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, 2002.

                        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]

Indicate  by check mark  whether  the  Registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act) Yes [ X ] No [ ]

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 17, 2003 (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   $88  per  share)  was
$108,316,000.

The number of shares  outstanding of the  Registrant's  common stock as of March
17, 2003 is 1,501,054 shares of no par value common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy  Statement  dated March 24, 2003 for the Annual Meeting of
the  Shareholders  of the  Registrant  to be held  April  21,  2003  (the  Proxy
Statement) are incorporated by reference in Part III of this Form 10-K.

                                  EXHIBIT INDEX

The exhibits index is on Page 74.



                                       1
<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 to 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.. The office is located in Kalona, Iowa (Washington County) which
is  approximately  20 miles  south of Iowa  City.  Kalona  has a  population  of
approximately 2,300 people. Kalona is primarily an agricultural  community,  but
is located within easy driving distance for employment in Iowa City,  Coralville
and North Liberty (combined population 85,000) and Washington,  Iowa (population
7,000). 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 86,000 and Johnson
County, Iowa has a population of approximately  111,000.  The University of Iowa
in Iowa City has over 29,700  students and 23,600 full and part-time  employees,
including  employees of The  University  of Iowa  Hospitals  and Clinics.  Other
principal employers in Johnson County include the following:
<TABLE>
           Employer                                  Type of Business                              Employees
------------------------------------------------------------------------------------------------------------
<S>                                              <C>                                               <C>
Iowa City Community School District              Education                                            1,300

NCS Pearson Corporation                          Information Service - Computers                      1,250

Hy-Vee Food Stores                               Grocery Stores                                       1,200

Mercy Hospital                                   Health Care                                          1,200

Veterans Administration Medical Center           Health Care                                          1,200

American College Testing Program                 Educational Testing Service                          1,100

Lear Corporation                                 Automotive Products Manufacturing                      900

Rockwell Collins                                 Electronic Manufacturing                               800

Oral B Laboratories                              Consumer Products                                      730

Proctor & Gamble                                 Consumer Products                                      580

City of Iowa City                                City Government                                        580
</TABLE>

                                       2
<PAGE>

The Bank also operates  offices in the Linn County,  Iowa communities of Lisbon,
Mount Vernon and Cedar Rapids,  Iowa.  In addition,  the Bank opened its twelfth
office  location  on  February  10, 2003 in Marion,  Iowa,  a community  that is
adjacent  to  Cedar  Rapids,  in  Linn  County.   Lisbon  has  a  population  of
approximately  1,900 and Mount  Vernon,  located  two miles from  Lisbon,  has a
population of 3,800.  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  1,000  students.  Cedar
Rapids has a metropolitan population of approximately 154,000,  including 27,000
from  Marion and is  located  approximately  10 miles  west of Lisbon,  Iowa and
approximately  25  miles  north  of  Iowa  City on  Interstate  380.  The  total
population of Linn County is approximately  192,000.The  largest employer in the
Cedar  Rapids  area  is  Rockwell   Collins,   manufacturer  of   communications
instruments,  with about 7,100  employees.  Other large  employers  in the Cedar
Rapids area and their approximate number of employees are as follows:
<TABLE>
         Employer                                  Type of Business                                Employees
------------------------------------------------------------------------------------------------------------
<S>                                              <C>                                               <C>
MCI WorldCom., Inc                               Telecommunications                                   2,900

Cedar Rapids Community Schools                   Education                                            2,750

Hy-Vee Food Stores                               Grocery Stores                                       2,400

AEGON USA, Inc.                                  Insurance                                            2,400

St. Luke's Hospital                              Health Care                                          2,400

Maytag Appliances, Amana Iowa                    Household Appliances                                 2,300

Mercy Medical Center                             Health Care                                          2,000

McLeod*USA                                       Telecommunications                                   1,650

Alliant Energy                                   Electric Utility                                     1,650

City of Cedar Rapids                             City Government                                      1,500

Kirkwood Community College                       Education                                            1,325

Quaker Oats Company                              Cereals and Chemicals                                1,275
</TABLE>

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,  Cedar Rapids,  Coralville,
North Liberty,  Lisbon, Mount Vernon,  Kalona and Marion. 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  attempts  to reduce the risk of credit  loss to the Bank by
requiring that, among other things, maintenance of minimum loan to value ratios,
evidence  of   appropriate   levels  of  insurance   carried  by  borrowers  and
documentation  of  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.

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,  2002 and the Bank had 285
regular and 109 part-time employees.

                                       3
<PAGE>

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 Bank is in direct  competition for loans and deposits and financial services
with a number of other  banks and credit  unions in Johnson and Linn  County.  A
comparison of deposits in the two counties are as follows:

                                                        Deposits as of June 2002
                                                              (In Millions)
                                                           Johnson       Linn
                                                           County       County

Hills Bank and Trust Company .......................       $  611       $   89
Branches of largest competing regional bank ........          234          591
Largest competing independent bank .................          345          331
Largest competing credit union .....................          219          278
Total Market in County .............................        1,713        3,099

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  68,500,
of which 23,600  employees  work for the University of Iowa or the University of
Iowa  Hospitals and Clinics.  Other larger  sectors of the economy are indicated
above in the  employment  table of large  employers.  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 2.0% for the past five years.  Johnson County, Iowa has had one of
the strongest  economies in Iowa and has had substantial  economic growth in the
past ten years.  The largest  segment of the employed  population is employed in
management, professional or related occupations.

The State of Iowa  continues to collect  decreasing  tax revenues while spending
continues to increase,  and the Iowa  legislature has required the University of
Iowa to reduce spending in the last two fiscal years. The University has reacted
to its budget  constraints  without  significant  lay-offs and has  continued to
review and reduce employment, when necessary, through attrition. However, salary
increases at the University have been minimal.

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
192,000, has a much higher dependence on manufacturing than Johnson County. Linn
County has an  employment  labor force of 114,300 and similar to Johnson  County
has an  unemployment  rate of about 2%.  Overall the economy in both Johnson and
Linn County has not been  adversely  affected  by the slow down in the  national
economy.  It is expected  that at some point the local economy will be adversely
affected if the national economy remains sluggish.

                                       4
<PAGE>

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
applicable 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  activities  that are permissible  for financial  holding  companies (as
described above) and certain  activities that the Secretary of the Treasury,  in
consultation  with the Federal  Reserve,  determines  are financial in nature or
incidental to any such financial activity.

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.

                                       5
<PAGE>

Furthermore,  the Act provides reform in transactions with the Federal Home Loan
Bank 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 by replacing the current $300 million  funding  formula for
the refinance corporation  ("REFCORP") obligations of the Federal Home Loan Bank
to permit such  obligations  to equal twenty  percent  (20%) of the Federal Home
Loan Bank's annual earnings.

In the area of privacy,  the Act  requires  clear  disclosure  by all  financial
institutions  of their  privacy  policies  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 reforms laws that  regulate  ATMs,  Community
Reinvestment  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  both on the  machine 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
reduces the  frequency of CRA exams for small banks and savings and loans (those
with no more than $250 million in assets).  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 the future.
Finally, the Act expands the prohibition of deposit production offices contained
in the Riegle-Neal  Interstate Banking and Branching Efficiency Act of 1994 (the
"Riegle-Neal  Act") 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"). 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.

Source  of  Strength   Policy.   According  to  Federal  Reserve  Board  policy,
bank/financial  holding  companies  are expected to act as a source of financial
strength to each  subsidiary  bank and to commit  resources to support each such
subsidiary.  This support may be required at times when a bank/financial holding
company may not be able to provide support. Similarly, under the cross-guarantee
provisions of the Federal Deposit Insurance Act, in the event of a loss suffered
or  anticipated  by the FDIC - either as a result  of  default  of a banking  or
thrift  subsidiary of a  bank/financial  holding  company such as the Company or
related to FDIC  assistance  provided to a subsidiary in danger of default - the
other  banking  subsidiaries  of  such  bank/financial  holding  company  may be
assessed for the FDIC's loss, subject to certain exceptions.

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.

                                       6
<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 a  "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 primarily to protect
it from the risk inherent 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
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. 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 banks  maintain
minimum levels of capital to protect the banks and their 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  consists 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.

                                       7
<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 minimum  requirements  for a well  capitalized
organization  experiencing significant growth are a leverage ratio of 5%, a Tier
1 risk-based  capital ratio of 6% and total risk-based  capital ratio of 10%. As
of  December  31,  2002,  the Company  had  regulatory  capital in excess of the
Federal Reserve's minimum and well-capitalized  definition requirements,  with a
leverage  ratio of 8.64%,  with total Tier 1 risk-based  capital ratio of 12.93%
and a total risk-based capital ratio of 14.19%.

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 of Banking of the State of Iowa
(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.

                                       8
<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,  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. State banks normally must have a primary capital to total assets
ratio  of six  and  one-half  percent  (6 1/2  %).  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,  2002,  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" 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, 2002,
the Bank was well capitalized, as defined by FDIC regulations.

Community  Investment and Consumer  Protection  Laws. In the connection with its
lending activities, the Bank is subject to a variety of federal laws designed to
protect  borrowers  and  promote  lending to various  sectors of the economy and
population.  Included among these are the Federal Home Mortgage  Disclosure Act,
Real Estate  Settlement  Procedures  Act,  Truth-in-Lending  Act,  Equal  Credit
Opportunity Act, Fair Credit Reporting Act and Community Reinvestment Act.

The  Community  Reinvestment  Act requires  insured  institutions  to define the
communities that they serve,  identify the credit needs of those communities and
adopt and implement a "Community  Reinvestment Act Statement"  pursuant to which
they offer  credit  products  and take other  actions that respond to the credit
needs of the community.  The responsible  federal banking regulator must conduct
regular   Community   Reinvestment   Act   examinations  of  insured   financial
institutions  and  assign  to  them  a  Community  Reinvestment  Act  rating  of
"outstanding,"  "satisfactory,"  "needs  improvement" and  "unsatisfactory."  In
2002, the Community  Reinvestment Act rating of the Company's banking subsidiary
was either "outstanding" or "satisfactory."

