Hills Bancorporation

                                    Form 10-k

                                December 31, 2001


<PAGE>


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

                                    FORM 10-k

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

For the fiscal year ended December 31, 2001.     Commission File Number 0-12668.

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

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

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

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

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

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  Registrant  was
required  to file  such  reports)  and  (2)  has  been  subject  to such  filing
requirements for the past 90 days.  Yes [ X ]   No [  ]

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

While  it is  difficult  to  determine  the  market  value  of  shares  owned by
nonaffiliates (within the meaning of such term under the applicable  regulations
of the Securities and Exchange  Commission),  the Registrant  estimates that the
aggregate market value of the Registrant's common stock held by nonaffiliates on
March 15, 2002 (based upon reports of beneficial  ownership  that  approximately
82%  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   $82  per  share)  was
$100,763,000.

The number of shares  outstanding of the  Registrant's  common stock as of March
15, 2002 is 1,498,558 shares of no par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement  dated March 22, 2002 for the Annual Meeting of
the  Shareholders  of the  Registrant  to be held  April  15,  2002  (the  Proxy
Statement) are incorporated by reference in Part III of this Form 10-K.

                                  EXHIBIT INDEX

The exhibits index is on Page 72.
<PAGE>

Part I

Item 1.   Business

GENERAL

Hills  Bancorporation (the "Company") is a holding company principally  engaged,
through  its  subsidiary  bank,  in the  business  of  banking.  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,  Hills,  Iowa  ("Hills  Bank and Trust" or the "Bank") as of
January  23,  1984 when  stockholders  of Hills Bank and Trust  exchanged  their
shares for shares of the Company.  Effective  July 1, 1996, the Company formed a
new subsidiary,  Hills Bank, which acquired for cash all the outstanding  shares
of a bank in Lisbon,  Iowa.  Subsequently  an office of Hills Bank was opened in
Mount Vernon, Iowa, a community that is contiguous in Lisbon. Effective November
17, 2000, Hills Bank was merged into Hills Bank and Trust.

On September 20, 1996, another subsidiary,  Hills Bank Kalona, acquired cash and
other  assets and assumed the  deposits of the Kalona,  Iowa office of Boatmen's
Bank Iowa,  N.A.,  Kalona,  Iowa  (Washington  County) is approximately 20 miles
south of Iowa City.  Kalona has a  population  of  approximately  2,000  people.
Kalona is  primarily  an  agricultural  community,  but is located  within  easy
driving distance for employment in Iowa City and Coralville (combined population
87,000) and Washington,  Iowa (population  7,300).  Effective  October 26, 2001,
Hills Bank Kalona was merged into Hills Bank and Trust.

The Bank primarily  serves the communities of Iowa City,  Coralville,  Hills and
North  Liberty,  located near  Interstate 80 and Interstate 380 in Eastern Iowa.
These communities have a combined population of approximately 80,000 and Johnson
County, Iowa has a population of approximately  106,000.  The University of Iowa
in Iowa City has over 27,000  students and 23,000 full and part-time  employees,
including  employees of The  University of Iowa  Hospitals and Clinics.  Johnson
County,  Iowa  has  had  one of the  strongest  economies  in  Iowa  and has had
substantial economic growth in the past ten years.

The Bank also operates  offices in the Linn County,  Iowa communities of Lisbon,
Mount Vernon and Cedar Rapids,  Iowa.  Lisbon has a population of  approximately
1,500 and Mount  Vernon,  located two miles from  Lisbon,  has a  population  of
3,700.  Both  communities are strong  economically and are within easy commuting
distances  to Cedar  Rapids and Iowa  City,  Iowa.  Mount  Vernon is the home of
Cornell  College,  which has  approximately  1,200 students.  Cedar Rapids has a
metropolitan population of approximately 180,000 and is located approximately 10
miles  west of Lisbon,  Iowa and  approximately  25 miles  north of Iowa City on
Interstate  380.  The larger  employers  in the Cedar  Rapids area are  Rockwell
Collins  with   approximately   6,300   employees  and  Amana   Appliances  with
approximately  2,950  employees.  Other major  employers  include  Cedar  Rapids
Community  Schools (about 2,475  employees),  St. Luke's  Hospital  (about 2,250
employees) and McLeod USA  (approximately  2,000  employees).  There are several
additional employers in Cedar Rapids having from 1,000 to 2,000 employees each.

The Bank is an all  full-service  commercial  bank  extending  its  services  to
individuals,  business, governmental units and institutional customers primarily
in the communities of Hills, Iowa City, Cedar Rapids, Coralville, North Liberty,
Lisbon,  Mount Vernon and Kalona.  This area includes all of Johnson  County and
parts of Linn and Washington counties. The Bank is actively engaged in all areas
of  commercial  banking,  including  acceptance  of  demand,  savings  and  time
deposits;  making  commercial,  real estate,  agricultural  and consumer  loans;
maintaining  night  and safe  deposit  facilities;  and  performing  collection,
exchange and other banking services tailored for individual customers.  The Bank
administers  estates,  personal  trusts,  and pension  plans and  provides  farm
management  and  investment  advisory and  custodial  services for  individuals,
corporations  and  nonprofit  organizations.   The  Bank  makes  commercial  and
agricultural  loans,  real  estate  loans,  automobile,  installment  and  other
consumer loans. In addition,  the Bank earns  substantial  fees from originating
mortgages that are sold in the secondary  residential real estate market without
mortgage servicing rights being retained.

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

The Bank's  business  is not  seasonal,  except that loan  origination  fees are
normally  higher during the spring and summer months.  Management  believes that
the Bank has not undertaken any significant new services during the current year
that  might  exceed  the  limits  of its  human  resources  and data  processing
capabilities.
<PAGE>

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

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

The  Company  had no  employees  as of  December  31,  2001 and the Bank had 265
regular and 101 part-time employees.

COMPETITION

The financial  services  industry is highly  competitive.  The Bank must compete
with financial services providers, such as banks, savings and loan associations,
credit  unions,  finance  companies,   mortgage  banking  companies,   insurance
companies and money market and mutual fund  companies.  It also faces  increased
competition from nonbanking  institutions such as brokerage houses and insurance
companies,  as well as from financial  services  subsidiaries  of commercial and
manufacturing  companies.  Many of these competitors enjoy the benefits of fewer
regulatory constraints and lower cost structures.

Effective March 13, 2000, securities firms and insurance companies that elect to
become  financial  holding  companies  may  acquire  banks and  other  financial
institutions. This may significantly change the competitive environment in which
the Company conducts business. The financial services industry is also likely to
become more competitive as further technological  advances enable more companies
to provide financial  services.  These  technological  advances may diminish the
importance of depository institutions and other financial  intermediaries in the
transfer of funds between parties.

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

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

The  Company  had no  employees  as of  December  31,  2001 and the Bank had 265
regular and 101 part-time employees.

The Bank is in direct  competition for loans and deposits and financial services
with a number of other banks in Johnson  County,  Iowa. A comparison of deposits
in Johnson County is as follows:
                                                                     Deposits
                                                                     June 30,
                                                                       2001
                                                                   -------------
                                                                   (In Millions)
Hills Bank and Trust Company ................................           $557
Branches of largest competing regional bank .................            245
Largest competing independent bank ..........................            321
Largest competing credit union ..............................            202

In Linn County, Iowa, the June 30, 2001 deposits of the Bank totaled $70 million
out of total deposits of $2,512 million.

THE ECONOMY

The Bank's primary trade territory is Johnson County,  Iowa.  Recent  employment
data indicates that the total employment in the county is approximately  45,000,
of which 23,000  employees  work for the University of Iowa or the University of
Iowa Hospitals and Clinics.  Other larger sectors of the economy are health care
(two other hospitals employ 2,500), educational testing and data processing (two
employers employ 2,300),  governmental  (city,  county and schools employ 2,600)
and retail and service  sectors.  The  University  of Iowa's impact on the local
economy has been to maintain  employment levels because of record enrollments at
the University of Iowa and to stabilize  unemployment at approximately  2.1% for
the past four years.

The State of Iowa has recently seen  decreasing  tax revenues while spending has
increased,  and the Iowa  legislature  has  required  the  University  to reduce
spending in the year ending June 30, 2002 with further  reductions  expected for
the year  ending June 2003.  So far,  the  University  has reacted to its budget
constraints  without  significant  lay-offs and has announced that it intends to
reduce employment, when necessary, through attrition.  However, salary increases
at the University are expected to be minimal in the next year.
<PAGE>

The Bank also  serves a number  of  smaller  communities  in  Johnson,  Linn and
Washington counties that are more dependent upon the agricultural economy, which
has  historically  been affected by commodity prices and weather.  However,  the
Bank's  total  agricultural  loans  comprise  only about 5% of the Bank's  total
loans.

The Bank also competes in Linn County,  Iowa where it holds  approximately 3% of
the county's total  deposits.  Linn County,  with a population of  approximately
180,000,  has a much higher dependence on manufacturing and its largest employer
is  Rockwell  Collins,  with about 6,300  employees.  Other  employment  sectors
include telecommunications with McLeod USA and MCI employing approximately 5,000
total employees. Several of Linn County's larger employers have recently reduced
employment,  including  McLeod USA, which is operating in  bankruptcy,  Rockwell
Collins, and Amana Appliances, which has been acquired by Maytag.

SUPERVISION AND REGULATION

Financial  institutions  and their holding  companies are extensively  regulated
under federal and state law. As a result, the growth and earnings performance of
the  Company  can be  affected  not only by  management  decisions  and  general
economic conditions but also by the requirements of applicable state and federal
statutes and  regulations  and the policies of various  governmental  regulatory
authorities,    including    the   Iowa    Superintendent    of   Banking   (the
"Superintendent"),  the Board of  Governors of the Federal  Reserve  System (the
"Federal Reserve"),  the Federal Deposit Insurance Corporation (the "FDIC"), the
Internal  Revenue  Service and state taxing  authorities  and the Securities and
Exchange Commission (the "SEC"). The effect of applicable  statues,  regulations
and regulatory  policies can be significant  and cannot be predicted with a high
degree of certainty.

Federal  and  state  laws and  regulations  generally  applicable  to  financial
institutions, such as the Company and its subsidiary Bank, regulate, among other
things, the scope of business,  investments,  reserves against deposits, capital
levels  relative to  operations,  the nature and amount of collateral for loans,
the establishment of branches, mergers, consolidations and dividends. The system
of supervision and regulation  applicable to the Company and its subsidiary Bank
establishes a  comprehensive  framework for their  respective  operations and is
intended  primarily for the protection of the FDIC's deposit insurance funds and
the depositors, rather than the stockholders, of financial institutions.

The following is a summary of the material elements of the regulatory  framework
that applies to the Company and its subsidiary Bank. It does not describe all of
the  statutes,  regulations  and  regulatory  policies  that apply,  nor does it
restate all of the  requirements  of the statutes,  regulations  and  regulatory
policies that are described. As such, the following is qualified in its entirety
by reference to the applicable  statutes,  regulations and regulatory  policies.
Any change in applicable  law,  regulations  or  regulatory  policies may have a
material effect on the business of the Company and its subsidiary Bank.

Recent Regulatory Developments

The  Gramm-Leach-Bliley  Act, also known as the Financial Services Modernization
Act (the "Act"),  was enacted on November 12, 1999. The Act allows eligible bank
holding companies to engage in a wider range of nonbanking activities and grants
them greater authority to engage in securities and insurance  activities.  Under
the Act,  an eligible  bank  holding  company  that elects to become a financial
holding  company  may  engage  in any  activity  that the  Federal  Reserve,  in
consultation  with the  Secretary of the  Treasury,  determines by regulation or
order is financial in nature,  incidental  to any such  financial  activity,  or
complementary  to any such  financial  activity and does not pose a  substantial
risk to the safety or  soundness of  depository  institutions  or the  financial
system  generally.  A financial  service  corporation  can engage in a number of
financial activities  including insurance and securities  underwriting and other
agency activities,  merchant banking and insurance company portfolio  investment
activities.  Activities  that are  ancillary  to financial  activities  are also
allowed. Additionally, the Act amends the federal securities laws to incorporate
functional  regulation of bank  securities  and  activities and provides for the
functional  regulation of insurance  activities by establishing  which insurance
products banks and bank  subsidiaries  may provide as principal.  National banks
are also authorized by the Act to engage,  through "financial  subsidiaries," in
certain  activity  that is  permissible  for  financial  holding  companies  (as
described  above) and certain  activity that the  Secretary of the Treasury,  in
consultation  with the Federal  Reserve,  determines  is  financial in nature or
incidental to any such financial activity.
<PAGE>

Various bank regulatory agencies have issued regulations as mandated by the Act.
During June 2000,  all of the federal bank  regulatory  agencies  jointly issued
regulations  implementing  the privacy  provisions of the Act. In addition,  the
Federal  Reserve issued  interim  regulations  establishing  procedures for bank
holding companies to elect to become financial holding companies and listing the
financial  activities  permissible for financial holding  companies,  as well as
describing  the  extent  to which  financial  holding  companies  may  engage in
securities and merchant  banking  activities.  The Federal Reserve has issued an
interim  regulation  regarding the parameters under which state member banks may
establish and maintain financial subsidiaries.  At this time, it is not possible
to predict the impact the Act and its  implementing  regulations may have on the
Company.  As of the date of this  filing,  the  Company  has not  applied for or
received  approval to operate as a financial holding company.  In addition,  the
Bank  has  not  applied  for  or  received   approval  to  establish   financial
subsidiaries.

Furthermore,  the Act  provides  reform  in the  Federal  Home Loan Bank area by
providing  that  banks with less than $500  million in assets may use  long-term
advances for loans to small  businesses,  small farms and small  agri-businesses
and  replaces  the  current  $300  million   funding  formula  for  the  REFCORP
obligations of the Federal Home Loan Banks to twenty percent (20%) of the Bank's
annual earnings.

In the area of privacy,  the Act  requires  clear  disclosure  by all  financial
institutions  of  their  privacy  policy  regarding  the  sharing  of  nonpublic
information with both affiliates and third parties.  Further, the Act requires a
notice to  consumers  and an  opportunity  to "opt out" of sharing of  nonpublic
personal information with nonaffiliated third parties subject to certain limited
exceptions.  The  Act  also  provides  reform  in the  area of  ATMs,  Community
Reinvestment Community Banks and Deposit Production Offices.  Specifically,  the
Act requires ATM  operators  who impose a fee for use of an ATM by a noncustomer
to post a notice on the  machine  that a fee will be  charged  and on the screen
that a fee will be charged  and the amount of the fee,  and  further  requires a
notice when ATM cards are issued that surcharges may be imposed by other parties
when  transactions are initiated from ATMs not operated by the card issuer.  The
Act  also  clarifies  that  nothing  in the act  repeals  any  provision  of the
Continuity  Reinvestment Act ("CRA");  however, the Act requires full disclosure
of all CRA agreements and grants  regulatory  relief  regarding the frequency of
CRA exams to small  banks and  savings  and loans  (those with no more than $250
million in assets).  In the community bank area, the Act allows  community banks
all the powers as a matter of right that large  institutions have accumulated on
an ad hoc basis,  including the ability to underwrite municipal bonds in several
years.  Finally,  the Act expands the prohibition of deposit  production offices
contained  in the  Riegle-Neal  Interstate  bill to include  all  branches of an
out-of-state bank holding company.

Regulation of the Company

General.  The Company,  as the sole  shareholder  of the Bank, is a bank holding
company.  As a bank holding  company,  the Company is  registered  with,  and is
subject to regulation  by, the Federal  Reserve  under the Bank Holding  Company
Act, as amended (the "BHCA"). In accordance with the Federal Reserve policy, the
Company is expected to act as a source of financial  strength to the Bank and to
commit  resources to support the Bank in  circumstances  where the Company might
not  otherwise  do so.  Under the BHCA,  the  Company  is  subject  to  periodic
examination  by the Federal  Reserve.  The Company is also required to file with
the  Federal  Reserve  periodic  reports of the  Company's  operations  and such
additional information regarding the Company and its subsidiaries as the Federal
Reserve may require.

