease) in accrued interest and other liabilities ............      (781)       603        505
                                                                                  ------------------------------
              Net cash provided by operating activities ........................     8,693      9,644     10,394
                                                                                  ------------------------------

Cash Flows from  Investing  Activities  Proceeds  from  maturities of investment
   securities:
      Available for sale .......................................................    27,300     21,292     22,353
      Held to maturity .........................................................     2,607      2,590      4,069
   Proceeds from sales of available-for-sale securities ........................       - -     16,411     10,988
   Purchases of investment securities:
      Available for sale .......................................................   (40,380)   (42,083)   (37,026)
      Held to maturity .........................................................       - -     (4,404)    (4,784)
   Federal funds sold, net .....................................................   (34,364)    (1,340)    26,421
   Loans made to customers, net of collections .................................   (39,066)   (55,545)   (29,807)
   Purchases of property and equipment .........................................    (3,081)    (2,171)      (859)
   Purchase of subsidiary banks, net of cash acquired (Note 14) ................       - -        - -     (7,163)
                                                                                  ------------------------------
              Net cash (used in) investing activities ..........................   (86,984)   (65,250)   (15,808)
                                                                                  ------------------------------

Cash Flows from Financing Activities
   Net increase in deposits ....................................................    54,381     29,709     18,938
   Net increase (decrease) in securities sold under agreements
      to repurchase ............................................................     1,546      2,937     (3,948)
   Borrowings from FHLB ........................................................    40,000     30,000        - -
   Payments on FHLB notes ......................................................   (15,032)    (5,031)    (5,032)
   Income tax benefits related to stock based compensation .....................        76
   Dividends paid ..............................................................    (1,761)    (1,537)    (1,391)
                                                                                  ------------------------------
              Net cash provided by financing activities ........................    79,210     56,078      8,567
                                                                                  ------------------------------

              Increase in cash and due from banks ..............................  $    919    $   472   $  3,153

Cash and due from banks:
   Beginning ...................................................................    15,508     15,036     11,883
                                                                                  ------------------------------
   Ending ......................................................................  $ 16,427   $ 15,508   $ 15,036
                                                                                  ==============================

Supplemental Disclosures
   Cash payments for:
      Interest paid to depositors and others ...................................  $ 20,470   $ 19,186   $ 17,848
      Interest paid on other obligations .......................................     4,796      3,208      2,189
      Income taxes .............................................................     3,544      2,942      2,565

   Noncash financing transactions:
      Increase in maximum cash obligation related to
        ESOP shares ............................................................     1,619      1,266      1,145
      Available-for-sale investment securities transferred
        as a charitable contribution ...........................................       - -      1,054        - -

      Purchase business acquisitions (Note 14)
</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  multibank
holding  company  engaged  in the  business  of  banking.  The  Company's  three
wholly-owned  subsidiary  commercial  banks  are Hills  Bank and Trust  Company,
Hills, Iowa, Hills Bank, Lisbon, Iowa, and Hills Bank Kalona,  Kalona, Iowa. The
Banks  are  all  full-service  commercial  banks  extending  their  services  to
individuals,   businesses,   governmental  units,  and  institutional  customers
primarily in the  communities of Hills,  Iowa City,  Coralville,  North Liberty,
Lisbon, Mount Vernon, and Kalona, Iowa.

The  Banks  compete  with  other   financial   institutions   and   nonfinancial
institutions providing similar financial products. Although the loan activity of
the Banks is diversified  with commercial and  agricultural  loans,  real estate
loans,  automobile,  installment and other consumer loans, each 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.

Certain  significant  estimates:  The allowance for loan losses,  fair values of
securities and other financial instruments, and stock-based compensation expense
involve certain  significant  estimates made by management.  These estimates are
reviewed  by  management   routinely   and  it  is   reasonably   possible  that
circumstances that exist at December 31, 1998 may change in the near-term future
and that the effect could be material to the consolidated financial statements.

Principles of consolidation:  The consolidated  financial statements include the
accounts of the  Company  and its  wholly-owned  subsidiaries.  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.  There were no trading securities as of December 31, 1998
and 1997.

Stock of the Federal Home Loan Bank is carried at cost.

Premiums and discounts on 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).  Realized gains and
losses on investment securities are included in income,  determined on the basis
of the cost of the specific securities sold.

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  collectability  of principal is unlikely.  The  allowance for loan
losses is maintained at a level  considered  adequate to provide for losses that
can be reasonably anticipated.  The allowance is increased by provisions charged
to expense and is reduced by net charge-offs.  The Banks make 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>


Loans are considered  impaired when, based on current information and events, it
is probable  the Banks 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.  Interest income on impaired loans is recognized on
the cash basis.