Supervisory  Assessments.  All  Iowa  banks  are  required  to  pay  supervisory
assessments to the Superintendent to fund the  Superintendent's  examination and
supervision operations. During the fiscal year ended December 31, 2002, the Bank
paid supervisory  assessments to the  Superintendent  totaling  $7,952,  for the
period  ending June 30,  2002.  Effective  July 1, 2002 the  Superintendent  has
changed the method of computation of the supervisory assessment from billing for
each  state  examination  completed  based on an hourly  rate,  to billing on an
annual  basis  based on the assets of the bank,  the  expected  hours  needed to
conduct  examinations of that size bank and an additional amount if more work is
required.  It is expected  that the Bank's total  assessment  on an annual basis
will be $100,000. This would be an amount similar to the current assessment in a
year in which a state examination would have been completed. For fiscal 2002 the
assessment total was $40,547.

                                       9
<PAGE>

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,
2002.  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.

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  orders 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 regulatory approval.

Under 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.

                                       10
<PAGE>

Miscellaneous.  The Bank is  subject  to  certain  restrictions  on loans to the
Company or its non-bank subsidiaries,  on investments in the stock or securities
thereof,  on the taking of such stock or securities  as collateral  for loans to
any  borrower,  and on the issuance of a guarantee or letter of credit on behalf
of the  Company or its  non-banking  subsidiaries.  The Bank is also  subject to
certain  restrictions  on most  types of  transactions  with the  Company or its
non-bank  subsidiaries,  requiring  that  the  terms  of  such  transactions  be
substantially  equivalent to terms of similar  transactions with  non-affiliated
firms.

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.

Regulatory  Enforcement  Authority.  The enforcement powers available to federal
and state banking  regulators are substantial  and include,  among other things,
the  ability to assess  civil  money  penalties,  to issue  cease-and-desist  or
removal orders and to initiate injunctive actions against banking  organizations
and  institutions-affiliated  parties, as defined. In general, these enforcement
actions may be initiated for  violations of laws and  regulations  and unsafe or
unsound  practices.  Other  actions  or  inactions  may  provide  the  basis for
enforcement  action,   including  misleading  or  untimely  reports  filed  with
regulatory authorities.

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)
<TABLE>
                                                               December 31,
                                                   ------------------------------------
                                                      2002         2001          2000
                                                   ------------------------------------
                                                            (Amounts In Thousands)
<S>                                                <C>          <C>          <C>
ASSETS
  Cash and due from banks ......................   $   27,815   $   24,493   $   20,347
  Taxable securities ...........................      143,422      132,227      121,499
  Nontaxable securities ........................       56,369       42,783       38,026
  Federal funds sold ...........................       34,827       29,551       11,358
  Loans, net ...................................      733,822      646,196      600,215
  Property and equipment, net ..................       21,598       18,889       13,675
  Other assets .................................       21,650       19,575       16,129
                                                   ------------------------------------
                                                   $1,039,503   $  913,714   $  821,249
                                                   ====================================

LIABILITIES AND STOCKHOLDERS' EQUITY
  Noninterest-bearing demand deposits ..........   $   92,145   $   78,687   $   69,246
  Interest-bearing demand deposits .............       96,054       76,366       66,090
  Savings deposits .............................      194,230      169,561      154,121
  Time deposits ................................      381,973      357,882      309,565
  Securities sold under agreements to repurchase       21,240       17,444       14,665
  FHLB borrowings ..............................      153,543      123,211      128,043
  Other liabilities ............................        6,173        5,924        5,569
  Redeemable common stock held by
    Employee Stock Ownership Plan ..............       12,572       11,872       11,251
  Stockholders' equity .........................       81,573       72,767       62,699
                                                   ------------------------------------
                                                   $1,039,503   $  913,714   $  821,249
                                                   ====================================
</TABLE>

                                       11
<PAGE>

INTEREST INCOME AND EXPENSE

                                                       Year Ended December 31,
                                                     ---------------------------
                                                      2002      2001      2000
                                                     ---------------------------
                                                        (Amounts In Thousands)
Income:
  Loans (1) ......................................   $54,491   $53,121   $50,267
  Taxable securities .............................     7,412     7,670     7,481
  Nontaxable securities (1) ......................     3,433     2,924     2,624
  Federal funds sold .............................       520     1,132       698
                                                     ---------------------------
        Total interest income ....................    65,856    64,847    61,070
                                                     ---------------------------

Expense:
  Interest-bearing demand deposits ...............     1,094     1,412     1,566
  Savings deposits ...............................     2,900     4,611     5,615
  Time deposits ..................................    18,300    20,611    17,690
  Securities sold under agreements to repurchase .       375       617       699
  FHLB borrowings ................................     8,472     7,184     7,494
                                                     ---------------------------
        Total interest expense ...................    31,141    34,435    33,064
                                                     ---------------------------

        Net interest income ......................   $34,715   $30,412   $28,006
                                                     ===========================

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

INTEREST RATES AND INTEREST DIFFERENTIAL


                                                         Year Ended December 31,
                                                         ----------------------
                                                         2002     2001     2000
                                                         ----------------------

Average yields:
  Loans (1) .........................................    7.41%    8.20%    8.34%
  Loans (tax equivalent basis) ......................    7.43     8.22     8.37
  Taxable securities ................................    5.17     5.80     6.15
  Nontaxable securities .............................    4.02     4.51     4.55
  Nontaxable securities (tax equivalent basis) ......    6.09     6.83     6.90
  Federal funds sold ................................    1.49     3.85     6.15
  Interest-bearing demand deposits ..................    1.14     1.85     2.37
  Savings deposits ..................................    1.49     2.72     3.64
  Time deposits .....................................    4.79     5.76     5.71
  Securities sold under agreements to repurchase ....    1.79     3.53     4.77
  FHLB borrowings ...................................    5.52     5.83     5.85
  Yield on average interest-earning assets ..........    6.80     7.62     7.92
  Rate on average interest-bearing liabilities ......    3.68     4.63     4.92
  Net interest spread (2) ...........................    3.12     2.99     3.00
  Net interest margin (3) ...........................    3.58     3.58     3.62

(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.

                                       12
<PAGE>

CHANGES IN INTEREST INCOME AND EXPENSE
<TABLE>
                                                    Changes Due  Changes Due    Total
                                                     To Volume     To Rates    Changes
                                                    ----------------------------------
                                                           (Amounts In Thousands)
<S>                                                 <C>          <C>           <C>
Year ended December 31, 2002:
  Change in interest income:
    Loans ........................................   $ 6,777      $(5,407)     $ 1,370
    Taxable securities ...........................       617         (875)        (258)
    Nont axable securities .......................       852         (343)         509
    Federal funds sold ...........................       177         (789)        (612)
                                                     ---------------------------------
                                                       8,423       (7,414)       1,009
                                                     ---------------------------------
  Change in interest expense:
    Interest-bearing demand deposits .............       308         (626)        (318)
    Savings deposits .............................       598       (2,309)      (1,711)
    Time deposits ................................     1,321       (3,638)      (2,317)
    Securities sold under agreements to repurchase       114         (350)        (236)
    FHLB borrowings ..............................     1,687         (399)       1,288
                                                     ---------------------------------
                                                       4,028       (7,322)      (3,294)
                                                     ---------------------------------
  Change in net interest income ..................   $ 4,395      $   (92)     $ 4,303
                                                     =================================

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
                                                     =================================
</TABLE>

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

LOANS

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

                                                 December 31,
                            ----------------------------------------------------
                              2002       2001       2000       1999       1998
                            ----------------------------------------------------
                                            (Amounts In Thousands)

Agricultural ............   $ 37,937   $ 34,304   $ 28,560   $ 27,302   $ 32,318
Commercial and financial      46,828     44,363     37,832     36,848     39,438
Real estate, construction     47,201     40,430     38,184     40,879     28,476
Real estate, mortgage ...    628,110    538,832    499,010    439,072    338,871
Loans to individuals ....     32,906     34,713     33,715     31,030     30,664
                            ----------------------------------------------------
        Total ...........   $792,982   $692,642   $637,301   $575,131   $469,767
                            ====================================================

                                       13
<PAGE>

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

MATURITY DISTRIBUTION OF LOANS

The following table shows the principal payments due on loans as of December 31,
2002:
<TABLE>
                                          Amount    One Year      One To    Over Five
                                         Of Loans  Or Less (1)  Five Years    Years
                                         --------------------------------------------
                                                   (Amounts In Thousands)
<S>                                      <C>       <C>          <C>         <C>
Commercial, financial and agricultural   $ 84,765   $ 46,961     $ 33,574    $  4,230
Real estate, construction and mortgage    675,311     82,051      216,792     376,468
Other ................................     32,906     15,328       17,230         348
                                         --------------------------------------------
                                         $792,982   $144,340     $267,596    $381,046
                                         ============================================
</TABLE>

The types of interest  rates  applicable to these  principal  payments are shown
below:

                               Amount       One Year       One To      Over Five
                              Of Loans     Or Less (1)   Five Years       Years
                              --------------------------------------------------
                                                   (Amounts In Thousands)

Fixed rate .............      $385,085      $ 92,665      $253,985      $ 38,435
Variable rate ..........       407,897        51,675        13,611       342,611
                              --------------------------------------------------
                              $792,982      $144,340      $267,596      $381,046
                              ==================================================

(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.

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:

                                  2002      2001      2000      1999      1998
                                 -----------------------------------------------
                                              (Amounts In Thousands)

Nonaccrual loans .............   $ 1,538   $ 1,001   $   618   $    --   $    12
Accruing loans past due
  90 days or more ............     2,516     2,921     2,143     1,320       945
Restructured loans ...........       --        --        --        --        --
Impaired loans ...............    16,261    11,288    11,068     9,265     8,956

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.

Impaired  loans  increased  as of December  31, 2002 from  December  31, 2001 by
$4,973,000.  The increase was  primarily  related to swine  production  loans of
$3,212,000  and other  agricultural  loans  that are  impaired  which  increased
$1,543,000.

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.