Investments and  Activities.  Under the BHCA, a bank holding company must obtain
Federal  Reserve  approval  before:  (i)  acquiring,   directly  or  indirectly,
ownership  or  control  of any voting  shares of  another  bank or bank  holding
company if, after the  acquisition,  it would own or control more than 5% of the
shares of the other bank or bank  holding  company  (unless  it already  owns or
controls the majority of such shares),  (ii) acquiring all or substantially  all
of the assets of another  bank or (iii)  merging or  consolidating  with another
bank holding company.  Subject to certain conditions  (including certain deposit
concentration  limits  established by the BHCA), the Federal Reserve may allow a
bank holding  company to acquire banks located in any state of the United States
without regard to whether the  acquisition is prohibited by the law of the state
in which the target  bank is  located.  On  approving  interstate  acquisitions,
however,  the Federal Reserve is required to give effect to applicable state law
limitations  on the  aggregate  amount  of  deposits  that  may be  held  by the
acquiring bank holding company and its insured depository institution affiliates
in the state in which the target bank is located  (provided that those limits do
not discriminate against out-of-state  depository  institutions or their holding
companies)  and state  laws  which  require  that the  target  bank have been in
existence  for a minimum  period of time (not to exceed five years) before being
acquired by an out-of-state bank holding company.
<PAGE>

The BHCA also generally  prohibits the Company from acquiring direct or indirect
ownership or control of more than 5% of the voting  shares of any company  which
is not a bank and from  engaging  in any  business  other than that of  banking,
managing  and  controlling  banks or  furnishing  services  to banks  and  their
subsidiaries. This general prohibition is subject to a number of exceptions. The
principal  exception  allows  bank  holding  companies  to engage in, and to own
shares of companies engaged in, certain  businesses found by the Federal Reserve
to be "so closely related to banking . . . as to be a proper incident  thereto."
Under current regulations of the Federal Reserve, the Company either directly or
through  nonbank  subsidiaries  would be  permitted  to engage  in a variety  of
banking-related  businesses,  including  the  operation  of a thrift,  sales and
consumer finance,  equipment leasing, the operation of a computer service bureau
(including  software  development) and mortgage banking and brokerage.  The BHCA
generally does not place territorial  restrictions on the domestic activities of
nonbank subsidiaries of bank holding companies.

Federal law also prohibits any person from acquiring "control" of a bank holding
company  without  prior  notice  to  the  appropriate  federal  bank  regulator.
"Control" is defined in certain cases as the  acquisition  of 10% or more of the
outstanding  shares  of a  bank  or a  bank  holding  company  depending  on the
circumstances surrounding the acquisition.

Regulatory Capital Requirements

Regulatory  guidelines  define  capital  and  spell out the  minimum  acceptable
capital  levels  for  banks.  The  purpose of these  guidelines  is to  increase
depositor protection and to reduce deposit insurance fund losses. Currently, the
three  federal  banking  agencies  use as  "risk-based"  approach  to gauge bank
capital. Under this approach, the agencies define what is to be included in bank
capital  and  establish  the  minimum  capital a bank must have to  protect  it,
primarily from the inherent risk in its asset holdings.

Risk-based capital guidelines divide capital into core and supplemental capital.
Core or Tier I capital is similar to what is  normally  thought of as capital in
other businesses.  It consists  primarily of common and certain preferred stock,
surplus and undivided  profits.  Bank holding companies are required to maintain
these  minimum  levels of capital in  accordance  with Federal  Reserve  capital
adequacy  guidelines.  If capital falls below minimum  guideline  levels, a bank
holding  company,  among  other  things,  may be denied  approval  to acquire or
establish  additional  banks  or  nonbank  businesses.  Total  capital  consists
primarily of Tier 1 capital plus certain other debt and equity instruments which
do not qualify as Tier 1 capital and a portion of the  company's  allowance  for
loan and lease losses.  Supplemental or Tier 2 capital consists,  within certain
specified  limits,  of such  things as the  allowance  for loan  losses,  hybrid
capital  instruments and subordinated  debt. These  supplemental items are often
forms of debt that are  subordinate  to claims of  depositors  and the FDIC.  As
such, they provide  depositor  protection and are included in bank capital.  The
sum of Tier 1 and Tier 2 capital,  less certain deductions,  represents a bank's
total  capital.  In the capital  guidelines,  Tier 1 capital must  constitute at
least 50% of a bank's total capital.  Thus, the use of Tier 2 capital is limited
by the "hard" equity in a bank's capital structure.

As part of their capital adequacy assessment,  the regulatory agencies convert a
bank's assets, including off-balance sheet items, to risk-equivalent assets. The
purpose of this  conversion is to quantify the relative risk,  primarily  credit
risk,  in these  assets  and to  determine  the  minimum  capital  necessary  to
compensate  for this risk.  For example,  assets that pose little risk,  such as
cash held at the bank's offices and U. S.  government  securities,  are weighted
zero, meaning that no capital support is required for these assets.  Assets that
pose  greater  risk are  weighted  at 20%,  50% or 100% of their  dollar  value,
indicating  the level of capital  support  they  require.  Except for banks with
large  "off-balance  sheet" asset  positions,  risk weighting will nearly always
lower total  assets  requiring  capital  support.  However,  even if a bank held
nothing  but cash and U.S.  securities,  it would  still be required to maintain
capital support for these assets. The reason is that banks face more than credit
risk (e.g.,  market risk), and these other risks require that capital be kept at
some minimum level to protect the bank and its depositors.

The  Federal  Reserve's  capital  guidelines  establish  the  following  minimum
regulatory  capital  requirements  for  bank  holding  companies:  a  risk-based
requirement  expressed  as a percentage  of total  risk-weighted  assets,  and a
leverage  requirement  expressed as a percentage of total assets. The risk-based
requirement  consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, at least  one-half of which must be Tier 1 capital.  The  leverage
requirement consisted of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated  companies,  with a minimum  requirement of 4% for all
others.
<PAGE>

The risk-based and leverage standards described above are minimum  requirements.
Higher   capital  levels  will  be  required  if  warranted  by  the  particular
circumstances or risk profiles of individual banking organizations. For example,
the Federal Reserve's capital guidelines contemplate that additional capital may
be required to take adequate account of, among other things, interest rate risk,
or the risks posed by  concentration  of credit,  nontraditional  activities  or
securities trading activities. Further, any banking organization experiencing or
anticipating  significant  growth would be expected to maintain  capital  ratios
(i.e.,  Tier 1 capital  less all  intangible  assets),  well  above the  minimum
levels. Current Federal Reserve requirements for a well capitalized organization
experiencing  significant growth are a minimum of leverage capital of 5%, a Tier
1 capital of 6% and total  risk-based  capital of 10%. As of December  31, 2001,
the Company had regulatory  capital in excess of the Federal  Reserve's  minimum
and well-capitalized  definition  requirements,  with a leverage ratio of 8.86%,
with  total Tier 1  risk-based  capital  ratio of 13.47% and a total  risk-based
capital of 14.72%.

Dividends.  The Iowa Business Corporation Act ("IBCA") allows the Company to pay
dividends  only out of its surplus (as defined and computed in  accordance  with
the provision of the IBCA) or if the Company has no such surplus, out of its net
profits  for the  fiscal  year in which the  dividend  is  declared  and/or  the
preceding  fiscal year.  Additionally,  the Federal  Reserve has issued a policy
statement  with  regard  to the  payment  of  cash  dividends  by  bank  holding
companies.  The policy statement provides that a bank holding company should not
pay cash  dividends  which  exceed its net income or which can only be funded in
ways  that  weaken  the bank  holding  company's  financial  health,  such as by
borrowing.  The Federal  Reserve  also  possesses  enforcement  powers over bank
holding  companies and their nonbank  subsidiaries  to prevent or remedy actions
that represent unsafe or unsound practices or violations of applicable  statutes
and  regulations.  Among these powers is the ability to proscribe the payment of
dividends by banks and bank holding companies.

Federal Securities Regulation. The Company's common stock is registered with the
SEC under the Securities  Exchange Act of 1934, as amended (the "Exchange Act").
Consequently,  the Company is subject to the  information,  proxy  solicitation,
insider  trading and other  restrictions  and  requirements of the SEC under the
Exchange Act.

Regulation of the Bank

General.  The Bank is an Iowa-chartered  bank, the deposit accounts of which are
insured by the FDIC's Bank Insurance Fund ("BIF").  As an  Iowa-chartered,  FDIC
insured bank, the Bank is subject to the examination, supervision, reporting and
enforcement requirements of the Superintendent,  as the chartering authority for
Iowa banks, and the FDIC, as administrator of the BIF.

Deposit Insurance. As an FDIC-insured  institution,  the Bank is required to pay
deposit  insurance  premium  assessments  to the  FDIC.  The FDIC has  adopted a
risk-based assessment system under which all insured depository institutions are
placed into one of nine  categories and assessed  insurance  premiums based upon
their  respective  levels of capital  and  results of  supervisory  evaluations.
Institutions  classified  as  well-capitalized  (as  defined  by the  FDIC)  and
considered healthy, pay the lowest premium while institutions that are less than
adequately  capitalized  (as defined by the FDIC) and  considered of substantial
supervisory concern, pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each  semi-annual  assessment  period.  The
Bank is currently paying the minimum assessment under the FDIC's risk assessment
system.

The  FDIC  may  terminate  the  deposit  insurance  of  any  insured  depository
institution if the FDIC  determines,  after a hearing,  that the institution (i)
has  engaged in or is  engaging  in unsafe or unsound  practices,  (ii) is in an
unsafe or unsound  condition  to continue  operations  or (iii) has violated any
applicable law,  regulation,  order, or any condition  imposed in writing by, or
written  agreement with, the FDIC. The FDIC may also suspend  deposit  insurance
temporarily during the hearing process for a permanent  termination of insurance
if the  institution  has no tangible  capital.  Management of the Company is not
aware of any  activity or  condition  that could  result in  termination  of the
deposit insurance of the Bank.
<PAGE>

Capital Requirements. Among the requirements and restrictions imposed upon state
banks by the  Superintendent  are the requirements to maintain  reserves against
deposits,  restrictions on the nature and amount of loans,  which may be made by
state banks, and restrictions  relating to investments,  opening of bank offices
and other activities of state banks.  Changes in the capital  structure of state
banks  are also  approved  by the  Superintendent.  One of the most  significant
standards of operation of state banks is the six and one-half  percent  (6-1/2%)
primary capital to total assets ratio generally required by the  Superintendent.
In certain instances,  the  Superintendent  may mandate higher capital,  but the
Superintendent   has  not  imposed  such  a   requirement   on  the  Bank.   The
Superintendent   defines  the  term  "primary   capital"  to  mean  the  sum  of
stockholders'  equity and the  allowance  for loan  losses  less any  intangible
assets.  In determining the primary capital ratio, the  Superintendent  uses the
total assets as of the date of  computation.  At December 31, 2001,  the primary
capital to total  assets ratio of the Bank  exceeded  the ratio  required by the
Superintendent.

Capital adequacy for banks took on an added dimension with the  establishment of
a formal system of prompt  corrective action under the Federal Deposit Insurance
Corporation  Improvement  Act of 1991  (FDICIA).  This system uses bank  capital
levels to  trigger  supervisory  actions  designed  to quickly  correct  banking
problems.  Capital  adequacy zones are used by the federal  banking  agencies to
trigger  these  actions.  The ratios and the  definition  of "adequate  capital"
(refer to line two in the table) are the same as those used by the  agencies  in
their capital adequacy guidelines.

Federal law provides the federal banking regulators of the Bank with broad power
to take prompt  corrective  action to resolve the  problems of  undercapitalized
banking  institutions.  The extent of the regulators'  powers depends on whether
the  institution in question is "well  capitalized,"  "adequately  capitalized,"
"undercapitalized,"     "significantly    undercapitalized"    or    "critically
undercapitalized,"  in  each  case  as  defined  by  regulation.   Under  prompt
corrective  action,  banks that are  inadequately  capitalized face a variety of
mandatory and discretionary supervisory actions. For example,  "undercapitalized
banks" must restrict asset growth, obtain prior approval for business expansion,
and have an  approved  plan to  restore  capital.  "Critically  undercapitalized
banks" must be placed in receivership or  conservatorship  within 90 days unless
some other action would result in lower long-term costs to the deposit insurance
fund.

Depending upon the capital  category to which an  institution  is assigned,  the
regulators'  corrective  powers  include:  requiring the institution to submit a
capital   restoration  plan;   limiting  the  institution's   asset  growth  and
restricting  its  activities;  requiring  the  institution  to issue  additional
capital stock (including additional voting stock) or to be acquired; restricting
transactions  between  the  institution  and  its  affiliates;  restricting  the
interest rate the  institution  may pay on deposits;  ordering a new election of
directors  of the  institution;  requiring  that  senior  executive  officers or
directors be dismissed; prohibiting the institution from accepting deposits from
correspondent banks;  requiring the institution to divest certain  subsidiaries;
prohibiting  the payment of  principal  or interest on  subordinated  debt;  and
ultimately,  appointing a receiver for the institution. As of December 31, 2001,
the Bank was well capitalized, as defined by FDIC regulations.

Supervisory  Assessments.  All  Iowa  banks  are  required  to  pay  supervisory
assessments to the Iowa  Superintendent of Banking to fund the operations of the
Superintendent  for their  examination and  supervision.  During the fiscal year
ended  December  31,  2001,  the  Bank  paid  supervisory   assessments  to  the
Superintendent totaling $9,679.

Dividends. The Iowa Banking Act provides that an Iowa bank may not pay dividends
in an amount greater than its undivided profits.

The payment of dividends by any financial  institution or its holding company is
affected by the requirement to maintain  adequate capital pursuant to applicable
capital  adequacy  guidelines  and  regulations,  and  a  financial  institution
generally is prohibited from paying any dividends if, following payment thereof,
the institution would be undercapitalized. As described above, the Bank exceeded
its minimum capital requirements under applicable  guidelines as of December 31,
2001.  Notwithstanding  the  availability of funds for dividends;  however,  the
Superintendent  may  prohibit  the payment of any  dividends  by the Bank if the
Superintendent  determines  such payment  would  constitute an unsafe or unsound
practice.
<PAGE>

Insider  Transactions.  The Bank is subject to certain  restrictions  imposed by
federal law on  extensions  of credit to the Company  and its  subsidiaries,  on
investments in the stock or other securities of the Company and its subsidiaries
and the  acceptance  of the  stock or other  securities  of the  Company  or its
subsidiaries  as  collateral  for  loans.   Certain  limitations  and  reporting
requirements  are  also  placed  on  extensions  of  credit  by the  Bank to its
directors  and  officers,  to  directors  and  officers  of the  Company and its
subsidiaries,  to  principal  stockholders  of  the  Company,  and  to  "related
interests" of such directors,  officers and principal stockholders. In addition,
federal law and  regulations may affect the terms upon which any person becoming
a director or officer of the Company or one of its  subsidiaries  or a principal
stockholder  of the  Company  may obtain  credit  from banks with which the Bank
maintains a correspondent relationship.

Safety and  Soundness  Standards.  The federal  banking  agencies  have  adopted
guidelines that establish  operational  and managerial  standards to promote the
safety  and  soundness  of  federally  insured  depository   institutions.   The
guidelines  set forth  standards  for internal  controls,  information  systems,
internal audit systems, loan documentation,  credit underwriting,  interest rate
exposure,  asset  growth,  compensation,  fees and  benefits,  asset quality and
earnings.

In  general,  the  safety and  soundness  guidelines  prescribe  the goals to be
achieved in each area, and each  institution is responsible for establishing its
own procedures to achieve those goals.  If an  institution  fails to comply with
any of the  standards set forth in the  guidelines,  the  institution's  primary
federal regulator may require the institution to submit a plan for achieving and
maintaining  compliance.  If  an  institution  fails  to  submit  an  acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been  accepted by its  primary  federal  regulator,  the  regulator  is
required to issue an order  directing the  institution  to cure the  deficiency.
Until the deficiency cited in the regulator's  order is cured, the regulator may
restrict the institution's  rate of growth,  require the institution to increase
its capital,  restrict the rates the institution pays on deposits or require the
institution  to take any  action  the  regulator  deems  appropriate  under  the
circumstances.  Noncompliance  with the standards  established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist order and civil money
penalty assessments.