The accrual of interest income on 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.

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

Property  and  equipment:   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.

Intangible  assets:  Intangible  assets  consist  principally  of goodwill which
represents the excess of cost over fair value of net assets acquired in business
combinations  of two banks in 1996  accounted  for under  the  purchase  method.
Goodwill is amortized on a straight-line  basis over the estimated  period to be
benefited, 15 years. The carrying value of goodwill is reviewed periodically for
impairment.  Goodwill  totaled  $3,282,000  and  $3,543,000,  net of accumulated
amortization  of $615,000  and  $354,000 as of December 31, 1998 and 1997 and is
included in other assets.

Stock  options:  Compensation  expense for stock issued through stock option and
award  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  fair  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 Banks in
fiduciary  or agency  capacities  for its  customers  are not  included in these
statements since they are not assets of the Company.

Earnings per share:  Basic per-share amounts are computed by dividing net income
(the numerator) by the weighted-average number of common shares outstanding (the
denominator).  Diluted  per share  amounts  assume the  conversion,  exercise or
issuance of all  potential  common stock unless the effect is to reduce the loss
or increase the income per common share from continuing operations.

Following is a reconciliation of the denominator:

                                                   Year Ended December 31,
                                               ---------------------------------
                                                 1998        1997        1996
                                               ---------------------------------

Weighted average number of shares ..........   1,467,772   1,465,914   1,465,384
Potential number of dilutive shares ........      22,702      18,040      13,968
                                               ---------------------------------
Total shares to compute diluted earnings 
  per share ................................   1,490,474   1,483,954   1,479,352
                                               =================================
<PAGE>


There are no potentially  dilutive securities that have not been included in the
determination of diluted shares.

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 Banks,  deposits
and federal funds purchased and sold are reported net.

Recently issued accounting  standards:  SFAS No. 130,  "Reporting  Comprehensive
Income," establishes standards for reporting and display of comprehensive income
and its  components  (revenues,  expenses,  gains and  losses)  in a full set of
general-purpose financial statements. The Statement requires that all items that
are  required to be  recognized  under  accounting  standards as  components  of
comprehensive income be reported in a financial statement that is displayed with
the same  prominence  as other  financial  statements.  The  Statement  does not
require a specific  format for that  financial  statement  but requires  that an
enterprise  display an amount  representing total  comprehensive  income for the
period in that financial  statement.  The Statement requires that an enterprise:
(a) classify items of other comprehensive  income by their nature in a financial
statement and (b) display the accumulated balance of other comprehensive  income
separately from retained  earnings and additional  paid-in capital in the equity
section of a statement  of  financial  position.  The  Company has adopted  this
accounting  standard  for the year ended  December  31,  1998 and  retroactively
presented prior year statements of comprehensive income.

Other recently issued accounting standards are not expected to materially affect
the Company's 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, 1998.  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 of borrowings under repurchase
   agreements approximate their fair values.

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


Note 2.  Investment Securities

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

                                                  Gross      Gross
                                     Amortized Unrealized  Unrealized    Fair
                                        Cost      Gains      Losses      Value
                                     ------------------------------------------
                                               (Amounts In Thousands)
December 31, 1998:
   U. S. Treasury .................   $ 32,804   $    536   $    - -   $ 33,340
   U. S. Government agencies and
      corporations ................     76,882      1,206         (5)    78,083
   State and political subdivisions     12,268        168        (24)    12,412
                                      -----------------------------------------
              Total ...............   $121,954   $  1,910   $    (29)  $123,835
                                      =========================================

December 31, 1997:
   U. S. Treasury .................   $ 39,858   $    331   $    - -   $ 40,189
   U. S. Government agencies and
      corporations ................     65,054        404        (13)    65,445
   State and political subdivisions      3,806         46        - -      3,852
                                      -----------------------------------------
              Total ...............   $108,718   $    781   $    (13)  $109,486
                                      =========================================

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

                      
                                         Amortized Unrealized Unrealized  Fair
                                           Cost      Gains      Losses    Value
                                         ---------------------------------------
                                                 (Amounts In Thousands)
December 31, 1998:
   States and political subdivisions ..  $ 21,168  $   574     $   (2)  $ 21,740
                                         =======================================

December 31, 1997:
   States and political subdivisions ..  $ 23,840  $   405     $   (15) $ 24,230
                                         =======================================

The contractual  maturity  distribution of investment  securities as of December
31, 1998 is summarized as follows:

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

Due in one year or less .............. $ 28,117 $ 28,337 $  2,720 $  2,732
Due after one year through five years    85,759   87,318   12,951   13,288
Due after five years through ten years    7,878    7,977    5,393    5,607
Due over ten years ...................      200      203      104      113
                                       -----------------------------------
              Total .................. $121,954 $123,835 $ 21,168 $ 21,740
                                       ===================================
<PAGE>


As of December 31, 1998,  investment securities with a carrying value of $34,928
were pledged to collateralize public and trust deposits,  short-term borrowings,
and for other purposes, as required or permitted by law.

