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, 1996.     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 14, 1997 (based upon reports of beneficial  ownership  that  approximately
80%  of  the  shares  are  so  owned  by  nonaffiliates   and  upon  information
communicated informally to the Registrant by various purchasers and sellers that
the sale price for the common stock is generally $40 per share) was $46,892,000.

The number of shares  outstanding of the  Registrant's  common stock as of March
14, 1997 is 1,465,384 shares of no par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement  dated April 4, 1997, for the Annual Meeting of
the  Shareholders  of the  Registrant  to be held  April  21,  1997  (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;  Lisbon  Bank and Trust  Company,
Lisbon,  Iowa; and Hills Bank Kalona,  Kalona, Iowa (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 the  Lisbon  Bank and  Trust  Company,
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 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,  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.

Lisbon  Bank and Trust  Company  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.  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.
<PAGE>



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.

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

In  recent  years,  Norwest  Corporation,  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."
<PAGE>



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

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  rquirements  of
operations have also beeen  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.

Under the 1994 federal  legislation  describe  above,  national banks may branch
nationwide,  effective  June 1, 1997,  even in states that have not extended the
privilege to their own state-chartered  banks. Until then, the federal law gives
states the  opportunity  to enact  legislation  either  opting in to  interstate
branching or opting out.  Opt-out  legilstation  would bar interstate  branching
within a state's borders,  by either national or state banks.  Iowa hsas not yet
expressly  elected to opt out or opt in. If the Iowa Legislature does not either
elect to opt in or opt out by June 1,  1997,  national  banks  and  out-of-state
banks,  which are  authorized  by their  particular  state law,  will be able to
branch  in and out of Iowa no later  than  June 1,  1997.  At this  time,  it is
uncertain what competitive impact any future interstate banking  developments or
Iowa banking legislation might have upon the company and the banks.

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,
                                                                       1996
                                                                    ------------
                                                                   (In Millions)

Largest competing bank ........................................         $395
Next largest competing bank ...................................          321
Largest competing credit union ................................          132

Hills Bank Kalona and Lisbon Bank and Trust Company  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   6.2%  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.

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.

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,  1996,  and the Banks had 173
regular and 54 part-time employees.
<PAGE>


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 monthly basis for the periods stated.

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

AVERAGE BALANCES
(Daily Average Basis)
<TABLE>

                                                                                    Year Ended December 31,
                                                                                  ----------------------------
                                                                                    1996      1995       1994
                                                                                  ----------------------------
                                                                                       (In Thousands)
<S>                                                                               <C>       <C>       <C>

ASSETS
   Cash and due from banks .....................................................  $  9,987  $  9,795  $  9,951
   Taxable securities ..........................................................   107,106    95,747   102,608
   Nontaxable securities .......................................................    22,291    19,528    18,775
   Federal funds sold ..........................................................     9,159     8,980     5,181
   Loans, net ..................................................................   337,630   311,592   277,774
   Property and equipment, net .................................................     7,516     6,685     5,861
   Other assets ................................................................    11,091     7,484     7,560
                                                                                  ----------------------------
                                                                                  $504,780 $ 459,811 $ 427,710
                                                                                  ============================

LIABILITIES AND STOCKHOLDERS' EQUITY
   Noninterest-bearing demand deposits .........................................  $ 39,929  $ 36,085  $ 34,409
   Interest-bearing demand deposits ............................................    37,310    37,249    45,220
   Savings deposits ............................................................   102,849    74,146    71,291
   Time deposits ...............................................................   234,825   226,251   209,602
   Securities sold under agreements to repurchase
      and federal funds purchased ..............................................     7,607     9,424     5,832
   FHLB borrowings .............................................................    28,914    28,965    17,473
   Debt of ESOP plan ...........................................................        --        --        73
   Other liabilities ...........................................................     3,509     2,978     2,680
   Redeemable common stock held by
      Employee Stock Ownership Plan ............................................     5,844     5,241     4,913
   Stockholders' equity ........................................................    43,993    39,472    36,217
                                                                                  ----------------------------
                                                                                  $504,780 $ 459,811 $ 427,710
                                                                                  ============================
</TABLE>
INTEREST INCOME AND EXPENSE
                                                        Year Ended December 31,
                                                     ---------------------------
                                                        1996     1995     1994
                                                     ---------------------------
                                                            (In Thousands)
Income:
   Loans (1) ....................................... $ 29,966 $ 27,506 $ 23,473
   Taxable securities ..............................    6,190    5,189    5,158
   Nontaxable securities (1) .......................    1,692    1,567    1,575
   Federal funds sold ..............................      485      519      212
                                                     --------------------------
              Total interest income ................   38,333   34,781   30,418
                                                     --------------------------
Expense:
   Interest-bearing demand deposits ................      819      894    1,039
   Savings deposits ................................    3,668    2,618    1,625
   Time deposits ...................................   13,275   12,673   10,857
   Securities sold under agreements to repurchase ..      326      409      204
   FHLB borrowings .................................    1,863    1,874    1,105
   Interest portion of Employee Stock Ownership Plan
      contribution .................................       --       --        4
                                                     --------------------------
              Total interest expense ...............   19,951   18,468   14,834
                                                     --------------------------
              Net interest income .................. $ 18,382 $ 16,313 $ 15,584
                                                     ==========================

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


INTEREST RATES AND INTEREST DIFFERENTIAL

                                                               Year Ended
                                                               December 31,
                                                           ---------------------
                                                           1996    1995    1994
                                                           ---------------------

Average yields:
   Taxable securities ..................................   5.78%   5.42%   5.03%
   Nontaxable securities ...............................   5.01    5.29    5.54
   Nontaxable securities (tax equivalent basis) ........   7.59    8.02    8.39
   Loans (1) ...........................................   8.80    8.74    8.34
   Loans (tax equivalent basis) ........................   8.87    8.83    8.45
   Federal funds sold ..................................   5.30    5.78    4.09
   Interest-bearing demand deposits ....................   2.20    2.40    2.30
   Savings deposits ....................................   3.57    3.53    2.28
   Time deposits .......................................   5.65    5.60    5.18
   Securities sold under agreements to repurchase ......   4.29    4.34    3.50
   Interest on FHLB borrowings .........................   6.44    6.47    6.32
   Yield on average interest earning assets ............   8.05    7.98    7.52
   Rate on average interest-bearing liabilities ........   4.85    4.91    4.24
   Net interest spread (2) .............................   3.20    3.07    3.28
   Net interest margin (3) .............................   3.86    3.74    3.85

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

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

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





<PAGE>


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

Year ended December 31, 1995: Change in interest income:
      Loans ............................................   $2,945       $1,088    $4,033
      Taxable securities ...............................     (356)         387        31
      Nontaxable securities ............................       62          (70)       (8)
      Federal funds sold ...............................      196          111       307
                                                           -----------------------------
                                                            2,847        1,516     4,363
                                                           -----------------------------
   Change in interest expense:
      Interest-bearing demand deposits .................     (189)          44      (145)
      Savings deposits .................................       68          925       993
      Time deposits ....................................      899          917     1,816
      Securities sold under agreements to repurchase ...      148           57       205
      Interest on FHLB borrowings ......................      742           27       769
      Other ............................................       (2)          (2)       (4)
                                                           -----------------------------
                                                            1,666        1,968     3,634
                                                           -----------------------------
   Change in net interest income .......................   $1,181       $ (452)   $  729
                                                           =============================
</TABLE>
Rate/volume  variances  are  allocated on a consistent  basis using the absolute
values of changes in volume  compared to the  absolute  values of the changes in
rates.  Loan fees  included in  interest  income are not  material.  Interest on
nontaxable securities and loans is shown at tax equivalent amounts.