Branching  Authority.  Historically,  Iowa's intrastate  branching statutes have
been  rather  restrictive  when  compared  with  those of other  states.  Iowa's
intrastate  branching  statutes were relaxed in recent  legislation  that became
effective on February 21, 2001 (the "2001 Amendment"). The 2001 Amendment allows
Iowa banks to move towards statewide  branching by allowing every Iowa bank with
the  approval of its primary  regulator,  to  establish  three new bank  offices
anywhere in Iowa during the next three years.  The three offices are in addition
to those offices allowed within certain restricted  geographic areas under prior
Iowa law.  Effective July 1, 2004, the 2001 Amendment repeals all limitations on
bank office  location and effectively  allows  statewide  branching.  After that
date,  banks will be allowed to establish an unlimited  number of offices in any
location in Iowa subject only to regulator's approval.

Under the Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994
(the "Riegle-Neal  Act"), both state and national banks are allowed to establish
interstate  branch  networks  through  acquisitions  of other banks,  subject to
certain  conditions,  including  certain  limitations on the aggregate amount of
deposits  that  may be  held  by  the  surviving  bank  and  all of its  insured
depository institution affiliates.  The establishment of new interstate branches
or the  acquisition  of  individual  branches of a bank in another state (rather
than the acquisition of an out-of-state  bank in its entirety) is allowed by the
Riegle-Neal  Act only if  specifically  authorized by state law. The legislation
allowed  individual states to "opt-out" of certain provisions of the Riegle-Neal
Act by enacting  appropriate  legislation  prior to June 1, 1997.  Iowa  permits
interstate  bank  mergers,   subject  to  certain   restrictions,   including  a
prohibition  against  interstate mergers involving an Iowa bank that has been in
existence and continuous operation for fewer than five years.

State Bank  Activities.  Under  federal law and FDIC  regulations,  FDIC insured
state  banks are  prohibited,  subject to  certain  exceptions,  from  making or
retaining  equity  investments  of a  type,  or  in  an  amount,  that  are  not
permissible for a national bank.  Federal law and FDIC regulations also prohibit
FDIC insured state banks and their subsidiaries,  subject to certain exceptions,
from  engaging as principal in any activity that is not permitted for a national
bank or its subsidiary,  respectively,  unless the Bank meets,  and continues to
meet, its minimum  regulatory  capital  requirements and the FDIC determines the
activity  would not pose a  significant  risk to the deposit  insurance  fund of
which  the Bank is a  member.  These  restrictions  have  not  had,  and are not
currently expected to have, a material impact on the operations of the Bank.
<PAGE>

CONSOLIDATED STATISTICAL INFORMATION

The following  consolidated  statistical  information reflects selected balances
and operations of the Company and the Bank for the periods indicated.

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

AVERAGE BALANCES
(Average Daily Basis)

                                                            December 31,
                                                  ------------------------------
                                                     2001      2000       1999
                                                  ------------------------------
                                                          (In Thousands)
                                                  ------------------------------
ASSETS
  Cash and due from banks .....................   $ 24,493   $ 20,347   $ 16,863
  Taxable securities ..........................    132,227    121,499    119,856
  Nontaxable securities .......................     42,783     38,026     34,699
  Federal funds sold ..........................     29,551     11,358      9,796
  Loans, net ..................................    646,196    600,215    508,293
  Property and equipment, net .................     18,889     13,675     11,633
  Other assets ................................     19,575     16,129     17,249
                                                  ------------------------------
                                                  $913,714   $821,249   $718,389
                                                  ==============================

LIABILITIES AND STOCKHOLDERS' EQUITY
Noninterest-bearing demand deposits ...........   $ 78,687   $ 69,246   $ 62,317
Interest-bearing demand deposits ..............     76,366     66,090     57,017
Savings deposits ..............................    169,561    154,121    152,507
Time deposits .................................    357,882    309,565    274,507
Securities sold under agreements to repurchase      17,444     14,665     12,139
FHLB borrowings ...............................    123,211    128,043     86,880
Other liabilities .............................      5,924      5,569      4,659
Redeemable common stock held by
  Employee Stock Ownership Plan ...............     11,872     11,251     10,127
Stockholders' equity ..........................     72,767     62,699     58,236
                                                  ------------------------------
                                                  $913,714   $821,249   $718,389
                                                  ==============================

INTEREST INCOME AND EXPENSE

                                                        Year Ended December 31,
                                                     ---------------------------
                                                       2001     2000      1999
                                                     ---------------------------
                                                          (In Thousands)

Income:
  Loans (1) ......................................   $53,121   $50,267   $42,107
  Taxable securities .............................     7,670     7,481     7,167
  Nontaxable securities (1) ......................     2,924     2,624     2,373
  Federal funds sold .............................     1,132       698       455
                                                     ---------------------------
        Total interest income ....................    64,847    61,070    52,102
                                                     ---------------------------

Expense:
  Interest-bearing demand deposits ...............     1,412     1,566     1,175
  Savings deposits ...............................     4,611     5,615     4,769
  Time deposits ..................................    20,611    17,690    14,882
  Securities sold under agreements to repurchase .       617       699       517
  FHLB borrowings ................................     7,184     7,494     4,970
                                                     ---------------------------
        Total interest expense ...................    34,435    33,064    26,313
                                                     ---------------------------

        Net interest income ......................   $30,412   $28,006   $25,789
                                                     ===========================

(1)  Presented  on a tax  equivalent  basis  using a federal tax rate of 34% and
     state tax rates of 5%.
<PAGE>

INTEREST RATES AND INTEREST DIFFERENTIAL

                                                         Year Ended December 31,
--------------------------------------------------------------------------------
                                                         2001     2000     1999
--------------------------------------------------------------------------------
Average yields:
  Loans (1) .........................................    8.20%    8.34%    8.25%
  Loans (tax equivalent basis) ......................    8.22     8.37     8.28
  Taxable securities ................................    5.80     6.15     5.98
  Nontaxable securities .............................    4.51     4.55     4.51
  Nontaxable securities (tax equivalent basis) ......    6.83     6.90     6.84
  Federal funds sold ................................    3.85     6.15     4.64
  Interest-bearing demand deposits ..................    1.85     2.37     2.06
  Savings deposits ..................................    2.72     3.64     3.13
  Time deposits .....................................    5.76     5.71     5.42
  Securities sold under agreements to repurchase ....    3.53     4.77     4.26
  FHLB borrowings ...................................    5.83     5.85     5.72
  Yield on average interest-earning assets ..........    7.62     7.92     7.75
  Rate on average interest-bearing liabilities ......    4.63     4.92     4.51
  Net interest spread (2) ...........................    2.99     3.00     3.24
  Net interest margin (3) ...........................    3.58     3.62     3.83

(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.

CHANGES IN INTEREST INCOME AND EXPENSE
<TABLE>
                                                   Changes Due  Changes Due    Total
                                                    To Volume    To Rates     Changes
                                                   ----------------------------------
                                                             (In Thousands)
<S>                                                <C>          <C>           <C>
Year ended December 31, 2001:
  Change in interest income:
    Loans ........................................   $ 3,763    $  (920)     $ 2,843
    Taxable securities ...........................       637       (440)         197
    Nontaxable securities ........................       325        (27)         298
    Federal funds sold ...........................       779       (340)         439
                                                     -------------------------------
                                                       5,504     (1,727)       3,777
                                                     -------------------------------
  Change in interest expense:
    Interest-bearing demand deposits .............       221       (375)        (154)
    Savings deposits .............................       520     (1,524)      (1,004)
    Time deposits ................................     2,767        154        2,921
    Securities sold under agreements to repurchase       120       (202)         (82)
    FHLB borrowings ..............................      (284)       (26)        (310)
                                                     -------------------------------
                                                       3,344     (1,973)       1,371
                                                     -------------------------------
  Change in net interest income ..................   $ 2,160    $   246      $ 2,406
                                                     ===============================
Year ended December 31, 2000:
  Change in interest income:
    Loans ........................................   $ 7,697    $   463      $ 8,160
    Taxable securities ...........................       102        212          314
    Nontaxable securities ........................       230         21          251
    Federal funds sold ...........................        80        163          243
                                                     -------------------------------
                                                       8,109        859        8,968
                                                     -------------------------------
  Change in interest expense:
    Interest-bearing demand deposits .............       201        190          391
    Savings deposits .............................        52        794          846
    Time deposits ................................     1,979        829        2,808
    Securities sold under agreements to repurchase       116         66          182
    FHLB borrowings ..............................     2,408        116        2,524
                                                     -------------------------------
                                                       4,756      1,995        6,751
                                                     -------------------------------
  Change in net interest income ..................   $ 3,353    $(1,136)     $ 2,217
                                                     ===============================
</TABLE>
<PAGE>

Rate volume  variances  are  allocated on a consistent  basis using the absolute
values of changes in volume  compared to the  absolute  values of the changes in
rates.  Loan fees  included in  interest  income are not  material.  Interest on
nontaxable securities and loans is shown at tax equivalent amounts.

LOANS

The  following  table  shows the  composition  of loans  (before  deducting  the
allowance for loan losses) as of December 31 for each of the last five years.

                                                December 31,
                            ----------------------------------------------------
                              2001       2000       1999       1998       1997
                            ----------------------------------------------------
                                               (In Thousands)

Agricultural ............   $ 34,304   $ 28,560   $ 27,302   $ 32,318   $ 27,636
Commercial and financial      44,363     37,832     36,848     39,438     33,616
Real estate, construction     40,430     38,184     40,879     28,476      8,157
Real estate, mortgage ...    538,832    499,010    439,072    338,871    332,655
Loans to individuals ....     34,713     33,715     31,030     30,664     28,707
        Total ...........   $692,642   $637,301   $575,131   $469,767   $430,771

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,
2001:
<TABLE>
                                          Amount    One Year      One To     Over Five
                                         Of Loans  Or Less (1)  Five Years     Years
                                         ---------------------------------------------
                                                       (In Thousands)
<S>                                      <C>       <C>          <C>          <C>
Commercial, financial and agricultural   $ 78,667   $ 38,669    $ 32,788     $  7,210
Real estate, construction and mortgage    579,262     73,683     214,261      291,318
Other ................................     34,713     12,783      21,401          529
                                         --------------------------------------------
                                         $692,642   $125,135    $268,450     $299,057
                                         ============================================
Interest rates on loans are as follows:

Fixed rate ............................  $380,184   $ 86,789    $259,490     $ 33,905
Variable rate .........................   312,458     38,346       8,960      265,152
                                         --------------------------------------------
                                         $692,642   $125,135    $268,450     $299,057
                                         ============================================
<FN>
(1)     A  significant  portion of the  commercial  loans are due in one year or
        less. A significant  percentage of the notes are  re-evaluated  prior to
        their maturity and are likely to be extended.
</FN>
</TABLE>

NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS

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

                                   2001     2000       1999     1998       1997
                                 -----------------------------------------------
                                                 (In Thousands)

Nonaccrual loans .............   $ 1,001   $   618   $    --   $    12   $    --
Accruing loans past due
  90 days or more ............     2,921     2,143     1,320       945       954
Restructured loans ...........        --        --        --        --        --
Impaired loans ...............    11,288    11,068     9,265     8,956     9,556
<PAGE>

The Company does not have a  significant  amount of loans that 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 non-accrual  status when management  believes the collection
of future interest is not reasonably assured. Interest income was not materially
affected by this classification.

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

Specific  allowance  for losses on impaired  loans are  established  if the loan
balances exceed 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 Bank's loan loss experience for each of the
last five years:
<TABLE>
                                                     Year Ended December 31,
                                       ---------------------------------------------------
                                        2001       2000       1999        1998      1997
                                       ---------------------------------------------------
                                                         (In Thousands)
<S>                                    <C>        <C>        <C>        <C>        <C>
Allowance for loan losses
  at beginning of year .............   $10,428    $ 9,750    $ 8,856    $ 8,010    $ 7,311
                                       ---------------------------------------------------
Charge-offs:
  Agriculture ......................        35         26         60          4        197
  Commercial and financial .........     1,225        522        181        431        326
  Real estate, mortgage ............       557        254        104        132        215
  Loans to individuals .............       724        372        418        401        390
                                       ---------------------------------------------------
                                         2,541      1,174        763        968      1,128
                                       ---------------------------------------------------
Recoveries:
  Agriculture ......................        72        153        157        125         65
  Commercial and financial .........       289        276        260        256        195
  Real estate, mortgage ............       362        118         30        100        377
  Loans to individuals .............       416        357        310        417        142
                                       ---------------------------------------------------
                                         1,139        904        757        898        779
                                       ---------------------------------------------------
Net charge-offs ....................     1,402        270          6         70        349
                                       ---------------------------------------------------
Provision for loan losses (1) ......       924        948        900        916      1,048
                                       ---------------------------------------------------
Allowance for loan losses
  at end of year ...................   $ 9,950    $10,428    $ 9,750    $ 8,856    $ 8,010
                                       ===================================================
Ratio of net charge-offs during year
  to average loans outstanding .....      0.22%      0.04%      0.00%      0.02%      0.09%
                                       ====================================================
</TABLE>

The allowance for loan losses 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 2002 that would be significantly  different than
the years ended December 31, 2001, 2000, 1999, 1998 and 1997.

(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 borrowers' ability to repay, past collection
     experience,  the risk  characteristics  of loan  portfolio  and such  other
     factors that deserve current recognition.  The growth of the loan portfolio
     is a  significant  element in the  determination  of the provision for loan
     losses.
<PAGE>

ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The Bank regularly  reviews a substantial  portion of the loans in the portfolio
and assesses whether the loans are impaired. If the loans are impaired, the Bank
determines if a specific allowance is appropriate.  Loans for which there are no
specific allowances are classified into one or more risk categories.  Based upon
the risk category  assigned,  the Banks allocate a percentage,  as determined by
management,  for  a  required  allowance  needed.  The  percentage  begins  with
historical loss experience factors, which are then adjusted for current economic
factors. The risk categories are compared to the risk categories used by federal
and state regulatory agencies as follows:

(1)  Pass
(2)  Watch
(3)  Substandard

In addition, the Bank's management also reviews and, where determined necessary,
provides  allowances  based upon  reviews of  specific  borrowers  and  provides
general allowances for areas that management  believes are of higher credit risk
(agricultural  loans and constructed  model real estate homes as of December 31,
2001).

The following table presents the allowance for estimated loan losses on loans by
type of loans and the  percentage in each category to total loans as of December
31, 2001:

                                                                    % Of Loans
                                                       Amount     To Total Loans
                                                       -------------------------
                                                            (In Thousands)

Agriculture ..................................         $1,032         4.95%
Commercial ...................................          1,714         6.40
Real estate, construction ....................            770         5.84
Real estate ..................................          5,722        77.79
Consumer .....................................            712         5.01
                                                       --------------------
                                                       $9,950       100.00%
                                                       ====================

Prior to December 31, 2001,  the allowance for loan losses was allocated by risk
category and not by type of loan. The components of the allowance for loan loss,
by risk category, as of December 31, 2000 is as follows:

                                                                  (In Thousands)

Pass .....................................................            $ 1,316
Watch ....................................................              3,471
Substandard ..............................................              2,521
Specific allowances ......................................              3,120
                                                                      -------
                                                                      $10,428
                                                                      =======
Anticipated charge-offs of the above categories are not determinable at December
31, 2001; however, management does not believe there are any categories of loans
where future charge-offs are likely to be higher than the allowances provided.
<PAGE>

INVESTMENT SECURITIES

The following tables show the carrying value of the investment  securities which
are principally  held by the Bank as of December 31, 2001, 2000 and 1999 and the
maturities  and  weighted  average  yield  of the  investment  securities  as of
December 31, 2001:

                                                           December 31,
                                                  ----------------------------
                                                    2001       2000       1999
                                                          (In Thousands)
Carrying value:
  U. S. Treasury securities ...................   $ 12,073   $ 18,318   $ 19,470
  Obligations of other U. S. Government
    agencies and corporations .................    123,165     95,036     94,302
  Obligations of state and political
    subdivisions ..............................     46,913     39,923     36,496
                                                  ------------------------------
                                                  $182,151   $153,277   $150,268
                                                  ==============================

                                                        December 31, 2001
                                                  ------------------------------
                                                                       Weighted
                                                     Carrying           Average
                                                      Value              Yield
                                                  ------------------------------
                                                  (In Thousands)
Type and maturity grouping:
  U. S. Treasury maturities:
    Within 1 year ............................      $  5,644             6.09%
    From 1 to 5 years ........................         6,429             6.35%
                                                    --------
                                                      12,073
                                                    --------
Obligations of other U. S. Government
  agencies and corporations, maturities:
  Within 1 year ..............................        19,859             5.82%
  From 1 to 5 years ..........................       103,306             5.62
                                                     -------
                                                     123,165
                                                     -------
Obligations of state and political
  subdivisions, maturities:
  Within 1 year ..............................         4,744             7.17%
  From 1 to 5 years ..........................        25,506             6.44
  From 5 to 10 years .........................        16,437             6.84
  Over 10 years ..............................           226             8.22
                                                    --------
                                                      46,913
                                                    --------
        Total ................................      $182,151
                                                    ========

INVESTMENT SECURITIES

As of December 31, 2001, there were no investment  securities,  exceeding 10% of
stockholders'  equity,  other than  securities of the U. S. Government and U. S.
Government agencies and corporations.