For the years ended  December 31, 1998,  1997 and 1996, net gains or losses from
the sale of investment securities were as follows:

                                                    Year Ended December 31,
                                                 ----------------------------
                                                   1998      1997       1996
                                                 ----------------------------
                                                     (Amounts In Thousands)

Gross gains ...............................      $    - -   $1,059   $    - -
Gross (losses) ............................           - -     (119)       (57)
                                                 ----------------------------
              Net gains (losses) ..........      $    - -   $  940   $    (57)
                                                 ============================

Included in 1997 gains was the contribution of a marketable equity security to a
private  charitable  foundation  organized by the Company,  upon which a gain of
$1,054,000 was recognized. The marketable equity security was an investment in a
development stage company that later went public in 1996.


Note 3.  Loans

The composition of loans is as follows:

                                                        December 31,
                                                  ----------------------
                                                      1998        1997
                                                  ----------------------
                                                  (Amounts In Thousands)

Agricultural ....................................   $ 32,318   $ 27,636
Commercial and financial ........................     39,438     33,616
Real estate:
   Construction .................................     28,476      8,157
   Mortgage .....................................    338,871    332,655
Loans to individuals ............................     30,664     28,707
                                                    -------------------
                                                     469,767    430,771
Less allowance for loan losses ..................      8,856      8,010
                                                    -------------------
                                                    $460,911   $422,761
                                                    ===================

Changes in the allowance for loan losses are as follows:

                                             Year Ended December 31,
                                           ---------------------------
                                             1998     1997      1996
                                           ---------------------------
                                             (Amounts In Thousands)

Balance, beginning ......................  $ 8,010   $ 7,311   $ 6,740
   Provision charged to expenses ........      916     1,048       754
   Recoveries ...........................      898       779       438
   Allowances of acquired banks .........      - -       - -       350
   Loans charged off ....................     (968)   (1,128)     (971)
                                           ---------------------------
Balance, ending .........................  $ 8,856   $ 8,010   $ 7,311
                                           ===========================
<PAGE>


Information about impaired loans as of and for the years ended December 31, 1998
and 1997 is as follows:

                                                           1998    1997
                                                          --------------
                                                       (Amounts In Thousands)

Loans receivable for which there is a 
  related allowance for credit losses..................   $  - -  $  - -
Loans receivable for which there is no 
  related allowance for credit losses ..................   8,956   9,556
                                                          --------------
              Total impaired loans .....................  $8,956  $9,556
                                                          ==============

Related allowance for credit losses ....................  $  - -  $  - -
Average balance ........................................   9,216   8,401
Interest income recognized .............................     869     808

No allowance for credit losses has been  recognized  for impaired  loans because
partial  charge-offs  have been  taken to reduce  the loan  balances  to the net
present value of the future cash flows or to the fair value of the collateral if
the loan is collateral dependent.



Note 4.  Property and Equipment

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

                                                   December 31,
                                              ----------------------
                                                 1998         1997
                                              ----------------------
                                              (Amounts In Thousands)

Land ....................................      $ 1,950      $ 1,950
Buildings and improvements ..............        8,363        7,149
Furniture and equipment .................       10,932        9,065
                                               --------------------
                                                21,245       18,164
Less accumulated depreciation ...........       10,052        8,727
                                               --------------------
              Net .......................      $11,193      $ 9,437
                                               ====================


Note 5.  Interest-Bearing Deposits

A summary of these deposits is as follows:

                                                              December 31,
                                                         ----------------------
                                                            1998        1997
                                                         ----------------------
                                                         (Amounts In Thousands)

NOW and other demand ............................         $ 53,296    $ 46,526
Savings .........................................          144,177     121,785
Time, $100,000 and over .........................           33,657      38,374
Other time ......................................          234,921     220,911
                                                          --------------------
                                                          $466,051    $427,596
                                                          ====================
<PAGE>


Note 6.  Federal Home Loan Bank Borrowings

As of December 31, 1998, the borrowings were as follows:

                                                          (In Thousands)
                                                          --------------

