HILLS BANCORPORATION


                                    FORM 10-K


                                DECEMBER 31, 1997










<PAGE>


                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, 1997.     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 13, 1998 (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 $48 per share) was $57,066,000.

The number of shares  outstanding of the  Registrant's  common stock as of March
13, 1998 is 1,467,754 shares of no par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement dated March 23, 1998, for the Annual Meeting of
the  Shareholders  of the  Registrant  to be held  April  20,  1998  (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 multi-bank 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
(formerly  Lisbon Bank and Trust Company),  Lisbon,  Iowa ("Hills Bank Lisbon");
and Hills Bank Kalona,  Kalona, Iowa ("Hills Bank Kalona") (hereinafter 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  Company as of January 23, 1984 when  stockholders
of the Bank exchanged their shares for shares of the Company.  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 Hills Bank Lisbon,  Lisbon,  Iowa.  The
Company chartered a new subsidiary bank, Hills Bank Kalona, and on September 20,
1996, the subsidiary bank 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.  The
Hills Bank and Trust Company's trust department  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 Company's 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
96,000.  The University of Iowa has over 27,000  students and 15,000  employees,
including  employees of The  University of Iowa  Hospitals and Clinics.  Johnson
County,  Iowa has one of the strongest economies in Iowa and has had substantial
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  Company.  Lisbon  has a  population  of
approximately 1,500 and Mount Vernon,  located two miles away, has 3,700 people.
In February 1998 Hills Bank opened a new office location in Mount Vernon,  Iowa.
The 4,200 square foot one-story  full-service  location in Mount Vernon 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 agriculture community, but is located within easy driving
distance for employment in Iowa City and Washington, Iowa.

The commercial  banking  business is highly  competitive and the Company's banks
compete with other commercial  banks,  credit unions,  brokerage firms,  finance
companies, insurance companies, and other financial institutions.
<PAGE>


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 merger 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  only 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  Corporation,  Mercantile  Bancorporation,   Firstar
Corporation  and Nations Bank have  acquired a number of  independent  banks and
smaller multi-bank holding companies in various metropolitan areas of Iowa. Each
operates  under a single  charter  in Iowa.  To date  none of the  Bank's  local
competitors  have been purchased by the larger regional or national bank holding
companies.

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

Iowa law permits the  acquisition of an Iowa bank holding  company or state bank
by an out-of-state  bank holding company located  anywhere in the United States.
Certain  restrictions  relating to deposit  concentrations  and  requirements of
operations have also been established for out-of-state bank holding companies by
the Iowa Legislature.  The state law prohibits de novo entry and the acquisition
of individual  branch offices by out-of-state bank holding  companies.  No state
bank may be directly or  indirectly  acquired by an  out-of-state  bank  holding
company that has not been in  continuous  existence  and  operation for at least
five years.

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 as follows:

                                                                    Approximate
                                                                   Assets As Of
                                                                    December 31,
                                                                        1997
                                                                   -------------
                                                                   (In Millions)

Largest competing bank (includes assets in out-of-territory
  branches)                                                           $550
Next largest competing bank                                            331
Largest competing credit union                                         152

Hills Bank Kalona and Hills Bank Lisbon  compete with other banks in their trade
territories. Based upon deposits, their market share compared to the other local
banks was approximately 35% and 28%, respectively.

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   6.4%  of  the  Banks'  loans  have  been  made  to  farmers  for
agricultural  purposes. The agricultural sector of the economy has been cyclical
with a  general  trend  toward  fewer  and  larger  farms.  The  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.  Technology  experts  believe that
many data processing  application  systems could fail or improperly perform as a
result of erroneous calculation or data integrity problems if they are unable to
process date  information  beyond  December 31, 1999. The subsidiary  banks have
responded to this issue by forming a Year 2000 steering committee. The committee
is responsible for identifying date sensitive financial applications,  obtaining
certification  and  validation  related to outside  systems,  and  developing  a
testing  plan for  in-house  and  outside  systems in order to insure  Year 2000
compliance.  Because  substantially  all the Company's  critical data processing
equipment and applications are licensed or purchased from outside vendors, it is
critical for the Company to assess  whether its equipment and  applications  are
Year 2000  compliant,  and to replace any items that are not compliant.  In this
regard, the Company has planned to convert to a new financial  accounting system
that the Company and the vendor  believe to be Year 2000  compliant  and to test
other  critical   applications.   Subject  to  the  identification  of  material
noncompliance by its outside  vendors,  the Company  currently  believes that it
will be Year 2000  compliant  on a timely  basis  and  thereby  meet  regulatory
requirements  concerning  the Year 2000  issue and  avoid  material  operational
disruptions. In the immediate future, the Company will be completing a number of
steps in its Year 2000 compliance  program.  These steps include completion of a
Year 2000 project budget,  implementation of customer contacts using notices and
questionnaires,  preparing a draft assessment  report,  obtaining an analysis of
legal and insurance issues, planning for implementation of improved systems, and
developing  preliminary testing strategies and audit plans. Although the Company
currently  does not expect that its  expenditures  to become Year 2000 compliant
will have a material  effect on its  operations,  there can be no assurance that
operational difficulties relating to the Year 2000 issue will not be experienced
in the future or that more  material  expenditures  will not be  required in the
future to fully resolve the Year 2000 issue.

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,  1997,  and the Banks had 191
regular and 63 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.
<PAGE>


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,
                                                                                  ----------------------------
                                                                                    1997       1996      1995
                                                                                  ----------------------------
                                                                                         (In Thousands)
<S>                                                                               <C>       <C>       <C>
ASSETS
   Cash and due from banks .....................................................  $ 12,689  $  9,987  $  9,795
   Taxable securities ..........................................................   110,542   107,106    95,747
   Nontaxable securities .......................................................    25,184    22,291    19,528
   Federal funds sold ..........................................................     3,032     9,159     8,980
   Loans, net ..................................................................   397,787   337,630   311,592
   Property and equipment, net .................................................     8,603     7,516     6,685
   Other assets ................................................................    14,829    11,091     7,484
                                                                                  ----------------------------
                                                                                  $572,666  $504,780  $459,811
                                                                                  ============================

LIABILITIES AND STOCKHOLDERS' EQUITY
   Noninterest-bearing demand deposits .........................................  $ 48,330  $ 39,929  $ 36,085
   Interest-bearing demand deposits ............................................    43,262    37,310    37,249
   Savings deposits ............................................................   119,282   102,849    74,146
   Time deposits ...............................................................   250,241   234,825   226,251
   Securities sold under agreements to repurchase
      and federal funds purchased ..............................................     8,740     7,607     9,424
   FHLB borrowings .............................................................    43,026    28,914    28,965
   Other liabilities ...........................................................     4,255     3,509     2,978
   Redeemable common stock held by
      Employee Stock Ownership Plan ............................................     7,049     5,844     5,241
   Stockholders' equity ........................................................    48,481    43,993    39,472
                                                                                  ----------------------------
                                                                                  $572,666  $504,780  $459,811
                                                                                  ============================
</TABLE>
INTEREST INCOME AND EXPENSE

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

Income:
   Loans (1) ....................................  $34,814  $29,966  $27,506
   Taxable securities ...........................    6,769    6,190    5,189
   Nontaxable securities (1) ....................    1,845    1,692    1,567
   Federal funds sold ...........................      158      485      519
                                                   -------------------------
              Total interest income .............   43,586   38,333   34,781
                                                   -------------------------

Expense:
   Interest-bearing demand deposits .............      949      819      894
   Savings deposits .............................    4,183    3,668    2,618
   Time deposits ................................   14,162   13,275   12,673
   Securities sold under agreements to repurchase      426      326      409
   FHLB borrowings ..............................    2,782    1,863    1,874
                                                   -------------------------
              Total interest expense ............   22,502   19,951   18,468
                                                   -------------------------

              Net interest income ...............  $21,084  $18,382  $16,313
                                                   =========================

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


INTEREST RATES AND INTEREST DIFFERENTIAL
                                                                Year Ended
                                                                December 31,
                                                           ---------------------
                                                           1997    1996    1995
                                                           ---------------------
Average yields:
   Taxable securities ..................................   6.12%   5.78%   5.42%
   Nontaxable securities ...............................   4.84    5.01    5.29
   Nontaxable securities (tax equivalent basis) ........   7.33    7.59    8.02
   Loans (1) ...........................................   8.70    8.80    8.74
   Loans (tax equivalent basis) ........................   8.75    8.87    8.83
   Federal funds sold ..................................   5.21    5.30    5.78
   Interest-bearing demand deposits ....................   2.19    2.20    2.40
   Savings deposits ....................................   3.51    3.57    3.53
   Time deposits .......................................   5.66    5.65    5.60
   Securities sold under agreements to repurchase ......   4.87    4.29    4.34
   Interest on FHLB borrowings .........................   6.47    6.44    6.47
   Yield on average interest earning assets ............   8.12    8.05    7.98
   Rate on average interest-bearing liabilities ........   4.84    4.85    4.91
   Net interest spread (2) .............................   3.28    3.20    3.07
   Net interest margin (3) .............................   3.93    3.86    3.74

(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.