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.
<TABLE>
                                                                             December 31,
                                                 --------------------------------------------------------------------
                                                    1996          1995           1994           1993           1992  
                                                 --------------------------------------------------------------------
                                                                             (In Thousands)
<S>                                              <C>            <C>            <C>            <C>            <C>  
Agricultural .............................       $ 23,133       $ 19,000       $ 17,826       $ 17,117       $ 16,430
Commercial and financial .................         30,650         26,810         26,024         24,721         24,121
Real estate, construction ................          8,846          7,937          6,933          7,006          4,759
Real estate, mortgage ....................        279,134        239,899        225,342        195,527        185,869
Loans to individuals .....................         33,812         31,640         30,906         24,380         22,787
                                                 --------------------------------------------------------------------
              Total ......................       $375,575       $325,286       $307,031       $268,751       $253,966
                                                 ====================================================================
</TABLE>
<PAGE>



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,
1996:

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

Commercial, financial and agricultural ........................   $ 53,783    $ 25,131  $ 22,221  $  6,431
Real estate, construction and mortgage ........................    287,980      60,152   126,626   101,202
Other .........................................................     33,812       8,366    22,953     2,493
                                                                  ----------------------------------------
                                                                  $375,575    $ 93,649  $171,800  $110,126
                                                                  ========================================

Interest rates on loans are as follows:

   Fixed rate .................................................   $257,273    $ 74,432  $160,734  $ 22,107
   Variable rate ..............................................    118,302      19,217    11,066    88,019
                                                                  ----------------------------------------
                                                                  $375,575    $ 93,649  $171,800  $110,126
                                                                  ========================================
</TABLE>
(1)   A  significant  portion  of the  commercial  loans  are  six-month  notes.
      However, a significant amount of these notes are renewed when due.

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:

                                           1996    1995    1994    1993    1992
                                          --------------------------------------
                                                    (In Thousands)

Nonaccrual loans .......................  $  339 $   489  $   --  $   --   $  47
Accruing loans past due 90 days
   or more .............................   1,092     417     822   1,064     463
Restructured loans
Impaired loans .........................   7,811   5,465     N/A     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:
<TABLE>
                                                                            Year Ended December 31,
                                                       ---------------------------------------------------------------
                                                         1996          1995           1994         1993         1992
                                                       ---------------------------------------------------------------
                                                                                (In Thousands)
<S>                                                    <C>            <C>           <C>           <C>           <C>  

Amount of loan loss allowance at
   beginning of year ............................       $6,740        $6,210        $5,775        $5,190        $4,650
                                                        --------------------------------------------------------------
   Agriculture ..................................          300           101           423           270           444
   Commercial and financial .....................          236           387           334           326           418
   Real estate, mortgage ........................          127           180           172           165            97
   Loans to individuals .........................          308           254           131           300           441
                                                        --------------------------------------------------------------
                                                           971           922         1,060         1,061         1,400
                                                        --------------------------------------------------------------
Recoveries:
   Agriculture ..................................           48           218           368           247           131
   Commercial and financial .....................           95           226           206           213            93
   Real estate, mortgage ........................          215           149           154            87           522
   Loans to individuals .........................           80           137           126           178           135
                                                        --------------------------------------------------------------
                                                           438           730           854           725           881
                                                        --------------------------------------------------------------
Net charge-offs .................................          533           192           206           336           519
                                                        --------------------------------------------------------------
Allowances of acquired banks ....................          350            --            --            --            --
                                                        --------------------------------------------------------------
Provision for loan losses (1) ...................          754           722           641           921         1,059
                                                        --------------------------------------------------------------
Balance of loan loss allowance
   at end of year ...............................       $7,311        $6,740        $6,210        $5,775        $5,190
                                                        ==============================================================

Ratio of net charge-offs during year
   to average loans outstanding .................        0.16%         0.06%         0.07%         0.13%         0.22%
                                                        ===============================================================
</TABLE>
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  1997 that  would be  significantly
different than the years ended December 31, 1996, 1995, 1994, 1993 and 1992.

(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.
<PAGE>


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

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, 1996).

A summary of the components of the allowance for loan loss, by risk element,  as
of December 31, 1996 and 1995 is as follows:

                                                     1996       1995
                                                    -----------------
                                                      (In Thousands)

Potential Watch and Watch Loans ...............     $1,769     $1,460
Substandard ...................................      1,337        900
Specific borrowers ............................      2,009      1,875
Constructed model real estate homes ...........        858        729
Agricultural loans ............................        250        250

Anticipated charge-offs of the above categories are not determinable at December
31, 1996;  however,  the Banks have no reason to expect actual charge-offs to be
significantly different from historical charge-offs.

INVESTMENT SECURITIES

The following tables show the carrying value of the investment  securities as of
December 31, 1996,  1995 and 1994 and the maturities and yield of the investment
securities as of December 31, 1996:
<TABLE>

                                                                                          December 31,
                                                                                 ----------------------------
                                                                                    1996     1995      1994
                                                                                 ----------------------------
                                                                                        (In Thousands)
<S>                                                                              <C>       <C>       <C> 

Carrying value:
   U. S. Treasury securities ..................................................  $ 45,213  $ 41,275  $ 52,475
   Obligations of other U. S. Government agencies and corporations ............    57,397    55,537    36,458
   Obligations of states and political subdivisions ...........................    23,447    21,443    19,255
   Federal Home Loan Bank stock ...............................................     3,398     3,281     1,862
   Other ......................................................................     3,180        --        --
                                                                                 ----------------------------
                                                                                 $132,635  $121,536  $110,050
                                                                                 ============================
</TABLE>
<PAGE>



<TABLE>

                                                                                     December 31, 1996
                                                                                ---------------------------
                                                                                                   Weighted
                                                                                Carrying            Average
                                                                                  Value              Yield
                                                                                ---------------------------
                                                                                (In Thousands)
<S>                                                                             <C>                <C>  
Type and maturity grouping:
   U. S. Treasury maturities:
      Within 1 year ...........................................................   $10,202             5.80%
      From 1 to 5 years .......................................................    35,011             6.14
                                                                                 --------
              Total ...........................................................    45,213
                                                                                 --------
   Obligations of other U. S. Government agencies and corporations, maturities:
      Within 1 year ...........................................................     9,100             6.25
      From 1 to 5 years .......................................................    47,913             6.05
      From 5 to 10 years ......................................................       384             7.20
                                                                                 --------
              Total ...........................................................    57,397
                                                                                 --------
   Obligations of states and political subdivisions, maturities:
      Within 1 year ...........................................................     2,728             8.71
      From 1 to 5 years .......................................................    11,241             7.30
      From 5 to 10 years ......................................................     9,217             7.22
      Over 10 years ...........................................................       261             7.55
                                                                                 --------
              Total ...........................................................    23,447
                                                                                 --------
Other:
   Within 1 year ..............................................................       200             5.99
   From 1 to 5 years ..........................................................       694             7.53
   Over 10 years ..............................................................     1,406             6.91
   Marketable equity security .................................................       880
   Federal Home Loan Bank stock ...............................................     3,398             7.00
                                                                                 --------
              Total ...........................................................     6,578
                                                                                 --------
                                                                                 $132,635
                                                                                 ========

</TABLE>
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, 1996,  there were no  investment  securities  of any issuer,
other than securities of the U. S. Government and U. S. Government  agencies and
corporations, exceeding 10% of stockholders' equity.

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


DEPOSITS

The following  tables show the average  deposits and rates paid on such deposits
for the years ended December 31, 1996,  1995 and 1994 and the composition of the
certificates issued in excess of $100,000 as of December 31, 1996:
<TABLE>

                                                                          December 31,
                                          -------------------------------------------------------------------------
                                                1996        Rate        1995         Rate        1994          Rate
                                          -------------------------------------------------------------------------
<S>                                       <C>               <C>    <C>               <C>    <C>               <C>
Average noninterest-bearing deposit       $       39,929    0.00%  $       36,085    0.00%  $       34,409    0.00%
Average interest-bearing demand
   deposits                                       37,310     2.20          37,249     2.40          45,220     2.30
Average savings deposits                         102,849     3.57          74,146     3.53          71,291     2.28
Average time deposits                            234,825     5.65         226,251     5.60         209,602     5.18
                                          ---------------          ---------------          --------------
                                          $      414,913           $      373,731           $      360,522
                                          ==============           ==============           ==============
</TABLE>
Time certificates issued in amounts
   of $100,000 or more as of
   December 31, 1996 with                 Amount           Rate
                                          ------------------------
   maturity in:
   3 months or less                       $        7,885    5.50%
   3 through 6 months                              5,196     4.61
   6 through 12 months                             3,410     4.22
   Over 12 months                                 16,145     6.25
                                          ---------------
                                          $       32,636
                                          ==============

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, 1996, 1995 and 1994.