The weighted  average  yield is based on the  amortized  cost of the  investment
securities.  The yields are computed on a  tax-equivalent  basis using a federal
tax rate of 34% and a state tax rate of 5%.
<PAGE>

DEPOSITS

The following  tables show the amount of average deposits and rates paid on such
deposits  for  the  years  ended  December  31,  2001,  2000  and  1999  and the
composition of the  certificates of deposit issued in denominations in excess of
$100,000 as of December 31, 2001:
<TABLE>
                                                            December 31,
                                       ------------------------------------------------------
                                         2001     Rate     2000      Rate     1999      Rate
                                       ------------------------------------------------------
<S>                                    <C>        <C>    <C>         <C>    <C>         <C>
Average noninterest-bearing deposits   $ 78,687   0.00%  $ 69,246    0.00%  $ 62,317    0.00%
Average interest-bearing demand
  deposits .........................     76,366   1.85     66,090    2.37     57,017    2.06
Average savings deposits ...........    169,561   2.72    154,121    3.64    152,507    3.13
Average time deposits ..............    357,882   5.76    309,565    5.71    274,507    5.42
                                       $682,496          $599,022           $546,348

Time certificates issued in amounts
  of $100,000 or more as of
  December 31, 2001 with ...........    Amount    Rate
  maturity in:                         ----------------
  3 months or less .................   $  5,777   4.50%
  3 through 6 months ...............      8,149   4.85
  6 through 12 months ..............     26,329   5.79
  Over 12 months ...................     15,262   5.76
                                       --------
                                       $ 55,517
                                       ========
</TABLE>

There were no deposits in foreign banking offices.

RETURN ON STOCKHOLDERS' EQUITY AND ASSETS

The following  table  presents the return on average  assets,  return on average
stockholders' equity, the dividend payout ratio and average stockholders' equity
to average assets ratio for the years ended December 31, 2001, 2000 and 1999:

                                                                December 31,
                                                          ----------------------
                                                           2001    2000    1999
                                                          ----------------------

Return on average assets ............................      1.11%   1.14%   1.18%
Return on average stockholders' equity ..............     13.94   14.94   14.54
Dividend payout ratio ...............................     23.58   23.18   22.56
Average stockholders' equity to average assets ratio       7.96    7.63    8.11

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 2001, 2000 and 1999:

                                                    2001       2000       1999
                                                  -----------------------------
                                                     (Amounts In Thousands)
                                                  -----------------------------

Outstanding balance as of December 31 .........   $22,409    $16,561    $26,714
Weighted average interest rate at year end ....     2.36%      4.80%      4.28%
Maximum month-end balance .....................    22,711     16,678     27,815
Average month-end balance .....................    17,444     14,665     12,139
Weighted average interest rate for the year ...     3.53%      4.77%      4.26%

FEDERAL HOME LOAN BANK 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 during 2001, 2000 and 1999:

                                                  2001       2000        1999
                                               ---------------------------------

Outstanding balance as of December 31 ......   $137,637    $120,668    $108,700
Weighted average interest rate at year end .      5.57%       5.79%       5.66%
Maximum month-end balance ..................    137,637     148,700     108,700
Average month-end balance ..................    123,211     128,043      86,880
Weighted average interest rate for the year       5.83%       5.85%       5.72%
<PAGE>

PART I

Item 2.   Properties

The  Company's  office  and the main  bank of the Bank are  located  at 131 Main
Street,  Hills, Iowa. This is a brick building containing  approximately  45,000
square feet.  A portion of the building was built in 1977, a two-story  addition
was  completed in 1984,  and in February  2001,  the Bank  completed a two-story
brick  addition.  With the completion of the 2001 addition,  all bank processing
and administrative systems, including trust, were consolidated in Hills, Iowa. A
majority of these  operations were located  previously in the Coralville  office
and sixty-five full-time and part-time employees relocated.

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

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

2.   Coralville  office is a two-story  building  built in 1972 and  expanded in
     2001 that contains approximately 23,000 square

3.   A 2,800  square  foot  branch  bank in North  Liberty,  Iowa was opened for
     business in 1986. This office is a full-service

4.   The Bank leases an office at 132 East  Washington  Street in downtown  Iowa
     City with approximately 2,500 square feet. The

5.   In December 2001,  the Bank opened a new East Side office  location at 2621
     Muscatine Avenue, Iowa City. The office is a

6.   The Lisbon  office is a  two-story  brick  building  in  Lisbon,  Iowa with
     approximately 3,000 square feet of banking retail

7.   The Mount Vernon office  opened in February  1998 with the  completion of a
     full-service, 4,200 square foot office, with

8.   In  February  2000,  the Bank opened a 2,900  square foot branch  office in
     downtown Cedar Rapids that is leased. In April

9.   The Kalona  office 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 was remodeled in late 1998.

10.  In October 2001,  the Bank began  construction  in Cedar Rapids on a second
     branch  office.  The new 7,200 square foot,  one-story  building  will have
     three drive-up lanes and a drive-up automatic teller machine.  The location
     is on Williams Boulevard in Southwest Cedar Rapids.

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

Item 3.   Legal Proceedings

There are no material pending legal proceedings.

Neither  the Company  nor the Bank hold any  properties  that 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, 2001.
<PAGE>

PART II

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

There is no established trading market for the Company's common stock. Its stock
is not listed with any exchange or quoted in an automated  quotation system of a
registered  securities  association,  nor is there any broker/dealer acting as a
market maker for its stock.  A bid and ask price is quoted in an Iowa City local
paper and the quotes are provided by a local broker.  The Company's stock is not
actively traded. As of March 15, 2002, the Company had 1,309 stockholders.

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

-------------------------------------------------------------------------------
                 Number                            High             Low
                Of Shares       Number Of         Selling         Selling
    Year         Traded        Transactions        Price           Price
-------------------------------------------------------------------------------
2001              9,273             28            $ 82.00         $ 77.00
2000             14,187             16              77.00           70.00
1999              6,415             22              70.00           58.00

The Company  paid  aggregate  annual cash  dividends  in 2001,  2000 and 1999 of
$2,392,000, $2,171,000 and $1,910,000, respectively, or $1.60 per share in 2001,
$1.45  per  share in 2000 and $1.30 per  share in 1999.  In  January  2002,  the
Company declared and paid a dividend of $1.75 per share totaling $2,622,000. The
decision to declare any such cash dividends in the future and the amount thereof
rests within the  discretion of the Board of Directors  and will remain  subject
to, among other things,  certain regulatory  restrictions imposed on the payment
of dividends by the Bank,  and the future  earnings,  capital  requirements  and
financial condition of the Company.

As of December 31, 2001, stock option information is as follows:

Number of shares that would be issued if all options were exercised       29,179
Weighted average price of options outstanding                            $ 44.98
Number of additional shares that could be granted                         55,600

There are no stock option plans that have not been approved by the stockholders.
<PAGE>

PART II

Item 6.   Selected Financial Data

CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
<TABLE>
                                        2001           2000          1999          1998         1997
                                      -----------------------------------------------------------------
<S>                                   <C>           <C>           <C>           <C>           <C>
YEAR-END TOTALS
  Total assets ....................   $ 976,105     $ 875,750     $ 773,966     $ 689,787     $ 603,102
  Investment securities ...........     189,960       161,066       156,198       149,350       138,064
  Federal funds sold ..............      29,428        28,065           206        36,811         2,447
  Loans, net ......................     682,692       626,873       565,381       460,911       422,761
  Deposits ........................     720,018       652,706       562,086       534,151       479,770
  Federal Home Loan Bank borrowings     137,637       120,668       108,700        75,732        50,764
  Redeemable common stock .........      12,194        11,550        10,953         9,301         7,682
  Stockholders' equity ............      78,155        68,524        60,264        56,452        51,500

EARNINGS
  Interest income .................   $  63,718     $  59,992     $  51,121     $  47,289     $  42,743
  Interest expense ................      34,435        33,064        26,313        25,254        22,502
  Provision for loan losses .......         924           948           900           916         1,048
  Other income ....................       9,257         7,514         6,437         5,811         5,938
  Other expenses ..................      22,859        20,069        18,309        16,438        15,500
  Applicable income taxes .........       4,613         4,059         3,570         3,006         2,545
  Net income ......................      10,144         9,366         8,466         7,486         7,086

PER SHARE
  Net income:
    Basic .........................   $    6.78     $    6.26     $    5.70     $    5.10     $    4.83
    Diluted .......................        6.72          6.21          5.66          5.02          4.78
  Cash dividends ..................        1.60          1.45          1.30          1.20          1.05
  Book value as of December 31 ....       52.15         45.82         40.29         38.42         35.08
  Increase (decrease) in book value
    due to:
    ESOP obligation ...............       (8.14)        (7.72)        (7.32)        (6.33)        (5.23)
    Accumulated other
      comprehensive income ........        2.02          0.47         (0.66)         0.81          0.33

SELECTED RATIOS
  Return on average assets ........       1.11%         1.14%         1.18%         1.17%         1.24%
  Return on average equity ........       13.94         14.94         14.54         14.12         14.62
  Net interest margin .............        3.58          3.62          3.83          3.81          3.93
  Average stockholders' equity to
    average total assets ..........        7.96          7.63          8.11          8.25          8.47
  Dividend payout ratio ...........       23.58         23.18         22.56         23.52         21.69
</TABLE>
<PAGE>

PART II

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

Special Note Regarding Forward-Looking Statements

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

Forward-looking  statements discuss matters that are not facts and are typically
identified by the words "believe,"  "expect,"  "anticipate,"  "target,"  "goal,"
"objective,"  "intend,"  "estimate,"  "will," "can," "would," "should," "could,"
"may" and similar  expressions.  They discuss  expectations about the future and
are not guarantees.  Forward-looking  statements  speak only as of the date they
are made,  and the Company  undertakes  no  obligation to update them to reflect
changes that occur after the date they are made.

There are several  factors - many of which are beyond the control of the Company
or its subsidiary Bank - that could cause results to differ  significantly  from
expectations. Some of these factors are described below. There are factors other
than those described below that could cause results to differ from expectations.
Any factor  described below could by itself,  or together with one or more other
factors,  adversely affect the business,  earnings and/or financial condition of
the Company and its subsidiary Bank.

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

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

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

Because the business of banking is of a highly regulated  nature,  the decisions
of governmental  entities can have a major effect on operating results.  Changes
to  statutes,   regulations  or  regulatory   policies,   including  changes  in
interpretation  or implementation  of statutes,  regulations or policies,  could
have substantial and unpredictable  effects including  increasing the ability of
nonbanks to offer competing financial services and products.

PART II

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

The Bank's  success  depends,  in part, on its ability to attract and retain key
people.  Competition  for the  best  people  - in  particular  individuals  with
technology  experience  -  is  intense.  The  Bank  may  not  be  able  to  hire
well-qualified people or pay them enough to keep them.

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

Critical Accounting Policies

The Company's most critical  accounting  policies that affect net income are the
accrual of interest  income and expense and providing an  appropriate  allowance
for loan  losses.  Interest  is accrued at the  stated  rate on the  outstanding
balances of all interest earning assets and  interest-bearing  liabilities.  The
Company  discontinues  accruing  interest  income on certain  loans at the point
there is reasonable doubt about the borrower's ability to make all the principal
and interest payments.  The allowance for loan losses and the provision for loan
losses charged to expense is affected by the Bank's quarterly review of the loan
portfolio,  the  Bank's  identification  of  impaired  loans for which  specific
allowances may be provided and the allowances on all other loans.  The allowance
is affected,  among other things,  by loan  delinquency  rates,  local  economic
conditions and the estimated fair value of collateral on loans.

Other  critical  policies that affect the  Company's  balance sheet are the fair
value of investment securities available-for-sale and the Company's maximum cash
obligation related to its obligation to redeem common stock held by the ESOP.

Financial Position
<TABLE>
Year End Amounts (In Thousands)        2001       2000       1999       1998       1997
-----------------------------------------------------------------------------------------
<S>                                  <C>        <C>        <C>        <C>        <C>
Loans, net of allowance for losses   $682,692   $626,873   $565,381   $460,911   $422,761
Investment securities ............    189,960    161,066    156,198    149,350    138,064
Deposits .........................    720,018    652,706    562,086    534,151    479,770
Federal Home Loan Bank borrowings     137,637    120,668    108,700     75,732     50,764
Stockholders' equity .............     78,155     68,524     60,264     56,452     51,500
Total assets .....................    976,105    875,750    773,966    689,787    603,102
</TABLE>

In 2001,  total assets grew $100.4 million,  slightly below the record growth of
$101.8 million for 2000.  The percentage  increase in total assets was 11.46% in
2001,  compared  to 13.15% in 2000.  Asset  growth for both years was  primarily
reflected in higher loan balances and investment securities.

In 2001, net loans  increased by $55.8 million,  including $42.1 million in real
estate loans.  For the year 2000, net loans  increased  $61.5  million,  and $60
million  of the  increase  was  attributable  to  real  estate  mortgage  loans.
Declining  interest rates in 2001 and stable  interest rates in 2000 have helped
housing  starts and new real estate  development  projects  in the Bank's  trade
territory.

Deposits increased $67.3 million,  or 10.31 % in 2001 compared to an increase of
16.12% in 2000. After several years of slower deposit growth, the past two years
have seen  substantial  deposit  growth.  In 2001,  the increase in net deposits
resulted from  uncertainties  in the stock market that led a number of investors
to move their funds to bank deposits.  In addition,  the addition and renovation
of branch banks helped bring new  customers to the Bank.  In 2001 and 2000,  the
Company has also borrowed from the Federal Home Loan Bank,  and such  borrowings
increased  by a net $17  million in 2001 and $12 million in 2000.  The  advances
were used to fund loan growth and lock in low interest rates.

Components of Diluted Earnings Per Share

                                               2001         2000         1999
                                            ------------------------------------

Net interest income .....................   $   19.40    $   17.85    $   16.59
Provision for loan losses ...............       (0.61)       (0.63)       (0.60)
Noninterest income ......................        6.13         4.98         4.30
Noninterest expense .....................      (15.14)      (13.30)      (12.24)
                                            ------------------------------------
        Income before income taxes ......        9.78         8.90         8.05
Income tax expense ......................       (3.06)       (2.69)       (2.39)
                                            ------------------------------------
        Net income ......................   $    6.72    $    6.21    $    5.66
                                            ====================================

Net income for 2001 reached a record high of  $10,144,000,  or diluted  earnings
per share of $6.72.  The rate of increase  in  earnings in 2001 slowed  slightly
from 2000  results.  For 2001,  diluted  earnings per share  increased  $.51 per
share,  while 2000  results  had  increased  $.55 per share.  For the year ended
December 31, 2000, net income  increased by $900,000 from the 1999 results.  Net
interest  income for 2000 was $2.1 million  higher than 1999.  For both 2001 and
2000, the Company's net interest income has benefited from substantial growth in
average earning assets and a stable net interest margin.
<PAGE>

The Company  consistently  benefited  from a high quality loan  portfolio  and a
strong local economy. Because the loan portfolio is concentrated in well-secured
real estate loans, the Bank has not needed higher provisions for loan losses.