CHANGE IN INTEREST INCOME AND EXPENSE
<TABLE>
                                                         Change Due  Change Due  Total
                                                         -----------------------------
                                                          To Volume  To Rates   Change
                                                         -----------------------------
                                                                 (In Thousands)
<S>                                                      <C>       <C>        <C>
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
                                                          ===========================

Year ended December 31, 1996: Change in interest income:
      Loans ............................................  $ 2,334   $   126   $ 2,460
      Taxable securities ...............................      642       359     1,001
      Nontaxable securities ............................      212       (87)      125
      Federal funds sold ...............................       10       (44)      (34)
                                                          ---------------------------
                                                            3,198       354     3,552
                                                          ---------------------------
   Change in interest expense:
      Interest-bearing demand deposits .................        1       (76)      (75)
      Savings deposits .................................    1,020        30     1,050
      Time deposits ....................................      487       115       602
      Securities sold under agreements to repurchase ...      (78)       (5)      (83)
      Interest on FHLB borrowings ......................       (3)       (8)      (11)
                                                          ---------------------------
                                                            1,427        56     1,483
                                                           --------------------------
   Change in net interest income .......................   $ 1,771  $   298   $ 2,069
                                                           ==========================
</TABLE>
<PAGE>


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.

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,
                           ------------------------------------------------
                             1997       1996      1995     1994      1993
                           ------------------------------------------------
                                            (In Thousands)

Agricultural ............  $ 27,636  $ 23,133  $ 19,000  $ 17,826  $ 17,117
Commercial and financial     33,616    30,650    26,810    26,024    24,721
Real estate, construction     8,157     8,846     7,937     6,933     7,006
Real estate, mortgage ...   332,655   279,134   239,899   225,342   195,527
Loans to individuals ....    28,707    33,812    31,640    30,906    24,380
                           ------------------------------------------------
              Total .....  $430,771  $375,575  $325,286  $307,031  $268,751
                           ================================================

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,
1997:
<TABLE>

                                                                  Amount   One Year     One To      Over
                                                                 Of Loans  or Less(1) Five Years  Five Years
                                                                 -------------------------------------------
                                                                              (In Thousands)
<S>                                                               <C>       <C>        <C>        <C>
Commercial, financial and agricultural ........................   $ 61,252  $ 32,834   $ 18,927   $  9,491
Real estate, construction and mortgage ........................    340,812    65,010    147,710    128,092
Other .........................................................     28,707     6,572     20,884      1,251
                                                                  ----------------------------------------
                                                                  $430,771  $104,416   $187,521   $138,834
                                                                  ========================================

Interest rates on loans are as follows:

   Fixed rate .................................................   $280,951  $ 80,361   $175,570   $ 25,020
   Variable rate ..............................................    149,820    24,055     11,951    113,814
                                                                  ----------------------------------------
                                                                  $430,771  $104,416   $187,521   $138,834
                                                                  ========================================
<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>

NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

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

                                       1997     1996    1995     1994      1993
                                      ------------------------------------------
                                                   (In Thousands)

Nonaccrual loans ...................  $  - -  $  339  $  489   $    --   $    --
Accruing loans past due 90 days
   or more .........................     954   1,092     417       822     1,064
Restructured loans .................     - -     - -     - -       - -       - -
Impaired loans .....................   9,556   7,811   5,465       N/A       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.
<PAGE>


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 the loans
have been  charged off to the net present  value of the future cash flows or the
fair value of the collateral if the loan is collateral dependent.

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,
                                      ------------------------------------------
                                       1997     1996     1995     1994     1993
                                      ------------------------------------------
                                                    (In Thousands)
Amount of loan loss allowance at
   beginning of year ...............  $7,311   $6,740   $6,210   $5,775   $5,190
                                      ------------------------------------------
Charge-offs:
   Agriculture .....................     197      300      101      423      270
   Commercial and financial ........     326      236      387      334      326
   Real estate, mortgage ...........     215      127      180      172      165
   Loans to individuals ............     390      308      254      131      300
                                      ------------------------------------------
                                       1,128      971      922    1,060    1,061
                                      ------------------------------------------
Recoveries:
   Agriculture .....................      65       48      218      368      247
   Commercial and financial ........     195       95      226      206      213
   Real estate, mortgage ...........     377      215      149      154       87
   Loans to individuals ............     142       80      137      126      178
                                      ------------------------------------------
                                         779      438      730      854      725
                                      ------------------------------------------
Net charge-offs ....................     349      533      192      206      336
                                      ------------------------------------------
Allowances of acquired banks .......     - -      350      - -      - -      - -
                                      ------------------------------------------
Provision for loan losses (1) ......   1,048      754      722      641      921
                                      ------------------------------------------
Balance of loan loss allowance
   at end of year ..................  $8,010   $7,311   $6,740   $6,210   $5,775
                                      ==========================================
Ratio of net charge-offs during year
   to average loans outstanding ....   0.09%    0.16%    0.06%    0.07%    0.13%
                                      ==========================================

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  1998 that  would be  significantly
different than the years ended December 31, 1997, 1996, 1995, 1994 and 1993.

(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, 1997).

A summary of the components of the allowance for loan loss, by risk element,  as
of December 31, 1997 and 1996 is as follows:

                                                     1997       1996
                                                    -----------------
                                                      (In Thousands)

Potential Watch and Watch Loans ...............     $2,600     $1,769
Substandard ...................................      1,507      1,337
Specific borrowers ............................      1,550      2,009
Constructed model real estate homes ...........        682        858
Agricultural loans ............................        250        250

Anticipated charge-offs of the above categories are not determinable at December
31, 1997;  however,  the Banks have no reason to expect actual charge-offs to be
significantly different from historical charge-offs.
<PAGE>


INVESTMENT SECURITIES

The following tables show the carrying value of the investment  securities as of
December 31, 1997,  1996 and 1995 and the maturities and yield of the investment
securities as of December 31, 1997:

<TABLE>
                                                                                         December 31,
                                                                                 ----------------------------
                                                                                   1997      1996      1995
                                                                                 ----------------------------
                                                                                        (In Thousands)
<S>                                                                              <C>       <C>       <C>
Carrying value:
   U. S. Treasury securities ..................................................  $ 40,189  $ 45,213  $ 41,275
   Obligations of other U. S. Government agencies and corporations ............    65,445    57,397    55,537
   Obligations of states and political subdivisions ...........................    27,692    23,447    21,443
   Other ......................................................................       - -     3,180       - -
                                                                                 ----------------------------
                                                                                 $133,326  $129,237  $118,255
                                                                                 ============================
</TABLE>
<TABLE>
                                                                                       December 31, 1997
                                                                                  --------------------------
                                                                                                  Weighted
                                                                                  Carrying         Average
                                                                                    Value           Yield
                                                                                  --------------------------
                                                                                         (In Thousands)
<S>                                                                               <C>             <C>
Type and maturity grouping:
   U. S. Treasury maturities:
      Within 1 year ...........................................................   $  6,996           6.21%
      From 1 to 5 years .......................................................     33,193           6.18
                                                                                  --------
                                                                                    40,189
                                                                                  --------
   Obligations of other U. S. Government agencies and corporations, maturities:
      Within 1 year ...........................................................     17,313           6.02%
      From 1 to 5 years .......................................................     47,728           6.21
      From 5 to 10 years ......................................................        404           7.19
                                                                                  --------
                                                                                    65,445
                                                                                  --------
   Obligations of states and political subdivisions, maturities:
      Within 1 year ...........................................................      3,095           7.92%
      From 1 to 5 years .......................................................     15,144           7.10
      From 5 to 10 years ......................................................      9,318           7.10
      Over 10 years ...........................................................        135           8.08
                                                                                  --------
                                                                                    27,692
                                                                                  --------
              Total ...........................................................   $133,326
                                                                                  ========
</TABLE>
<PAGE>


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%.

As of December  31, 1997,  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.