                                                            December 31,
                                                  ------------------------------
                                                   1996        1995       1994
                                                  ------------------------------

Return on assets ...........................       1.22%       1.14%       1.15%
Return on stockholders' equity .............      13.97       13.32       13.62
Dividend payout ratio ......................      22.62       24.12       23.83
Stockholders' equity to assets ratio .......       8.72        8.58        8.47

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 1996, 1995 and 1994:

                                                1996     1995        1994
                                              ----------------------------
                                                 (Amounts In Thousands)

Outstanding as of December 31 .............   $ 6,071   $10,019    $ 7,043
Weighted average interest rate at year end      4.31%     4.25%      3.85%
Maximum month-end balance .................     9,112    12,028     10,652
Average month-end balance .................     7,607     9,424      5,832
Weighted average interest rate for the year     4.29%     4.34%      3.50%

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 1996, 1995 and 1994:

                                               1996      1995      1994
                                              ---------------------------

Outstanding as of December 31 .............   $25,795   $30,727   $20,758
Weighted average interest rate at year end      6.42%     6.29%     6.30%
Maximum month-end balance .................    30,826    35,758    20,758
Average month-end balance .................    28,914    28,965    17,473
Weighted average interest rate for the year     6.44%     6.47%     6.32%
<PAGE>


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 only office of Lisbon Bank and Trust Company is a two-story  brick  building
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 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.

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


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

No matters  were  submitted  to a vote of security  holders for the three months
ended December 31, 1996.




<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.

On April 17, 1996, the Company  effected a three for one stock split in the form
of a stock dividend when it issued a stock dividend of two additional shares for
each share then held. The number of shares outstanding and per share information
has been retroactively restated for all periods presented.

During 1996, the Company's stock transfer records reflect that 5,716 shares were
traded in a total of 29 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 1996 the range of selling price of shares
was $33.34 to $40 per share. During 1995, 5,322 shares were traded in a total of
15 transactions. The 1995 price of these shares was believed to be in the $27.60
to $31.30 range.  In 1994,  7,586 shares were traded in 13  transactions.  As of
December 31, 1996, the Company has 1,004 shareholders.

The Company paid aggregate  annual cash dividends in 1996 and 1995 of $1,391,000
and  $1,268,000,  respectively,  or $.95 per share in 1996 and $.87 per share in
1995.  In January  1997,  the Company  declared and paid a dividend of $1.05 per
share  totaling  $1,539,000.  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.

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

As a result  of the 1991  amendments,  Iowa law  permitted  an  Iowa-based  bank
holding company to exempt itself for a specific period of time from  acquisition
by a regional  bank holding  company if a resolution  was passed by its Baord of
Directors and filed with the Superintendent  before January 1, 1991. On December
21, 1990, the Board of Directors adopted a resolution  exempting the Company for
a period  ending June 30,  1990,  unless  renewed as provided  under Iowa law. A
certified   copy  of  the   resolution   has  been  filed   annually   with  the
Superintendent,  the latest  extending the  exemption  from December 31, 1995 to
December 31, 1996.  This  exemption is no longer  available to the Comapny after
December 31, 1996.  Prior to July 1, 1996,  Iowa law also  prohibited a regional
bank holding  company from acquiting an Iowa-based  bank holding  company unless
each of its subsidiary banks has been in existence and continously operated as a
bank for five or more years. This provision was repealed effective July 1, 1996.
Beginning  July 1, 1996,  an  out-of-state  bank or  out-of-state  bank  holding
company may not directly or indirectly  acquire all or substantially  all of the
assets of a bank located in Iowa unless the bank has been in continous existence
and  operation  for at least  five  years.  On  August  13,  1996,  the  Comapny
incorporated  a de novo bank,  Hill Bank Kalona,  to acquire  certain assets and
assume  certain  liabilities of the Kalona branch office in Baotman's Bank Iowa,
N.A. See Note 14 to the Company's audited financial statements.
<PAGE>


PART II

Item 6.   Selected Financial Data

CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
<TABLE>

                                                        1996          1995          1994         1993           1992
                                                      ----------------------------------------------------------------
<S>                                                   <C>           <C>           <C>           <C>           <C>  

YEAR-END TOTALS
   Total assets ..................................    $539,452      $484,607      $444,912      $417,043      $393,581
   Investment securities .........................     132,635       121,536       110,050       126,894       106,073
   Federal funds sold ............................       1,107        16,080         7,500         3,768        19,893
   Loans, net ....................................     368,264       318,546       300,821       262,976       248,776
   Deposits ......................................     450,061       392,257       372,838       353,486       334,052
   Federal Home Loan Bank notes ..................      25,795        30,727        20,758        15,790        15,000
   Redeemable common stock .......................       6,416         5,271         5,210         4,616         4,234
   Stockholders' equity ..........................      47,335        43,277        36,447        35,943        32,009

EARNINGS
   Interest income ...............................    $ 37,516      $ 33,978      $ 29,583      $ 29,031      $ 30,593
   Interest expense ..............................      19,951        18,468        14,834        15,520        17,546
   Provision for loan losses .....................         754           722           641           921         1,059
   Other income ..................................       3,868         3,438         3,311         4,181         3,433
   Other expenses ................................      12,057        10,975        10,640        10,299         9,163
   Applicable income taxes .......................       2,478         1,994         1,845         1,799         1,837
   Net income ....................................       6,144         5,257         4,934         4,673         4,421

PER SHARE
   Net income ....................................    $   4.15      $   3.57      $   3.36     $    3.20     $    3.04
   Cash dividends ................................        0.95          0.87          0.80          0.73          0.65
   Book value as of December 31 ..................       34.30         29.57         24.91         24.57         22.01
   Increase (decrease) in book value
      due to:
      ESOP obligation and debt ...................       (4.38)        (3.60)        (3.56)        (3.29)        (3.18)
      Unrealized gains (losses) on
        debt securities ..........................        0.46          0.20         (1.77)         0.19            --

SELECTED RATIOS
   Return on average assets ......................        1.22%         1.14%         1.15%         1.16%         1.19%
   Return on average equity ......................       13.97         13.32         13.62         13.91         14.64
   Net interest margin ...........................        3.86          3.74          3.85          3.73          3.91
   Average stockholders' equity to
      average total assets .......................        8.72          8.58          8.47          8.32          8.12
   Dividend payout ratio .........................       22.62         24.12         23.83         22.92         21.38

</TABLE>
<PAGE>


PART II

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

Financial Position
<TABLE>

Year End Amounts (In Thousands)                         1996           1995         1994          1993          1992
-------------------------------------------------     ----------------------------------------------------------------
<S>                                                   <C>           <C>           <C>           <C>           <C>  

Loans, net of allowance for losses .............      $368,264      $318,546      $300,821      $262,976      $248,776
Investment securities ..........................       132,635       121,536       110,050       126,894       106,073
Deposits .......................................       450,061       392,257       372,838       353,486       334,052
Federal Home Loan Bank notes ...................        25,795        30,727        20,758        15,790        15,000
Stockholders' equity ...........................        47,335        43,277        36,447        35,943        32,009
Total assets ...................................       539,452       484,607       444,912       417,043       393,581
</TABLE>

Total assets increased 11.32% in 1996, compared to an increase of 8.92% in 1995.
The higher 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
14.74% in 1996  compared to an increase of 5.21% in 1995.  Of the $57.8  million
increase  in 1996,  approximately  $39  million  was  deposits  acquired  in the
purchases.

Components of Net Income Per Share

Dollars Per Share                                    1996    1995   1994
--------------------------------------------------------------------------

Net interest income ............................   $ 11.87 $ 10.53 $ 10.04
Provision for loan losses ......................     (0.51)  (0.49)  (0.44)
Noninterest income .............................      2.61    2.34    2.25
Noninterest expense ............................     (8.14)  (7.46)  (7.24)
                                                   -----------------------
              Income before income taxes .......      5.83    4.92    4.61
Income tax expense .............................     (1.68)  (1.35)  (1.25)
                                                   -----------------------
              Net income .......................   $  4.15 $  3.57 $  3.36
                                                   =======================

Net income per share in 1996 resulted from increases in net interest  income and
noninterest  income,  but were partially offset by higher  noninterest  expense.
Increases in 1995  compared to 1994 were similar.  Both 1996 and 1995  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.