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 2001 as follows:
<TABLE>
                                                        Change In  Change In            Increase (Decrease)
                                                         Average    Average      Volume      Rate         Net
                                                         Balance     Rate        Changes    Changes      Change
                                                        -------------------------------------------------------
<S>                                                     <C>        <C>          <C>         <C>        <C>
Interest income:
  Loans, net ........................................   $ 45,981    (0.15)%     $  3,763   $   (920)   $  2,843
  Taxable securities ................................     10,728    (0.35)           637       (440)        197
  Nontaxable securities .............................      4,757    (0.07)           325        (27)        298
  Federal funds sold ................................     18,193    (2.30)           779       (340)        439
                                                        --------                -------------------------------
                                                        $ 79,659                   5,504     (1,727)      3,777
                                                        --------                -------------------------------
Interest expense:
  Interest-bearing demand deposits ..................   $ 10,276    (0.15)%          221        (375)       (154)
  Savings deposits ..................................     15,440    (0.92)           520      (1,524)     (1,004)
  Time deposits .....................................     48,317     0.05          2,767         154       2,921
  Federal funds purchased and securities
    sold under agreements to repurchase .............      2,779    (1.24)           120        (202)        (82)
  FHLB borrowings ...................................     (4,832)   (0.02)          (284)        (26)       (310)
                                                        --------                --------------------------------
                                                        $ 71,980                   3,344      (1,973)      1,371
                                                        ========                --------------------------------
Change in net interest income .......................                           $  2,160    $    246    $  2,406
                                                                                ================================
</TABLE>
Net interest income changes for 2000 were as follows:

                                     Change In   Effect Of   Effect Of
                                      Average     Volume        Rate       Net
                                      Balance     Changes    Changes     Change
                                     -------------------------------------------

Interest-earning assets ...........   $98,454     $ 8,109     $   859    $ 8,968
Interest-bearing liabilities ......    89,434       4,756       1,995      6,751
                                      ------------------------------------------
Change in net interest income .....   $ 3,353     $(1,136)    $ 2,217
                                      ==========================================

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

(Tax Equivalent Basis)                                     2001    2000    1999
--------------------------------------------------------------------------------

Yield on average interest-earning assets ...............   7.62%   7.92%   7.75%
Rate on average interest-bearing liabilities ...........   4.63    4.92    4.51
                                                           ---------------------
Net interest spread ....................................   2.99    3.00    3.24
Effect of noninterest-bearing funds ....................   0.59    0.62    0.59
                                                           ---------------------
Net interest margin (tax equivalent interest income
  divided by average interest-earning assets) ..........   3.58%   3.62%   3.83%
                                                           =====================

Provision For Loan Losses

The provision for loan losses totaled $924,000,  $948,000 and $900,000 for 2001,
2000 and 1999, respectively.  Charge-offs,  net of recoveries,  were $1,402,000,
$270,000 for 2000 and $6,000 for 2001, 2000 and 1999, respectively. Although net
charge-offs for 2001 increased from the prior two years, the charge-offs related
to loans that had previously  been classified and the losses had been accrued in
prior years.

The allowance for loan losses  totaled  $9,950,000 at December 31, 2001 compared
to  $10,428,000  at December  31,  2000.  The  percentage  of the  allowance  to
outstanding   loans  was  1.44%  and  1.64%  at  December  31,  2001  and  2000,
respectively.
<PAGE>

Agricultural loans totaled  $34,304,000 and $28,560,000 at December 31, 2001 and
2000,  respectively.  Management has assessed the risks for  agricultural  loans
higher than other loans due to unpredictable  commodity  prices,  the effects of
weather  on crops  and  uncertainties  regarding  government  support  programs.
Therefore,  the allowance for loan losses includes general and specific reserves
for these loans.

Loan  concentrations,  quality and credit terms had no significant  changes from
2000 to 2001.  Therefore,  the 2001 allowance for loan losses was not materially
different than the 2000  allowance.  In 2001,  the Bank refined the  methodology
used to compute the allowance for loan losses,  primarily by applying loss rates
to several risk  categories  of loans instead of more general  populations.  The
estimated loss rates used in 2001 increased  slightly because there were several
early indicators of an economic  slowdown in the area. The primary  indicator in
Johnson  County is the  tightening of the budget for the  University of Iowa and
the possibility of staffing cutbacks and wage constraints.

The allowance for loan losses is sensitive to the underlying collateral value of
real estate, especially in Johnson County, Iowa. Real estate values are affected
by the  inventory of unsold  properties,  vacancy rates for  residential  rental
units,  the  supply  and demand for  commercial  and  retail  space and  overall
employment and retail sales. Overbuilding in the area could lower the fair value
of properties and affect the allowance for loan losses. Likewise, sharply higher
interest  rates could  affect the ability of some  borrowers  to make  scheduled
interest and principal payments.

The  University  of Iowa has a dominant  economic  effect on the  economy of the
Bank's  primary trade area,  Johnson  County,  Iowa,  and in 2001 and 2000,  the
University  has helped the local  economy  remain  strong even when the national
economy has experienced weaknesses. However, in recent months the economy of the
state  of Iowa has  weakened  to the  point  that the  University  has  recently
suffered  modest budget cuts and for its fiscal year  beginning July 1, 2002 the
University is anticipating  more significant  budget  constraints.  The possible
effects on the local economy  cannot be predicted,  but are likely to weaken the
economy in future years.

The above factors  could,  but are not reasonably  expected,  to have a material
effect on the allowance for loan losses.

Other Income

Dollars Per Share, Based on Weighted
Average Diluted Shares Outstanding                  2001      2000       1999
--------------------------------------------------------------------------------

Real estate origination fees .................   $   0.77   $   0.21   $   0.39
Trust fees ...................................       1.59       1.58       1.36
Deposit account charges and fees .............       2.06       1.70       1.47
Other fees and charges .......................       1.71       1.49       1.29
Investment securities gains (losses) .........         --         --      (0.21)
                                                 -------------------------------
                                                 $   6.13   $   4.98   $   4.30
                                                 ===============================

In 2001, the Company's total other income increased  $1,743,000  compared to the
prior year. Real estate origination fee revenue for 2001 made up $849,000 of the
increase from the prior year because of reduced interest rates that enabled many
borrowers to re-finance at lower interest  rates.  In addition,  the increase in
customer deposit  accounts,  along with changes in the fee structure,  accounted
for a $542,000  increase in deposit account charges and fees. Trust fees in 2001
were virtually unchanged from 2000 because new trust accounts provided fees that
offset the decline in asset  related  trust fees  affected by the stock  market.
Total other income reached a record high of $6.13 per share in 2001.

Total other income  increased  $1,077,000  for the year ended  December 31, 2000
compared to the same  period in 1999.  Loan  origination  fees for the year 2000
were $276,000 less than 1999 as a result of higher  interest  rates in 2000 that
slowed  re-financings.  Trust  fees,  deposit  account  charges  and other  fees
increased $1,038,000 for 2000 and resulted from volume increases in trust assets
and deposit  accounts.  During 1999, the Company had a reduction of other income
of $315,000,  which  represented  investment  securities losses taken to replace
lower yielding  securities with higher  yielding  securities of similar risk and
maturity.  For the  year  2000,  no  gains  and  losses  on  sale of  investment
securities occurred.
<PAGE>

Other Expenses

Dollars Per Share, Based on Weighted
Average Diluted Shares Outstanding               2001         2000        1999
--------------------------------------------------------------------------------

Salaries and employees benefits ............   $    7.86   $    7.06   $    6.56
Occupancy ..................................        1.21        0.94        0.84
Furniture and equipment ....................        1.86        1.43        1.26
Office supplies and postage ................        0.79        0.75        0.74
Other ......................................        3.42        3.12        2.84
                                               ---------------------------------
                                               $   15.14   $   13.30   $   12.24
                                               =================================

Total other expenses increased  $2,790,000 in 2001. Occupancy expenses increased
$409,000 in 2001, up sharply from $1,417,000 in 2000. The increase was primarily
related to the opening and use of the Bank's 31,000 square foot  operations area
in  early  2001 and the  Coralville  expansion.  Salary  and  employee  benefits
increased  $1,212,000 in 2001 and were  primarily  related to an increase in new
employees  at various  locations  and higher  employee  benefit  costs.  The new
operations  center in Hills and the Coralville  expansion  accounted for most of
the increase in occupancy  and  furniture  and  equipment  related  expenses and
depreciation.

Other  expenses  increased  $1,760,000 in 2000.  Of the  increase,  salaries and
benefits  accounted for $844,000,  occupancy and furniture and equipment expense
$431,000 and all other  expenses  $485,000.  The salaries and employee  benefits
increased as a direct result of salary  adjustments in the first quarter of 2000
and furniture and equipment related expenses. The Iowa City eastside location of
Hills Bank and Trust  Company  opened in June 1999 and the Cedar  Rapids  office
opened in February  2000.  The two new locations also accounted for a portion of
the increase in occupancy  expense and other expense increases were in marketing
and business promotion. Also during 2000, the Bank introduced an on-line banking
product and incurred increased product promotion expense.

Income Taxes

Income tax expense was $4,613,000, $4,059,000 and $3,570,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.  The corresponding percentage of
income taxes compared to income before income taxes is 31.26% in 2001, 30.23% in
2000 and 29.66% in 1999.

Impact of Recently Issued Accounting Standards

In July 2001, the Financial  Accounting  Standards  Board issued  Statement 141,
"Business  Combinations"  and  Statement  142,  "Goodwill  and Other  Intangible
Assets." Statement 141 eliminates the pooling method for accounting for business
combinations,  requires  that  intangible  assets that meet certain  criteria be
reported  separately from goodwill and requires negative goodwill arising from a
business  combination  to be recorded as an  extraordinary  gain.  Statement 142
eliminates  the  amortization  of  goodwill  and  other   intangibles  that  are
determined  to have an  indefinite  life,  and  requires,  at a minimum,  annual
impairment tests for goodwill and other intangible assets that are determined to
have an indefinite  life. For the Company,  the provisions of the Statements are
effective January 1, 2002.

Implementation  of Statement 141 will have no immediate  impact on the Company's
financial statements.  Implementation of Statement 142 is not expected to have a
material effect on the Company's financial statements in 2002.

The Financial  Accounting  Standards Board has issued Statement 143, "Accounting
for  Asset  Retirement  Obligations"  and  Statement  144,  "Accounting  for the
Impairment  or Disposal of Long-Lived  Assets."  Statement 143 requires that the
fair value of liability for an asset retirement  obligation be recognized in the
period in which it is  incurred  if a  reasonable  estimate of fair value can be
made.  The  associated  asset  retirement  costs are  capitalized as part of the
carrying amount of the long-lived asset. Statement 144 supersedes FASB Statement
121 and the accounting and reporting provisions of APB Opinion No. 30. Statement
144 establishes a single  accounting model for long-lived  assets to be disposed
of by sale which includes  measuring a long-lived  asset  classified as held for
sale at the lower of its  carrying  amount or its fair  value less costs to sell
and to cease  depreciation/amortization.  For the  Company,  the  provisions  of
Statement  143 and 144 are  effective  January  1,  2003,  and  January 1, 2002,
respectively.  Implementation  of the  Statements  is  not  expected  to  have a
material impact on the Company's financial statements.
<PAGE>

Interest Rate Sensitivity and Liquidity Analysis

At December 31, 2001,  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    $  29,428    $      --   $      --    $      --    $      --    $      --   $  29,428
  Investment
    securities ......          --        1,135       5,085        7,409       15,787      160,544     189,960
  Loans .............          --       60,706      21,674       30,121       55,916      524,225     692,642
                        -------------------------------------------------------------------------------------
        Total .......      29,428       61,841      26,759       37,530       71,703      684,769     912,030
                        -------------------------------------------------------------------------------------
Sources of funds:
  Interest-bearing
    checking and
    savings accounts       56,815           --          --           --           --      203,565     260,380
  Certificates of
    deposit .........          --       13,177      19,483       58,380      150,822      125,597     367,459
  Other borrowings -
    FHLB ............          --       30,000      10,000       10,000       10,000       77,637     137,637
  Repurchase
    agreements and
    federal funds ...      22,409           --          --           --           --           --      22,409
                        -------------------------------------------------------------------------------------
                           79,224       43,177      29,483       68,380      160,822      406,799     787,885
Other sources,
  primarily
  noninterest-
  bearing ...........          --           --          --           --           --       92,179      92,179
                        -------------------------------------------------------------------------------------
        Total sources      79,224       43,177      29,483       68,380      160,822      498,978     880,064
                        -------------------------------------------------------------------------------------
Repricing
  differences .......   $ (49,796)   $  18,664   $  (2,724)   $ (30,850)   $ (89,119)   $ 185,791   $  31,966
                        =====================================================================================
</TABLE>

A portion of the  interest-bearing  checking,  savings and money market accounts
has  been  included  in the  above  table as  maturing  immediately  based  upon
management's estimate using a financial model and the rest of these deposits are
shown as more than one year.  The  classifications  are used  because the Bank's
historical data indicates that these have been very stable deposits without much
interest rate  fluctuation.  Historically,  these  accounts would not need to be
adjusted  upward as quickly in a period of rate  increases so the interest  risk
exposure  would  be less  than  the  re-pricing  schedule  indicates.  The  FHLB
borrowings  are  classified  based on their  callable  dates because they may be
called if interest rates rise over current rates.

Inflation

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

Liquidity and Capital Resources

On an  unconsolidated  basis,  the Company had cash balances of $1,655,000 as of
December 31, 2001. In 2001, the holding company received dividends of $2,392,000
from  its  subsidiary  bank  and  used  those  funds  to  pay  dividends  to its
stockholders of $2,392,000.
<PAGE>

As of December 31, 2001 and 2000, stockholders' equity, before deducting for the
maximum  cash  obligation  related to ESOP,  was  $90,349,000  and  $80,074,000,
respectively.  This  measure of equity as a percent of total assets was 9.26% at
December 31, 2001 and 9.14% at December 31, 2000. As of December 31, 2001, total
equity  was 8.01% of assets  compared  to 7.82% 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 its subsidiary bank, which affects the
Bank's  dividends to the Company.  The Bank is subject to certain  statutory and
regulatory  restrictions  on the  amount  it may pay in  dividends.  In order to
maintain  acceptable  capital  ratios in the  subsidiary  bank,  certain  of its
retained  earnings  are not  available  for the payment of  dividends.  Retained
earnings   available   for  the  payment  of  dividends  to  the  Company  total
approximately $7,015,000 as of December 31, 2001.

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

As  of  December  31,  2001,   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,  non-cumulative  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.

The Bank is an insured state bank,  incorporated  under the laws of the state of
Iowa.  As such,  the Bank is subject to  regulation,  supervision  and  periodic
examination  by  the  Superintendent  of  Banking  of the  State  of  Iowa  (the
"Superintendent").  Among the requirements  and restrictions  imposed upon state
banks by the  Superintendent  are the requirements to maintain  reserves against
deposits,  restrictions on the nature and amount of loans,  which may be made by
state banks, and restrictions  relating to investments,  opening of bank offices
and other activities of state banks.  Changes in the capital  structure of state
banks  are also  approved  by the  Superintendent.  One of the most  significant
standards of  operation of state banks is the six and one-half  percent (6 1/2%)
primary capital to total assets ratio generally required by the  Superintendent.
In certain instances,  the  Superintendent  may mandate higher capital,  but the
Superintendent   has  not  imposed  such  a   requirement   on  the  Bank.   The
Superintendent   defines  the  term  "primary   capital"  to  mean  the  sum  of
stockholders'  equity and the  allowance  for loan  losses  less any  intangible
assets.  In determining the primary capital ratio, the  Superintendent  uses the
total assets as of the date of  computation.  At December 31, 2001,  the primary
capital to total  assets ratio of the Bank  exceeded  the ratio  required by the
Superintendent.