DEPOSITS

The following  tables show the average  deposits and rates paid on such deposits
for the years ended December 31, 1997,  1996 and 1995 and the composition of the
certificates issued in excess of $100,000 as of December 31, 1997:
<TABLE>
                                                              December 31,
                                      -------------------------------------------------------------
                                        1997      Rate        1996      Rate       1995       Rate
                                      -------------------------------------------------------------
<S>                                   <C>         <C>       <C>         <C>      <C>         <C>
Average noninterest-bearing deposit   $ 48,330    0.00%     $ 39,929    0.00%$   $ 36,085     0.00%
Average interest-bearing demand
   deposits .......................     43,262    2.19        37,310    2.20       37,249     2.40
Average savings deposits ..........    119,282    3.51       102,849    3.57       74,146     3.53
Average time deposits .............    250,241    5.66       234,825    5.65      226,251     5.60
                                      --------              --------             --------
                                      $461,115              $414,913             $373,731
                                      ========              ========             ========
</TABLE>

Time certificates issued in amounts
   of $100,000 or more as of
   December 31, 1997 with                 Amount           Rate
                                          ------------------------
   maturity in:
   3 months or less                       $        9,200    6.03%
   3 through 6 months                              7,950     5.14
   6 through 12 months                            13,727     5.64
   Over 12 months                                  7,497     6.22
                                          --------------
                                          $       38,374
                                          ==============



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, 1997, 1996 and 1995:

                                                            December 31,
                                                  ------------------------------
                                                   1997        1996        1995
                                                  ------------------------------

Return on assets ...........................       1.24%       1.22%       1.14%
Return on stockholders' equity .............      14.62       13.97       13.32
Dividend payout ratio ......................      21.69       22.62       24.12
Stockholders' equity to assets ratio .......       8.47        8.72        8.58

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 1997, 1996 and 1995:

                                               1997       1996      1995
                                              ---------------------------
                                                 (Amounts In Thousands)

Outstanding as of December 31 .............   $ 9,008    $6,071   $10,019
Weighted average interest rate at year end      4.30%     4.31%     4.25%
Maximum month-end balance .................    16,104     9,112    12,028
Average month-end balance .................     8,740     7,607     9,424
Weighted average interest rate for the year     4.87%     4.29%     4.34%
<PAGE>


FEDERAL HOME LOAN BANK BORROWINGS

The following  table shows  outstanding  month-end  balances,  weighted  average
interest rates at year end,  maximum  month-end  balances,  average balances and
weighted average interest rates during 1997, 1996 and 1995:

                                                1997        1996          1995
                                              ---------------------------------

Outstanding as of December 31 .............   $50,764      $25,795      $30,727
Weighted average interest rate at year end      6.42%        6.42%        6.29%
Maximum month-end balance .................    50,764       30,826       35,758
Average month-end balance .................    43,026       28,914       28,965
Weighted average interest rate for the year     6.47%        6.44%        6.47%


PART I

Item 2.   Properties

The  Company's  office  and the main  bank of Hills  Bank and Trust  Company  is
located at 131 Main Street,  Hills,  Iowa.  The Hills office 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 Company are as follows:

1.   Iowa City office located at 1401 South Gilbert Street is a one-story  brick
     building containing  approximately  11,400 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.

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 renovated and expanded building in North Liberty,  Iowa
     was opened for  business in 1986.  That office is a  full-service  location
     including  three  drive-up  teller  lanes and a drive-up  automatic  teller
     machine.

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 Bank has options to renew the lease in 2001.

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 added its
first office location in Mount Vernon, Iowa 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.

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, 1997.




<PAGE>


PART II

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.

During 1997, the Company's stock transfer records reflect that 7,314 shares were
traded in a total of 12 transactions.  While the Company has no direct knowledge
of the selling price for these shares, based upon information informally related
by  shareholders,  it believes that in 1997 the range of selling price of shares
was $40.00 to $48.00 per share. During 1996, 5,716 shares were traded in a total
of 29  transactions.  The 1996 price of these  shares was  believed to be in the
$33.34 to $40.00 range. In 1995, 5,322 shares were traded in 15 transactions. As
of December 31, 1997, the Company has 1,035 shareholders.

The Company paid aggregate  annual cash dividends in 1997 and 1996 of $1,537,000
and $1,391,000,  respectively,  or $1.05 per share in 1997 and $.95 per share in
1996.  In January  1998,  the Company  declared and paid a dividend of $1.20 per
share  totaling  $1,761,000.  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.


PART II

Item 6.   Selected Financial Data

CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
<TABLE>
                                         1997         1996         1995         1994         1993
                                       ------------------------------------------------------------
<S>                                    <C>          <C>          <C>          <C>          <C>
YEAR-END TOTALS
   Total assets ....................   $603,102     $539,452     $484,607     $444,912     $417,043
   Investment securities ...........    138,064      132,635      121,536      110,050      126,894
   Federal funds sold ..............      2,447        1,107       16,080        7,500        3,768
   Loans, net ......................    422,761      368,264      318,546      300,821      262,976
   Deposits ........................    479,770      450,061      392,257      372,838      353,486
   Federal Home Loan Bank notes ....     50,764       25,795       30,727       20,758       15,790
   Redeemable common stock .........      7,682        6,416        5,271        5,210        4,616
   Stockholders' equity ............     51,500       47,335       43,277       36,447       35,943

EARNINGS
   Interest income .................   $ 42,743     $ 37,516     $ 33,978     $ 29,583     $ 29,031
   Interest expense ................     22,502       19,951       18,468       14,834       15,520
   Provision for loan losses .......      1,048          754          722          641          921
   Other income ....................      5,938        3,868        3,438        3,311        4,181
   Other expenses ..................     15,500       12,057       10,975       10,640       10,299
   Applicable income taxes .........      2,545        2,478        1,994        1,845        1,799
   Net income ......................      7,086        6,144        5,257        4,934        4,673

PER SHARE Net income:
      Basic ........................   $   4.83     $   4.19     $   3.59     $   3.37     $   3.20
      Diluted ......................       4.78         4.15         3.57         3.36         3.20
   Cash dividends ..................       1.05         0.95         0.87         0.80         0.73
   Book value as of December 31 ....      35.08        32.30        29.57        24.91        24.57
   Increase (decrease) in book value
      due to:
      ESOP obligation and debt .....      (5.23)       (4.38)       (3.60)       (3.56)       (3.29)
      Unrealized gains (losses) on
        debt securities ............       0.33         0.46         0.20        (1.77)        0.19

SELECTED RATIOS
   Return on average assets ........       1.24%        1.22%        1.14%        1.15%        1.16%
   Return on average equity ........      14.62        13.97        13.32        13.62        13.91
   Net interest margin .............       3.93         3.86         3.74         3.85         3.73
   Average stockholders' equity to
      average total assets .........       8.47         8.72         8.58         8.47         8.32
   Dividend payout ratio ...........      21.69        22.62        24.12        23.83        22.92
</TABLE>
<PAGE>


PART II

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.

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 operation of a
financial institution,  and stockholders are cautioned that management's view of
the  future,  which  serves as the basis for both the ongoing  operation  of the
Company and the forward looking statements included in this report, may prove to
be other than anticipated.

Financial Position
<TABLE>
Year End Amounts (In Thousands)       1997      1996      1995      1994      1993
------------------------------------------------------------------------------------
<S>                                 <C>       <C>       <C>       <C>       <C>

Loans, net of allowance for losses  $422,761  $368,264  $318,546  $300,821  $262,976
Investment securities ............   138,064   132,635   121,536   110,050   126,894
Deposits .........................   479,770   450,061   392,257   372,838   353,486
Federal Home Loan Bank notes .....    50,764    25,795    30,727    20,758    15,790
Stockholders' equity .............    51,500    47,335    43,277    36,447    35,943
Total assets .....................   603,102   539,452   484,607   444,912   417,043
</TABLE>

In 1997, net loans  increased  $54.5 million,  primarily in real estate mortgage
loans, as demand remains high and rates continue to be attractive.

Total  assets  increased  11.80% in 1997,  compared  to an increase of 11.32% in
1996.  In 1997 net loans  increased  $54.5  million,  primarily  in real  estate
mortgage  loans,  as demand  remained high and rates continued to be attractive.
The  growth in assets in 1996 was  attributable  to strong  loan  demand and the
acquisition of approximately $39 million of investment securities, federal funds
sold and loans acquired in two purchase  business  transactions that occurred in
the  third  quarter.  Approximately  42% of the  total  loan  growth in 1996 was
attributable to the purchase business transactions.

Deposits  increased  6.60% in 1997  compared  to an  increase of 14.74% in 1996.
Federal Home Loan Bank note  borrowings in 1997 increased by a net $25.0 million
and the  advances  were  used to fund  the loan  growth.  Of the  $57.8  million
increase in deposits in 1996, approximately $39 million was deposits acquired in
the purchases.
<PAGE>


Components of Diluted Earnings Per Share

                                                   1997     1996     1995
--------------------------------------------------------------------------

Net interest income ...........................   $13.64   $11.87   $10.53
Provision for loan losses .....................    (0.71)   (0.51)   (0.49)
Noninterest income ............................     4.00     2.61     2.34
Noninterest expense ...........................   (10.44)   (8.14)   (7.46)
                                                  ------------------------
              Income before income taxes ......     6.49     5.83     4.92
Income tax expense ............................    (1.71)   (1.68)   (1.35)
                                                  ------------------------
              Net income ......................   $ 4.78   $ 4.15   $ 3.57
                                                  ========================

Higher net income per share in 1997  resulted  from  increases  in net  interest
income and noninterest  income,  but were partially offset by higher noninterest
expense.  Both noninterest income and noninterest  expense for 1997 included the
recognition of $1,054,000  gain on the transfer 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 is reflected as a reduction in the income tax
expense  for 1997.  Each of the years  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 1997 as follows:
<TABLE>
                                                                                  INTEREST INCOME
                                                              ------------------------------------------------------
                                                                                          Increase (Decrease)
                                                              Change In   Change In  -------------------------------
                                                               Average     Average    Volume        Rate       Net
                                                               Balance       Rate     Change      Changes    Changes
                                                               -----------------------------------------------------
                                                                               (Amounts In Thousands)
<S>                                                            <C>        <C>       <C>          <C>         <C>
Loans, net .................................................   $ 60,157    (0.12)   $  5,259     $   (411)   $  4,848
Taxable securities .........................................      3,436     0.34         204          375         579
Nontaxable securities ......................................      2,893    (0.26)        213          (60)        153
Federal funds sold .........................................     (6,127)   (0.09)       (319)          (8)       (327)
                                                               --------             --------------------------------
                                                               $ 60,359             $  5,357     $   (104)   $  5,253
                                                               ========             =================================