Due April 9, 1999, 6.55%                                     $  7,000
Due August 5, 1999, 6.57%                                       5,000
Due January 24, 2000, 6.21%                                    10,000
Due April 9, 2000, 6.71%                                        3,000
Due July 8, 2003, 5.21%                                         5,000
Due November 18, 2002, 5.33%                                    5,000
Due August 17, 2005, 7.12%                                        100
Due January 14, 2008, 5.22%                                    10,000
Due February 4, 2008, 5.38%                                    10,000
Due February 4, 2008, 5.24%                                    10,000
Due April 30, 2008, 5.40%                                      10,000
Due August 11, 2008, 6.00%                                        632
                                                             --------
                                                             $ 75,732
                                                             ========

The  borrowings  are  collateralized  by 1-4 family  mortgage  loans with a face
amount of  $94,540,000.  As of December 31, 1998,  the Company held Federal Home
Loan Bank  stock  with a cost of  $4,347,000  which is  included  in  investment
securities.



Note 7.  Employee Benefit Plans

The Company has an Employee Stock  Ownership Plan (the "ESOP") to which it makes
discretionary cash contributions. The Company's contribution to the ESOP totaled
$58,000,  $49,000 and $42,000 for the years ended  December 31,  1998,  1997 and
1996, respectively.

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 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, 1998,  160,458  shares held by the ESOP, at a fair value of $58 per
share, have been reclassified from stockholders' equity to liabilities.

The Company has 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  $461,000,  $394,000  and
$340,000 for the years ended December 31, 1998, 1997 and 1996, respectively.

The Company has a Stock  Incentive  Plan for certain key employees and directors
whereby  shares of common  stock  have been  reserved  for awards in the form of
stock  options or stock  awards.  A Stock Option  Committee may grant options at
prices  equal to the fair value of the stock at the date of the  grant.  Options
expire 10 years  from the date of the  grant.  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.  No
compensation expense has been charged to expense using the intrinsic value based
method as prescribed  by APB No. 25. Had  compensation  expense been  determined
based on the grant date fair values of the  awards,  as  prescribed  by SFAS No.
123, reported net income and earnings per share would have been as follows:

                                                Years Ended December 31,
                                               ----------------------------
                                                 1998     1997       1996
                                               ----------------------------

Pro forma net income (in thousands) ......     $ 7,481   $ 7,084    $ 6,144
Pro forma earnings per share:
   Basic .................................        5.10      4.83       4.19
   Diluted ...............................        5.02      4.77       4.15
<PAGE>


The pro forma  effects of applying  SFAS are not  indicative  of future  amounts
since, among other reasons, the pro forma requirements of SFAS No. 123 have been
applied only to options granted after December 31, 1994. No options were granted
during 1998 or 1996.

The fair  value  of each  grant is  established  at the  grant  date  using  the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions for grants in 1997:  Dividend rate 2.19%; price volatility of 4.64%;
risk-free interest rate of 6.63%; and an expected life of 5 years.

A summary of the stock options is as follows:

                                                                    Weighted
                                                                    Average
                                                          Number    Exercise
                                                         Of Shares   Price
                                                         -------------------

Balance, December 31, 1996 and 1995 ...............        46,569    $ 25.76
   Granted ........................................         2,055      41.00
   Exercised ......................................        (2,055)     25.33
                                                           -----------------
Balance, December 31, 1997 ........................        46,569      26.45
   Exercised ......................................        (1,029)     25.33
                                                           -----------------
Balance, December 31, 1998 ........................        45,540    $ 26.48
                                                           =================

                                                         1998     1997     1996
                                                       -------------------------

Number of options exercisable, end of year ..........   45,540   22,605   22,605
Weighted-average fair value of options granted
   during the year ..................................  $   - -  $   - -  $ 13.22

Other pertinent  information  related to the options outstanding at December 31,
1998 is as follows:

                                                         Remaining
Exercise            Number             Contractual         Number
 Price            Outstanding             Life           Exercisable
--------------------------------------------------------------------

$ 25.33              19,521             39 Months            19,521
  41.00               2,055             87 Months             2,055
  26.17              23,964             42 Months            23,964
                     ------                                  ------
                     45,540                                  45,540
                     ======                                  ======

The committee is also  authorized to grant awards of common stock and authorized
the  issuance  of 902,  938 and  1,936  shares  of  common  stock  to a group of
employees in 1998, 1997 and 1996, respectively.

As of  December  31,  1998,  options  for  70,208  shares of common  stock  were
available for future grants.