                                       14
<PAGE>

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,
                                       ---------------------------------------------------
                                         2002      2001       2000       1999       1998
                                       ---------------------------------------------------
                                                   (Amounts In Thousands)
<S>                                    <C>        <C>        <C>        <C>        <C>
Allowance for loan losses
  at beginning of year .............   $ 9,950    $10,428    $ 9,750    $ 8,856    $ 8,010
                                       ---------------------------------------------------
Charge-offs:
  Agriculture ......................        33         35         26         60          4
  Commercial and financial .........       562      1,225        522        181        431
  Real estate, mortgage ............       390        557        254        104        132
  Loans to individuals .............       803        724        372        418        401
                                       ---------------------------------------------------
                                         1,788      2,541      1,174        763        968
                                       ---------------------------------------------------
Recoveries:
  Agriculture ......................       116         72        153        157        125
  Commercial and financial .........       371        289        276        260        256
  Real estate, mortgage ............       402        362        118         30        100
  Loans to individuals .............       625        416        357        310        417
                                       ---------------------------------------------------
                                         1,514      1,139        904        757        898
                                       ---------------------------------------------------
Net charge-offs ....................       274      1,402        270          6         70
                                       ---------------------------------------------------
Provision for loan losses (1) ......     2,449        924        948        900        916
                                       ---------------------------------------------------
Allowance for loan losses
  at end of year ...................   $12,125    $ 9,950    $10,428    $ 9,750    $ 8,856
                                       ===================================================

Ratio of net charge-offs during year
  to average loans outstanding .....      0.04%      0.22%      0.04%      0.00%      0.02%
                                       ===================================================
<FN>
(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 the 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.  It is not expected at this time that the provision for loan losses
     will  have  material  increases  in 2003  related  to  agricultural  loans,
     primarily swine  production.  However the Company will continue to evaluate
     the loan portfolio on a quarterly basis.
</FN>
</TABLE>

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 Bank allocates 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.

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,
2002).

                                       15
<PAGE>

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, 2002 and 2001:
<TABLE>
                                              2002                      2001
                                      ---------------------------------------------------
                                                  % Of Loans                 % Of Loans
                                      Amount    To Total Loans    Amount   To Total Loans
                                      ---------------------------------------------------
                                         (In Thousands)             (In Thousands)
<S>                                   <C>       <C>               <C>      <C>
Agriculture ......................    $ 2,219        4.78%        $ 1,032       4.95%
Commercial .......................      1,374        5.91           1,714       6.40
Real estate, construction ........        975        5.95             770       5.84
Real estate ......................      6,638       79.21           5,722      77.80
Consumer .........................        919        4.15             712       5.01
                                      -----------------------------------------------
                                      $12,125      100.00%        $ 9,950     100.00%
                                      ===============================================
</TABLE>

In reviewing the  allocation of the  allowance for loan losses  changes  between
2002 and 2001 in the various risk categories of loans,  the largest change is in
the agriculture area that increased  $1,187,000.  This change is principally due
to swine  production  loans, and an increase in the volume of loans that are now
classified as watch or potential  watch  increasing  $3.3 million.  In addition,
substandard  loans  relating to swine  production  increased  to $4.9 million at
December  31, 2002 from $1.4  million at December  31,  2001.  Hog prices  while
averaging  $44.50 and $46.57 per hundred  weight in 2000 and 2001  dropped to an
average of $34.34 in 2002,  with the average  breakeven  in the  industry  being
approximately $40.00 per hundred weight loan loss exposure exists in these types
of loans.

The other large change in the allowance occurred for real estate loans. Net real
estate mortgage loans outstanding  increased from $538.8 million at December 31,
2001 to $628.1  million at December 31, 2002.  The  allowance  related to 1 to 4
family real estate loan risk category increased $625,000 and the commercial real
estate loan allocation  increased  $471,000.  The loss rate allocation for these
types of loans increased  slightly  between years as past due loans over 90 days
and  nonperforming  1 to 4 family loans at December 31, 2002 were $2.3  million.
Approximately  $520,000  of the  increases  for these  loans were due to the net
increases in loans of $89.3 million between years.

Anticipated charge-offs of the above categories are not determinable at December
31, 2002; however, management does not believe there are any categories of loans
where future charge-offs are likely to be higher than the allowances provided.

INVESTMENT SECURITIES

The following tables show the carrying value of the investment  securities which
are principally  held by the Bank as of December 31, 2002, 2001 and 2000 and the
maturities  and  weighted  average  yield  of the  investment  securities  as of
December 31, 2002:

                                                            December 31,
                                                  ------------------------------
                                                    2002       2001       2000
                                                  ------------------------------
                                                      (Amounts In Thousands)
Carrying value:
U. S. Treasury securities .....................   $  6,365   $ 12,073   $ 18,318
Obligations of other U. S. Government
agencies and corporations .....................    134,936    123,165     95,036
Obligations of state and political subdivisions     64,528     46,913     39,923
                                                  ------------------------------
                                                  $205,829   $182,151   $153,277
                                                  ==============================

                                       16
<PAGE>
<TABLE>
                                                                                    December 31, 2002
                                                                               -------------------------
                                                                                                Weighted
                                                                               Carrying          Average
                                                                                 Value            Yield
                                                                               -------------------------
                                                                                 (Amounts In Thousands)
<S>                                                                            <C>              <C>
Type and maturity grouping:
  U. S. Treasury maturities:
    Within 1 year ..........................................................   $  2,018            5.82%
    From 1 to 5 years ......................................................      4,347            6.60
                                                                               --------
                                                                                  6,365
                                                                               --------

Obligations of other U. S. Government agencies and corporations, maturities:
  Within 1 year ............................................................     32,744            5.31%
  From 1 to 5 years ........................................................    102,192            4.70
                                                                               --------
                                                                                134,936
                                                                               --------

Obligations of state and political subdivisions, maturities:
  Within 1 year ............................................................     12,507            4.35%
  From 1 to 5 years ........................................................     31,824            5.92
  From 5 to 10 years .......................................................     19,697            5.94
  Over 10 years ............................................................        500            6.26
                                                                               --------
                                                                                 64,528
                                                                               --------
        Total ..............................................................   $205,829
                                                                               ========
</TABLE>

INVESTMENT SECURITIES

As of December 31, 2002, 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%.

DEPOSITS

The following  tables show the amount of average deposits and rates paid on such
deposits  for  the  years  ended  December  31,  2002,  2001  and  2000  and the
composition of the  certificates of deposit issued in denominations in excess of
$100,000 as of December 31, 2002:
<TABLE>
                                                                December 31,
                                       -----------------------------------------------------------
                                         2002      Rate       2001      Rate       2000      Rate
                                       -----------------------------------------------------------
<S>                                     <C>        <C>      <C>         <C>      <C>         <C>
Average noninterest-bearing deposits   $ 92,145    0.00%    $ 78,687    0.00%    $ 69,246    0.00%
Average interest-bearing demand
  deposits .........................     96,054    1.14       76,366    1.85       66,090    2.37
Average savings deposits ...........    194,230    1.49      169,561    2.72      154,121    3.64
Average time deposits ..............    381,973    4.79      357,882    5.76      309,565    5.71
                                       --------             --------             --------
                                       $764,402             $682,496             $599,022
                                       ========             ========             ========

Time certificates issued in amounts
  of $100,000 or more as of             Amount     Rate
  December 31, 2002 with               -----------------
  maturity in:
  3 months or less .................   $ 11,589    4.29%
  3 through 6 months ...............      7,779    3.73
  6 through 12 months ..............     11,168    3.23
  Over 12 months ...................     30,000    4.11
                                       --------
                                       $ 60,536
                                       ========
</TABLE>

                                       17
<PAGE>

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, 2002, 2001 and 2000:
<TABLE>
                                                                  December 31,
                                                           ------------------------
                                                            2002     2001     2000
                                                           ------------------------
<S>                                                        <C>      <C>      <C>
Return on average assets ............................       1.10%    1.11%    1.14%
Return on average stockholders' equity ..............      14.05    13.94    14.94
Dividend payout ratio ...............................      22.87    23.58    23.18
Average stockholders' equity to average assets ratio        7.85     7.96     7.63
</TABLE>

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 during 2002, 2001 and 2000:

                                                   2002       2001        2000
                                                  ------------------------------
                                                      (Amounts In Thousands)

Outstanding balance as of December 31 .........   $20,798    $22,409    $16,561
Weighted average interest rate at year end ....      1.52%      2.36%      4.80%
Maximum month-end balance .....................    28,882     22,711     16,678
Average month-end balance .....................    21,240     17,444     14,665
Weighted average interest rate for the year ...     1.79%      3.53%      4.77%

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 2002, 2001 and 2000:

                                                 2002        2001        2000
                                               ---------------------------------
                                                   (Amounts In Thousands)

Outstanding balance as of December 31 ......   $167,606    $137,637    $120,668
Weighted average interest rate at year end .      5.35%       5.57%       5.79%
Maximum month-end balance ..................    167,637     137,637     148,700
Average month-end balance ..................    153,543     123,211     128,043
Weighted average interest rate for the year       5.52%       5.83%       5.85%

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, the Bank completed a two-story brick addition in February
2001.  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  previously were located in the Bank's  Coralville
office.  As a result of the  consolidation,  sixty-five  full-time and part-time
employees were relocated.

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

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

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

                                       18
<PAGE>

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 March of 2002,  Hills Bank opened its  eleventh  office,  and the second
     office location in the Cedar Rapids market.  The new 11. In August of 2002,
     Hills Bank and Trust  Company  began an  extensive  remodeling  of property
     located at 800 11th  Street in  Marion,  Iowa.  The  office is a  two-story
     building having  approximately  8,400 square feet with three drive-up lanes
     and a drive-up ATM. The full service office opened on February 10, 2003.

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, 2002.