The actual  amounts and capital  ratios as of December  31, 2001 and the minimum
regulatory  requirements  for the Company and the Bank are  presented  below (in
thousands):
<TABLE>
                                                                               To Be Well
                                                              For Capital  Capitalized Under
                                                               Adequacy    Prompt Corrective
                                               Actual          Purposes    Action Provisions
                                         ---------------------------------------------------
                                          Amount     Ratio      Ratio            Ratio
                                         ---------------------------------------------------
<S>                                      <C>         <C>     <C>           <C>
As of December 31, 2001:
  Company:
    Total risk based capital .......     $92,725     14.72%     8.00%           10.00%
    Tier 1 risk based capital ......      84,827     13.47      4.00             6.00
    Leverage ratio .................                  8.86      3.00             5.00
  Bank:
    Total risk based capital .......      89,690     14.34      8.00            10.00
    Tier 1 risk based capital ......      82,103     13.09      4.00             6.00
    Leverage ratio .................                  8.71      3.00             5.00
</TABLE>

The Bank is classified as "well capitalized" by FDIC capital guidelines.
<PAGE>

On a consolidated basis, 2001 cash flows from operations  provided  $13,778,000,
net  increases  in deposits  provided  $67,312,000  and  Federal  Home Loan Bank
borrowings provided $17,000,000.  These cash flows were invested in net loans of
$56,743,000,  net  securities  of  $25,377,000  and net  federal  funds  sold of
$1,363,000. In addition, $6,710,000 was used to purchase property and equipment.

At December 31, 2001, the Bank had total outstanding loan commitments and unused
portions of lines of credit totaling $117,609,000.  Management believes that its
liquidity  levels are  sufficient,  but the Bank may increase  its  liquidity by
limiting the growth of its assets by selling more loans in the secondary  market
or selling portions of loans to other banks through participation agreements. It
may also obtain additional funds from the Federal Home Loan Bank.

While the Bank has off-balance sheet  commitments to fund additional  borrowings
of customers,  it does not use other  off-balance-sheet  financial  instruments,
including  interest rate swaps,  as part of its asset and liability  management.
Contractual commitments to fund loans are met from the proceeds of Federal funds
sold or investment securities and additional borrowings. Many of the contractual
commitments  to extend  credit will not be funded  because  they  represent  the
credit limits on credit cards and home equity lines of credits.

As of December 31, 2001, the Bank estimates  that 2002  additional  construction
expenditures for the new office on Williams Boulevard in Cedar Rapids,  Iowa, to
be completed in 2002 will total $893,000 and will not require outside financing.

Related Party Transactions

The Bank's primary  transactions  with related parties are the loans and deposit
relationships  it maintains  with  officers,  directors and entities  related to
these individuals.  The Bank makes loans to related parties under  substantially
the same interest rates, terms and collateral as those prevailing for comparable
transactions  with unrelated  persons.  In addition,  these parties may maintain
deposit account  relationships  with the Bank that also are on the same terms as
with  unrelated  persons.  As of December  31, 2001 and 2000,  loan  balances to
related   individuals  and  businesses  totaled   $24,440,000  and  $13,297,000,
respectively. Deposits from related parties totaled $5,884,000 and $4,825,000 as
of December 31, 2001 and 2000, respectively.

Commitments and Trends

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

PART II

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

Market Risk Exposures

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

The Bank maintains 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 Bank uses a
simulation  model to  review  various  assumptions  relating  to  interest  rate
movement.  The model  attempts  to limit rate risk even if it appears the Bank's
asset and liability  maturities are perfectly  matched and a favorable  interest
margin is present.
<PAGE>

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

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

The following  table,  which presents  principal cash flows and related weighted
average interest rates by expected  maturity dates,  provides  information about
the Company's  loans,  investment  securities and deposits that are sensitive to
changes in interest rates.
<TABLE>
                          2002          2003          2004          2005          2006       Thereafter        Total      Fair Value
                      --------------------------------------------------------------------------------------------------------------
<S>                   <C>            <C>           <C>           <C>           <C>           <C>            <C>           <C>
Assets:
  Loans, fixed:
    Balance .......   $     5,530    $   46,101    $   91,060    $   37,564    $   84,766    $    35,163    $   300,184    $376,829
    Average
      interest rate         8.01%         8.33%         7.62%         7.95%         7.20%          7.00%          7.67%

Loans, variable:
  Balance .........   $    27,300    $    1,136    $    3,486    $    1,728    $    2,610    $   276,198    $   312,458    $312,458
  Average
    interest rate .         7.03%         7.48%         6.98%         7.42%         7.33%          7.45%          7.40%

Investments (1):
  Balance .........   $    58,594    $   33,586    $   47,335    $   46,506    $    7,927    $    25,440    $   219,388    $219,694
    Average
      interest rate         3.92%         6.13%         5.93%         5.43%         5.82%          5.83%          5.30%

Liabilities:
  Liquid
    deposits (2):
    Balance .......   $   260,380    $     --      $     --      $     --      $     --      $      --      $   260,380    $260,380
    Average
      interest rate         1.59%         0.00%         0.00%         0.00%         0.00%          0.00%          1.59%

Deposits,
  certificates:
  Balance .........   $   241,862    $   77,702    $   32,865    $    6,812    $    8,218    $      --      $   367,459    $376,384
  Average
    interest rate .         5.32%         5.46%         5.82%         5.34%         5.11%          0.00%          5.39%
<FN>
(1)  Includes all available-for-sale investments,  held-to-maturity investments,
     federal funds and Federal Home Loan Bank stock.

(2)  Includes  passbook  accounts,  NOW  accounts,  Super NOW accounts and money
     market funds.
</FN>
</TABLE>

Item 8.   Financial Statements and Supplementary Data

The financial statements and supplementary data are included on Pages 39 through
67.
<PAGE>


                          Independent Auditor's Report



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

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Hills
Bancorporation  and subsidiary as of December 31, 2001 and 2000, and the related
consolidated  statements of income,  comprehensive income,  stockholders' equity
and cash flows for the years  ended  December  31,  2001,  2000 and 1999.  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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects, the financial position of Hills Bancorporation
and  subsidiary  as of  December  31,  2001 and 2000,  and the  results of their
operations and their cash flows for the years ended December 31, 2001,  2000 and
1999 in conformity with accounting  principles  generally accepted in the United
States of America.


/s/ McGladrey & Pullen, LLP


Iowa City, Iowa
February 7, 2002
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(In Thousands, Except Shares)
<TABLE>
ASSETS                                                                2001        2000
----------------------------------------------------------------------------------------
<S>                                                                  <C>        <C>
Cash and due from banks (Note 9) .................................   $ 37,070   $ 25,669
Investment securities (Note 2):
  Available for sale (amortized cost 2001 $165,515; 2000 $136,661)    170,311    137,768
  Held to maturity (fair value 2001 $12,146; 2000 $15,676) .......     11,840     15,509
Stock of Federal Home Loan Bank ..................................      7,809      7,789
Federal funds sold ...............................................     29,428     28,065
Loans, net of allowance for loan losses 2001 $9,950; 2000 $10,428
  (Notes 3, 6 and 10) ............................................    682,692    626,873
Property and equipment, net (Note 4) .............................     20,997     16,499
Accrued interest receivable ......................................      7,257      7,522
Deferred income taxes (Note 8) ...................................      1,873      3,286
Other assets .....................................................      6,828      6,770
                                                                     -------------------
                                                                     $976,105   $875,750
                                                                     ===================

LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------
Liabilities
  Noninterest-bearing deposits ...................................   $ 92,179   $ 76,087
  Interest-bearing deposits (Note 5) .............................    627,839    576,619
                                                                     -------------------
        Total deposits ...........................................    720,018    652,706
  Securities sold under agreements to repurchase .................     22,409     16,561
  Federal Home Loan Bank borrowings (Note 6) .....................    137,637    120,668
  Accrued interest payable .......................................      2,683      2,865
  Other liabilities ..............................................      3,009      2,876
                                                                     -------------------
                                                                      885,756    795,676
                                                                     -------------------
Commitments and Contingencies (Notes 7 and 13)

Redeemable Common Stock Held By Employee Stock
  Ownership Plan (ESOP) (Note 7) .................................     12,194     11,550
                                                                     -------------------

Stockholders' Equity (Note 9)
  Capital stock, no par value; authorized 10,000,000 shares;
    issued 2001 1,498,558 shares; 2000 1,495,483 shares ..........     10,397     10,197
  Retained earnings ..............................................     76,931     69,179
  Accumulated other comprehensive income .........................      3,021        698
                                                                     -------------------
                                                                       90,349     80,074
  Less maximum cash obligation related to ESOP shares (Note 7) ...     12,194     11,550
                                                                     -------------------
                                                                       78,155     68,524
                                                                     -------------------
                                                                     $976,105   $875,750
                                                                     ===================
</TABLE>

See Notes to Financial Statements.
<PAGE>

HILLS BANCORPORATION


CONSOLIDATED  STATEMENTS OF INCOME
Years Ended December 31, 2001,  2000 and 1999
(In Thousands, Except Per Share Amounts)
<TABLE>
                                                                2001       2000       1999
--------------------------------------------------------------------------------------------
<S>                                                           <C>        <C>        <C>
Interest income:
  Loans, including fees ...................................   $ 52,986   $ 50,081   $ 41,933
  Investment securities:
    Taxable ...............................................      7,670      7,481      7,167
    Nontaxable ............................................      1,930      1,732      1,566
  Federal funds sold ......................................      1,132        698        455
                                                              ------------------------------
        Total interest income .............................     63,718     59,992     51,121
                                                              ------------------------------
Interest expense:
  Deposits ................................................     26,634     24,871     20,826
  Securities sold under agreements to repurchase ..........        617        699        517
  FHLB borrowings .........................................      7,184      7,494      4,970
                                                              ------------------------------
        Total interest expense ............................     34,435     33,064     26,313
                                                              ------------------------------
        Net interest income ...............................     29,283     26,928     24,808
Provision for loan losses (Note 3) ........................        924        948        900
                                                              ------------------------------
        Net interest income after provision for loan losses     28,359     25,980     23,908
                                                              ------------------------------
Other income:
  Loan origination fees ...................................      1,165        316        592
  Trust fees ..............................................      2,399      2,388      2,029
  Deposit account charges and fees ........................      3,108      2,566      2,203
  Other fees and charges ..................................      2,585      2,244      1,928
  Net (losses) on sale of  investment securities (Note 2) .         --         --       (315)
                                                              ------------------------------
                                                                 9,257      7,514      6,437
                                                              ------------------------------
Other expenses:
  Salaries and employee benefits ..........................     11,863     10,651      9,807
  Occupancy ...............................................      1,826      1,417      1,249
  Furniture and equipment .................................      2,807      2,156      1,893
  Office supplies and postage .............................      1,198      1,128      1,111
  Other ...................................................      5,165      4,717      4,249
                                                              ------------------------------
                                                                22,859     20,069     18,309
                                                              ------------------------------
        Income before income taxes ........................     14,757     13,425     12,036
Federal and state income taxes (Note 8) ...................      4,613      4,059      3,570
                                                              ------------------------------
        Net income ........................................   $ 10,144   $  9,366   $  8,466
                                                              ==============================

Earnings per share:
  Basic ...................................................   $   6.78   $   6.26   $   5.70
  Diluted .................................................       6.72       6.21       5.66
</TABLE>
See Notes to Financial Statements.
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED  STATEMENTS OF COMPREHENSIVE  INCOME
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)
<TABLE>
                                                                   2001      2000     1999
--------------------------------------------------------------------------------------------
<S>                                                              <C>       <C>       <C>
Net income ...................................................   $10,144   $ 9,366   $ 8,466
                                                                 ---------------------------

Other comprehensive income, net of income taxes:
  Unrealized holding gains (losses) arising during the year,
    net of income taxes 2001 $1,366; 2000 $983; 1999 $(1,385)      2,323     1,679    (2,364)
  Reclassification adjustments for net (gains) losses realized
    in net income, net of income taxes 2001 none;
    2000 none; 1999 $116 .....................................      --        --         198
                                                                 ---------------------------
        Other comprehensive income (loss) ....................     2,323     1,679    (2,166)
                                                                 ---------------------------

        Comprehensive income .................................   $12,467   $11,045   $ 6,300
                                                                 ===========================
</TABLE>
See Notes to Financial Statements.
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Notes 7 and 9)
Years Ended December 31, 2001, 2000 and 1999
(In Thousands, Except Share Amounts)
<TABLE>
                                                                          Maximum
                                                                           Cash
                                                            Accumulated  Obligation
                                                               Other      Related
                                     Capital     Retained  Comprehensive  To ESOP
                                      Stock      Earnings  Income (Loss)  Shares      Total
---------------------------------------------------------------------------------------------
<S>                                  <C>         <C>       <C>           <C>         <C>
Balance, December 31, 1998 .......   $  9,140    $ 55,428    $  1,185    $ (9,301)   $ 56,452
  Issuance of 26,665 shares of
    common stock .................        752          --          --          --         752
  Redemption of 167 shares
    of common stock ..............         (8)         --          --          --          (8)
  Change related to ESOP shares ..         --          --          --      (1,652)     (1,652)
  Net income .....................         --       8,466          --          --       8,466
  Income tax benefit related to
    stock based compensation .....        330          --          --          --         330
  Cash dividends ($1.30 per share)         --      (1,910)         --          --      (1,910)
  Other comprehensive
    income (loss) ................         --          --      (2,166)         --      (2,166)
                                     --------------------------------------------------------
Balance, December 31, 1999 .......     10,214      61,984        (981)    (10,953)     60,264
  Redemption of 458 shares
    of common stock ..............        (23)         --          --          --         (23)
  Change related to ESOP shares ..         --          --          --        (597)       (597)
  Net income .....................         --       9,366          --          --       9,366
  Income tax benefit related to
    stock based compensation .....          6          --          --          --           6
  Cash dividends ($1.45 per share)         --      (2,171)         --          --      (2,171)
  Other comprehensive income .....         --          --       1,679          --       1,679
                                     --------------------------------------------------------
Balance, December 31, 2000 .......     10,197      69,179         698     (11,550)     68,524
  Issuance of 3,233 shares of
    common stock .................        165          --          --          --         165
  Redemption of 158 shares
    of common stock ..............         (8)         --          --          --          (8)
  Change related to ESOP shares ..         --          --          --        (644)       (644)
  Net income .....................         --      10,144          --          --      10,144
  Income tax benefit related to ..
    stock based compensation .....         43          --          --          --          43
  Cash dividends ($1.60 per share)         --      (2,392)         --          --      (2,392)
  Other comprehensive income .....         --          --       2,323          --       2,323
                                     --------------------------------------------------------
Balance, December 31, 2001 .......   $ 10,397    $ 76,931    $  3,021    $(12,194)   $ 78,155
                                     ========================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)
<TABLE>
                                                                       2001        2000         1999
-------------------------------------------------------------------------------------------------------
<S>                                                                 <C>          <C>          <C>
Cash Flows from Operating Activities
  Net income ....................................................   $  10,144    $   9,366    $   8,466
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation ................................................       2,212        1,648        1,484
    Amortization ................................................         301          261          261
    Provision for loan losses ...................................         924          948          900
    Net losses on sale of investment securities .................          --           --          315
    Compensation paid by issuance of common stock ...............         121           --           94
    Deferred income taxes .......................................          47         (315)        (847)
    (Increase) decrease in accrued interest receivable ..........         266       (1,146)        (491)
    Amortization of bond discount ...............................         171           39          339
    (Increase) in other assets ..................................        (359)       1,409       (1,329)
    Increase (decrease) in accrued interest and other liabilities         (49)         492        1,652
                                                                    -----------------------------------
        Net cash provided by operating activities ...............      13,778       12,702       10,844
                                                                    -----------------------------------

Cash Flows from Investing Activities
  Proceeds from maturities of investment securities:
    Available for sale ..........................................      47,282       27,115       29,278
    Held to maturity ............................................       3,668        2,798        2,862
  Proceeds from sales of available-for-sale securities ..........          --           --       17,013
  Purchases of investment securities available for sale .........     (76,327)     (32,158)     (60,090)
  Federal funds sold, net .......................................      (1,363)     (27,859)      36,605
  Loans made to customers, net of collections ...................     (56,743)     (62,440)    (105,370)
  Purchases of property and equipment ...........................      (6,710)      (6,501)      (1,937)
                                                                    -----------------------------------
        Net cash (used in) investing activities .................     (90,193)     (99,045)     (81,639)
                                                                    -----------------------------------

Cash Flows from Financing Activities
  Net increase in deposits ......................................      67,312       90,620       27,935
  Net increase (decrease) in federal funds purchased and
    securities sold under agreements to repurchase ..............       5,848      (10,153)      16,160
  Borrowings from FHLB ..........................................      17,000       40,000       50,000
  Payments on FHLB borrowings ...................................         (31)     (28,032)     (17,032)
  Stock options exercised .......................................          44           --          650
  Income tax benefits related to stock based compensation .......          43            6          330
  Redemption of common stock ....................................          (8)         (23)          --
  Dividends paid ................................................      (2,392)      (2,171)      (1,910)
                                                                    -----------------------------------
        Net cash provided by financing activities ...............      87,816       90,247       76,133
                                                                    -----------------------------------
</TABLE>
                                (Continued)
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 2001, 2000 and 1999
(In Thousands)
<TABLE>
                                                      2001      2000      1999
--------------------------------------------------------------------------------
<S>                                                  <C>       <C>       <C>
        Increase in cash and due from banks ......   $11,401   $ 3,904   $ 5,338

Cash and due from banks:
  Beginning ......................................    25,669    21,765    16,427
                                                     ---------------------------
  Ending .........................................   $37,070   $25,669   $21,765
                                                     ===========================

Supplemental Disclosures
  Cash payments for:
    Interest paid to depositors and others .......   $26,884   $24,046   $20,824
    Interest paid on other obligations ...........     8,504     8,193     5,487
    Income taxes .................................     4,974     4,424     3,755

  Noncash financing activities:
    Increase in maximum cash obligation related to
      ESOP shares ................................   $   644   $   597   $ 1,652
</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 holding company
engaged in the business of commercial banking. The Company's subsidiary is Hills
Bank and Trust Company,  Hills,  Iowa (the "Bank"),  which is wholly-owned.  The
Bank is a full-service  commercial  bank extending its services to  individuals,
businesses,  governmental  units and  institutional  customers  primarily in the
communities  of Hills,  Iowa City,  Coralville,  North  Liberty,  Lisbon,  Mount
Vernon, Kalona and Cedar Rapids, Iowa.