Note 8.  Income Taxes

Income taxes for the years ended December 31, 1998, 1997 and 1996 are summarized
as follows:

                                                          1998    1997    1996
                                                         -----------------------
                                                         (Amounts In Thousands)

Current:
   Federal ..........................................    $2,435  $2,399  $2,098
   State ............................................       586     563     457
Deferred ............................................       (15)   (417)    (77)
                                                         ----------------------
                                                         $3,006  $2,545  $2,478
                                                         ======================
<PAGE>


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

                                                      December 31,
                                                  ----------------------
                                                   1998    1997    1996
                                                  ----------------------
                                                  (Amounts In Thousands)
Deferred income tax assets:
   Allowance for loan losses ...................  $3,079  $2,622  $2,264
   Deferred compensation .......................     156      77     - -
   Certain accrued expenses ....................     211     302     205
   Other .......................................     - -     - -       7
                                                  ----------------------
              Gross tax assets .................   3,446   3,001   2,476
                                                  ----------------------
Deferred income tax liabilities:
   Property and equipment ......................     677     644     621
   FHLB dividends ..............................     130     130     130
   Unrealized gains on debt securities .........     696     283     366
   Other .......................................     105      85     - -
                                                  ----------------------
              Gross tax liabilities ............   1,608   1,142   1,117
                                                  ----------------------
              Net deferred income tax asset ....  $1,838  $1,859  $1,359
                                                  ======================

The net change in the  deferred  income  taxes for the years ended  December 31,
1998, 1997 and 1996 is reflected in the financial statements as follows:

                                                     Year Ended December 31,
                                                  -----------------------------
                                                  1998        1997        1996
                                                  -----------------------------
                                                     (Amounts In Thousands)

Statement of income ........................      $ (15)      (417)       $ (77)
Statement of stockholders' equity ..........        413        (83)         192
                                                  -----------------------------
                                                  $ 398       (500)       $ 115
                                                  =============================

The income tax provisions  for the years ended December 31, 1998,  1997 and 1996
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:

                             1998               1997              1996    
                      ------------------------------------------------------
                                  % Of               % Of              % Of
                                 Pretax             Pretax            Pretax
                       Amount    Income    Amount   Income   Amount   Income
                      ------------------------------------------------------
                                     (Amounts In Thousands)

Expected provision    $ 3,567     34.0%  $ 3,275     34.0%  $ 2,931    34.0%
Tax-exempt interest      (596)    (5.7)     (557)    (5.8)     (539)   (6.3)
Interest expense
   limitation .....       102      1.0        97      1.0        95     1.1
Investment securi-
   ties contributed       - -      - -      (358)    (3.7)      - -     - -
State income taxes,
   net of federal
   income tax
   benefit ........       398      3.8       372      3.9       315     3.7
Income tax credits       (345)    (3.3)     (345)    (3.6)     (344)   (4.0)
Other .............      (120)    (1.2)       61      0.6        20     0.2
                      ------------------------------------------------------
                      $ 3,006     28.6%  $ 2,545     26.4%  $ 2,478    28.7%
                      ======================================================

<PAGE>


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  Company's  capital as of December 31, 1998 with the minimum
requirements is presented below.

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

Tier 1 Risk-Based Capital .....................          13.87%        4.00%
Total Risk-Based Capital ......................          15.13         8.00
Leverage Ratio ................................           9.15         3.00

According to FDIC capital  guidelines,  each of the Banks is classified as "Well
Capitalized." The ability of the Company to pay dividends to its stockholders is
dependent  upon  dividends  paid by the Banks.  The Banks are subject to certain
statutory and regulatory  restrictions  on the amount they may pay in dividends.
To maintain  acceptable  capital ratios in the Banks,  certain of their retained
earnings are not available for the payment of dividends.  To maintain a ratio of
capital to assets of 8%, retained  earnings,  which otherwise could be available
for the payment of dividends to the Company,  total approximately  $3,632,000 as
of December 31, 1998.

Each of the Banks is required to maintain  reserve  balances in cash or with the
Federal Reserve Bank.  Reserve balances totaled  $5,783,000 and $4,503,000 as of
December 31, 1998 and 1997, respectively.


Note 10.  Related Party Transactions

Certain  directors  of the  Company and the Banks and  companies  with which the
directors are  affiliated and certain  principal  officers are customers of, and
have banking  transactions  with, the Banks 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.