                                       19
<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 17, 2003, the Company had 1,366 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
-------------------------------------------------------------------

2002         16,917             22         $ 88.00          $ 82.00
2001          9,273             28           82.00            77.00
2000         14,187             16           77.00            70.00

The Company  paid  aggregate  annual cash  dividends  in 2002,  2001 and 2000 of
$2,622,000, $2,392,000 and $2,171,000, respectively, or $1.75 per share in 2002,
$1.60  per  share in 2001 and $1.45 per  share in 2000.  In  January  2003,  the
Company declared and paid a dividend of $1.90 per share totaling $2,852,000. 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, 2002, stock option information is as follows:

Number of shares that would be issued if all options were exercised       27,815

Weighted average price of options outstanding                            $ 46.99

Number of additional shares that could be granted                         53,156

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

                                       20
<PAGE>

PART II

Item 6.   Selected Financial Data

CONSOLIDATED FIVE-YEAR STATISTICAL SUMMARY
<TABLE>

                                             2002            2001             2000          1999            1998
                                         ---------------------------------------------------------------------------
<S>                                      <C>             <C>             <C>             <C>             <C>
YEAR-END TOTALS (Amounts in Thousands)
  Total assets .......................   $ 1,098,547     $   976,105     $   875,750     $   773,966     $   689,787
  Investment securities ..............       214,211         189,960         161,066         156,198         149,350
  Federal funds sold .................        32,514          29,428          28,065             206          36,811
  Loans, net .........................       780,857         682,692         626,873         565,381         460,911
  Deposits ...........................       802,321         720,018         652,706         562,086         534,151
  Federal Home Loan Bank borrowings ..       167,606         137,637         120,668         108,700          75,732
  Redeemable common stock ............        12,951          12,194          11,550          10,953           9,301
  Stockholders' equity ...............        88,084          78,155          68,524          60,264          56,452

EARNINGS (Amounts in Thousands)
  Interest income ....................   $    64,561     $    63,718     $    59,992     $    51,121     $    47,289
  Interest expense ...................        31,141          34,435          33,064          26,313          25,254
  Provision for loan losses ..........         2,449             924             948             900             916
  Other income .......................        10,230           9,257           7,514           6,437           5,811
  Other expenses .....................        24,615          22,859          20,069          18,309          16,438
  Applicable income taxes ............         5,122           4,613           4,059           3,570           3,006
  Net income .........................        11,464          10,144           9,366           8,466           7,486

PER SHARE Net income:
  Basic ..............................   $      7.65     $      6.78     $      6.26     $      5.70     $      5.10
  Diluted ............................          7.58            6.72            6.21            5.66            5.02
  Cash dividends .....................          1.75            1.60            1.45            1.30            1.20
  Book value as of December 31 .......         58.68           52.15           45.82           40.29           38.42
  Increase (decrease) in book value
   due to:
  ESOP obligation ....................         (8.63)          (8.14)          (7.72)          (7.32)          (6.33)
  Accumulated other
    comprehensive income .............          3.15            2.02            0.47           (0.66)           0.81

SELECTED RATIOS
  Return on average assets ...........          1.10%           1.11%           1.14%           1.18%           1.17%
  Return on average equity ...........         14.05           13.94           14.94           14.54           14.12
  Net interest margin ................          3.58            3.58            3.62            3.83            3.81
  Average stockholders' equity to
   average total assets ..............          7.85            7.96            7.63            8.11            8.25
  Dividend payout ratio ..............         22.87           23.58           23.18           22.56           23.52
</TABLE>

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.

                                       21
<PAGE>

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.

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.

Critical Accounting Policies

The Company's  financial  statements are prepared in accordance  with accounting
principles  generally  accepted in the United  States of America.  The financial
information  contained  within these  statements  is, to a  significant  extent,
financial  information  that is based on  approximate  measures of the financial
effects of  transactions  and events that have  already  occurred.  Based on its
consideration  of  accounting   policies  that  involve  the  most  complex  and
subjective  decisions  and  assessments,  management  has  identified  its  most
critical  accounting policy to be related to the allowance for loan losses.  The
Company's  allowance for loan loss  methodology  incorporates  a variety of risk
considerations,  both  quantitative and qualitative in establishing an allowance
for loan loss that  management  believes is appropriate at each reporting  date.
Quantitative   factors  include  the  Company's   historical  loss   experience,
delinquency and charge-off trends,  collateral values,  changes in nonperforming
loans,  and  other  factors.   Quantitative   factors  also  incorporate   known
information about individual loans, including borrowers' sensitivity to interest
rate movements.  Qualitative factors include the general economic environment in
the Company's markets,  including economic conditions throughout the Midwest and
in  particular,  the  state  of  certain  industries.  Size  and  complexity  of
individual  credits in relation to loan  structure,  existing  loan policies and
pace of portfolio  growth are other  qualitative  factors that are considered in
the  methodology.  As the Company adds new products and increases the complexity
of its  loan  portfolio,  it will  enhance  its  methodology  accordingly.  This
discussion  and  analysis  should  be read in  conjunction  with  the  Company's
financial  statements and the accompanying notes presented  elsewhere herein, as
well as the  portion  of  this  Management's  Discussion  and  Analysis  section
entitled "Financial Condition - Allowance for Loan Losses".  Although management
believes the levels of the  allowance as of both December 31, 2002 and 2001 were
adequate to absorb  losses  inherent in the loan  portfolio,  a decline in local
economic  conditions,  or other factors,  could result in increasing losses that
cannot be reasonably predicted at this time.

                                       22
<PAGE>

The Company's other critical  accounting policies that affect net income are the
accrual of interest  income and expense.  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
when there is  reasonable  doubt  about the  borrower's  ability to make all the
principal  and  interest  payments.  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 (Amounts
    In Thousands)                       2002         2001         2000         1999        1998
---------------------------------------------------------------------------------------------------
<S>                                  <C>          <C>          <C>          <C>          <C>
Loans, net of allowance for losses   $  780,857   $  682,692   $  626,873   $  565,381   $  460,911
Investment securities ............      214,211      189,960      161,066      156,198      149,350
Deposits .........................      802,321      720,018      652,706      562,086      534,151
Federal Home Loan Bank borrowings       167,606      137,637      120,668      108,700       75,732
Stockholders' equity .............       88,084       78,155       68,524       60,264       56,452
Total assets .....................    1,098,547      976,105      875,750      773,966      689,787
</TABLE>

In 2002, total assets grew $122.4 million,  ahead of the record growth of $101.8
million for 2000.  The  percentage  increase in total assets was 12.54% in 2002,
compared to 11.46% in 2001. Asset growth for both years was primarily  reflected
in higher loan balances and investment securities.

In 2002, net loans  increased by $98.2 million,  including $96.0 million in real
estate loans.  For the year 2001, net loans increased  $55.8 million,  and $42.1
million  of the  increase  was  attributable  to  real  estate  mortgage  loans.
Declining  interest rates in both 2002 and 2001 with forty year lows have helped
housing  starts and new real estate  development  projects  in the Bank's  trade
territory.

Deposits increased $82.3 million,  or 11.43 % in 2002 compared to an increase of
10.31% in 2001. After several years of slower deposit growth, the past two years
have seen  substantial  deposit  growth.  In 2002,  the increase in net deposits
resulted from continued uncertainties in the stock market that has led investors
to move their funds to bank  deposits.  The  addition and  renovation  of branch
banks has  assisted  in  bringing  new  customers  to the Bank  with two  recent
additions in Cedar Rapids,  Iowa, one established in 2000 and the other in early
2002. In 2002 and 2001, the Company has also borrowed from the Federal Home Loan
Bank, and such borrowings increased by a net $30 million in 2002 and $17 million
in 2001.  The  advances  were used to fund loan growth and lock in low  interest
rates.

Components of Diluted Earnings Per Share
<TABLE>
                                                  2002         2001         2000
                                               -----------------------------------
<S>                                            <C>          <C>          <C>
Net interest income .....................      $   22.11    $   19.40    $   17.85
Provision for loan losses ...............          (1.62)       (0.61)       (0.63)
Noninterest income ......................           6.77         6.13         4.98
Noninterest expense .....................         (16.29)      (15.14)      (13.30)
                                               -----------------------------------
        Income before income taxes ......          10.97         9.78         8.90
Income tax expense ......................          (3.39)       (3.06)       (2.69)
                                               -----------------------------------
        Net income ......................      $    7.58    $    6.72    $    6.21
                                               ===================================
</TABLE>

Net income for 2002 reached a record high of  $11,464,000,  or diluted  earnings
per share of $7.58.  The rate of increase in earnings in 2002 is 13.01% compared
to 8.31% in 2001. For 2002, diluted earnings per share increased $.86 per share,
while 2001 results had increased $.51 per share. For the year ended December 31,
2001, net income increased by $778,000 from the 2000 results.  For both 2002 and
2001, the Company's net interest income has benefited from substantial growth in
average earning assets and a stable net interest margin.

The Company has 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.
However, in 2002 the provision for loan losses was substantially  higher than in
2001 and 2000 and is discussed in the provision for loan losses section.

                                       23
<PAGE>

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 2002 as follows:
<TABLE>
                                                                      Increase (Decrease)
                                          Change In  Change In   -----------------------------
                                           Average    Average    Volume      Rate        Net
                                           Balance      Rate     Changes    Changes     Change
                                          ----------------------------------------------------
                                                         (Amounts In Thousands)
<S>                                       <C>        <C>         <C>        <C>        <C>
Interest income:
  Loans, net ...........................   $ 87,626    (0.79)%   $ 6,777    $(5,407)   $ 1,370
  Taxable securities ...................     11,195    (0.63)        617       (875)   $  (258)
  Nontaxable securities ................     13,586    (0.74)        852       (343)   $   509
  Federal funds sold ...................      5,276    (2.36)        177       (789)   $  (612)
                                           ---------------------------------------------------
                                           $117,683              $ 8,423    $(7,414)   $ 1,009
                                           --------              -----------------------------
Interest expense:
  Interest-bearing demand deposits .....   $19,688     (0.71)%       308       (626)      (318)
  Savings deposits .....................    24,669     (1.23)        598     (2,309)    (1,711)
  Time deposits ........................    24,091     (0.97)      1,321     (3,638)    (2,317)
  Federal funds purchased and securities
    sold under agreements to repurchase      3,796     (1.74)        114       (350)      (236)
  FHLB borrowings ......................    30,332     (0.31)      1,687       (399)     1,288
                                          --------               -----------------------------
                                          $102,576               $ 4,028    $(7,322)   $(3,294)
                                          --------               -----------------------------
Change in net interest income ..........                         $ 4,395    $   (92)   $ 4,303
                                                                 =============================
</TABLE>

Net interest income changes for 2001 were as follows:

                                     Change In   Effect Of  Effect Of
                                      Average     Volume      Rate         Net
                                      Balance     Changes    Changes     Change
                                     -------------------------------------------
                                                (Amounts In Thousands)
Interest-earning assets ..........   $79,659     $ 5,504     $(1,727)    $ 3,777
Interest-bearing liabilities .....    71,980       3,344      (1,973)    $ 1,371
                                                 -------------------------------
Change in net interest income ....               $ 2,160     $   246     $ 2,406
                                                 ===============================

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

(Tax Equivalent Basis)                                     2002    2001    2000
--------------------------------------------------------------------------------

Yield on average interest-earning assets .............     6.80%   7.62%   7.92%
Rate on average interest-bearing liabilities .........     3.68    4.63    4.92
                                                           ---------------------
Net interest spread ..................................     3.12    2.99    3.00
Effect of noninterest-bearing funds ..................     0.46    0.59    0.62
                                                           ---------------------
Net interest margin (tax equivalent interest income
  divided by average interest-earning assets) ........     3.58%   3.58%   3.62%
                                                           =====================

Provision For Loan Losses

The  provision  for loan losses  totaled  $2,449,000,  $924,000 and $948,000 for
2002, 2001 and 2000, respectively. Charge-offs, net of recoveries, were $274,000
for 2002, $1,402,000 for 2001 and $270,000 for 2000, respectively.  Although net
charge-offs  for 2002  decreased  from the prior year,  the  provision  for loan
losses  increased to reflect the estimated  loan losses in the loan portfolio at
December 31, 2002.