The  Bank  competes  with  other   financial   institutions   and   nonfinancial
institutions providing similar financial products. Although the loan activity of
the Bank is diversified  with  commercial and  agricultural  loans,  real estate
loans,  automobile,  installment and other consumer loans,  the Bank's credit is
concentrated in real estate loans.

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

Certain  significant  estimates:  The allowance for loan losses,  fair values of
securities and other financial instruments, and stock-based compensation expense
involves certain significant  estimates made by management.  These estimates are
reviewed  by  management   routinely   and  it  is   reasonably   possible  that
circumstances that exist at December 31, 2001 may change in the near-term future
and that the effect could be material to the consolidated financial statements.

Principles of consolidation:  The consolidated  financial statements include the
accounts  of the  Company  and  its  subsidiary.  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  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, 2001 and 2000.

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

Premiums and discounts on debt  securities  are amortized  over the  contractual
lives of those  securities.  The  method of  amortization  results in a constant
effective yield on those  securities (the interest  method).  Realized gains and
losses on investment securities are included in income,  determined on the basis
of the cost of the specific securities sold.

Loans:  Loans are  stated at the  amount of  unpaid  principal,  reduced  by the
allowance for loan losses.  Interest income is accrued on the unpaid balances as
earned.

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

Loans are considered  impaired when, based on current information and events, it
is probable the Bank 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.
<PAGE>

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.

Transfers of financial  assets:  Transfers of financial assets are accounted for
as sales,  when  control  over the assets  has been  surrendered.  Control  over
transferred  assets is deemed to be  surrendered  when (1) the assets  have been
isolated  from the  Company,  (2) the  transferee  obtains  the  right  (free of
conditions  that constrain it from taking  advantage of that right) to pledge or
exchange the transferred  assets and (3) the Company does not maintain effective
control over the  transferred  assets  through an agreement to  repurchase  them
before their maturity or the ability to unilaterally  cause the holder to return
specific assets.

Credit related financial  instruments:  In the ordinary course of business,  the
Company has entered into  commitments  to extend credit,  including  commitments
under credit card arrangements, commercial letters of credit and standby letters
of credit. Such financial instruments are recorded when they are funded.

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 3-10 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  $2,500,000  and  $2,760,000,  net of accumulated
amortization of $1,398,000 and $1,137,000, respectively, as of December 31, 2001
and 2000, respectively, and is included in other assets.

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

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

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

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

Following is a reconciliation of the denominator:
<TABLE>
                                                           Year Ended December 31,
                                                     ------------------------------------
                                                        2001         2000        1999
                                                     ------------------------------------
<S>                                                  <C>          <C>          <C>
Weighted average number of shares ................   $1,497,064   $1,495,906   $1,483,540
Potential number of dilutive shares ..............       12,432       12,875       11,784
Total shares to compute diluted earnings per share   $1,509,496   $1,508,781   $1,495,324
</TABLE>

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

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

Recently issued accounting  standards:  Recently issued accounting standards are
not expected to materially affect the Company's financial statements.

Fair value of financial instruments: In cases where quoted market prices are not
available,  fair values of financial  instruments  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.  Certain  financial
instruments  and all  nonfinancial  instruments  are  excluded  from fair  value
disclosure.  Accordingly,  the aggregate fair value amounts presented in Note 11
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.  Unfunded loan  commitments are not valued since
   the loans are generally priced at market at the time of funding.

   Cash and due from banks 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 federal funds sold and securities
sold under agreements to repurchase approximate their fair values.

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

Accrued  interest  payable:  The  carrying  amount of accrued  interest  payable
approximates its fair value. Note 2.
<PAGE>

Investment Securities

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

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

December 31, 2001:
  U. S. Treasury .................. $ 11,549    $    524    $     --    $ 12,073
  U. S. Government agencies and
    corporations ..................  119,308       3,887         (30)    123,165
  State and political subdivisions    34,658         544        (129)     35,073
                                    --------------------------------------------
        Total ..................... $165,515    $  4,955    $   (159)   $170,311
                                    ============================================

December 31, 2000:
  U. S. Treasury .................. $ 18,070    $    249    $     (1)   $ 18,318
  U. S. Government agencies and
    corporations ..................   94,439         720        (123)     95,036
  State and political subdivisions    24,152         331         (69)     24,414
                                    --------------------------------------------
        Total ..................... $136,661    $  1,300    $   (193)   $137,768
                                    ============================================

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

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

December 31, 2001:
  State and political subdivisions ... $11,840    $   306     $    --    $12,146
                                       =========================================

December 31, 2000:
  State and political subdivisions ... $15,509    $   168     $    (1)   $15,676
                                       =========================================

The contractual  maturity  distribution of investment  securities as of December
31, 2001 is summarized as follows:

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


Due in one year or less .............. $ 26,680   $ 27,193   $  3,053   $  3,090
Due after one year through five years   122,597    126,643      8,599      8,855
Due after five years through ten years   16,038     16,273        163        174
Due over ten years ...................      200        202         25         27
                                       -----------------------------------------
        Total ........................ $165,515   $170,311   $ 11,840   $ 12,146
                                       =========================================

As of  December  31,  2001,  investment  securities  with a  carrying  value  of
$44,782,000 were pledged to collateralize public and trust deposits,  short-term
borrowings and for other purposes, as required or permitted by law.

Net gains or losses from the sale of investment securities were as follows:

                                                     Year Ended December 31,
                                                  ------------------------------
                                                   2001       2000        1999
                                                  ------------------------------
                                                      (Amounts In Thousands)

Gross gains ...............................       $   --     $   --     $     4
Gross (losses) ............................           --         --        (319)
                                                  -----------------------------
        Net (losses) ......................       $   --     $   --     $  (315)
                                                  =============================

<PAGE>

Note 3.  Loans

The composition of loans is as follows:

                                                             December 31,
                                                       -------------------------
                                                        2001              2000
                                                       -------------------------
                                                         (Amounts In Thousands)

Agricultural .................................         $ 34,304         $ 28,560
Commercial and financial .....................           44,363           37,832
Real estate:
  Construction ...............................           40,430           38,184
  Mortgage ...................................          538,832          499,010
Loans to individuals .........................           34,713           33,715
                                                       -------------------------
                                                        692,642          637,301
Less allowance for loan losses ...............            9,950           10,428
                                                       -------------------------
                                                       $682,692         $626,873
                                                       =========================

Changes in the allowance for loan losses are as follows:

                                                  Year Ended December 31,
                                           -------------------------------------
                                             2001          2000          1999
                                           -------------------------------------
                                                   (Amounts In Thousands)

Balance, beginning ...................     $ 10,428      $  9,750      $  8,856
  Provision charged to expenses ......          924           948           900
  Recoveries .........................        1,139           904           757
  Loans charged off ..................       (2,541)       (1,174)         (763)
                                           -------------------------------------
Balance, ending ......................     $  9,950      $ 10,428      $  9,750
                                           =====================================

Information about impaired loans as of and for the years ended December 31, 2001
and 2000 is as follows:
<TABLE>
                                                                            2001      2000
                                                                        ----------------------
                                                                        (Amounts In Thousands)
   <S>                                                                     <C>       <C>
Loans receivable for which there is a related allowance for loan losses    $ 4,417   $    --
Loans receivable for which there is no related allowance for loan losses     6,871    11,068
                                                                           -----------------
        Total impaired loans ...........................................   $11,288   $11,068
                                                                           =================

Related allowance for credit losses ....................................   $   897   $    --
Average balance ........................................................    11,200    10,409
Interest income recognized .............................................       962       977
</TABLE>


Note 4.  Property and Equipment

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

                                                               December 31,
                                                         -----------------------
                                                          2001             2000
                                                         -----------------------
                                                         (Amounts In Thousands)

Land ...........................................         $ 3,715         $ 3,080
Buildings and improvements .....................          15,844          12,664
Furniture and equipment ........................          16,834          13,939
                                                         -----------------------
                                                          36,393          29,683
Less accumulated depreciation ..................          15,396          13,184
                                                         -----------------------
        Net ....................................         $20,997         $16,499
                                                         =======================
<PAGE>

Note 5.  Interest-Bearing Deposits

A summary of these deposits is as follows:

                                                             December 31,
                                                      --------------------------
                                                        2001              2000
                                                      --------------------------
                                                        (Amounts In Thousands)

NOW and other demand .......................          $ 84,480          $ 70,980
Savings ....................................           175,900           161,603
Time, $100,000 and over ....................            55,517            46,653
Other time .................................           311,942           297,383
                                                      --------------------------
                                                      $627,839          $576,619
                                                      ==========================

Note 6.  Federal Home Loan Bank Borrowings

As of December 31, 2001 and 2000, the borrowings were as follows:

                                                       2001               2000
                                                      --------------------------
(Effective interest rates as of December 31, 2001)         (In Thousands)

Due 2005, 3.72% ............................          $  4,350          $ 10,000
Due 2006, 4.08% ............................            12,750              --
Due 2008, 5.22% to 6.00% ...................            50,000            40,100
Due 2009, 5.66% to 6.04% ...................            30,537            30,568
Due 2010, 5.77% to 6.61% ...................            40,000            40,000
                                                      --------------------------
                                                      $137,637          $120,668
                                                      ==========================

Approximately  $120,000,000  of the  borrowings  are  callable at various  dates
through 2005.

The borrowings are collateralized by 1-4 family mortgage loans with an aggregate
face amount of  $165,165,000.  As of December 31, 2001, the Company held Federal
Home Loan Bank stock with a cost of $7,809,000.

Note 7.  Employee Benefit Plans

The Company has an Employee Stock  Ownership Plan (the "ESOP") to which it makes
discretionary cash contributions. The Company's contribution to the ESOP totaled
$79,000,  $70,000 and $64,000 for the years ended  December 31,  2001,  2000 and
1999, respectively.

In the event a terminated plan participant  desires to sell his or her shares of
the Company stock, or for certain employees who elect to diversify their account
balances,  the  Company  may  be  required  to  purchase  the  shares  from  the
participant at their fair value.  To the extent that shares of common stock held
by the ESOP are not readily  traded,  a sponsor  must  reflect the maximum  cash
obligation  related to those securities  outside of stockholders'  equity. As of
December 31, 2001,  148,713  shares held by the ESOP, at a fair value of $82 per
share, had 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  $636,000,  $562,000  and
$509,000 for the years ended December 31, 2001, 2000 and 1999, respectively.
<PAGE>

The Company has a Stock Option and Incentive  Plan for certain key employees and
directors  whereby  shares of common stock have been  reserved for awards in the
form of stock options or stock awards.  Under the plan, the aggregate  number of
options and shares granted cannot exceed 66,000 shares. A Stock Option Committee
may grant  options at prices equal to the fair value of the stock at the date of
the grant.  Options  expire 10 years from the date of the grant.  Directors  may
exercise  options  immediately  and officers'  rights under the plan vest over a
five-year  period from the date of the grant. No  compensation  expense has been
charged to expense using the  intrinsic  value based method as prescribed by APB
No. 25. Had  compensation  expense been determined  based on the grant date fair
values of the awards,  as  prescribed  by SFAS No. 123,  reported net income and
earnings per share would have been as follows:

                                                  Years Ended December 31,
                                            ------------------------------------
                                               2001         2000          1999
                                            ------------------------------------

Pro forma net income (in thousands) ....    $   10,131    $   9,361    $   8,461
Pro forma earnings per share:
  Basic ................................          6.77         6.26         5.70
  Diluted ..............................          6.71         6.21         5.66

The fair  value  of each  grant is  established  at the  grant  date  using  the
Black-Scholes   option-pricing   model  with  the  following   weighted  average
assumptions  for 2001 grants:  Dividend rate 2.19%;  risk-free  interest rate of
4.40% and an expected life of 10 years. There were no grants in 2000 or 1999.

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

Balance, December 31, 1999 ...................        20,462           $   27.15
  Exercised ..................................            --                  --
                                                     ---------------------------
Balance, December 31, 2000 ...................        20,462               27.15
  Granted* ...................................        10,400               77.00
  Exercised ..................................        (1,683)              26.17
                                                     ---------------------------
Balance, December 31, 2001 ...................        29,179           $   44.98
                                                     ===========================

* The weighted average fair value of these options was $15 per share.

Other pertinent  information  related to the options outstanding at December 31,
2001 is as follows:

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

 $ 25.33           12,330         15 Months          12,330
   26.17            4,394         18 Months           4,394
   41.00            2,055         63 Months           2,055
   77.00           10,400         113 months              -
                   ------                            ------
                   29,179                            18,779
                   ======                            ======

As of December 31, 2001, 55,600 options were available for future grants.

The  committee  is also  authorized  to grant  awards  of common  stock,  and if
authorized  the  issuance of 1,550,  none and 1,587  shares of common stock to a
group of employees in 2001, 2000 and 1999, respectively.

Note 8.  Income Taxes

Income taxes for the years ended December 31, 2001, 2000 and 1999 are summarized
as follows:

                                        2001            2000             1999
                                       -----------------------------------------
                                                (Amounts In Thousands)
Current:
  Federal ....................         $ 3,819         $ 3,648          $ 3,707
  State ......................             747             726              710
Deferred .....................              47            (315)            (847)
                                       -----------------------------------------
                                       $ 4,613         $ 4,059          $ 3,570
                                       =========================================
<PAGE>

Deferred income tax  liabilities  and assets arose from the following  temporary
differences:
                                                             December 31,
                                                      --------------------------
                                                       2001      2000      1999
                                                      --------------------------
                                                        (Amounts In Thousands)
Deferred income tax assets:
  Allowance for loan losses ......................    $3,693    $3,860    $3,597
  Unrealized losses on investment securities .....        --        --       574
  Deferred compensation ..........................       530       433       311
  Certain accrued expenses .......................       276       198       190
  Other ..........................................        91        90       112
                                                      --------------------------
        Gross deferred tax assets ................     4,590     4,581     4,784
                                                      --------------------------
Deferred income tax liabilities:
  Property and equipment .........................       773       750       700
  FHLB dividends .................................       130       130       130
  Unrealized gains on investment securities ......     1,775       409        --
  Other ..........................................        39         6        --
                                                      --------------------------
        Gross deferred tax liabilities ...........     2,717     1,295       830
                                                      --------------------------
        Net deferred income tax asset ............    $1,873    $3,286    $3,954
                                                      ==========================

The net change in the  deferred  income  taxes for the years ended  December 31,
2001, 2000 and 1999 is reflected in the financial statements as follows:

                                                    Year Ended December 31,
                                               ---------------------------------
                                                2001        2000          1999
                                               ---------------------------------
                                                    (Amounts In Thousands)

Statement of income ......................     $    47     $  (315)     $  (847)
Statement of stockholders' equity ........       1,366         983       (1,269)
                                               ---------------------------------
                                               $ 1,413     $   668      $(2,116)
                                               =================================

The income tax provisions  for the years ended December 31, 2001,  2000 and 1999
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:

                                 2001               2000                 1999
                                 % Of               % Of                 % Of
                                Pretax             Pretax               Pretax
                       Amount   Income    Amount   Income   Amount      Income
                      --------------------------------------------------------
                                        (Amounts In Thousands)

Expected provision    $ 5,165    35.0%   $ 4,699    35.0%   $ 4,213     35.0%
Tax-exempt interest      (745)   (5.0)      (712)   (5.3)      (647)    (5.3)
Interest expense
  limitation ......       143     1.0        111     1.0        120      1.0
State income taxes,
  net of federal
  income tax
  benefit .........       493     3.3        479     3.6        468      3.9
Income tax credits       (345)   (2.3)      (345)   (2.6)      (345)    (2.9)
Other .............       (98)   (0.7)      (173)   (1.3)      (239)    (2.0)
                      -------------------------------------------------------
                      $ 4,613    31.3%   $ 4,059    30.4%   $ 3,570     29.7%
                      =======================================================

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.
<PAGE>

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.