The  following  is an analysis  of the  changes in the loans to related  parties
during the years ended December 31, 1998 and 1997:

                                        Year Ended December 31,
                                        -----------------------
                                          1998         1997
                                        ----------------------
                                        (Amounts In Thousands)

Balance, beginning ..............        $10,511      $ 9,232
   Advances .....................          7,077        2,243
   Collections ..................         (6,607)        (964)
                                         --------------------
Balance, ending .................        $10,981      $10,511
                                         ====================

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


Note 11. Fair Value of Financial Instruments

The  carrying  value  and  estimated  fair  values  of the  Company's  financial
instruments as of December 31, 1998 and 1997 are as follows:

                                        1998                 1997
                                   ------------------- -------------------
                                   Carrying Estimated  Carrying Estimated
                                    Amount  Fair Value  Amount  Fair Value
                                   ---------------------------------------
                                          (Amounts In Thousands)

Cash and due from banks .........  $ 16,427  $ 16,427  $ 15,508  $ 15,508
Federal funds sold ..............    36,811    36,811     2,447     2,447
Investment securities ...........   149,350   149,922   138,064   138,454
Loans ...........................   460,911   468,581   422,761   431,806
Accrued interest receivable .....     5,885     5,885     5,441     5,441
Deposits ........................   534,151   536,824   479,770   480,780
Securities sold under agreements
   to repurchase ................    10,554    10,554     9,008     9,008
Borrowings from Federal Home Loan
   Bank .........................    75,732    78,609    50,764    50,678
Accrued interest payable ........     2,048     2,048     2,060     2,060

                                    Face                 Face 
                                   Amount               Amount
                                   -------              -------

Off-balance sheet instruments:
   Loan commitments.............   $93,920              $97,530 
   Letters of credit ...........    10,571                9,779



<PAGE>



Parent Company Only Financial Information

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

                              BALANCE SHEETS
                        December 31, 1998 and 1997
                          (Amounts In Thousands)

ASSETS                                                     1998     1997
-------------------------------------------------------------------------- 

Cash ...................................................  $   698  $   408
Investment securities available for sale ...............      303      300
Investment in subsidiary banks .........................   64,332   57,774
Other assets ...........................................      653      940
                                                          ----------------
              Total assets .............................  $65,986  $59,422
                                                          ================

LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------

Liabilities ............................................  $   233  $   240
                                                          ----------------
Redeemable common stock held by ESOP ...................    9,301    7,682
                                                          ----------------
Stockholders' equity:
   Capital stock .......................................    9,140    9,070
   Retained earnings ...................................   55,428   49,627
   Unrealized gains on investment securities, net ......    1,185      485
                                                          ----------------
                                                           65,753   59,182
   Less maximum cash obligation related to ESOP shares .    9,301    7,682
                                                          ----------------
              Total stockholders' equity ...............   56,452   51,500
                                                          ----------------
              Total liabilities and stockholders' equity  $65,986  $59,422
                                                          ================
<PAGE>


Note 12.   Parent Company Only Financial Information (Continued)
                     STATEMENTS OF INCOME
         Years Ended December 31, 1998, 1997 and 1996
                    (Amounts In Thousands)
<TABLE>
                                                        1998      1997      1996
----------------------------------------------------------------------------------
<S>                                                    <C>       <C>       <C>  
Interest on investment securities ...................  $    17   $    17   $    15
Gain on sale of investment security .................      - -     1,054       - -
Dividends received from subsidiaries ................    2,762     2,515     9,422
Contributions .......................................      - -    (1,054)      - -
Other expenses ......................................     (113)     (102)      (67)
                                                       ---------------------------
              Income before income taxes and equity
                in subsidiaries' undistributed income    2,666     2,430     9,370
Income tax benefit ..................................       39       370        22
                                                       ---------------------------
                                                         2,705     2,800     9,392
Equity in subsidiaries' undistributed income ........    4,781     4,286    (3,248)
                                                       ---------------------------
              Net income ............................  $ 7,486   $ 7,086   $ 6,144
                                                       ===========================
</TABLE>

                   STATEMENTS OF CASH FLOWS
         Years Ended December 31, 1998, 1997 and 1996
                    (Amounts In Thousands)
<TABLE>