                                       24
<PAGE>

The allowance for loan losses totaled  $12,125,000 at December 31, 2002 compared
to  $9,950,000  at  December  31,  2001.  The  percentage  of the  allowance  to
outstanding   loans  was  1.53%  and  1.44%  at  December  31,  2002  and  2001,
respectively.   The  increase  in  the  allowance  was  based  on   management's
consideration of a number of factors, including loan concentrations,  loans with
higher  credit  risks   (primarily   agriculture   loan  and  spec  real  estate
construction)  and overall increases in net loans  outstanding.  The methodology
used in 2002 is  consistent  with the prior year.  Beginning  in 2001,  the Bank
refined the methodology used to compute the allowance for loan losses, primarily
by applying  estimated loss rates to several risk categories of loans instead of
more  general  categories  of  loans.  The  estimated  loss  rates  used in 2001
increased because management  believes 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.

Agricultural loans totaled  $37,937,000 and $34,304,000 at December 31, 2002 and
2001,  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.  In
particular,  loans that are in the swine  production  segment  continue to be of
major concern as prices for hogs are subject to severe fluctuations.  Therefore,
the allowance for loan losses includes  general and specific  reserves for these
loans.

The  University  of Iowa has a dominant  economic  effect on the  economy of the
Bank's  primary trade area,  Johnson  County,  Iowa,  and in 2002 and 2001,  the
University  has helped the local  economy  remain  strong even when the national
economy has  experienced  weaknesses.  However,  in the last fifteen  months the
economy of the state of Iowa has weakened and the University continues to suffer
from budget  cuts.  For its fiscal year  beginning  July 1, 2003 the  University
expects continued budget constraints.  The possible effects on the local economy
cannot be predicted, but are likely to weaken the economy in future years.

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,  the
possibility  of sharply  higher  interest rates could affect the ability of some
borrowers to make scheduled interest and principal  payments.  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                2002        2001        2000
--------------------------------------------------------------------------------

Real estate origination fees ...............    $   1.32    $   0.77    $   0.21
Trust fees .................................        1.56        1.59        1.58
Deposit account charges and fees ...........        2.18        2.06        1.70
Other fees and charges .....................        1.71        1.71        1.49
                                                --------------------------------
                                                $   6.77    $   6.13    $   4.98
                                                ================================

In 2002, the Company's  total other income  increased  $973,000  compared to the
prior year.  Real estate  origination  fee revenue for 2002  increased  over the
prior  year by  $826,000  due to  continued  low  interest  rates  that  enabled
borrowers to re-finance. Interest rates on secondary market loans averaged under
6.50% the last  half of 2002  compared  to 7.10% in 2001 and  8.20% in 2000.  In
addition,  the increase in customer deposit accounts,  along with changes in the
fee structure,  accounted for a $189,000 increase in deposit account charges and
fees. Trust fees in 2002 were virtually unchanged from 2001, a $47,000 increase.
The  number  of  trust  accounts  under  management  increased  in 2002  but the
continued  decline in stock  values had the effect of reducing  trust fees which
are based on asset  value.  Approximately  47% of the trust  assets  are held in
common stock and the major stock market averages declined in 2002 (including the
Dow Jones Industrial  Average which was down  approximately 16% in 2002).  Total
other income reached a record high of $6.77 per share in 2002.

                                       25
<PAGE>

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.

Other Expenses

Dollars Per Share, Based on Weighted
Average Diluted Shares Outstanding                2002       2001         2000
--------------------------------------------------------------------------------

Salaries and employees benefits ............   $    9.05   $    7.86   $    7.06
Occupancy ..................................        1.20        1.21        0.94
Furniture and equipment ....................        1.91        1.86        1.43
Office supplies and postage ................        0.77        0.79        0.75
Other ......................................        3.36        3.42        3.12
                                               ---------------------------------
                                               $   16.29   $   15.14   $   13.30
                                               =================================

Other  expenses  increased  $1,756,000 in 2002.  Of the  increase,  salaries and
benefits accounted for $1,804,000, occupancy and furniture and equipment expense
accounted for $76,000 of the increase and all other expenses decreased $124,000.
The  salaries  and  employee  benefits  increased  as a direct  result of salary
adjustments for 2002 and staff additions  primarily at the new office locations.
Total full-time equivalent employees increased between years by twenty-four. The
benefits  include  a  $150,000  increase  in  medical  insurance  costs  due  to
increasing  medical costs.  The increased  occupancy and furniture and equipment
expense was the result of new locations  added and new equipment  purchases both
in 2001 and 2002. Other expenses  decreased  $124,000 between 2001 and 2002. The
other expenses in 2001 included $261,000 for amortization of intangible  assets,
which consisted  principally of goodwill,  equal to 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.  As discussed in the section of Impact
of  Recently  Issued  Accounting  Standards  amortization  of  goodwill  with an
indefinite life was suspended on January 1, 2002.

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.

Income Taxes

Income tax expense was $5,122,000, $4,613,000 and $4,059,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.  The corresponding percentage of
income taxes compared to income before income taxes is 30.88% in 2002, 31.26% in
2001 and 30.23% in 2000.

Impact of Recently Issued Accounting Standards

The  FASB has  issued  Statement  No.  143,  "Accounting  for  Asset  Retirement
Obligations"  which  requires  that the fair value of a  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.
For  the  Company,   the  Statement  is  effective  January  1,  2003,  but  its
implementation will not have any impact on the financial statements.

The FASB has issued Statement No. 145, "Rescission of FASB Statements No. 4, 44,
and 64,  Amendment of FASB  Statement No. 13, and Technical  Corrections."  This
statement  is  applicable  to debt  extinguishments  and  their  classification;
certain  sale-leaseback  transactions  and intangible  assets of motor carriers.
Implementation  of these  provisions  of the  Statement had no effect and is not
expected to have a material impact on the Company's financial statements.

The FASB has issued Statement No.146, "Accounting for Costs Associated with Exit
or Disposal  Activities." The provisions of the Statement are effective for exit
or  disposal   activities   that  are   initiated   after   December  31,  2002.
Implementation of the Statement is not expected to have a material impact on the
Company's financial statements.


                                       26
<PAGE>

The  FASB  has  issued  Interpretation  No.  45,  "Guarantor's   Accounting  and
Disclosure  Requirements  for  Guarantees,   Including  Indirect  Guarantees  of
Indebtedness of Others" - an interpretation of FASB Statements No. 5, 57 and 107
and rescission of FASB Interpretation No. 34." This Interpretation elaborates on
the  disclosures  to be made by a guarantor in its interim and annual  financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize,  at the inception of a
guarantee,  a  liability  for the fair  value of the  obligation  undertaken  in
issuing the guarantee.  The initial  recognition and  measurement  provisions of
this  Interpretation  are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002.  Implementation  of these provisions of the
Interpretation  is not  expected  to have a  material  impact  on the  Company's
consolidated   financial   statements.   The  disclosure   requirements  of  the
Interpretation  are  effective  for  financial  statements  of interim or annual
periods   ending  after  December  15,  2002,  and  have  been  adopted  in  the
consolidated financial statements for December 31, 2002.

Interest Rate Sensitivity and Liquidity Analysis

At December 31, 2002,  the  Company's  interest  rate  sensitivity  report is as
follows (amounts 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    $   32,514    $       --    $       --    $       --   $       --   $       --   $   32,514
  Investment
    securities ......         --           4,665         4,600        20,323       16,647      167,976      214,211
  Loans .............         --          63,518        25,582        28,816       68,869      606,197      792,982
                        -------------------------------------------------------------------------------------------
        Total .......       32,514        68,183        30,182        49,139       85,516      774,173    1,039,707
                        -------------------------------------------------------------------------------------------
Sources of funds:
  Interest-bearing
    checking and
    savings accounts       118,463            --            --            --           --      181,842      300,305
  Certificates of
    deposit .........           --        24,883        48,302        39,759       61,651      219,589      394,184
  Other borrowings -
    FHLB ............           --        60,000        30,000            --           --       77,606      167,606
  Repurchase
    agreements and
    federal funds ...       20,798            --            --            --           --           --       20,798
                        -------------------------------------------------------------------------------------------
                           139,261        84,883        78,302        39,759       61,651      479,037      882,893
Other sources,
  primarily
  noninterest-
  bearing ...........           --            --            --            --           --      107,833      107,833
                        -------------------------------------------------------------------------------------------
        Total sources      139,261        84,883        78,302        39,759       61,651      586,870      990,726
                        -------------------------------------------------------------------------------------------
Repricing
  differences .......   $ (106,747)   $  (16,700)   $  (48,120)   $    9,380   $   23,865   $  187,303   $   48,981
                        ===========================================================================================
</TABLE>

                                       27
<PAGE>

The  table  set  forth  above   includes   the   portion  of  the   balances  in
interest-bearing checking, savings and money market accounts that management has
estimated to mature  within on 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 $1,856,000 as of
December 31, 2002. In 2002, the holding company received dividends of $2,623,000
from  its  subsidiary  bank  and  used  those  funds  to  pay  dividends  to its
stockholders of $2,622,000.