<PAGE>


PART II

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

Financial Review

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 1996 as follows:
<TABLE>

                                                                                INTEREST INCOME
                                                               ----------------------------------------------------
                                                                                          Increase (Decrease)
                                                               Change In Change In   ------------------------------
                                                                Average   Average    Volume        Rate      Net
                                                                Balance    Rate      Changes      Changes   Change
                                                               ----------------------------------------------------
                                                                              (Amounts in Thousands)
<S>                                                            <C>        <C>        <C>          <C>       <C> 

Loans, net .................................................   $ 26,038     0.04     $ 2,334      $  126    $ 2,460
Taxable securities .........................................     11,359     0.36         642         359      1,001
Nontaxable securities ......................................      2,763    (0.43)        212         (87)       125
Federal funds sold .........................................        179    (0.48)         10         (44)       (34)
                                                               --------              ------------------------------
                                                               $ 40,339              $ 3,198      $  354    $ 3,552
                                                               ========              ==============================

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

Interest-bearing demand deposits ...........................   $     61    (0.20)    $    1      $  (76)   $    (75)
Savings deposits ...........................................     28,703     0.04      1,020          30       1,050
Time deposits ..............................................      8,574     0.05        487         115         602
Securities sold under agreements to repurchase .............     (1,817)   (0.05)       (78)         (5)        (83)
FHLB borrowings ............................................        (51)   (0.03)        (3)         (8)        (11)
                                                               --------              ------------------------------
                                                               $ 35,470              $1,427      $   56    $  1,483
                                                               ========              ==============================
Change in net interest income ..............................                         $1,771      $  298      $2,069
                                                                                     ==============================
</TABLE>

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


        (Tax Equivalent Basis)                                                                 1996           1995             1994
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>            <C>              <C>

Yield on average interest-earning assets ...........................................           8.05%           7.98%           7.52%
Rate on average interest-bearing liabilities .......................................           4.85            4.91            4.24
                                                                                              -------------------------------------
Net interest spread ................................................................           3.20            3.07            3.28
Effect of noninterest-bearing funds ................................................           0.66            0.67            0.57
                                                                                              -------------------------------------
Net interest margin (tax equivalent interest income divided by
   average interest-earning assets) ................................................          3.86%           3.74%           3.85%
                                                                                              =====================================
</TABLE>

<PAGE>


PART II

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

Loan Losses

The provision for loan losses was $754,000, $722,000 and $641,000 for 1996, 1995
and 1994.  Charge-offs,  net of recoveries were $533,000 for 1996,  $192,000 for
1995 and $206,000 for 1994.

The allowance for loan losses  totaled  $7,311,000 at December 31, 1996 compared
to  $6,740,000  at  December  31,  1995.  The  percentage  of the  allowance  to
outstanding   loans  was  1.95%  and  2.07%  at  December  31,  1996  and  1995,
respectively.  Agricultural  loans  totaled  $23,133,000  at December  31, 1996.
Management has an ongoing concern about  agricultural loans due to unpredictable
commodity  prices,  the  effects of weather on crop  projection,  and  continued
uncertainties regarding government programs.
Therefore,  the allowance for loan losses has been  established  to reflect this
concern.

The economy remains strong in the 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                                        1996    1995    1994
------------------------------------------------------------------------------

Real estate origination fees ........................   $ 0.22  $ 0.20  $ 0.27
Trust fees ..........................................     0.61    0.51    0.46
Deposit account charges and fees ....................     1.11    1.09    1.02
Other fees and charges ..............................     0.71    0.62    0.65
Investment securities (losses) ......................    (0.04)  (0.08)  (0.15)
                                                        ----------------------
                                                        $ 2.61  $ 2.34  $ 2.25
                                                        ======================

Total  other  income  increased  $430,000  or 12.5% in  1996,  primarily  due to
$153,000 more in trust fees and $154,000  more in other fees and charges.  Total
other income  increased  $127,000 in 1995 compared to 1994,  which was primarily
due to higher trust fees and deposit account charges.  Trust fees have increased
in 1996, 1995 and 1994 because of new accounts and the effect of higher balances
under management. Other deposit account charges and fees were relatively flat in
1996 due to competitive  pressures.  There were $57,000 in investment securities
losses in 1996  following  modest  losses of $111,000  and  $215,000 in 1995 and
1994, respectively.




<PAGE>


PART II

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

Other Expenses

Dollars Per Share                                            1996    1995   1994
--------------------------------------------------------------------------------

Salaries and employees benefits .........................   $ 4.15 $ 3.73 $ 3.49
Occupancy ...............................................     0.60   0.54   0.48
Furniture and fixtures ..................................     0.75   0.75   0.67
FDIC insurance ..........................................     0.01   0.29   0.54
Supplies and postage ....................................     0.55   0.49   0.44
Other ...................................................     2.08   1.66   1.62
                                                            --------------------
                                                            $ 8.14 $ 7.46 $ 7.24
                                                            ====================

Total other expenses increased  $1,082,000 or 9.86% in 1996 following  increases
of 3.15%  and  3.31% for 1995 and 1994,  respectively.  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  $117,000  in  1996  due  to the  added  locations  and  the
acquisition of new data processing equipment.

Income Taxes

Income tax expense was $2,478,000, $1,994,000 and $1,845,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.  The corresponding percentage of
tax expense  compared to income before  income taxes is 28.7% in 1996,  27.5% in
1995 and 27.2% in 1994.

Impact of Recently Issued Accounting Standards

The adoption of new accounting  standards had no effect on financial position or
results of  operations  in 1996,  and the  adoption of several  recently  issued
standards is not expected to have a significant effect.

Liquidity and Capital Resources

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





<PAGE>


PART II

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

Interest Rate Sensitivity

At December 31, 1996,  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 ............       $ 1,107       $    --       $    --       $    --      $     --      $     --     $  1,107
   Investment
      securities .................            --           125         2,200         7,457        12,448       109,489      131,719
   Loans .........................            --        40,619        17,538        34,703        49,739       232,453      375,052
                                         ------------------------------------------------------------------------------------------
        Total earning
           assets ................         1,107        40,744        19,738        42,160        62,187       341,942      507,878
                                         ------------------------------------------------------------------------------------------
Sources of funds:
   Interest-bearing
      checking and
      savings accounts ...........        51,448            --            --            --            --       106,606      158,054
   Certificates of
      deposit ....................            --        22,128        39,023        24,490        25,854       134,358      245,853
   Other borrowings -
      FHLB .......................            --            --            --            --         5,000        20,795       25,795
   Repurchase
      agreements .................         6,071            --            --            --            --            --        6,071
                                        -------------------------------------------------------------------------------------------
                                          57,519        22,128        39,023        24,490        30,854       261,759      435,773
   Other sources .................            --            --            --            --            --        72,105       72,105
                                        -------------------------------------------------------------------------------------------
        Total sources ............        57,519        22,128        39,023        24,490        30,854       333,864      507,878
                                        -------------------------------------------------------------------------------------------
   Repricing
      differences ................      $(56,412)      $18,616      $(19,285)      $17,670       $31,333      $  8,078     $     --
                                        ===========================================================================================
</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.








<PAGE>


PART II

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

Inflation

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

Capital

As of December 31, 1996 and 1995,  stockholders' equity before deducting for the
maximum  cash  obligation  related  to ESOP  was  $53,751,000  and  $48,548,000,
respectively.  This  measure of equity as a percent of total assets was 9.96% at
December 31, 1996 and 10.02% at December 31, 1995.  These ratios are competitive
with the  Company's  peers.  As of December 31, 1996,  total equity was 8.77% of
assets  compared  to 8.93% 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
$4,900,000 as of December 31, 1996.

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,  1996,   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, 1996 with  minimum
requirements is presented below:

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

Tier I Risk-Based Capital ........................        14.01%        4%
Total Risk-Based Capital .........................        15.27         8
Leverage Ratio ...................................         9.11         3

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



<PAGE>


PART II

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

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.

As of  December  31,  1996,  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.


Item 8.   Financial Statements and Supplementary Data

The financial  statements  are included on Pages 27 through 52. 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,  1996 and 1995,  and the
related consolidated statements of income,  stockholders' equity, and cash flows
for the years ended December 31, 1996, 1995 and 1994. 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,  1996 and 1995,  and the results of their
operations and their cash flows for the years ended December 31, 1996,  1995 and
1994 in conformity with generally accepted accounting principles.