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

Interest-bearing demand deposits ...........................   $  5,952    (0.01)   $    134     $     (4)   $    130
Savings deposits ...........................................     16,433    (0.06)        578          (63)        515
Time deposits ..............................................     15,416     0.01         864           23         887
Securities sold under agreements to repurchase .............      1,133     0.58          52           48         100
FHLB borrowings ............................................     14,112     0.03         910            9         919
                                                               --------             ---------------------------------
                                                               $ 53,046             $  2,538     $     13    $  2,551
                                                                                    =================================
Change in net interest income ..............................                        $  2,819     $   (117)   $  2,702
                                                                                    =================================
</TABLE>

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

        (Tax Equivalent Basis)                                      1997    1996    1995
-----------------------------------------------------------------------------------------
<S>                                                                 <C>     <C>     <C>

Yield on average interest-earning assets .....................      8.12%   8.05%   7.98%
Rate on average interest-bearing liabilities .................      4.84    4.85    4.91
                                                                    ---------------------
Net interest spread ..........................................      3.28    3.20    3.07
Effect of noninterest-bearing funds ..........................      0.65    0.66    0.67
                                                                    --------------------
Net interest margin (tax equivalent interest income divided by
   average interest-earning assets) ..........................      3.93%   3.86%   3.74%
                                                                    =====================
</TABLE>
<PAGE>


Loan Losses

The  provision for loan losses was  $1,048,000,  $754,000 and $722,000 for 1997,
1996 and 1995.  Charge-offs,  net of recoveries were $349,000 for 1997, $533,000
for 1996 and $192,000 for 1995.

The allowance for loan losses  totaled  $8,010,000 at December 31, 1997 compared
to  $7,311,000  at  December  31,  1996.  The  percentage  of the  allowance  to
outstanding   loans  was  1.86%  and  1.95%  at  December  31,  1997  and  1996,
respectively.  Agricultural  loans  totaled  $27,636,000  at December  31, 1997.
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 low, the University of Iowa enrollment
is stable,  the University of Iowa Hospitals and Clinics 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                 1997     1996     1995
--------------------------------------------------------------------------

Real estate origination fees ................     $0.26    $0.22     $0.20
Trust fees ..................................      0.92     0.61      0.51
Deposit account charges and fees ............      1.28     1.11      1.09
Other fees and charges ......................      0.81     0.71      0.62
Other (sale of portfolio) ...................      0.10
Investment securities gains (losses) ........      0.63    (0.04)    (0.08)
                                                  ------------------------
                                                  $4.00    $2.61     $2.34
                                                  ========================

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. Total other income increased $430,000 in 1996 compared
to 1995,  which was  primarily  due to higher  trust  fees and  deposit  account
charges.  Trust  fees  have  increased  in 1997,  1996 and 1995  because  of new
accounts and the effect of higher balances under management. There were $940,000
in investment  securities gains in 1997 following losses of $57,000 and $111,000
in 1996 and 1995, respectively.

Other Expenses

Dollars Per Share, Based on Weighted
Average Diluted Shares Outstanding                        1997   1996   1995
----------------------------------------------------------------------------

Salaries and employees benefits ....................     $4.79  $4.15  $3.73
Occupancy ..........................................      0.68   0.60   0.54
Furniture and fixtures .............................      0.96   0.75   0.75
F.D.I.C. insurance .................................      0.04   0.01   0.29
Supplies and postage ...............................      0.60   0.55   0.49
Contributions ......................................      0.75   0.06   0.06
Other ..............................................      2.62   2.02   1.60
                                                        --------------------
                                                        $10.44  $8.14  $7.46
                                                        ====================
<PAGE>


Total other expenses increased  $3,443,000 or 28.6% in 1997 following  increases
of 9.86%  for 1996 and  3.31% for  1995,  respectively.  Contributions  for 1997
includes the $1,054,000 gift to the Hills  Bancorporation  Foundation.  Salaries
and employee  benefits  increased  $981,000,  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. For 1995 there were
eleven  full-time  equivalents  added.  Medical  insurance  has had only  modest
increases  in the past three years.  Occupancy  and  furniture  and fixtures had
total  increase  of  $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 $2,545,000, $2,478,000 and $1,994,000 for the years ended
December 31, 1997, 1996 and 1995, respectively.  The corresponding percentage of
tax expense  compared to income before  income taxes is 26.4% in 1997,  28.7% in
1996 and 27.5% in 1995.

Impact of Recently Issued Accounting Standards

The adoption of new accounting  standards had no effect on financial position or
results of  operations  in 1997,  and the  adoption of several  recently  issued
standards is not expected to have a significant effect.

Interest Rate Sensitivity and Liquidity Analysis

At December 31, 1997,  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 ............      $  2,447  $    - -    $    - -     $    - -     $    - -     $    - -    $  2,447
   Investment
      securities .................           - -     3,550       4,200        7,053       12,021      111,240     138,064
   Loans .........................           - -    41,255      21,146       28,563       53,737      286,070     430,771
                                        ---------------------------------------------------------------------------------
        Total earning
           assets ................         2,447    44,805      25,346       35,616       65,758      397,310     571,282
                                        ---------------------------------------------------------------------------------
Sources of funds:
   Interest-bearing
      checking and
      savings accounts ...........        55,712       - -         - -          - -          - -      112,600     168,312
   Certificates of
      deposit ....................           - -     6,755      39,300       55,449       66,874       90,909     259,287
   Other borrowings -
      FHLB .......................           - -       - -       5,000       10,000        5,000       30,764      50,764
   Repurchase
      agreements .................         9,008       - -         - -          - -          - -          - -       9,008
                                        ---------------------------------------------------------------------------------
                                          64,720     6,755      44,300       65,449       71,874      234,273     487,371
   Other sources .................           - -       - -         - -          - -          - -       83,911      83,911
                                        ---------------------------------------------------------------------------------
        Total sources ............        64,720     6,755      44,300       65,449       71,874      318,184     571,282
                                        ---------------------------------------------------------------------------------
   Repricing
      differences ................      $(62,273)  $38,050    $(18,954)    $(29,833)    $ (6,116)      $79,126   $    - -
                                        =================================================================================
</TABLE>

A portion of the interest-bearing  checking,  savings, and money market accounts
have been  included in the above table as maturing  immediately  and the rest of
these  deposits are shown as more than one year.  The  classifications  are used
because the 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.
<PAGE>


Liquidity and Capital Resources

On an unconsolidated  basis, Hills Bancorporation (the holding company) had cash
balances of  $408,000 as of December  31,  1997.  In 1997,  the holding  company
received  dividends of $2,515,000 from its subsidiary banks and used those funds
to make a $750,000  capital  contribution to a subsidiary bank, pay dividends to
its stockholders of $1,537,000 and increase its cash position by $114,000.

As of December 31, 1997 and 1996,  stockholders' equity before deducting for the
maximum  cash  obligation  related  to ESOP  was  $59,182,000  and  $53,751,000,
respectively.  This  measure of equity as a percent of total assets was 9.81% at
December 31, 1997 and 9.96% at December 31, 1996.  These ratios are  competitive
with the  Company's  peers.  As of December 31, 1997,  total equity was 8.54% of
assets  compared  to 8.77% 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
$4,902,000 as of December 31, 1997.

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,  1997,   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, 1997 with  minimum
requirements is presented below:

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

Tier I Risk-Based Capital                              13.97%          4%
Total Risk-Based Capital                               15.23           8
Leverage Ratio                                          9.09           3

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

On a consolidated basis, 1997 cash flows from operations provided $9,644,000 and
another $57,615,000 was provided by net increases in deposits of $32,646,000 and
Federal Home Loan Bank borrowings of $24,969,000. These cash flows were invested
in net loans of  $55,545,000  and net  securities  of  $6,194,000.  In addition,
$2,171,000 was used to purchase property and equipment.

At December 31, 1997,  the Company had total  outstanding  loan  commitments  of
$97,530,000.  Management  believes that its liquidity levels are appropriate and
that it has  borrowing  capacity  from the  Federal  Home  Loan  Bank and  other
sources.
<PAGE>


Commitments and Trends

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

The Company is currently involved in the assessment phase of its Year 2000 plan.
Critical  applications  have been identified and an outside  consultant has been
engaged to assist  with  obtaining  certification  from  outside  vendors.  Upon
completion of the assessment  phase,  applications  will be tested. To date, the
Company  has  incurred  expenses  related  to this  issue in the form of outside
consulting fees as well as time spent by internal staff, but the expense has not
been  significant.  In  1998,  the  subsidiary  banks  are  converting  to a new
financial  accounting  system,  which will be Year 2000 compliant.  As a result,
costs for hardware upgrades have been incurred in 1997.  Additional hardware and
software costs are expected in 1998 related to the  conversion.  These costs are
not expected to have a significant impact on the earnings or future liquidity of
the Company.

As of  December  31,  1997,  the  Company  is not aware of any  known  trends or
uncertainties  which  are  expected  that  will  have a  material  effect on the
financial condition of the Company.