As of December 31, 2002 and 2001, stockholders' equity, before deducting for the
maximum cash  obligation  related to ESOP,  was  $101,035,000  and  $90,349,000,
respectively.  This  measure of equity as a percent of total assets was 9.20% at
December 31, 2002 and 9.26% at December 31, 2001. As of December 31, 2002, total
equity  was 8.02% of assets  compared  to 8.01% 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 $6,092,000 as of December 31, 2002.

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,  2002,   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 weighting
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.

                                       28
<PAGE>

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, 2002,  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, 2002 and the minimum
regulatory  requirements  for the  Company  and the  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, 2002:
  Company:
    Total risk based capital ..........    $102,921       14.19%    8.00%           10.00%
    Tier 1 risk based capital .........      93,814       12.93     4.00             6.00
    Leverage ratio ....................                    8.64     3.00             5.00
  Bank:
    Total risk based capital ..........     100,288       13.84     8.00            10.00
    Tier 1 risk based capital .........      91,189       12.58     4.00             6.00
    Leverage ratio ....................                    8.41     3.00             5.00
</TABLE>

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

On a consolidated basis, 2002 cash flows from operations  provided  $15,972,000,
net  increases  in deposits  provided  $82,303,000  and  Federal  Home Loan Bank
borrowings provided $30,000,000.  These cash flows were invested in net loans of
$100,614,000,  net  securities  of  $21,984,000  and net  federal  funds sold of
$3,086,000. In addition, $2,819,000 was used to purchase property and equipment.

At December 31, 2002, the Bank had total outstanding loan commitments and unused
portions of lines of credit totaling $112,260,000.  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, 2002, the Bank estimates  that 2003  additional  construction
expenditures for the new office on 11th Street in Marion,  Iowa, to be completed
in 2003 will total $456,000 and will not require outside financing.

                                       29
<PAGE>

PART II

Item 7A.   Quantitative and Qualitative Disclosures About Market Risk

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, 2002 and 2001,  loan  balances to
related   individuals  and  businesses  totaled   $27,813,000  and  $24,440,000,
respectively.  Deposits from related  parties totaled $ 6,599,000 and $5,884,000
as of December 31, 2002 and 2001, 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.

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.

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
tend to reduce  net  interest  income  because  the  resulting  increase  in the
Company's  cost of funds would not be  immediately  offset by an increase in its
yield on earning  assets.  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.

                                       30
<PAGE>

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>
                          2003           2004          2005          2006           2007       Thereafter     Total    Fair Value
                      -----------------------------------------------------------------------------------------------------------
                                                              (Amounts In Thousands)
<S>                   <C>            <C>            <C>           <C>           <C>           <C>            <C>         <C>
Assets:
  Loans, fixed:
    Balance .......   $    92,665    $    53,298    $   42,625    $   77,505    $   80,557    $    38,435    $385,085    $431,501
    Average
      interest rate         6.86%          7.45%         7.36%         6.86%         7.05%          6.84%       7.04%

Loans, variable:
  Balance .........   $    51,675    $     4,812    $    2,054    $    2,333    $    4,412    $   342,611    $407,897    $407,897
  Average
    interest rate .         6.72%          6.32%         6.57%         6.77%         6.55%          6.61%       6.62%

Investments (1):
  Balance .........   $    78,749    $    37,967    $   61,647    $   21,392    $   16,757    $    30,213    $246,725    $247,006
  Average
    interest rate .         3.44%          5.83%         4.99%         4.51%         4.51%          5.30%       4.59%

Liabilities:
  Liquid
    deposits (2):
  Balance .........   $   300,304    $        --    $       --    $       --    $       --    $        --    $300,304    $300,304
  Average
    interest rate .         1.22%                                                                               1.22%

Deposits,
  certificates:
  Balance .........   $   174,595    $   132,283    $   17,726    $   36,336    $   33,244    $        --    $394,184    $373,793
  Average
    interest rate .         3.90%          3.74%         4.09%         4.41%         4.67%          0.00%       3.97%
<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 42 through
70.


                                       31
<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, 2002 and 2001, and the related
consolidated  statements of income,  comprehensive income,  stockholders' equity
and cash flows for the years  ended  December  31,  2002,  2001 and 2000.  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,  2002 and 2001,  and the  results of their
operations and their cash flows for the years ended December 31, 2002,  2001 and
2000 in conformity with accounting  principles  generally accepted in the United
States of America.


/s/ McGladrey & Pullen, LLP
---------------------------

Iowa City, Iowa
February 25, 2003

                                       32
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED BALANCE SHEETS

December 31, 2002 and 2001
(Amounts In Thousands, Except Shares)
<TABLE>
ASSETS                                                                   2002         2001
---------------------------------------------------------------------------------------------
<S>                                                                   <C>          <C>
Cash and due from banks (Note 9) ..................................   $   32,647   $   37,070
Investment securities (Note 2):
  Available for sale (amortized cost 2002 $190,313 ; 2001 $165,515)      197,807      170,311
  Held to maturity (fair value 2002 $8,303 ; 2001 $12,146) ........        8,022       11,840
Stock of Federal Home Loan Bank ...................................        8,382        7,809
Federal funds sold ................................................       32,514       29,428
Loans, net of allowance for loan losses 2002 $12,125 ; 2001 $9,950
  (Notes 3, 6 and 10) .............................................      780,857      682,692
Property and equipment, net (Note 4) ..............................       21,500       20,997
Accrued interest receivable .......................................        7,278        7,257
Deferred income taxes (Note 8) ....................................        1,971        1,873
Other assets ......................................................        7,569        6,828
                                                                      -----------------------
                                                                      $1,098,547   $  976,105
                                                                      =======================

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

Liabilities
  Noninterest-bearing deposits ....................................   $  107,833   $   92,179
  Interest-bearing deposits (Note 5) ..............................      694,488      627,839
                                                                      -----------------------
        Total deposits ............................................      802,321      720,018
Securities sold under agreements to repurchase ....................       20,798       22,409
Federal Home Loan Bank borrowings ("FHLB") (Note 6) ...............      167,606      137,637
Accrued interest payable ..........................................        2,134        2,683
Other liabilities .................................................        4,653        3,009
                                                                      -----------------------
                                                                         997,512      885,756
                                                                      -----------------------
Commitments and Contingencies (Notes 7 and 13)

Redeemable Common Stock Held By Employee Stock
  Ownership Plan (ESOP) (Note 7) ..................................       12,951       12,194
                                                                      -----------------------

Stockholders' Equity (Note 9)
  Capital stock, no par value; authorized 10,000,000 shares;
    issued 2002 1,501,054 shares; 2001 1,498,558 shares ...........       10,541       10,397
  Retained earnings ...............................................       85,773       76,931
  Accumulated other comprehensive income ..........................        4,721        3,021
                                                                      -----------------------
                                                                         101,035       90,349
  Less maximum cash obligation related to ESOP shares (Note 7) ....       12,951       12,194
                                                                      -----------------------
                                                                          88,084       78,155
                                                                      -----------------------
                                                                      $1,098,547   $  976,105
                                                                      =======================
</TABLE>

See Notes to Financial Statements.

                                       33
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED STATEMENTS OF INCOME

Years Ended December 31, 2002, 2001 and 2000
(Amounts In Thousands, Except Per Share Amounts)
<TABLE>
                                                               2002       2001     2000
-----------------------------------------------------------------------------------------
<S>                                                           <C>       <C>       <C>
Interest income:
  Loans, including fees ...................................   $54,363   $52,986   $50,081
  Investment securities:
    Taxable ...............................................     7,412     7,670     7,481
    Nontaxable ............................................     2,266     1,930     1,732
  Federal funds sold ......................................       520     1,132       698
                                                              ---------------------------
        Total interest income .............................    64,561    63,718    59,992
                                                              ---------------------------
Interest expense:
  Deposits ................................................    22,294    26,634    24,871
  Securities sold under agreements to repurchase ..........       375       617       699
  FHLB borrowings .........................................     8,472     7,184     7,494
                                                              ---------------------------
        Total interest expense ............................    31,141    34,435    33,064
                                                              ---------------------------
        Net interest income ...............................    33,420    29,283    26,928
Provision for loan losses (Note 3) ........................     2,449       924       948
                                                              ---------------------------
        Net interest income after provision for loan losses    30,971    28,359    25,980
                                                              ---------------------------
Other income:
  Loan origination fees ...................................     1,991     1,165       316
  Trust fees ..............................................     2,352     2,399     2,388
  Deposit account charges and fees ........................     3,297     3,108     2,566
  Other fees and charges ..................................     2,590     2,585     2,244
                                                              ---------------------------
                                                               10,230     9,257     7,514
                                                              ---------------------------
Other expenses:
  Salaries and employee benefits ..........................    13,667    11,863    10,651
  Occupancy ...............................................     1,817     1,826     1,417
  Furniture and equipment .................................     2,892     2,807     2,156
  Office supplies and postage .............................     1,167     1,198     1,128
  Other ...................................................     5,072     5,165     4,717
                                                              ---------------------------
                                                               24,615    22,859    20,069
                                                              ---------------------------
        Income before income taxes ........................    16,586    14,757    13,425
Federal and state income taxes (Note 8) ...................     5,122     4,613     4,059
                                                              ---------------------------
        Net income ........................................   $11,464   $10,144   $ 9,366
                                                              ===========================

Earnings per share:
  Basic ...................................................   $  7.65   $  6.78   $  6.26
  Diluted .................................................      7.58      6.72      6.21
</TABLE>

See Notes to Financial Statements.

                                       34
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2002, 2001 and 2000
(Amounts In Thousands)
<TABLE>
                                                            2002     2001      2000
-------------------------------------------------------------------------------------
<S>                                                       <C>       <C>       <C>
Net income ............................................   $11,464   $10,144   $ 9,366
Other comprehensive income,
  unrealized holding gains arising during the year,
  net of income taxes 2002 $998; 2001 $1,366; 2000 $983     1,700     2,323     1,679
                                                          ---------------------------
        Comprehensive income ..........................   $13,164   $12,467   $11,045
                                                          ===========================
</TABLE>
See Notes to Financial Statements.