                                               /s/McGLADREY & PULLEN, LLP


Iowa City, Iowa
February 13, 1997




<PAGE>


HILLS BANCORPORATION


CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In Thousands, Except Shares)
<TABLE>

ASSETS                                                                                         1996               1995
---------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>             <C>  


Cash and due from banks (Note 9)                                                          $        15,036 $         11,883
Investment securities (Note 2):
   Available for sale (amortized cost 1996 $109,495; 1995 $99,621)                                110,537          100,093
   Held to maturity (fair value 1996 $22,232; 1995 $21,754)                                        22,098           21,443
Federal funds sold                                                                                  1,107           16,080
Loans, net (Notes 3, 7 and 10)                                                                    368,264          318,546
Property and equipment, net (Note 4)                                                                8,409            6,996
Accrued interest receivable                                                                         4,884            4,446
Deferred income taxes, net (Note 8)                                                                 1,359            1,474
Other assets                                                                                        7,758            3,646
                                                                                          ---------------------------------
                                                                                          $       539,452 $        484,607
                                                                                          ================================

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

Liabilities
   Noninterest-bearing deposits                                                           $        46,154 $         42,927
   Interest-bearing deposits (Note 5)                                                             403,907          349,330
                                                                                          ---------------------------------
              Total deposits                                                                      450,061          392,257
   Securities sold under agreements to repurchase                                                   6,071           10,019
   Federal Home Loan Bank notes (Note 7)                                                           25,795           30,727
   Accrued interest payable                                                                         1,952            1,885
   Other liabilities                                                                                1,822            1,171
                                                                                          ---------------------------------
                                                                                                  485,701          436,059
                                                                                          ---------------------------------
Commitments and Contingencies (Notes 6 and 13)

Redeemable Common Stock Held By Employee Stock
   Ownership Plan (ESOP) (Note 6)                                                                   6,416            5,271
                                                                                          ---------------------------------

Stockholders' Equity (Note 9)
   Capital stock, no par value; authorized 10,000,000 shares;
      issued 1996 1,465,384 shares; 1995 1,463,604 shares                                           8,997            8,925
   Retained earnings                                                                               44,078           39,325
   Unrealized gains on investment securities, net                                                     676              298
                                                                                          ---------------------------------
                                                                                                   53,751           48,548
   Less maximum cash obligation related to ESOP shares (Note 6)                                     6,416            5,271
                                                                                          ---------------------------------
                                                                                                   47,335           43,277
                                                                                          ---------------------------------
                                                                                          $       539,452 $        484,607
                                                                                          ================================
</TABLE>

See Notes to Financial Statements.


<PAGE>


HILLS BANCORPORATION


CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1996, 1995 and 1994
(In Thousands, Except Per Share Amounts)
<TABLE>

                                                                                 1996           1995          1994
------------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>            <C>           <C> 

Interest income:
   Interest and fees on loans                                               $       29,724 $      27,236 $       23,173
   Interest on investment securities:
      Taxable                                                                        6,190         5,189          5,158
      Nontaxable                                                                     1,117         1,034          1,040
   Interest on federal funds sold                                                      485           519            212
                                                                            --------------------------------------------
              Total interest income                                                 37,516        33,978         29,583
                                                                            --------------------------------------------
Interest expense:
   Interest on deposits                                                             17,762        16,185         13,521
   Interest on securities sold under agreements to repurchase                          326           409            204
   Interest on FHLB borrowings                                                       1,863         1,874          1,109
                                                                            --------------------------------------------
              Total interest expense                                                19,951        18,468         14,834
                                                                            --------------------------------------------
              Net interest income                                                   17,565        15,510         14,749
Provision for loan losses (Note 3)                                                     754           722            641
                                                                            --------------------------------------------

              Net interest income after provision for loan losses                   16,811        14,788         14,108
                                                                            --------------------------------------------
Other income:
   Loan origination fees                                                               324           294            402
   Trust fees                                                                          908           755            681
   Deposit account charges and fees                                                  1,645         1,606          1,500
   Other fees and charges                                                            1,048           894            943
   Investment securities (losses) (Note 2)                                            (57)         (111)          (215)
                                                                            --------------------------------------------
                                                                                     3,868         3,438          3,311
                                                                            --------------------------------------------
Other expenses:
   Salaries and employee benefits                                                    6,137         5,492          5,127
   Occupancy                                                                           891           792            712
   Furniture and equipment                                                           1,117         1,099            989
   F.D.I.C. insurance                                                                    8           424            793
   Office supplies and postage                                                         819           725            641
   Other                                                                             3,085         2,443          2,378
                                                                            --------------------------------------------
                                                                                    12,057        10,975         10,640
                                                                            --------------------------------------------
              Income before income taxes                                             8,622         7,251          6,779
Federal and state income taxes (Note 8)                                              2,478         1,994          1,845
                                                                            --------------------------------------------
              Net income                                                    $        6,144 $       5,257 $        4,934
                                                                            ===========================================

Average common and common equivalent shares                                      1,479,352     1,472,784      1,469,345
                                                                            ===========================================

Earnings per common and common equivalent share                             $         4.15 $        3.57 $         3.36
                                                                            ===========================================
</TABLE>

See Notes to Financial Statements.


<PAGE>


HILLS BANCORPORATION


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 6 AND 9)
Years Ended December 31, 1996, 1995 and 1994
(In Thousands, Except Share Amounts)
<TABLE>

                                                                                                                      
                                                                                            Less                      
                                                                                           Maximum                     
                                                                  Unrealized                Cash
                                                                   Gains On     Less      Obligation
                                                                  Investment    ESOP       Related
                                              Capital   Retained  Securities,   Debt       To ESOP
                                              Stock     Earnings      Net     Guarantee     Shares       Total
------------------------------------------------------------------------------------------------------------------
<S>                                       <C>         <C>         <C>         <C>         <C>        <C>
Balance, December 31, 1993                $     8,898 $    31,573 $       283 $     (195) $   (4,616) $    35,943
   Issuance of 1,110 shares of
      common stock                                 34          --         --          --          --           34
   Redemption of  657 shares
      of common stock                            (17)          --         --          --          --          (17)
   Payment on debt of ESOP                         --          --         --         195          --          195
   Change related to ESOP shares                   --          --         --          --        (594)        (594)
   Net income                                      --       4,934         --          --          --        4,934
   Cash dividends ($.80 per share)                 --      (1,171)        --          --          --       (1,171)
   Unrealized (losses) on investment
      securities, net                              --          --     (2,877)         --          --       (2,877)
                                          ------------------------------------------------------------------------
Balance, December 31, 1994                      8,915      35,336     (2,594)         --      (5,210)      36,447
   Issuance of 609 shares of
      common stock                                 20          --         --          --          --           20
   Redemption of 324 shares of
      common stock                                (10)         --         --          --          --          (10)
   Change related to ESOP shares                   --          --         --          --          (61)        (61)
   Net income                                      --       5,257         --          --          --        5,257
   Cash dividends ($.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
                                          ------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.



<PAGE>


HILLS BANCORPORATION


CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996, 1995 and 1994
(In Thousands)
<TABLE>

                                                                                     1996       1995      1994
----------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>        <C>        <C>

Cash Flows from Operating Activities
   Net income ..................................................................   $ 6,144    $ 5,257    $ 4,934
   Adjustments to reconcile net income to net cash
      provided by operating activities:
      Depreciation .............................................................       884        837        703
      Amortization .............................................................       133
      Provision for loan losses ................................................       754        722        641
      Compensation paid by issuance of common stock ............................        72         10         17
      Deferred income taxes ....................................................       (77)      (238)      (145)
      (Increase) in accrued interest receivable ................................      (121)      (670)       (57)
      Amortization of bond discount ............................................       511        494        764
      (Increase) in other assets ...............................................     1,589       (971)       (14)
      Increase in accrued interest and other liabilities .......................       505        440         92
                                                                                  ------------------------------
              Net cash provided by operating activities ........................    10,394      5,881      6,935
                                                                                  ------------------------------

Cash Flows from  Investing  Activities  Proceeds  from  maturities of investment
   securities:
      Available for sale .......................................................    22,353     19,404     29,216
      Held to maturity .........................................................     4,069      2,653      2,674
   Proceeds from sales of available-for-sale securities ........................    10,988     11,013      8,961
   Purchases of investment securities:
      Available for sale .......................................................   (37,026)   (35,563)   (26,180)
      Held to maturity .........................................................    (4,784)    (4,896)    (3,184)
   Federal funds sold, net .....................................................    26,421     (8,580)    (3,732)
   Loans made to customers, net of collections .................................   (29,807)   (18,447)   (38,485)
   Purchases of property and equipment .........................................      (859)    (1,483)    (1,210)
   Purchase of subsidiary banks, net of cash acquired (Note 14) ................    (7,163)        --         --
                                                                                  ------------------------------
              Net cash (used in) investing activities ..........................   (15,808)   (35,899)   (31,940)
                                                                                  ------------------------------