PART II

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.

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.
<PAGE>


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>
                           1998        1999       2000       2001      2002    Thereafter     Total    Fair Value
                       ------------------------------------------------------------------------------------------
<S>                    <C>        <C>         <C>        <C>        <C>        <C>         <C>        <C>
Assets:
   Loans, fixed:
      Balance          $   80,361 $    53,205 $   50,889 $   29,068 $   42,408 $    25,020 $  280,951 $  281,986
      Average
        interest rate       8.37%       8.38%      8.48%      8.53%      8.37%       7.94%      8.37%

   Loans, variable:
      Balance          $   24,055 $     2,478 $    4,527 $    1,628 $    3,318 $   113,814 $  149,820 $  149,820
      Average
        interest rate       9.33%       9.07%      8.39%      8.77%      8.65%       8.35%      8.53%

   Investments (1):
      Balance          $   29,296 $    30,916 $   30,084 $   26,670 $    6,614 $    16,931 $  140,511 $  140,901
      Average
        interest rate       6.20%       6.36%      6.28%      6.26%      6.79%       6.89%      6.37%

Liabilities:
   Liquid
      deposits (2):
      Balance          $  168,312 $       - - $     - -  $     - -  $     - -  $      - -  $  168,312 $  168,312
      Average
        interest rate       3.22%       0.00%      0.00%      0.00%      0.00%       0.00%      3.22%

   Deposits,
      certificates:
      Balance          $  168,376 $    56,302 $   27,806 $    4,874 $    1,827 $       102 $  259,287 $  260,296
      Average
        interest rate       5.63%       5.80%      6.29%      5.63%      5.52%       5.75%      5.73%
<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>

Item 8.   Financial Statements and Supplementary Data

The financial  statements  are included on Pages 31 through 58. 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,  1997 and 1996,  and the
related consolidated statements of income,  stockholders' equity, and cash flows
for the years ended December 31, 1997, 1996 and 1995. 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,  1997 and 1996,  and the results of their
operations and their cash flows for the years ended December 31, 1997,  1996 and
1995 in conformity with generally accepted accounting principles.




                                             /s/McGLADREY & PULLEN, LLP


Iowa City, Iowa
February 6, 1998




<PAGE>


HILLS BANCORPORATION


CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
(In Thousands, Except Shares)
<TABLE>

ASSETS                                                                                         1997      1996
---------------------------------------------------------------------------------------------------------------
<S>                                                                                          <C>       <C>

Cash and due from banks (Note 9) ..........................................................  $ 15,508  $ 15,036
Investment securities (Note 2):
   Available for sale (amortized cost 1997 $108,718; 1996 $106,097) .......................   109,486   107,139
   Held to maturity (fair value 1997 $24,230; 1996 $22,232) ...............................    23,840    22,098
   Stock of Federal Home Loan Bank ........................................................     4,738     3,398
Federal funds sold ........................................................................     2,447     1,107
Loans, net (Notes 3, 7 and 10) ............................................................   422,761   368,264
Property and equipment, net (Note 4) ......................................................     9,437     8,409
Accrued interest receivable ...............................................................     5,441     4,884
Deferred income taxes, net (Note 8) .......................................................     1,859     1,359
Other assets ..............................................................................     7,585     7,758
                                                                                             ------------------
                                                                                             $603,102  $539,452
                                                                                             ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------

Liabilities
   Noninterest-bearing deposits ...........................................................  $ 52,174  $ 46,154
   Interest-bearing deposits (Note 5) .....................................................   427,596   403,907
                                                                                             ------------------
              Total deposits ..............................................................   479,770   450,061
   Securities sold under agreements to repurchase .........................................     9,008     6,071
   Federal Home Loan Bank notes (Note 6) ..................................................    50,764    25,795
   Accrued interest payable ...............................................................     2,060     1,952
   Other liabilities ......................................................................     2,318     1,822
                                                                                             ------------------
                                                                                              543,920   485,701
                                                                                             ------------------
Commitments and Contingencies (Notes 7 and 13)

Redeemable Common Stock Held By Employee Stock
   Ownership Plan (ESOP) (Note 7) .........................................................     7,682     6,416
                                                                                             ------------------

Stockholders' Equity (Note 9)
   Capital stock, no par value; authorized 10,000,000 shares;
      issued 1997 1,467,754 shares; 1996 1,465,384 shares .................................     9,070     8,997
   Retained earnings ......................................................................    49,627    44,078
   Unrealized gains on investment securities, net .........................................       485       676
                                                                                             ------------------
                                                                                               59,182    53,751
   Less maximum cash obligation related to ESOP shares (Note 7) ...........................     7,682     6,416
                                                                                             ------------------
                                                                                               51,500    47,335
                                                                                             ------------------
                                                                                             $603,102  $539,452
                                                                                             ==================
</TABLE>
See Notes to Financial Statements.


<PAGE>


HILLS BANCORPORATION


CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996 and 1995
(In Thousands, Except Per Share Amounts)
<TABLE>

                                                                     1997      1996        1995
------------------------------------------------------------------------------------------------
<S>                                                                 <C>       <C>        <C>
Interest income:
   Interest and fees on loans ...................................   $34,598   $29,724    $27,236
   Interest on investment securities:
      Taxable ...................................................     6,769     6,190      5,189
      Nontaxable ................................................     1,218     1,117      1,034
   Interest on federal funds sold ...............................       158       485        519
                                                                    ----------------------------
              Total interest income .............................    42,743    37,516     33,978
                                                                    ----------------------------
Interest expense:
   Interest on deposits .........................................    19,294    17,762     16,185
   Interest on securities sold under agreements to repurchase ...       426       326        409
   Interest on FHLB borrowings ..................................     2,782     1,863      1,874
                                                                    ----------------------------
              Total interest expense ............................    22,502    19,951     18,468
                                                                    ----------------------------
              Net interest income ...............................    20,241    17,565     15,510
Provision for loan losses (Note 3) ..............................     1,048       754        722
                                                                    ----------------------------

              Net interest income after provision for loan losses    19,193    16,811     14,788
                                                                    ----------------------------
Other income:
   Loan origination fees ........................................       387       324        294
   Trust fees ...................................................     1,363       908        755
   Deposit account charges and fees .............................     1,893     1,645      1,606
   Other fees and charges .......................................     1,201     1,048        894
   Net gains (losses) on sale of  investment securities (Note 2)        940       (57)      (111)
   Other ........................................................       154       - -        - -
                                                                    ----------------------------
                                                                      5,938     3,868      3,438
                                                                    ----------------------------
Other expenses:
   Salaries and employee benefits ...............................     7,118     6,137      5,492
   Occupancy ....................................................     1,017       891        792
   Furniture and equipment ......................................     1,429     1,117      1,099
   F.D.I.C. insurance ...........................................        58         8        424
   Office supplies and postage ..................................       889       819        725
   Contributions ................................................     1,118        88         94
   Other ........................................................     3,871     2,997      2,349
                                                                    ----------------------------
                                                                     15,500    12,057     10,975
                                                                    ----------------------------
              Income before income taxes ........................     9,631     8,622      7,251
Federal and state income taxes (Note 8) .........................     2,545     2,478      1,994
                                                                    ----------------------------
              Net income ........................................   $ 7,086   $ 6,144    $ 5,257
                                                                    ============================

Earnings per share:
   Basic ........................................................   $  4.83   $  4.19    $  3.59
   Diluted ......................................................      4.78      4.15       3.57
</TABLE>

See Notes to Financial Statements.


<PAGE>


HILLS BANCORPORATION


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES
7 AND 9)
Years Ended December 31, 1997, 1996 and 1995
(In Thousands, Except Share Amounts)
<TABLE>
                                                                                                 Less
                                                                                               Maximum
                                                                                  Unrealized     Cash
                                                                                   Gains On   Obligation
                                                                                  Investment   Related
                                                         Capital       Retained   Securities,  To ESOP
                                                          Stock        Earnings       Net       Shares      Total
------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>           <C>         <C>         <C>         <C>
Balance, December 31, 1994 ........................      $ 8,915       $35,336     $(2,594)    $(5,210)    $36,447
   Issuance of 609 shares of
      common stock ................................           20           - -         - -         - -          20
   Redemption of 324 shares of
      common stock ................................          (10)          - -         - -         - -         (10)
   Change related to ESOP shares ..................          - -           - -         - -         (61)        (61)
   Net income .....................................          - -         5,257         - -         - -       5,257
   Cash dividends ($.87 per share) ................          - -        (1,268)        - -         - -      (1,268)
   Unrealized gains on investment
      securities, net .............................          - -           - -       2,892         - -       2,892
                                                         ---------------------------------------------------------
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)
   Unrealized gains on investment
      securities, net .............................          - -           - -         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)
   Unrealized (losses) on investment
      securities, net .............................          - -           - -        (191)        - -        (191)
                                                         ---------------------------------------------------------
Balance, December 31, 1997 ........................      $ 9,070       $49,627     $   485     $(7,682)    $51,500
                                                         =========================================================
</TABLE>

See Notes to Financial Statements.
<PAGE>


HILLS BANCORPORATION


CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996 and 1995
(In Thousands)
<TABLE>
                                                                                              1997      1996        1995
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                                         <C>        <C>        <C>