                                                            1998       1997      1996
--------------------------------------------------------------------------------------
<S>                                                        <C>       <C>       <C>   
Cash flows from operating activities:
   Net income ...........................................  $ 7,486   $ 7,086   $ 6,144
   Noncash items included in net income:
      Undistributed earnings of subsidiaries ............   (4,781)   (4,286)    3,248
      (Increase) decrease in other assets ...............      357      (174)     (414)
      Increase (decrease) in liabilities ................      (84)     (225)      464
                                                           ---------------------------
              Net cash provided by operating activities .    2,978     2,401     9,442
                                                           ---------------------------
Cash flows from investing activities:
   Investment in subsidiary banks .......................   (1,000)     (750)   (8,073)
   Proceeds from maturities of investment securities ....      300       - -       300
   Purchase of investment securities ....................     (303)      - -      (300)
                                                           ---------------------------
              Net cash (used in) investing activities ...   (1,003)     (750)   (8,073)
                                                           ---------------------------
Cash flows (used in) financing activities:
   Income tax benefit related to stock based compensation       76       - -       - -
   Dividends paid .......................................   (1,761)   (1,537)   (1,391)
                                                           ---------------------------
              Net cash (used in) financing activities ...   (1,685)   (1,537)   (1,391)
                                                           ---------------------------
              Increase (decrease) in cash ...............      290       114       (22)
Cash balance:
   Beginning ............................................      408       294       316
                                                           ---------------------------
   Ending ...............................................  $   698   $   408   $   294
                                                           ===========================
</TABLE>




<PAGE>



Note 13.  Commitments and Contingencies

Concentrations  of credit risk:  All of the Banks' loans,  commitments to extend
credit,  unused  lines of credit and  outstanding  letters  of credit  have been
granted to customers  within each Bank's market area.  Investments in securities
issued by state and  political  subdivisions  within  the state of Iowa  totaled
approximately $15,229,000.  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 Banks have 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 Banks are  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
accompanying financial statements.

Risks and uncertainties:  Certain data processing application systems could fail
or perform  improperly as a result of erroneous  calculation  or data  integrity
problems if they are unable to process  date  information  beyond  December  31,
1999,  an issue  known as Year 2000.  The Banks have  identified,  assessed  and
tested critical  information  systems and are developing  contingency  plans for
their own applications.  There is risk that in the early weeks of the Year 2000,
the  Banks  could  experience   disruptions  that  may  affect  its  operations.
Management  believes  that  the Year  2000  problem  will  not pose  significant
operations  problems for the Banks' computer  systems,  but disruptions could be
material to the financial  statements if there are significant  interruptions in
basic  services,  such as the  electric  power grid,  telephone  services or the
banking system. These risks cannot be estimated.

Financial  instruments  with  off-balance  sheet risk:  The Banks are parties to
financial  instruments  with  off-balance  sheet  risk in the  normal  course of
business  to meet  the  financing  needs  of their  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 Banks' 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 Banks use the same credit  policies in making
commitments  and  conditional  obligations  as  they  do  for  on-balance  sheet
instruments.  A summary of the Banks'  commitments at December 31, 1998 and 1997
is as follows:

                                                               1998      1997
                                                              ---------------
                                                                 (Amount
                                                               In Thousands)

Firm loan commitments and unused portion of lines of credit:
   Home equity loans .......................................  $ 3,509  $ 4,861
   Credit card participations ..............................    8,689    6,896
   Commercial, real estate and home construction ...........   27,549   38,784
   Commercial lines ........................................   54,173   46,989
Outstanding letters of credit ..............................   10,571    9,779

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
Banks evaluate 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
Banks  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 Banks deem necessary.
<PAGE>


Note 14.  Business Acquisitions

Effective  July 1, 1996,  the Company  acquired for cash all of the  outstanding
shares of LBC,  Inc.,  which  owned 100% of the  outstanding  shares of Alliance
Bancorporation, which held 100% of the outstanding shares of the Lisbon Bank and
Trust Company,  Lisbon,  Iowa. The total  acquisition  cost was $3,042,000.  The
excess  of the total  acquisition  cost  over the fair  value of the net  assets
acquired of $1,373,000  is being  amortized  over 15 years by the  straight-line
method.

On September 20, 1996, the Company acquired cash, certain assets and assumed the
deposits  of the Kalona,  Iowa office of  Boatmen's  Bank Iowa,  N.A.  The total
acquisition  cost was $5,031,000.  The excess of the cost over the fair value of
the net assets  acquired was $2,523,000 and is being  amortized over 15 years by
the straight-line method.

The  acquisitions  were accounted for as purchases and the results of operations
since  the  acquisition  dates  are  included  in  the  consolidated   financial
statements.  Unaudited pro forma net income for 1996, as though these banks were
acquired at January 1, 1995, is not  significantly  different  than reported net
income.