Cash Flows from Financing Activities
   Net increase in deposits ....................................................    18,938     19,419     19,352
   Net increase (decrease) in securities sold under agreements
      to repurchase ............................................................    (3,948)     2,976      2,554
   Borrowings from FHLB ........................................................    15,000      5,000
   Payments on FHLB notes ......................................................    (5,032)    (5,031)       (32)
   Dividends paid ..............................................................    (1,391)    (1,268)    (1,171)
                                                                                  ------------------------------
              Net cash provided by financing activities ........................     8,567     31,096     25,703
                                                                                  ------------------------------
</TABLE>

                                                           (Continued)



<PAGE>


HILLS BANCORPORATION


CONSOLIDATED STATEMENTS OF CASH FLOWS (C ONTINUED)
Years Ended December 31, 1996, 1995 and 1994
(In Thousands)
<TABLE>


                                                                 1996     1995       1994
-------------------------------------------------------------------------------------------
<S>                                                            <C>       <C>       <C>  


              Increase in cash and due from banks ..........   $ 3,153   $ 1,078   $    698

Cash and due from banks:
   Beginning ...............................................    11,883    10,805     10,107
                                                               ----------------------------
   Ending ..................................................   $15,036   $11,883   $ 10,805
                                                               ============================

Supplemental Disclosures
   Cash payments for:
      Interest paid to depositors and others ...............   $17,848  $ 15,868   $13,417
      Interest paid on other obligations ...................     2,189     2,263     1,313
      Income taxes .........................................     2,565     2,099     1,981

   Noncash financing transactions:
      Increase in stockholders' equity related to ESOP debt         --        --       195
      Increase in maximum cash obligation related to
        ESOP shares ........................................     1,145        61       594
      Net unrealized gains (losses) on investment securities       570     4,591    (4,593)

      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; Lisbon Bank and Trust Company, 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 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, 1996
and 1995.

Premiums and discounts on  held-to-maturity  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.
<PAGE>



In accordance  with Financial  Accounting  Standards  Board (FASB)  Statement of
Financial  Accounting Standards No. 114, "Accounting by Creditors for Impairment
of a Loan," as amended by FASB  Statement No. 118,  "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," 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.

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  $3,804,000,  net of accumulated  amortization of
$93,000, as of December 31, 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 market
value of the stock at the date of award less the amount  required to be paid for
the stock.  The  difference,  if any, is charged to expense  over the periods of
service.

Common stock held by ESOP:  The  Company's  maximum cash  obligation  related to
these shares is classified outside  stockholders'  equity because the shares are
not readily traded and could be put to the Company for cash.
<PAGE>



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

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

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

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

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

Off-balance sheet instruments: Fair values for outstanding letters of credit are
based on fees currently  charged to enter into similar  agreements,  taking into
account the remaining  terms of the  agreements and the  counterparties'  credit
standing. The fair value of the outstanding letters of credit is not believed to
be significant at December 31, 1996.  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.
<PAGE>


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.



Note 2.  Investment Securities

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


                                                                  Gross        Gross
                                                 Amortized      Unrealized   Unrealized   
                                                    Cost          Gains        Losses       Fair Value
                                              ----------------------------------------------------------
                                                               (Amounts In Thousands)
<S>                                           <C>            <C>            <C>           <C>   

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                                               5,661            920           (3)          6,578
                                              -----------------------------------------------------------
              Total                           $      109,495 $        1,455 $       (413) $      110,537
                                              ===========================================================
December 31, 1995:
   U. S. Treasury                             $       41,094 $          330 $       (149) $       41,275
   U. S. Government agencies and
      corporations                                    55,246            511         (220)         55,537
   Other                                               3,281             --           --           3,281
                                              -----------------------------------------------------------
              Total                           $       99,621 $          841 $       (369) $      100,093
                                              ===========================================================
</TABLE>


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

                                                  Gross     Gross
                                      Amortized Unrealized Unrealized 
                                        Cost      Gains     Gains     Fair Value
                                       -----------------------------------------
                                                (Amounts In Thousands)
December 31, 1996:
   States and political subdivisions . $  22,098 $   239    $  (105)    $22,232
                                       ========================================

December 31, 1995:
   States and political subdivisions . $  21,443 $   387    $   (76)    $21,754
                                       ========================================




<PAGE>


Gross  losses  realized  on  sales of  investment  securities  totaled  $57,000,
$111,000  and $215,000  for the years ended  December  31, 1996,  1995 and 1994,
respectively.

The contractual  maturity  distribution of investment  securities as of December
31, 1996 is summarized as follows:
<TABLE>

                                                                   Available for Sale             Held to Maturity
                                                                ------------------------      ------------------------
                                                                Amortized                     Amortized
                                                                   Cost       Fair Value        Cost        Fair Value
                                                                ------------------------------------------------------
                                                                               (Amounts In Thousands)
<S>                                                             <C>            <C>            <C>            <C>   


Due in one year or less .................................       $ 20,715       $ 21,664       $  2,231       $  2,246
Due after one year through five years ...................         86,702         86,811         10,792         10,872
Due after five years through ten years ..................            917            928          9,010          9,044
Due over ten years ......................................          1,161          1,134             65             70
                                                                -----------------------------------------------------
              Total .....................................       $109,495       $110,537       $ 22,098       $ 22,232
                                                                =====================================================
</TABLE>

As of December 31, 1996  investment  securities with a carrying value of $27,616
were pledged to collateralize public and trust deposits,  short-term borrowings,
and for other purposes, as required or permitted by law.


Note 3.  Loans

The composition of loans is as follows:
                                                                December 31,
                                                          ----------------------
                                                               1996     1995
                                                          ----------------------
                                                          (Amounts In Thousands)

Agricultural .........................................      $ 23,133  $ 19,000
Commercial and financial .............................        30,650    26,810
Real estate:
   Construction ......................................         8,846     7,937
   Mortgage ..........................................       279,134   239,899
Loans to individuals .................................        33,812    31,640
                                                            ------------------
                                                             375,575   325,286
Less allowance for loan losses .......................         7,311     6,740
                                                            ------------------
                                                            $368,264 $ 318,546
                                                            ==================

Changes in the allowance for loan losses are as follows:

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

Balance, beginning ......................   $6,740    $6,210    $5,775
   Provision charged to expenses ........      754       722       641
   Recoveries ...........................      438       730       854
   Allowances of acquired banks .........      350        --        --
   Loans charged off ....................     (971)     (922)   (1,060)
                                            --------------------------
Balance, ending .........................   $7,311    $6,740    $6,210
                                            ==========================
<PAGE>



Information about impaired loans as of and for the years ended December 31, 1996
and 1995 is as follows:
                                                           1996          1995
                                                         ----------------------
                                                         (Amounts In Thousands)

Loans receivable for which there is a 
     related allowance for credit losses............      $   --       $   --
Loans receivable for which there is no 
     related allowance for credit losses ...........       7,811        5,465
                                                          -------------------
              Total impaired loans .................      $7,811       $5,465
                                                          -------------------

Related allowance for credit losses ................      $   --       $   --
Average balance ....................................       6,438        5,617
Interest income recognized .........................         547          491


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



Note 4.  Property and Equipment

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

                                                    December 31,
                                              ----------------------
                                                1996         1995
                                              ----------------------
                                              (Amounts In Thousands)

Land ....................................      $ 1,700      $ 1,362
Buildings and improvements ..............        6,475        5,358
Furniture and equipment .................        8,007        6,900
                                               --------------------
                                                16,182       13,620
Less accumulated depreciation ...........        7,773        6,624
                                               --------------------
              Net .......................      $ 8,409      $ 6,996
                                               ====================



Note 5.  Interest-Bearing Deposits

A summary of these deposits is as follows:

                                                                December 31,
                                                          ----------------------
                                                              1996      1995
                                                          ----------------------
                                                          (Amounts In Thousands)

NOW and other demand ..................................     $ 43,017  $ 35,463
Savings ...............................................      115,037    85,502
Time, $100,000 and over ...............................       32,635    29,451
Other time ............................................      213,218   198,914
                                                            ------------------
                                                            $403,907  $349,330
                                                            ==================
<PAGE>



Note 6.  Employee Benefit Plans

The Company has an Employee  Stock  Ownership  Plan (the "Plan")  established to
provide retirement benefits for its employees. The Plan borrowed $1,953,000 from
a bank in 1985 and acquired  172,200 shares of the Company's  stock,  which were
pledged as  collateral  on the bank note.  The Company  committed to annual ESOP
contributions  sufficient to service the debt until the debt was retired in 1994
and has since made discretionary cash contributions.