Cash Flows from Operating Activities
   Net income ...........................................................................   $ 7,086    $ 6,144    $ 5,257
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Depreciation ......................................................................     1,143        884        837
      Amortization ......................................................................       261        133
      Provision for loan losses .........................................................     1,048        754        722
      Net (gains) losses on disposition of investment securities ........................      (940)        57        111
      Compensation paid by issuance of common stock .....................................        73         72         10
      Contribution of investment securities .............................................     1,054        - -        - -
      Deferred income taxes .............................................................      (417)       (77)      (238)
      (Increase) in accrued interest receivable .........................................      (557)      (121)      (670)
      Amortization of bond discount .....................................................       378        454        383
      (Increase) in other assets ........................................................       (88)     1,589       (971)
      Increase in accrued interest and other liabilities ................................       603        505        440
                                                                                            -----------------------------
              Net cash provided by operating activities .................................     9,644     10,394      5,881
                                                                                            -----------------------------

Cash Flows from  Investing  Activities  Proceeds  from  maturities of investment
   securities:
      Available for sale ................................................................    21,292     22,353     19,404
      Held to maturity ..................................................................     2,590      4,069      2,653
   Proceeds from sales of available-for-sale securities .................................    16,411     10,988     11,013
   Purchases of investment securities:
      Available for sale ................................................................   (42,083)   (37,026)   (35,563)
      Held to maturity ..................................................................    (4,404)    (4,784)    (4,896)
   Federal funds sold, net ..............................................................    (1,340)    26,421     (8,580)
   Loans made to customers, net of collections ..........................................   (55,545)   (29,807)   (18,447)
   Purchases of property and equipment ..................................................    (2,171)      (859)    (1,483)
   Purchase of subsidiary banks, net of cash acquired (Note 14) .........................       - -     (7,163)       - -
                                                                                           ------------------------------
              Net cash (used in) investing activities ...................................   (65,250)   (15,808)   (35,899)
                                                                                           ------------------------------

Cash Flows from Financing Activities
   Net increase in deposits .............................................................    29,709     18,938     19,419
   Net increase (decrease) in securities sold under agreements
      to repurchase .....................................................................     2,937     (3,948)     2,976
   Borrowings from FHLB .................................................................    30,000        - -     15,000
   Payments on FHLB notes ...............................................................    (5,031)    (5,032)    (5,031)
   Dividends paid .......................................................................    (1,537)    (1,391)    (1,268)
                                                                                           ------------------------------
              Net cash provided by financing activities .................................    56,078      8,567     31,096
                                                                                           ------------------------------

              Increase in cash and due from banks .......................................  $    472    $ 3,153    $ 1,078

Cash and due from banks:
   Beginning ............................................................................    15,036     11,883     10,805
                                                                                           ------------------------------
   Ending ...............................................................................  $ 15,508    $15,036    $11,883
                                                                                           ==============================

Supplemental Disclosures
   Cash payments for:
      Interest paid to depositors and others ............................................  $ 19,186    $17,848    $15,868
      Interest paid on other obligations ................................................     3,208      2,189      2,263
      Income taxes ......................................................................     2,942      2,565      2,099

   Noncash financing transactions:
      Increase in maximum cash obligation related to
        ESOP shares .....................................................................     1,266      1,145         61
      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 multi-bank
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.

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, 1997
and 1996.

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).  Interest on debt
securities  is recognized  in income as accrued.  Realized  gains and losses are
included  in  income,  determined  on the  basis  of the  cost  of the  specific
securities sold.

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

The allowance for loan losses is established through a provision for loan losses
charged to expense.  Loans are charged  against the  allowance  when  management
believes the  collectibility  of principal is unlikely.  The  allowance for loan
losses is maintained at a level  considered  adequate to provide for losses that
can 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.

Loans are considered  impaired when, based on current information and events, it
is probable the Company will not be able to collect all amounts due. The portion
of the allowance for loan losses  applicable to impaired loans has been computed
based on the present  value of the  estimated  future cash flows of interest and
principal  discounted at the loans effective  interest rate or on the fair value
of the collateral for collateral  dependent  loans. The entire change in present
value of  expected  cash  flows of  impaired  loans  or of  collateral  value is
reported as bad debt  expense in the same manner in which  impairment  initially
was  recognized  or as a  reduction  in the  amount  of bad  debt  expense  that
otherwise would be reported.  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.
<PAGE>


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  $3,543,000  and  $3,804,000,  net of accumulated
amortization  of $354,000  and  $93,000 as of December  31, 1997 and 1996 and is
included in other assets.

Stock options: Compensation expense for stock issued through stock options plans
is accounted for using the intrinsic value based method of accounting prescribed
by APB Opinion No. 25,  "Accounting  for Stock Issued to Employees."  Under this
method,  compensation  is measured as the difference  between the estimated 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: The FASB has issued Statement No. 128, "Earnings Per Share,"
which supersedes APB Opinion No. 15. Statement No. 128 requires the presentation
of basic and diluted  earnings per share by all entities  that have common stock
or potential common stock, such as options,  warrants and convertible securities
outstanding.  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.  Statement
No. 128 has been applied for annual and interim  periods  ending after  December
15,  1997,  and earnings  per share for prior  periods  have been  retroactively
restated, which had no effect on reported earnings per share.

Following is a reconciliation of the denominator:
<TABLE>
                                                                Year Ended
                                                                December 31,
                                                     ---------------------------------
                                                       1997        1996        1995
                                                     ---------------------------------
<S>                                                  <C>         <C>         <C>

Weighted average number of shares ................   1,465,914   1,465,384   1,463,319
Potential number of dilutive shares ..............      18,040      13,968       9,465
                                                     ---------------------------------
Total shares to compute diluted earnings per share   1,483,954   1,479,352   1,472,784
                                                     =================================
</TABLE>
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.
<PAGE>


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.  It is not  expected  that this
Statement will materially affect the presentation of the Company's comprehensive
income.

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, 1997.  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, 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
                                      ==========================================

December 31, 1996:
   U. S. Treasury .................   $ 45,100    $   220    $  (107)   $ 45,213
   U. S. Government agencies and
      corporations ................     57,405        295       (303)     57,397
   State and political subdivisions      1,329         20        - -       1,349
   Other debt securities ..........      2,263         39         (3)      2,299
   Marketable equity securities ...        - -        881        - -         881
                                      ------------------------------------------
              Total ...............   $106,097    $ 1,455    $  (413)   $107,139
                                      ==========================================

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

                                                    Gross       Gross
                                        Amortized Unrealized  Unrealized  Fair
                                          Cost      Gains      Losses     Value
                                       -----------------------------------------
                                                (Amounts In Thousands)
December 31, 1997:
   States and political subdivisions .  $23,840    $   405   $   (15)    $24,230
                                        ========================================

December 31, 1996:
   States and political subdivisions .  $22,098    $   239   $   (105)   $22,232
                                        ========================================

The contractual  maturity  distribution of investment  securities as of December
31, 1997 is summarized as follows:

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

Due in one year or less .............. $ 24,915 $ 24,973 $  2,431 $  2,435
Due after one year through five years    83,304   84,005   12,058   12,256
Due after five years through ten years      499      508    9,214    9,396
Due over ten years ...................      - -      - -      137      143
                                       -----------------------------------
              Total .................. $108,718 $109,486 $ 23,840 $ 24,230
                                       ===================================

As of December 31, 1997,  investment securities with a carrying value of $38,043
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, 1997,  1996 and 1995, net gains or losses from
the sale of investment securities were as follows:

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

Gross gains ............................     $1,059    $    - -     $    - -
Gross (losses) .........................       (119)        (57)        (111)
                                             -------------------------------
              Net gains (losses) .......     $  940    $    (57)    $   (111)
                                             ===============================
<PAGE>


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:
<TABLE>
                                                                                   December 31,
                                                                               ------------------
                                                                                1997       1996
                                                                               ------------------
                                                                                  (Amounts In
                                                                                   Thousands)
<S>                                                                           <C>        <C>
Agricultural ................................................................  $ 27,636  $ 23,133
Commercial and financial ....................................................    33,616    30,650
Real estate:
   Construction .............................................................     8,157     8,846
   Mortgage .................................................................   332,655   279,134
Loans to individuals ........................................................    28,707    33,812
                                                                               ------------------
                                                                                430,771   375,575
Less allowance for loan losses ..............................................     8,010     7,311
                                                                               ------------------
                                                                               $422,761 $ 368,264
                                                                               ==================
</TABLE>
Changes in the allowance for loan losses are as follows:

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

Balance, beginning ......................   $7,311    $6,740    $6,210
   Provision charged to expenses ........    1,048       754       722
   Recoveries ...........................      779       438       730
   Allowances of acquired banks .........      - -       350       - -
   Loans charged off ....................   (1,128)     (971)     (922)
                                            --------------------------
Balance, ending .........................   $8,010    $7,311    $6,740
                                            ==========================