A summary of the net assets acquired of these two institutions is as follows:

                                                                       (Amounts
                                                                          In
                                                                      Thousands)
                                                                      ----------

Cash purchase price ..........................................         $  8,073
                                                                       ========
Assets acquired:
   Cash and due from banks ...................................         $    910
   Investment securities available for sale ..................            6,640
   Federal funds sold ........................................           11,448
   Loans .....................................................           20,665
   Property and equipment ....................................            1,438
   Accrued interest receivable ...............................              317
   Intangible assets .........................................            3,896
   Other assets ..............................................            1,938
Liabilities assumed:
   Deposits and accrued interest .............................          (39,019)
   Borrowings from FHLB ......................................             (100)
   Other liabilities .........................................              (60)
                                                                       --------
                                                                       $  8,073
                                                                       ========
<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
                                                                                                             Elected
                                                Position With Registrant Or Bank And                        Officer Of
                                                 Principal Occupation And Employment                        Registrant
           Name       Age                            During The Past Five Years                               (Bank)
-----------------------------------------------------------------------------------------------------------------------
<S>                   <C>    <C>                                                                            <C>    
Dwight O. Seegmiller   46    Director of Registrant and Bank; President, Registrant and Bank                 1986 (1975)

Willis M. Bywater      60    Director of Registrant and Bank; Chairman of the Board, Bank;                   1997
                               Vice President of the Registrant; Executive Officer and Shareholder
                               of Economy Advertising Company

Earl M. Yoder           71   Director of Registrant and Bank; Vice President of the Registrant;              1997
                               Executive Officer and Shareholder of Iowa City Ready Mix, Inc.

James G. Pratt          50   Treasurer of Registrant; Senior Vice President from January 1986                1985 (1982)
                               to present

Thomas J. Cilek         52   Secretary of Registrant; Senior Vice President of Bank from                     1988 (1986)
                               August 1986 to present

</TABLE>

<PAGE>


PART III

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, 1998 and 1997    
         Consolidated statements of income for the years ended 
           December 31, 1998, 1997 and 1996 
         Consolidated statements of comprehensive income for the years
           ended December 31, 1998, 1997 and 1996              
         Consolidated statements of stockholders' equity for the 
           years ended December 31, 1998, 1997 and 1996         
         Consolidated statements of cash flows for the years ended
           December 31, 1998, 1997 and 1996  
         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 (1995 Deferred  Compensation  Plans)
         filed as  Exhibit  10(c) in Form 10-K for the year ended  December  31,
         1995 is incorporated by reference.

         Exhibit 11 - Statement Re Computation of Basic and Diluted Earnings Per
         Share is attached on Page 69.

         Exhibit 21 - Subsidiaries of the Registrant is attached on Page 70.

         Exhibit 23 - Consent of Accountants is attached on Page 71.

         Exhibit 27 - Financial Data Schedule is attached on Pages 72 and 73.

(b)      Reports on Form 8-K:

         There were no reports on Form 8-K for the three months  ended  December
31, 1998.



<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:  March 22, 1999       By  /s/ Dwight O. Seegmiller
                                ------------------------------------------------
                                Dwight O. Seegmiller, Director and President

Date:  March 22, 1999       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:  March 22, 1999       By  /s/ Willis M. Bywater
                                ------------------------------------------------
                                Willis M. Bywater, Director

Date:  March 22, 1999       By  /s/ Thomas J. Gill
                                ------------------------------------------------
                                Thomas J. Gill, Director

Date:  March 22, 1999       By  /s/ Donald H. Gringer
                                ------------------------------------------------
                                Donald H. Gringer, Director

Date:  March 22, 1999       By  /s/ Richard W. Oberman
                                ------------------------------------------------
                                Richard W. Oberman, Director

Date:  March 22, 1999       By  /s/ Theodore H. Pacha
                                ------------------------------------------------
                                Theodore H. Pacha, Director

Date:  March 22, 1999       By  /s/ Ann M. Rhodes
                                ------------------------------------------------
                                Ann M. Rhodes, Director

Date:  March 22, 1999       By  /s/ Ronald E. Stutsman
                                ------------------------------------------------
                                Ronald E. Stutsman, Director

Date:  March 22, 1999       By  /s/ Earl M. Yoder
                                ------------------------------------------------
                                Earl M. Yoder, Director

Date:  March 22, 1999       By  /s/ Sheldon E. Yoder
                                ------------------------------------------------
                                Sheldon E. Yoder





<PAGE>


                              HILLS BANCORPORATION
                       ANNUAL REPORT ON FORM 10-K FOR THE
                       FISCAL YEAR ENDED DECEMBER 31, 1996

                                  EXHIBIT INDEX

                                                                 Page Number
                                                              In The Sequential
 Exhibit                                                       Numbering System
  Number                           Description                For 1998 Form 10-K
--------------------------------------------------------------------------------

    11     Statement Re Computation of Basic and Diluted 
             Earnings Per Share                            

    21     Subsidiaries of the Registrant                       

    23     Consent of Independent Certified Public Accountants    

    27     Financial Data Schedule