                                       35
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED  STATEMENTS  OF  STOCKHOLDERS'  EQUITY  (Notes 7 and 9)
Years Ended December 31, 2002, 2001 and 2000

(Amounts 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, 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
  Issuance of 2,891 shares of
    common stock .................        127          --          --            --         127
  Redemption of 395 shares
    of common stock ..............        (30)         --          --            --         (30)
  Change related to ESOP shares ..         --          --          --          (757)       (757)
  Net income .....................         --      11,464          --            --      11,464
  Income tax benefit related to
    stock based compensation .....         47          --          --            --          47
  Cash dividends ($1.75 per share)         --      (2,622)         --            --      (2,622)
  Other comprehensive income .....         --          --       1,700            --       1,700
                                      ---------------------------------------------------------
Balance, December 31, 2002 .......     10,541      85,773       4,721       (12,951)     88,084
                                      =========================================================
</TABLE>
See Notes to Financial Statements.

                                       36
<PAGE>

HILLS BANCORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2002, 2001 and 2000
(Amounts In Thousands)
<TABLE>
                                                                       2002         2001         2000
                                                                    -----------------------------------
<S>                                                                 <C>          <C>          <C>
Cash Flows from Operating Activities
  Net income ....................................................   $  11,464    $  10,144    $   9,366
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Depreciation ................................................       2,316        2,212        1,648
    Amortization ................................................        --            301          261
    Provision for loan losses ...................................       2,449          924          948
    Compensation paid by issuance of common stock ...............          75          121         --
    Deferred income taxes .......................................      (1,096)          47         (315)
    (Increase) decrease in accrued interest receivable ..........         (21)         266       (1,146)
    Amortization of bond discount ...............................         431          171           39
    (Increase) decrease in other assets .........................        (741)        (359)       1,409
    Increase (decrease) in accrued interest and other liabilities       1,095          (49)         492
                                                                    -----------------------------------
        Net cash provided by operating activities ...............      15,972       13,778       12,702
                                                                    -----------------------------------

Cash Flows from  Investing  Activities
  Proceeds  from  maturities of investment securities:
  Available for sale ............................................      59,140       47,282       27,115
  Held to maturity ..............................................       3,819        3,668        2,798
  Purchases of investment securities available for sale .........     (84,943)     (76,327)     (32,158)
  Federal funds sold, net .......................................      (3,086)      (1,363)     (27,859)
  Loans made to customers, net of collections ...................    (100,614)     (56,743)     (62,440)
  Purchases of property and equipment ...........................      (2,819)      (6,710)      (6,501)
                                                                    -----------------------------------
        Net cash (used in) investing activities .................    (128,503)     (90,193)     (99,045)
                                                                    -----------------------------------

Cash Flows from Financing Activities
  Net increase in deposits ......................................      82,303       67,312       90,620
  Net increase (decrease) in federal funds purchased and
    securities sold under agreements to repurchase ..............      (1,611)       5,848      (10,153)
  Borrowings from FHLB ..........................................      30,000       17,000       40,000
  Payments on FHLB borrowings ...................................         (31)         (31)     (28,032)
  Stock options exercised .......................................          52           44           --
  Income tax benefits related to stock based compensation .......          47           43            6
  Redemption of common stock ....................................         (30)          (8)         (23)
  Dividends paid ................................................      (2,622)      (2,392)      (2,171)
                                                                    -----------------------------------
        Net cash provided by financing activities ...............     108,108       87,816       90,247
                                                                    -----------------------------------

Increase (decrease) in cash and due from banks ..................   $  (4,423)   $  11,401    $   3,904

Cash and due from banks:
  Beginning .....................................................      37,070       25,669       21,765
                                                                    -----------------------------------
  Ending ........................................................   $  32,647    $  37,070    $  25,669
                                                                    ===================================

Supplemental Disclosures
  Cash payments for:
    Interest paid to depositors and others ......................   $  22,843    $  26,884    $  24,046
    Interest paid on other obligations ..........................       8,847        8,504        8,193
    Income taxes ................................................       5,245        4,974        4,424

  Noncash financing activities:
    Increase in maximum cash obligation related to
      ESOP shares ...............................................   $     757    $     644    $     597
</TABLE>
See Notes to Financial Statements.

                                       37
<PAGE>

HILLS BANCORPORATION

NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

Note 1.  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, Cedar Rapids and Marion 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, 2002 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.

Revenue  recognition:  Interest  income on loans and  investment  securities  is
recognized on the accrual method.  Loan origination fees are recognized when the
loans are sold.  Trust fees,  deposit account service charges and other fees are
recognized when the services are provided or when customers use the services.

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, 2002 and 2001.

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.

                                       38
<PAGE>

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.

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.

Goodwill:  Goodwill represents the excess of cost over the fair value of the net
assets acquired,  and FASB Statement No. 142 provides for the elimination of the
amortization  of goodwill and other  intangibles  that are determined to have an
indefinite  life,  and  requires,  at a  minimum,  annual  impairment  tests for
intangibles that are determined to have an indefinite life. Effective January 1,
2002, the Company discontinued the amortization of goodwill, but makes an annual
assessment for possible impairment. The change in this accounting policy reduced
goodwill  amortization by $261,000 for the year ended December 31, 2002 compared
to the year ended  December  31,  2001.  The  carrying  amount of goodwill as of
December 31, 2002 and 2001 totaled $2,500,000 net of accumulated amortization of
$1,398,000 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.

                                       39
<PAGE>

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.

Following is a reconciliation of the denominator:
<TABLE>
                                                           Year Ended December 31,
                                                     ---------------------------------
                                                        2002       2001        2000
                                                     ---------------------------------
<S>                                                  <C>         <C>         <C>
Weighted average number of shares ................   1,499,269   1,497,064   1,495,906
Potential number of dilutive shares ..............      12,106      12,432      12,875
                                                     ---------------------------------
Total shares to compute diluted earnings per share   1,511,375   1,509,496   1,508,781
                                                     =================================
</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 sold 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.

                                       40
<PAGE>

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.   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, 2002:
U. S. Treasury ....................   $  6,035   $    330   $     --    $  6,365
U. S. Government agencies and
corporations ......................    129,916      5,020         --     134,936
State and political subdivisions ..     54,362      2,159        (15)     56,506
                                      ------------------------------------------
Total .............................   $190,313   $  7,509   $    (15)   $197,807
                                      ==========================================

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
                                      ==========================================

The  amortized  cost and fair value of debt  securities  held to maturity are as
follows:
<TABLE>
                                                         Gross         Gross
                                           Amortized   Unrealized   Unrealized   Fair
                                             Cost        Gains       (Losses)    Value
                                           -------------------------------------------
                                                        (Amounts In Thousands)
<S>                                        <C>         <C>          <C>         <C>
December 31, 2002:
State and political subdivisions .......    $ 8,022     $   281       $   --    $ 8,303
                                            ===========================================

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

The contractual  maturity  distribution of investment  securities as of December
31, 2002 is summarized as follows:
<TABLE>
                                         Available For Sale     Held To Maturity
                                         -------------------  --------------------
                                         Amortized   Fair     Amortized     Fair
                                           Cost      Value      Cost        Value
                                         -----------------------------------------
                                                   (Amounts In Thousands)
<S>                                      <C>        <C>       <C>         <C>
Due in one year or less ..............   $ 43,479   $ 44,202   $  3,068   $  3,100
Due after one year through five years     127,618    133,545      4,817      5,051
Due after five years through ten years     18,723     19,561        137        152
Due over ten years ...................        493        499         --         --
                                         -----------------------------------------
Total ................................   $190,313   $197,807   $  8,022   $  8,303
                                         =========================================
</TABLE>

As of  December  31,  2002,  investment  securities  with a  carrying  value  of
$51,746,000 were pledged to collateralize public and trust deposits,  short-term
borrowings and for other purposes, as required or permitted by law.

There were no net gains or losses from the sale of investment securities for the
years ended December 31, 2002, 2001 and 2000.

                                       41
<PAGE>

Note 3.   Loans

The composition of loans is as follows:

                                                              December 31,
                                                       -------------------------
                                                         2002             2001
                                                       -------------------------
                                                         (Amounts In Thousands)

Agricultural .................................         $ 37,937         $ 34,304
Commercial and financial .....................           46,828           44,363
Real estate:
Construction .................................           47,201           40,430
Mortgage # ...................................          628,110          538,832
Loans to individuals .........................           32,906           34,713
                                                       -------------------------
                                                        792,982          692,642
Less allowance for loan losses ...............           12,125            9,950
                                                       -------------------------
                                                       $780,857         $682,692
                                                       =========================

# Includes  loans  held for sale with a cost and fair value of $5,105 and $5,575
  as of December 31, 2002 and 2001, respectively.

Changes in the allowance for loan losses are as follows:

                                                 Year Ended December 31,
                                           -------------------------------------
                                             2002          2001          2000
                                           -------------------------------------
                                                   (Amounts In Thousands)

Balance, beginning ...................     $  9,950      $ 10,428      $  9,750
Provision charged to expenses ........        2,449           924           948
Recoveries ...........................        1,514         1,139           904
Loans charged off ....................       (1,788)       (2,541)       (1,174)
                                           ------------------------------------
Balance, ending ......................     $ 12,125      $  9,950      $ 10,428
                                           ====================================

Information  about impaired and  nonaccrual  loans as of and for the years ended
December 31, 2002 and 2001 is as follows:
<TABLE>
                                                                             2002      2001
                                                                         ----------------------
                                                                         (Amounts In Thousands)

<S>                                                                        <C>       <C>
Loans receivable for which there is a related allowance for loan losses    $ 4,588   $ 4,417
Loans receivable for which there is no related allowance for loan losses    11,673     6,871
                                                                           -----------------
Total impaired loans ...................................................   $16,261   $11,288
                                                                           =================

Related allowance for credit losses on impaired loans ..................   $   547   $   897
Average balance of impaired loans ......................................    12,739    11,200
Nonaccrual loans .......................................................     1,538     1,001
Loans past due ninety days or more and still accruing ..................     2,516     2,921
Interest income recognized on impaired loans ...........................       962       962
</TABLE>

Note 4.   Property and Equipment

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

                                                              December 31,
                                                         -----------------------
                                                          2002            2001
                                                         -----------------------
                                                          (Amounts In Thousands)