Information about impaired loans as of and for the years ended December 31, 1997
and 1996 is as follows:
<TABLE>
                                                                             1997    1996
                                                                            --------------
                                                                             (Amounts In
                                                                              Thousands)
<S>                                                                         <C>     <C>
Loans receivable for which there is a related allowance for credit losses   $  - -  $  - -
Loans receivable for which there is no related allowance for credit losses   9,556   7,811
                                                                            --------------
              Total impaired loans .......................................  $9,556  $7,811
                                                                            ==============

Related allowance for credit losses ......................................  $  - -  $  - -
Average balance ..........................................................   8,401   6,438
Interest income recognized ...............................................     808     547

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


Note 4.  Property and Equipment

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

                                                    December 31,
                                                -------------------
                                                  1997       1996
                                                -------------------
                                                    (Amounts In
                                                    Thousands)

Land ....................................       $1,950       $1,700
Buildings and improvements ..............        7,149        6,475
Furniture and equipment .................        9,065        8,007
                                                -------------------
                                                18,164       16,182
Less accumulated depreciation ...........        8,727        7,773
                                                -------------------
              Net .......................       $9,437       $8,409
                                                ===================



Note 5.  Interest-Bearing Deposits

A summary of these deposits is as follows:

                                                               December 31,
                                                           ------------------
                                                            1997       1996
                                                           ------------------
                                                              (Amounts In
                                                               Thousands)

NOW and other demand ....................................  $ 46,526  $ 43,017
Savings .................................................   121,785   115,037
Time, $100,000 and over .................................    38,374    32,635
Other time ..............................................   220,911   213,218
                                                           ------------------
                                                           $427,596  $403,907
                                                           ==================

Note 6.  Federal Home Loan Bank Borrowings

As of December 31, 1997, the borrowings were as follows:

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

Due June 5, 1998, 5.74% ....................................             $10,000
Due July 2, 1998, 5.83% ....................................               5,000
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 February 22, 2000, 7.73% ...............................               5,000
Due April 9, 2000, 6.71% ...................................               3,000
Due November 18, 2002, 5.33% ...............................               5,000
Due August 17, 2005, 7.12% .................................                 100
Due August 11, 2008, 6.00% .................................                 664
                                                                         -------
                                                                         $50,764
                                                                         =======

The  borrowings  are  collateralized  by 1-4 family  mortgage  loans with a face
amount of  $65,993,000.  As of December 31, 1997,  the Company held Federal Home
Loan Bank  stock  with a cost of  $4,738,000  which is  included  in  investment
securities.


Note 7.  Employee Benefit Plans

The Company has an  unleveraged  Employee  Stock  Ownership Plan (the "Plan") to
which it makes discretionary cash contributions.  The Company's  contribution to
the Plan totaled  $49,000,  $42,000 and $76,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
<PAGE>


In the event a terminated plan participant  desires to sell his or her shares of
the Company stock, or for certain employees who elect to diversify their account
balances,  the  Company  may  be  required  to  purchase  the  shares  from  the
participant at their fair 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, 1997,  160,049  shares held by the ESOP, at a fair value of $48 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  $394,000,  $340,000  and
$419,000 for the years ended December 31, 1997, 1996 and 1995, 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 common and common  equivalent  share
would have been as follows:

                                                 Years Ended December 31,
                                               ---------------------------
                                                1997       1996     1995
                                               ---------------------------

Pro forma net income (in thousands) ......     $ 7,084   $ 6,144   $ 5,257
Pro forma earnings per share:
   Basic .................................        4.83      4.19      3.59
   Diluted ...............................        4.77      4.15      3.57

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 1996 or 1995.

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 are as follows:
                                                                  Weighted
                                                                   Average
                                                           Number  Exercise
                                                         Of Shares  Price
                                                         -----------------

Balance, December 31, 1995 ....................           46,569    $25.76
   Exercised ..................................              - -       - -
   Forfeited ..................................              - -       - -
                                                          ----------------
Balance, December 31, 1996 ....................           46,569     25.76
   Granted ....................................            2,055     41.00
   Exercised ..................................           (2,055)    25.33
   Forfeited ..................................              - -       - -
                                                         -----------------
Balance, December 31, 1997 ....................          46,569     $26.45
                                                         =================

                                                         1997     1996     1995
                                                        ------------------------

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


Other pertinent  information  related to the options outstanding at December 31,
1997 is as follows:

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

$25.33            20,550               63 Months                    20,550
 41.00             2,055              111 Months                     2,055
 26.17            23,964               66 Months                       - -
                  ------                                            ------
                  46,569                                            22,605
                  ======                                            ======

The committee is also  authorized to grant awards of common stock and authorized
the  issuance  of 938,  1,936  and 609  shares  of  common  stock  to a group of
employees in 1997, 1996 and 1995, respectively.

As of December 31, 1997,  option to purchase  83,176 shares of common stock were
available for future grants.

Note 8.  Income Taxes

Income taxes for the years ended December 31, 1997, 1996 and 1995 are summarized
as follows:

                                                         1997    1996      1995
                                                        ------------------------
                                                         (Amounts In Thousands)

Current:
   Federal ..........................................   $2,399  $2,098   $1,828
   State ............................................      563     457      404
Deferred ............................................     (417)    (77)    (238)
                                                        -----------------------
                                                        $2,545  $2,478   $1,994
                                                        =======================

Deferred income tax  liabilities  and assets arose from the following  temporary
differences:
                                                       December 31,
                                                  ----------------------
                                                   1997    1996    1995
                                                  ----------------------
                                                  (Amounts In Thousands)
Deferred income tax assets:
   Allowance for loan losses ...................  $2,622  $2,264  $2,135
   Certain accrued expenses ....................     302     205     166
   Other .......................................       8       7      43
                                                  ----------------------
              Gross tax assets .................   2,932   2,476   2,344
                                                  ----------------------
Deferred income tax liabilities:
   Property and equipment ......................     644     621     591
   FHLB dividends ..............................     130     130     105
   Unrealized gains on debt securities .........     283     366     174
   Other .......................................      16     - -     - -
                                                  ----------------------
              Gross tax liabilities ............   1,073   1,117     870
                                                  ----------------------
              Net deferred income tax asset ....  $1,859  $1,359  $1,474
                                                  ======================

The net change in the  deferred  income  taxes for the years ended  December 31,
1997, 1996 and 1995 is reflected in the financial statements as follows:

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

Statement of income .............................   $  (417)   $  (77)  $ (238)
Statement of stockholders' equity ...............       (83)      192    1,699
                                                    --------------------------
                                                    $  (500)   $  115   $1,461
                                                    ==========================
<PAGE>


The income tax provisions  for the years ended December 31, 1997,  1996 and 1995
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:
<TABLE>

                             1997                 1996                 1995
                      -------------------------------------------------------------
                                   % Of                  % Of                 % Of
                                   Pretax               Pretax               Pretax
                       Amount      Income   Amount      Income   Amount      Income
                      -------------------------------------------------------------
                                         (Amounts In Thousands)
<S>                   <C>          <C>     <C>          <C>      <C>         <C>
Expected provision    $ 3,275       34.0%  $ 2,931       34.0%  $ 2,465       34.0%
Tax-exempt interest      (557)      (5.8)     (539)      (6.3)     (530)      (7.3)
Interest expense
   limitation .....        97        1.0        95        1.1        87        1.2
Investment securi-
   ties contributed      (358)      (3.7)      - -        - -       - -        - -
State income taxes,
   net of federal
   income tax
   benefit ........       372        3.9       315        3.7       245        3.4
Income tax credits       (345)      (3.6)     (344)      (4.0)     (250)      (3.5)
Other .............        61        0.6        20        0.2       (23)      (0.3)
                      ------------------------------------------------------------
                      $ 2,545       26.4%  $ 2,478       28.7%  $ 1,994       27.5%
                      ============================================================
</TABLE>

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, 1997 with the minimum
requirements is presented below.

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

Tier 1 Risk-Based Capital .....................       13.97%           4.00%
Total Risk-Based Capital ......................       15.23            8.00
Leverage Ratio ................................        9.09            3.00

According  to FDIC capital  guidelines,  all of the Banks are  considered  to be
"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  $4,902,000  as of
December 31, 1997.

The Bank is required to  maintain  reserve  balances in cash or with the Federal
Reserve Bank.  Reserve balances totaled $4,503,000 and $3,974,000 as of December
31, 1997 and 1996, respectively.