The Company's contribution to the Plan totaled $42,000,  $76,000 and $71,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.

In the event a terminated plan participant  desires to sell his or her shares of
the Company stock, or for certain employees who elect to diversify their account
balances,  the  Company  may  be  required  to  purchase  the  shares  from  the
participant  at their fair  market  value.  To the extent  that shares of common
stock  held by the ESOP are not  readily  traded,  a sponsor  must  reflect  the
maximum cash obligation  related to those  securities  outside of  stockholders'
equity.  As of December 31,  1996,  160,401  shares held by the ESOP,  at a fair
value of $40 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  $340,000,  $419,000  and
$464,000 for the years ended December 31, 1996, 1995 and 1994, respectively.

The Company has a Stock  Incentive  Plan for certain key employees and directors
whereby 130,800 shares of common stock have been reserved for awards in the form
of stock options or stock awards.  A Stock Option  Committee  grants  options at
prices  equal to the fair value of the stock at the date of the  grant.  Options
expire 10 years  from the date of the  grant.  Directors  may  exercise  options
immediately  and  officers'  rights under the plan vest over a five-year  period
from the date of the grant. Additional compensation is accrued equivalent to the
amount of dividends  that would have been paid on the stock had the options been
exercised. Such compensation is payable upon exercise of the options.

A summary of the stock option transactions are as follows:

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

Balance, December 31, 1994 ...................           46,569        $   25.76
   Exercised .................................               --               --
   Forfeited .................................               --               --
                                                                          ------
Balance, December 31, 1995 ...................           46,569            25.76
   Exercised .................................               --               --
   Forfeited .................................               --               --
                                                         -----------------------
Balance, December 31, 1996 ...................           46,569        $   25.76
                                                         =======================

As of  December  31,  1996,  options  for  22,605  shares of common  stock  were
exercisable at a weighted average price of $25.33.  The range of exercise prices
is from $25.33 to $26.17 and the weighted average  contractual life of all stock
options outstanding as of December 31, 1996 is 6.5 years.

The Committee is also  authorized to grant awards of common stock and authorized
the  issuance  of  1,936,  609 and 1,110  shares  of common  stock to a group of
employees in 1996, 1995 and 1994, respectively.
<PAGE>



Note 7.  Federal Home Loan Bank Borrowings

As of December 31, 1996, the borrowings were as follows:

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

Due August 29, 1997, 6.60% .................................         $ 5,000
Due June 5, 1998, 5.74% ....................................          10,000
Due August 5, 1999, 6.57% ..................................           5,000
Due February 22, 2000, 7.73% ...............................           5,000
Due August 17, 2005, 7.12% .................................             100
Due August 11, 2008, 6.00% .................................             695
                                                                     -------
                                                                     $25,795
                                                                     =======

The  borrowings  are  collateralized  by 1-4 family  mortgage  loans with a face
amount of  $38,693,000.  As of December 31, 1996,  the Company held Federal Home
Loan Bank  stock  with a cost of  $3,398,000  which is  included  in  investment
securities.


Note 8.  Income Taxes

Income taxes for the years ended December 31, 1996, 1995 and 1994 are summarized
as follows:

                                                   1996       1995      1994
                                                  ---------------------------
                                                    (Amounts In Thousands)

Current:
   Federal ...............................        $ 2,098   $ 1,828   $ 1,630
   State .................................            457       404       360
Deferred .................................            (77)     (238)     (145)
                                                  ---------------------------
                                                  $ 2,478   $ 1,994   $ 1,845
                                                  ===========================

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

                                                     December 31,
                                               ------------------------
                                                1996     1995     1994
                                               ------------------------
                                                (Amounts In Thousands)
Deferred income tax assets:
   Unrealized losses on debt securities ....   $   --   $   --   $1,525
   Allowance for loan losses ...............    2,264    2,135    1,938
   Certain accrued expenses ................      205      166      107
   Other ...................................        7       43       24
                                               ------------------------
              Gross tax assets .............    2,476    2,344    3,594
                                               ------------------------
Deferred income tax liabilities:
   Property and equipment ..................      621      591      570
   FHLB dividends ..........................      130      105       80
   Unrealized gains on debt securities .....      366      174       --
   Other ...................................        9       --       --
                                               ------------------------
              Gross tax liabilities ........    1,117      870      659
                                               ------------------------
              Net deferred income tax asset    $1,359   $1,474   $2,935
                                               ========================

<PAGE>


The net change in the  deferred  income  taxes for the years ended  December 31,
1996, 1995 and 1994 is reflected in the financial statements as follows:

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

Statement of income ............................   $   (77)   $  (238) $   (145)
Statement of stockholders' equity ..............       192      1,699    (1,715)
                                                   -----------------------------
                                                   $   115    $ 1,461  $ (1,860)
                                                   =============================

The income tax provisions  for the years ended December 31, 1996,  1995 and 1994
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>
                                                  1996                              1995                              1994
                                         -------------------------        -------------------------        ------------------------
                                                             % Of                            % Of                            % Of
                                                            Pretax                           Pretax                         Pretax
                                           Amount           Income          Amount           Income          Amount         Income
                                         -------------------------        -------------------------        ------------------------
                                                                      (Amounts In Thousands)
<S>                                      <C>                <C>            <C>               <C>           <C>              <C>
Expected provision ..............         $ 2,931             34.0%        $ 2,465             34.0%        $ 2,305            34.0%
Tax-exempt interest .............            (539)            (6.3)           (530)            (7.3)           (551)           (8.1)
Interest expense limitation .....              95              1.1              87              1.2              75             1.1
State income taxes, net of 
   federal income tax benefit ...             315              3.7             245              3.4             225             3.3
Income tax credits ..............            (344)            (4.0)           (250)            (3.5)           (195)           (2.9)
Other ...........................              20              0.2             (23)            (0.3)            (14)           (0.2)
                                          ------------------------------------------------------------------------------------------
                                          $ 2,478             28.7%        $ 1,994             27.5%        $ 1,845            27.2%
                                          ==========================================================================================
</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, 1996 with the minimum
requirements is presented below.

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

Tier 1 Risk-Based Capital .....................        14.01%        4.00%
Total Risk-Based Capital ......................        15.27         8.00
Leverage Ratio ................................         9.11         3.00

According  to FDIC  capital  guidelines,  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 it 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 could be  available  for the payment of
dividends to the Company total approximately $4,900,000 as of December 31, 1996.

The Bank is required to  maintain  reserve  balances in cash or with the Federal
Reserve Bank.  Reserve balances totaled $3,974,000 and $3,389,000 as of December
31, 1996 and 1995, respectively.
<PAGE>


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.

The  following  is an analysis  of the  changes in the loans to related  parties
during the years ended December 31, 1996 and 1995:

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

Balance, beginning ..............              $ 9,548   $ 9,011
   Advances .....................                1,502     1,327
   Collections ..................               (1,818)     (790)
                                               -----------------
Balance, ending .................              $ 9,232   $ 9,548
                                               =================

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, 1996 and 1995 are as follows:
<TABLE>

                                                                     1996                           1995
                                                            -------------------------      --------------------------
                                                            Carrying       Estimated       Carrying        Estimated
                                                             Amount        Fair Value       Amount         Fair Value
                                                            ---------------------------------------------------------
                                                                              (Amounts In Thousands)
<S>                                                         <C>             <C>             <C>             <C>  
Cash and due from banks ............................        $ 15,036        $ 15,036        $ 11,883        $ 11,883
Federal funds sold .................................           1,107           1,107          16,080          16,080
Investment securities ..............................         132,635         132,769         121,536         121,847
Loans ..............................................         368,264         374,804         318,546         321,553
Accrued interest receivable ........................           4,884           4,884           4,446           4,446
Deposits ...........................................         450,061         451,114         392,257         394,390
Securities sold under agreements
   to repurchase ...................................           6,071           6,071          10,019          10,019
Borrowings from Federal Home Loan
   Bank ............................................          25,795          26,629          30,727          30,973
Accrued interest payable ...........................           1,952           1,952           1,885           1,885

                                                               Face                          Face      
                                                              Amount                        Amount
                                                            --------                       --------
Off-balance sheet instruments:
   Loan commitments                                         $ 72,322                       $ 50,456
   Letters of credit                                           9,583                          5,822
</TABLE>
<PAGE>