The actual amounts and capital ratios as of December 31, 2001,  with the minimum
regulatory requirements for the Company and Bank are presented below (amounts in
thousands):
<TABLE>
                                                                             To Be Well
                                                             For Capital  Capitalized Under
                                                              Adequacy    Prompt Corrective
                                         Actual               Purposes    Action Provisions
                                         --------------------------------------------------
                                          Amount     Ratio      Ratio           Ratio
                                        ---------------------------------------------------
<S>                                     <C>         <C>     <C>           <C>
As of December 31, 2001:
  Company:
    Total risk based capital .......     $92,725     14.72%     8.00%          10.00%
    Tier 1 risk based capital ......      84,827     13.47      4.00            6.00
    Leverage ratio .................                  8.86      3.00            5.00
  Bank:
    Total risk based capital .......      89,690     14.34      8.00           10.00
    Tier 1 risk based capital ......      82,103     13.09      4.00            6.00
    Leverage ratio .................                  8.71      3.00            5.00
</TABLE>

The ability of the Company to pay  dividends  to its  stockholders  is dependent
upon dividends  paid by the Bank.  The Bank is subject to certain  statutory and
regulatory  restrictions  on the  amount it may pay in  dividends.  To  maintain
acceptable  capital ratios in the Bank, certain of its retained earnings are not
available for the payment of dividends. To maintain a ratio of capital to assets
of 8%, retained earnings of $7,015,000 as of December 31, 2001 are available for
the payment of dividends to the Company.

The Bank is required to  maintain  reserve  balances in cash or with the Federal
Reserve Bank. Reserve balances totaled $11,998,000 and $9,662,000 as of December
31, 2001 and 2000, respectively.

Note 10.  Related Party Transactions

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

The  following  is an analysis  of the  changes in the loans to related  parties
during the years ended December 31, 2001 and 2000:

                                                     Year Ended December 31,
                                                   -----------------------------
                                                     2001                2000
                                                   -----------------------------
                                                      (Amounts In Thousands)

Balance, beginning .....................           $ 13,297            $ 10,733
  Advances .............................             15,445               8,725
  Collections ..........................             (4,302)             (6,161)
                                                   -----------------------------
Balance, ending ........................           $ 24,440            $ 13,297
                                                   =============================

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

Note 11.  Fair Value of Financial Instruments

The  carrying  value  and  estimated  fair  values  of the  Company's  financial
instruments as of December 31, 2001 and 2000 are as follows:
<TABLE>
                                                                        2001                 2000
                                                                 --------------------  --------------------
                                                                 Carrying  Estimated   Carrying  Estimated
                                                                  Amount   Fair Value   Amount   Fair Value
                                                                 ------------------------------------------
                                                                           (Amounts In Thousands)
<S>                                                              <C>        <C>        <C>        <C>
Cash and due from banks ......................................   $ 37,070   $ 37,070   $ 25,669   $ 25,669
Federal funds sold ...........................................     29,428     29,428     28,065     28,065
Investment securities ........................................    189,960    190,266    161,066    161,233
Loans ........................................................    682,692    679,337    626,873    624,450
Accrued interest receivable ..................................      7,257      7,257      7,522      7,522
Deposits .....................................................    720,018    728,943    652,706    659,327
Federal funds purchased and securities
  sold under agreements to repurchase ........................     22,409     22,409     16,561     16,561
Borrowings from Federal Home Loan
  Bank .......................................................    137,637    137,371    120,668    121,325
Accrued interest payable .....................................      2,683      2,683      2,865      2,865

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

Off-balance sheet instruments:
  Loan commitments ...........................................   $117,609   $     --   $ 91,060   $     --
  Letters of credit ..........................................     12,569         --     10,993         --
</TABLE>

Note 12.  Parent Company Only Financial Information

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

                          CONDENSED BALANCE SHEETS
                         December 31, 2001 and 2000
                           (Amounts In Thousands)

ASSETS                                                         2001        2000
--------------------------------------------------------------------------------

Cash ...................................................     $ 1,655     $ 1,583
Investment securities available for sale ...............         520         499
Investment in subsidiary bank ..........................      87,837      77,711
Other assets ...........................................         572         529
                                                             -------------------
        Total assets ...................................     $90,584     $80,322
                                                             ===================

LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Liabilities ............................................     $   235     $   248
                                                             -------------------
Redeemable common stock held by ESOP ...................      12,194      11,550
                                                             -------------------
Stockholders' equity:
  Capital stock ........................................      10,397      10,197
  Retained earnings ....................................      76,931      69,179
  Accumulated other comprehensive income ...............       3,021         698
                                                             -------------------
                                                              90,349      80,074
Less maximum cash obligation related to ESOP shares ....      12,194      11,550
                                                             -------------------
        Total stockholders' equity .....................      78,155      68,524
                                                             -------------------
        Total liabilities and stockholders' equity .....     $90,584     $80,322
                                                             ===================

                CONDENSED STATEMENTS OF INCOME
         Years Ended December 31, 2001, 2000 and 1999
                    (Amounts In Thousands)

                                                 2001        2000        1999
                                               ---------------------------------

Interest on investment securities ...........  $     32    $     30    $     16
Dividends received from subsidiary ..........     2,392       2,170       1,911
Other expenses ..............................      (112)       (119)       (121)
                                               ---------------------------------
        Income before income taxes and equity
        in subsidiary's undistributed income      2,312       2,081       1,806
Income tax benefit ..........................        29          43          37
                                               ---------------------------------
                                                  2,341       2,124       1,843
Equity in subsidiary's undistributed income .     7,803       7,242       6,623
                                               ---------------------------------
        Net income ..........................  $ 10,144    $  9,366    $  8,466
                                               =================================

<PAGE>


               CONDENSED STATEMENTS OF CASH FLOWS
          Years Ended December 31, 2001, 2000 and 1999
                     (Amounts In Thousands)
<TABLE>
                                                        2001        2000        1999
                                                      --------------------------------
<S>                                                   <C>         <C>         <C>
Cash flows from operating activities:
  Net income ......................................   $ 10,144    $  9,366    $  8,466
  Noncash items included in net income:
    Undistributed earnings of subsidiary ..........     (7,803)     (7,242)     (6,623)
    (Increase) decrease in other assets ...........        (43)        304        (180)
    Increase (decrease) in liabilities ............        (13)        (76)         90
                                                      --------------------------------
        Net cash provided by operating activities .      2,285       2,352       1,753
                                                      --------------------------------

Cash flows from investing activities:
  Proceeds from maturities of investment securities        250          --         303
  Purchase of investment securities ...............       (271)         --        (499)
                                                      --------------------------------
        Net cash (used in) investing activities ...        (21)         --        (196)
                                                      --------------------------------

Cash flows from financing activities:
  Stock issued (redeemed) .........................        157         (23)        744
  Income tax benefits related to stock based
    compensation ..................................         43           6         330
  Dividends paid ..................................     (2,392)     (2,171)     (1,910)
                                                      --------------------------------
        Net cash (used in) financing activities ...     (2,192)     (2,188)       (836)
                                                      --------------------------------
        Increase in cash ..........................         72         164         721
Cash balance:
  Beginning .......................................      1,583       1,419         698
                                                      --------------------------------
  Ending ..........................................   $  1,655    $  1,583    $  1,419
                                                      ================================
</TABLE>

Note 13. Commitments and Contingencies

Concentrations  of credit risk: The Bank's loans,  commitments to extend credit,
unused  lines of credit and  outstanding  letters of credit have been granted to
customers  within the Bank's market area.  Investments  in securities  issued by
state and political  subdivisions within the state of Iowa totaled approximately
$17,417,000.  The concentrations of credit by type of loan are set forth in Note
3. Outstanding letters of credit were granted primarily to commercial borrowers.
Although the Bank has a diversified loan portfolio, a substantial portion of its
debtors'  ability  to honor  their  contracts  is  dependent  upon the  economic
conditions in Johnson County, Iowa.

Contingencies:  In the  normal  course of  business,  the  Company  and Bank 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  Bank is a party to
financial  instruments  with  off-balance  sheet  risk in the  normal  course of
business  to  meet  the  financing  needs  of  its  customers.  These  financial
instruments include commitments to extend credit, credit card participations and
standby  letters of  credit.  These  instruments  involve,  to varying  degrees,
elements  of credit  risk in  excess of the  amount  recognized  in the  balance
sheets.
<PAGE>

The Bank's exposure to credit loss in the event of  nonperformance  by the other
party to the financial instrument for commitments to extend credit,  credit card
participations  and standby  letters of credit is represented by the contractual
amount of those  instruments.  The Bank uses the same credit  policies in making
commitments  and  conditional  obligations  as  it  does  for  on-balance  sheet
instruments.  A summary of the Bank's  commitments at December 31, 2001 and 2000
is as follows:

                                                              2001      2000
                                                          ----------------------
                                                          (Amounts In Thousands)
Firm loan commitments and unused portion of lines
  of credit:
  Home equity loans ...................................     $ 5,819   $ 4,693
  Credit card participations ..........................      14,050    12,639
  Commercial, real estate and home construction .......      44,880    33,562
  Commercial lines ....................................      52,860    40,166
Outstanding letters of credit .........................      12,569    10,993

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

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

Note 14. Quarterly Results of Operations  (unaudited,  in thousands,  except per
         share amounts)

                                                 Quarter Ended
                                 -----------------------------------------------
                                  March     June    September December    Year
                                 -----------------------------------------------
2001:
  Total interest income ......   $15,752   $15,931   $16,032   $16,003   $63,718
  Net interest income after
    provisions for loan losses     6,527     6,923     7,298     7,611    28,359
  Net income .................     2,307     2,534     2,680     2,623    10,144
  Basic earnings per share ...      1.54      1.69      1.79      1.76      6.78
  Diluted earnings per share .      1.53      1.68      1.77      1.74      6.72

2000:
  Total interest income ......   $14,059   $14,651   $15,300   $15,982   $59,992
  Net interest income after
    provisions for loan losses     6,294     6,496     6,511     6,679    25,980
  Net income .................     2,204     2,399     2,336     2,427     9,366
  Basic earnings per share ...      1.47      1.60      1.56      1.63      6.26
  Diluted earnings per share .      1.46      1.59      1.55      1.61      6.21

Part II

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

None
<PAGE>

Part III

Item 10.   Directors and Executive Officers of the Registrant

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

The following  table sets forth the name,  age and  principal  occupation of the
Executive  Officers of the  Registrant  and Executive  Officers of the Bank. All
officers of the Registrant and the Bank are elected  annually for one-year terms
of office.
<TABLE>
                                                                                                        Year First
                                                                                                         Elected
                                         Position With Registrant Or Bank And                           Officer Of
                                         Principal Occupation And Employment                            Registrant
         Name         Age                    During The Past Five Years                                   (Bank)
-------------------------------------------------------------------------------------------------------------------
<S>                   <C>   <C>                                                                         <C>
Dwight O. Seegmiller  49    Director of Registrant and Bank; President, Registrant and Bank             1986 (1975)

Willis M. Bywater     63    Director of Registrant and Bank; Chairman of the Board, Bank;               1997
                            Vice President of the Registrant; Executive Officer and Shareholder
                            of Economy Advertising Company

James G. Pratt        53    Treasurer of Registrant; Senior Vice President from January 1986            1985 (1982)
                            to present

Thomas J. Cilek       55    Secretary of Registrant; Senior Vice President of Bank from                 1988 (1986)
                            August 1986 to present
</TABLE>
Item 11.   Executive Compensation

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

Item 12.   Security Ownership of Certain Beneficial Owners and Management

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

Item 13.   Certain Relationships and Related Transactions

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

Part IV

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

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

         Independent auditor's report on the financial statements
         Consolidated balance sheets as of December 31, 2001 and 2000
         Consolidated statements of income for the years ended
           December 31, 2001, 2000 and 1999
         Consolidated statements of comprehensive income for the
           years ended December 31, 2001, 2000 and 1999
         Consolidated statements of stockholders' equity for the years
           ended December 31, 2001, 2000 and 1999
         Consolidated statements of cash flows for the years ended
           December 31, 2001, 2000 and 1999
         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  10(d) - Material  contract  (2000 Stock  Option and  Incentive
         Plan) filed as Exhibit  10(d) in Form 10-K for the year ended  December
         31, 2000 is incorporated by reference.

         Exhibit 11 - Statement Re Computation of Basic and Diluted Earnings Per
         Share is attached on Page 73.

         Exhibit 21 - Subsidiaries of the Registrant is attached on Page 74.

         Exhibit 23 - Consent of Accountants is attached on Page 75.

(b)      Reports on Form 8-K:

         The Registrant  filed no reports on Form 8-K for the three months ended
         December 31, 2001.

<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 25, 2002                     By  /s/ Dwight O. Seegmiller
      ---------------------------            -----------------------------------
                                             Dwight O. Seegmiller, Director
                                             and President

Date  March 25, 2002                     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 25, 2002                     By  /s/ Willis M. Bywater
      ----------------------------           -----------------------------------
                                             Willis M. Bywater, Director


Date  March 25, 2002                     By  /s/ Thomas J. Gill
      ----------------------------           -----------------------------------
                                             Thomas J. Gill, Director


Date  March 25, 2002                     By  /s/ Donald H. Gringer
     ----------------------------            -----------------------------------
                                             Donald H. Gringer, Director


Date  March 25, 2002                     By  /s/ Michael E. Hodge
      ---------------------------            -----------------------------------
                                             Michael E. Hodge, Director


Date  March 25, 2002                     By  /s/ Richard W. Oberman
      ---------------------------            -----------------------------------
                                             Richard W. Oberman, Director


Date  March 25, 2002                     By  /s/ Theodore H. Pacha
      ---------------------------           -----------------------------------
                                             Theodore H. Pacha, Director


Date  March 25, 2002                     By  /s/ Ann M. Rhodes
      ----------------------------          -----------------------------------
                                             Ann M. Rhodes, Director


Date  March 25, 2002                     By  /s/ Ronald E. Stutsman
      -----------------------------         -----------------------------------
                                             Ronald E. Stutsman, Director


Date  March 25, 2002                     By  /s/ Sheldon E. Yoder
      ----------------------------         -----------------------------------
                                             Sheldon E. Yoder, Director
<PAGE>


                              HILLS BANCORPORATION

                       ANNUAL REPORT ON FORM 10-K FOR THE
                       FISCAL YEAR ENDED DECEMBER 31, 2001

                                  EXHIBIT INDEX

<TABLE>
                                                                                        Page Number
                                                                                     In The Sequential
  Exhibit                                                                             Numbering System
  Number                          Description                                        For 2001 Form 10-K
-------------------------------------------------------------------------------------------------------
<S>         <C>                                                                      <C>
    11      Statement Re Computation of Basic and Diluted Earnings Per Share

    21      Subsidiary of the Registrant

    23      Consent of Independent Certified Public Accountants
</TABLE>