Note 10.  Related Party Transactions

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


The  following  is an analysis  of the  changes in the loans to related  parties
during the years ended December 31, 1997 and 1996:

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

Balance, beginning ..............              $ 9,232    $ 9,548
   Advances .....................                2,243      1,502
   Collections ..................                 (964)    (1,818)
                                               ------------------
Balance, ending .................              $10,511    $ 9,232
                                               ==================

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


Note 11.  Fair Value of Financial Instruments

The  carrying  value  and  estimated  fair  values  of the  Company's  financial
instruments as of December 31, 1997 and 1996 are as follows:
<TABLE>
                                                                             1997                       1996
                                                                    ---------------------------------------------------
                                                                    Carrying     Estimated      Carrying     Estimated
                                                                     Amount      Fair Value      Amount      Fair Value
                                                                    ---------------------------------------------------
                                                                                  (Amounts In Thousands)
<S>                                                                  <C>          <C>           <C>           <C>


Cash and due from banks ......................................      $ 15,508      $ 15,508      $ 15,036      $ 15,036
Federal funds sold ...........................................         2,447         2,447         1,107         1,107
Investment securities ........................................       138,064       138,454       132,635       132,769
Loans ........................................................       422,761       431,806       368,264       374,804
Accrued interest receivable ..................................         5,441         5,441         4,884         4,884
Deposits .....................................................       479,770       480,780       450,061       451,114
Securities sold under agreements
   to repurchase .............................................         9,008         9,008         6,071         6,071
Borrowings from Federal Home Loan
   Bank ......................................................        50,764        50,678        25,795        26,629
Accrued interest payable .....................................         2,060         2,060         1,952         1,952

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

Off-balance sheet instruments:
   Loan commitments ..........................................      $ 97,530      $    - -      $ 72,322      $    - -
   Letters of credit .........................................         9,779           - -         9,583           - -

</TABLE>
<PAGE>


Note 12.  Parent Company Only Financial Information

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

                              BALANCE SHEETS
                        December 31, 1997 and 1996
                          (Amounts In Thousands)

ASSETS                                                      1997     1996
---------------------------------------------------------------------------

Cash ...................................................  $   408   $   294
Investment securities available for sale ...............      300     1,181
Investment in subsidiary banks .........................   57,774    52,355
Other assets ...........................................      940       693
                                                          -----------------
              Total assets .............................  $59,422   $54,523
                                                          =================

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

Liabilities ............................................  $   240  $   772
                                                          ----------------
Redeemable common stock held by ESOP ...................    7,682    6,416
                                                          ----------------
Stockholders' equity:
   Capital stock .......................................    9,070    8,997
   Retained earnings ...................................   49,627   44,078
   Unrealized gains on investment securities, net ......      485      676
                                                          ----------------
                                                           59,182   53,751
   Less maximum cash obligation related to ESOP shares .    7,682    6,416
                                                          ----------------
              Total stockholders' equity ...............   51,500   47,335
                                                          ----------------
              Total liabilities and stockholders' equity  $59,422  $54,523
                                                          ================


                     STATEMENTS OF INCOME
         Years Ended December 31, 1997, 1996 and 1995
                    (Amounts In Thousands)
<TABLE>
                                                        1997      1996      1995
----------------------------------------------------------------------------------
<S>                                                    <C>      <C>        <C>
Interest on investment securities ...................  $    17  $     15   $    20
Gain on sale of investment security .................    1,054       - -       - -
Dividends received from subsidiaries ................    2,515     9,422     1,272
Contributions .......................................   (1,054)      - -       - -
Other expenses ......................................     (102)      (67)      (20)
                                                       ---------------------------
              Income before income taxes and equity
                in subsidiaries' undistributed income    2,430     9,370     1,272
Income tax benefit ..................................      370        22         2
                                                       ---------------------------
                                                         2,800     9,392     1,274
Equity in subsidiaries' undistributed income ........    4,286    (3,248)    3,983
                                                       ---------------------------
              Net income ............................  $ 7,086   $ 6,144   $ 5,257
                                                       ===========================
</TABLE>
<PAGE>



                   STATEMENTS OF CASH FLOWS
         Years Ended December 31, 1997, 1996 and 1995
                    (Amounts In Thousands)
<TABLE>

                                                           1997       1996        1995
---------------------------------------------------------------------------------------
<S>                                                       <C>        <C>        <C>
Cash flows from operating activities:
   Net income .........................................   $ 7,086      6,144    $ 5,257
   Noncash items included in net income:
      Undistributed earnings of subsidiaries ..........    (4,286)     3,248     (3,983)
      (Increase) decrease in other assets .............      (174)      (414)        39
      Increase in liabilities .........................      (225)       464        - -
                                                          -----------------------------
              Net cash provided by operating activities     2,401      9,442      1,313
                                                          -----------------------------
Cash flows from investing activities:
   Investment in subsidiary banks .....................      (750)    (8,073)       - -
   Proceeds from maturities of investment securities ..       - -        300        300
   Purchase of investment securities ..................       - -       (300)      (300)
                                                          -----------------------------
              Net cash (used in) investing activities .      (750)    (8,073)       - -
                                                          -----------------------------
Cash flows (used in) financing activities,
   cash dividends paid ................................    (1,537)    (1,391)    (1,268)
                                                          -----------------------------
              Increase (decrease) in cash .............       114        (22)        45
Cash balance:
   Beginning ..........................................       294        316        271
                                                          -----------------------------
   Ending .............................................   $   408        294    $   316
                                                          =============================
</TABLE>


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 $11,006,000.  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.

Year  2000  plans:   Information  technology  experts  believe  that  many  data
processing  application  systems could fail or improperly perform as a result of
erroneous  calculation or data integrity  problems if they are unable to process
data  information  beyond  December 31, 1999,  an issue known as Year 2000.  The
Company is heavily  dependent  upon computer  processing  and has addressed this
issue by forming a Year 2000 committee  responsible  for identifying and testing
critical  applications and vendors. The Company expects the plan to be completed
by December 31, 1998.  Management  believes the costs  associated with Year 2000
will not be material to the financial statements.

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.
<PAGE>


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, 1997 and 1996
is as follows:

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

Firm loan commitments and unused portion of lines of credit:
   Home equity loans .......................................  $ 4,861  $ 3,979
   Credit card participants ................................    6,896    6,336
   Commercial, real estate and home construction ...........   38,784   23,862
   Commercial lines ........................................   46,989   38,145
Outstanding letters of credit ..............................    9,779    9,583

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.


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.

The Company chartered a new subsidiary bank, Hills Bank Kalona, and on September
20, 1996,  the  subsidiary  bank 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 and 1995,  as though the Banks had been
acquired as of January 1, 1994, is not significantly different than reported net
income of the Company after  consideration of goodwill  amortization and imputed
interest on borrowed funds.
<PAGE>


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
                                                                       ========


PART II

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

None


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        45     Director of Registrant and Bank; President, Registrant and Bank                 1986 (1975)

Willis M. Bywater           59     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               70     Director of Registrant and Bank; Vice President of the Registrant;              1997
                                   Executive Officer and Shareholder of Iowa City Ready Mix, Inc.

James G. Pratt              49     Treasurer of Registrant; Senior Vice President from January 1986                1985 (1982)
                                   to present

Thomas J. Cilek             51     Secretary of Registrant; Senior Vice President of Bank from                     1988 (1986)
                                   August 1986 to present
</TABLE>

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.
<PAGE>


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.


PART IV

Item 14.   Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
<TABLE>
                                                                                                                   Form 10-K
                                                                                                                   Reference
                                                                                                                  -------------
<S>       <C>                                                                                                     <C>
(a)  1.  Financial Statements

         Independent auditor's report on the financial statements
         Consolidated balance sheets as of December 31, 1997 and 1996
         Consolidated statements of income for the years ended December 31, 1997, 1996 and 1995
         Consolidated statements of stockholders' equity for the years ended
            December 31, 1997, 1996 and 1995
         Consolidated statements of cash flows for the years ended December 31, 1997, 1996 and 1995
         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 65.

         Exhibit 21 - Subsidiaries of the Registrant is attached on Page 66.

         Exhibit 23 - Consent of Accountants is attached on Page 67.

         Exhibit 27 - Financial Data Schedule is attached on Pages 68 and 69.

(b)      Reports on Form 8-K:

         There were no reports on Form 8-K for the three months  ended  December
         31, 1997.

</TABLE>
<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 30, 1998                  By /s/ Dwight O. Seegmiller
     -------------------------       -------------------------------------------
                                     Dwight O. Seegmiller, Director and
                                        President

Date MARCH 30, 1998                  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 30, 1998                  By /s/ Willis M. Bywater
     -------------------------       -------------------------------------------
                                     Willis M. Bywater, Director

Date MARCH 30, 1998                  By /s/ Thomas J. Gill
     -------------------------       -------------------------------------------
                                     Thomas J. Gill, Director

Date MARCH 30, 1998                  By /s/ Donald H. Gringer
     -------------------------       -------------------------------------------
                                     Donald H. Gringer, Director

Date MARCH 30, 1998                  By /s/ Richard W. Oberman
     -------------------------       -------------------------------------------
                                     Richard W. Oberman, Director

Date MARCH 30, 1998                  By /s/ Theodore H. Pacha
     -------------------------       -------------------------------------------
                                     Theodore H. Pacha, Director

Date MARCH 30, 1998                  By /s/ Ann M. Rhodes
     -------------------------       -------------------------------------------
                                     Ann M. Rhodes, Director

Date MARCH 30, 1998                  By /s/ Ronald E. Stutsman
     -------------------------       -------------------------------------------
                                     Ronald E. Stutsman, Director

Date MARCH 30, 1998                  By /s/ Earl M. Yoder
     -------------------------       -------------------------------------------
                                     Earl M. Yoder, Director

Date MARCH 30, 1998                  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
<TABLE>


                                                                                                            Page Number
                                                                                                         In The Sequential
 Exhibit                                                                                                  Numbering System
  Number                           Description                                                           For 1997 Form 10-K
------------------------------------------------------------------------------------------------------------------------------
<S>        <C>                                                                                           <C>

    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
</TABLE>