Note 12.  Parent Company Only Financial Information

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

                              BALANCE SHEETS
                        December 31, 1996 and 1995
                          (Amounts In Thousands)

ASSETS                                                     1996      1995
--------------------------------------------------------------------------

Cash ...................................................  $   294  $   316
Investment securities available for sale ...............    1,181      300
Investment in subsidiary banks .........................   52,355   47,727
Other assets ...........................................      693      205
                                                          ----------------
              Total assets .............................  $54,523  $48,548
                                                          ================

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

Liabilities ............................................  $    772 $    --
                                                          ----------------
Redeemable common stock held by ESOP ...................    6,416    5,271
                                                          ----------------
Stockholders' equity:
   Capital stock .......................................    8,997    8,925
   Retained earnings ...................................   44,078   39,325
   Unrealized gains on investment securities, net ......      676      298
                                                          ----------------
                                                           53,751   48,548
   Less maximum cash obligation related to ESOP shares .    6,416    5,271
                                                          ----------------
              Total stockholders' equity ...............   47,335   43,277
                                                          ----------------
              Total liabilities and stockholders' equity  $54,523  $48,548
                                                          ================





<PAGE>


Note 12. Parent Company Only Financial Information (Continued)

                              STATEMENTS OF INCOME
                  Years Ended December 31, 1996, 1995 and 1994
                             (Amounts In Thousands)
<TABLE>

                                                           1996      1995      1994
------------------------------------------------------------------------------------
<S>                                                       <C>       <C>       <C>   

Interest on investment securities .....................   $   15    $   20    $   11
Dividends received from subsidiaries ..................    9,422     1,272     1,212
Operating expenses ....................................      (67)      (20)      (20)
                                                          --------------------------
              Income before income taxes and equity
                in subsidiaries' undistributed income .    9,370     1,272     1,203
Income tax benefit ....................................       22         2         5
                                                          --------------------------
                                                           9,392     1,274     1,208
Equity in subsidiaries' undistributed income ..........   (3,248)    3,983     3,726
                                                          --------------------------
              Net income ..............................   $6,144    $5,257    $4,934
                                                          ==========================
</TABLE>

                   STATEMENTS OF CASH FLOWS
         Years Ended December 31, 1996, 1995 and 1994
                    (Amounts In Thousands)
<TABLE>

                                                           1996      1995      1994
                                                          --------------------------
<S>                                                       <C>       <C>       <C>

Cash flows from operating activities:
   Net income .........................................   $6,144    $5,257    $4,934
   Noncash items included in net income:
      Undistributed earnings of subsidiaries ..........    3,248    (3,983)   (3,726)
      (Increase) decrease in other assets .............     (414)       39       123
      Increase in liabilities .........................      464        --        --
                                                          --------------------------
              Net cash provided by operating activities    9,442     1,313     1,331
                                                          --------------------------
Cash flows from investing activities:
   Investment in subsidiary banks .....................   (8,073)       --        --
   Proceeds from maturities of investment securities ..      300       300       300
   Purchase of investment securities ..................     (300)     (300)     (300)
                                                          --------------------------
              Net cash (used in) investing activities .   (8,073)       --        --
                                                          --------------------------
Cash flows (used in) financing activities,
   cash dividends paid ................................   (1,391)   (1,268)   (1,171)
                                                          --------------------------
              Increase (decrease) in cash .............      (22)       45       160
Cash balance:
   Beginning ..........................................      316       271       111
                                                          --------------------------
   Ending .............................................   $  294    $  316    $  271
                                                          ==========================
</TABLE>





<PAGE>



Note 13.  Commitments and Contingencies

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

Financial  instruments  with  off-balance  sheet  risk:  The  Banks are party to
financial  instruments  with  off-balance  sheet  risk in the  normal  course of
business  to  meet  the  financing  needs  of  its  customers.  These  financial
instruments include commitments to extend credit, credit card participations and
standby  letters of  credit.  These  instruments  involve,  to varying  degrees,
elements  of credit  risk in  excess of the  amount  recognized  in the  balance
sheets.

The 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  it  does  for  on-balance  sheet
instruments.  A summary of the Banks'  commitments at December 31, 1996 and 1995
is as follows:

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

Firm loan commitments and unused portion of lines of credit:
   Home equity loans .......................................  $ 3,979  $ 2,333
   Credit card participants ................................    6,336    5,123
   Commercial, real estate and home construction ...........   23,862   18,103
   Commercial lines ........................................   38,145   24,897
Outstanding letters of credit ..............................    9,583    5,822

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.
<PAGE>



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  proforma net income for 1996,  1995 and 1994, 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.

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
                                                                       ========

Note 15.  Common Stock Dividend

On April 17, 1996, the Company  effected a three for one stock split in the form
of a stock dividend when it issued a stock dividend of two additional shares for
each share then held. The number of shares outstanding and per share information
has been retroactively restated for all periods presented.
<PAGE>



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

William H. Olin, D.D.S.       73   Director of Registrant and Bank; Chairman of the Board, Bank;                   1984
                                   Vice President of the Registrant; Dentist, University of Iowa Hospitals
                                   and Clinics

Earlis Rohret                 72   Director of Registrant and Bank; Vice President of the Registrant; Farmer       1984

James G. Pratt                48   Treasurer of Registrant; Senior Vice President and Controller of Bank           1985 (1982)
                                   from January 1986 to present

Thomas J. Cilek               50   Secretary of Registrant; Senior Vice President of Bank from August 1986         1988 (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

                                                                     Form 10-K
                                                                     Reference
                                                                     -----------
(a)  1.  Financial Statements

         Independent auditor's report on the financial statements         
         Consolidated balance sheets as of December 31, 1996 and 1995  
         Consolidated statements of income for the years ended December 31, 
            1996, 1995 and 1994                             
         Consolidated statements of stockholders' equity for the years ended
            December 31, 1996, 1995 and 1994                               
         Consolidated statements of cash flows for the years ended 
            December 31, 1996, 1995 and 1994
         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 Earnings Per Common and Common
         Equivalent Share is attached on Page 59.

         Exhibit 21 - Subsidiaries of the Registrant is attached on Page 60.

         Exhibit 23 - Consent of Accountants is attached on Page 61.

         Exhibit 27 - Financial Data Schedule is attached on Pages 62 and 63.

(b)      Reports on Form 8-K:

         There were no reports on Form 8-K for the three months  ended  December
         31, 1996.
<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 27, 1997              By /s/ Dwight O. Seegmiller
     ----------------------         --------------------------------------------
                                    Dwight O. Seegmiller, Director and President

Date March 27, 1997              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 27, 1997              By /s/ Willis M. Bywater
     ----------------------         --------------------------------------------
                                    Willis M. Bywater, Director

Date March 27, 1997              By /s/ Thomas J. Gill
     ----------------------         --------------------------------------------
                                    Thomas J. Gill, Director

Date March 27, 1997              By /s/ Donald H. Gringer
     ----------------------         --------------------------------------------
                                    Donald H. Gringer, Director

Date March 27, 1997              By /s/ Richard W. Oberman
     ----------------------         --------------------------------------------
                                    Richard W. Oberman, Director

Date March 27, 1997              By /s/ William H. Olin
     ----------------------         --------------------------------------------
                                    William H. Olin, Director

Date March 27, 1997              By /s/ Theodore H. Pacha
     ----------------------         --------------------------------------------
                                    Theodore H. Pacha, Director

Date March 27, 1997              By /s/ Ann M. Rhodes
     ----------------------         --------------------------------------------
                                    Ann M. Rhodes, Director

Date March 27, 1997              By /s/ Earlis Rohet
     ----------------------         --------------------------------------------
                                    Earlis Rohet, Director

Date March 27, 1997              By /s/ Ronald E. Stutsman
     ----------------------         --------------------------------------------
                                    Ronald E. Stutsman, Director

Date March 27, 1997              By /s/ Earl M. Yoder
     ----------------------         --------------------------------------------
                                    Earl M. Yoder, Director





<PAGE>


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

                                  EXHIBIT INDEX


                                                                 Page Number
                                                             In The Sequential
 Exhibit                                                      Numbering System
  Number                           Description               For 1996 Form 10-K
--------------------------------------------------------------------------------


    11     Statement Re Computation of Earnings Per 
               Common and Common Equivalent Share                  

    21     Subsidiaries of the Registrant  

    23     Consent of Independent Certified Public Accountants

    27     Financial Data Schedule