Land ...........................................         $ 3,715         $ 3,715
Buildings and improvements .....................          17,041          15,844
Furniture and equipment ........................          18,456          16,834
                                                         -----------------------
                                                          39,212          36,393
Less accumulated depreciation ..................          17,712          15,396
                                                         -----------------------
Net ............................................         $21,500         $20,997
                                                         =======================

                                       42
<PAGE>

Note 5.   Interest-Bearing Deposits

A summary of these deposits is as follows:

                                                              December 31,
                                                      --------------------------
                                                        2002              2001
                                                      --------------------------
                                                        (Amounts In Thousands)

NOW and other demand .......................          $ 98,415          $ 84,480
Savings ....................................           201,890           175,900
Time, $100,000 and over ....................            60,536            55,517
Other time .................................           333,647           311,942
                                                      --------------------------
                                                      $694,488          $627,839
                                                      ==========================


Note 6.   Federal Home Loan Bank Borrowings

As of December 31, 2002 and 2001, the borrowings were as follows:

                                                        2002              2001
                                                      --------------------------
(Effective interest rates as of December 31, 2002)      (Amounts In Thousands)

Due 2005, 3.80% ............................          $  4,350          $  4,350
Due 2006, 4.27% ............................            42,750            12,750
Due 2008, 5.22% to 6.00% ...................            40,506            50,000
Due 2009, 5.66% to 6.22% ...................            40,000            30,537
Due 2010, 5.77% to 6.61% ...................            40,000            40,000
                                                      --------------------------
                                                      $167,606          $137,637
                                                      ==========================

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  $201,127,000.  As of December 31, 2002, the Company held Federal
Home Loan Bank stock with a cost of $8,382,000. .

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
$93,000,  $79,000 and $70,000 for the years ended  December 31,  2002,  2001 and
2000, 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, 2002,  147,122  shares held by the ESOP, at a fair value of $88 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  $741,000,  $636,000  and
$562,000 for the years ended December 31, 2002, 2001 and 2000, respectively.

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.

                                       43
<PAGE>

The following table  illustrates the effect on net income and earnings per share
had  compensation  cost  for  all of the  stock-based  compensation  plans  been
determined  based on the grant date values of awards (the  method  described  in
FASB Statement No. 123, Accounting for Stock-based Compensation):
<TABLE>
                                                              Years Ended December 31,
                                                        -------------------------------------
                                                           2002           2001        2000
                                                        -------------------------------------
<S>                                                     <C>           <C>           <C>
Net income:
   As reported ......................................   $   11,464    $   10,144    $   9,366
   Deduct total stock-based employee compensation
    expense determined under fair value based
    method for all awards, net of related tax effects          (18)          (13)          (5)
                                                        -------------------------------------
   Pro forma ........................................   $   11,446    $   10,131    $   9,361
                                                        =====================================

Basic earnings per share:
As reported .........................................   $     7.65    $     6.79    $    6.26
Pro forma ...........................................   $     7.64    $     6.77    $    6.26

Diluted earnings per share:
As reported .........................................   $     7.58    $     6.72    $    6.21
Pro forma ...........................................   $     7.57    $     6.71    $    6.21
</TABLE>

A summary of the stock options is as follows:

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

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
Granted ......................................              636            73.81
Exercised ....................................           (2,000)           26.17
                                                        ------------------------
Balance, December 31, 2002 ...................           27,815        $   46.99
                                                        ========================

The weighted  average fair value of options  granted in 2002 and 2001 was $20.13
per share and $15.00 per share, respectively.

Other pertinent  information  related to the options outstanding at December 31,
2002 is as follows:

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

$ 25.33           12,330            3 Months                    12,330
  26.17            2,394            6 Months                     2,394
  41.00            2,055           51 Months                     2,055
  77.00           10,400          101 Months                         -
  73.00              378          104 Months                         -
  75.00              258          108 months                         -
                  ------                                        ------
                  27,815                                        16,779
                  ======                                        ======

As of December 31, 2002, 53,156 options were available for future grants.

The  committee  is also  authorized  to grant  awards  of common  stock,  and it
authorized the issuance of 891, 1,550 and none shares of common stock to a group
of employees in 2002, 2001 and 2000, respectively.

                                       44
<PAGE>

Note 8.   Income Taxes

Income taxes for the years ended December 31, 2002, 2001 and 2000 are summarized
as follows:

                                        2002              2001            2000
                                       -----------------------------------------
                                                  (Amounts In Thousands)

Current:
  Federal ....................         $ 5,258          $ 3,819         $ 3,648
  State ......................             960              747             726
Deferred .....................          (1,096)              47            (315)
                                       ----------------------------------------
                                       $ 5,122          $ 4,613         $ 4,059
                                       =======================================

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

                                                            December 31,
                                                    ----------------------------
                                                    2002        2001       2000
                                                    ----------------------------
                                                      (Amounts In Thousands)
Deferred income tax assets:
Allowance for loan losses .....................     $4,515     $3,693     $3,860
Deferred compensation .........................        624        530        433
Certain accrued expenses ......................        301        276        198
Other .........................................        150         91         90
                                                    ----------------------------
Gross deferred tax assets .....................      5,590      4,590      4,581
                                                    ----------------------------
Deferred income tax liabilities:
Property and equipment ........................        716        773        750
FHLB dividends ................................        130        130        130
Unrealized gains on investment securities .....      2,773      1,775        409
Other .........................................       --           39          6
                                                    ----------------------------
Gross deferred tax liabilities ................      3,619      2,717      1,295
                                                    ----------------------------
Net deferred income tax asset .................     $1,971     $1,873     $3,286
                                                    ============================

The net change in the  deferred  income  taxes for the years ended  December 31,
2002, 2001 and 2000 is reflected in the financial statements as follows:

                                                    Year Ended December 31,
                                               ---------------------------------
                                                2002         2001         2000
                                               ---------------------------------
                                                    (Amounts In Thousands)

Statement of income ......................     $(1,096)     $    47     $  (315)
Statement of stockholders' equity ........         998        1,366         983
                                               --------------------------------
                                               $   (98)     $ 1,413     $   668
                                               ================================

The income tax provisions  for the years ended December 31, 2002,  2001 and 2000
are less than the amounts  computed by applying  the maximum  effective  federal
income tax rate to the  income  before  income  taxes  because of the  following
items:
<TABLE>
                              2002                2001                  2000
                      -------------------------------------------------------------
                                    % Of                 % Of                 % Of
                                   Pretax               Pretax               Pretax
                       Amount      Income  Amount       Income   Amount      Income
                      -------------------------------------------------------------
                                          (Amounts In Thousands)
<S>                   <C>          <C>     <C>         <C>       <C>         <C>
Expected provision    $ 5,805       35.0%  $ 5,165       35.0%  $ 4,699       35.0%
Tax-exempt interest      (875)      (5.3)     (745)      (5.0)     (712)      (5.3)
Interest expense
  limitation ......       128        0.8       143        1.0       111        1.0
State income taxes,
  net of federal
  income tax
  benefit .........       547        3.3       493        3.3       479        3.6
Income tax credits       (345)      (2.1)     (345)      (2.3)     (345)      (2.6)
Other .............      (138)      (0.8)      (98)      (0.7)     (173)      (1.3)
                      -------------------------------------------------------------
                      $ 5,122       30.9%  $ 4,613       31.3%  $ 4,059       30.4%
                      =============================================================
</TABLE>

                                       45
<PAGE>

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

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

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

The actual amounts and capital ratios as of December 31, 2002,  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, 2002:
  Company:
    Total risk based capital ..........    $102,921   14.19%    8.00%           10.00%
    Tier 1 risk based capital .........      93,814   12.93     4.00             6.00
    Leverage ratio ....................                8.64     3.00             5.00
  Bank:
    Total risk based capital ..........     100,288   13.84     8.00            10.00
    Tier 1 risk based capital .........      91,189   12.58     4.00             6.00
    Leverage ratio ....................                8.41     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 $6,092,000 as of December 31, 2002 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 $1,405,000 and $11,998,000 as of December
31, 2002 and 2001, 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, 2002 and 2001: Deposits from related parties
are  accepted  subject  to the same  interest  rates  and  terms  as those  from
nonrelated parties.

                                                       Year Ended December 31,
                                                   -----------------------------
                                                     2002               2001
                                                   -----------------------------
                                                      (Amounts In Thousands)

Balance, beginning .....................           $ 24,440            $ 13,297
Advances ...............................             15,607              15,445
Collections ............................            (12,234)             (4,302)
                                                   ----------------------------
Balance, ending ........................           $ 27,813            $ 24,440
                                                   ============================

                                       46
<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, 2002 and 2001 are as follows:
<TABLE>
                                                                           2002               2001
                                                                 -------------------------------------------
                                                                 Carrying   Estimated   Carrying  Estimated
                                                                  Amount    Fair Value   Amount   Fair Value
                                                                 -------------------------------------------
                                                                          (Amounts In Thousands)

<S>                                                              <C>         <C>        <C>        <C>
Cash and due from banks ......................................   $ 32,647    $ 32,647   $ 37,070   $ 37,070
Federal funds sold ...........................................     32,514      32,514     29,428     29,428
Investment securities ........................................    214,211     214,492    189,960    190,266
Loans ........................................................    780,857     839,398    682,692    679,337
Accrued interest receivable ..................................      7,278       7,278      7,257      7,257
Deposits .....................................................    802,321     783,784    720,018    728,943
Federal funds purchased and securities
sold under agreements to repurchase ..........................     20,798      20,798     22,409     22,409
Borrowings from Federal Home Loan
Bank .........................................................    167,606     169,085    137,637    137,371
Accrued interest payable .....................................      2,134       2,134      2,683      2,683

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

Off-balance sheet instruments:
Loan commitments .............................................   $112,260   $   --     $117,609   $   --
Letters of credit ............................................     12,650       --       12,569       --
</TABLE>

Note 12.   Parent Company Only Financial Information

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

                          CONDENSED BALANCE SHEETS
                         December 31, 2002 and 2001
                           (Amounts In Thousands)

ASSETS                                                        2002        2001
--------------------------------------------------------------------------------

Cash ...................................................    $  1,856    $  1,655
Investment securities available for sale ...............         514         520
Investment in subsidiary bank ..........................      98,410      87,837
Other assets ...........................................         564         572
                                                            --------------------
Total assets ...........................................    $101,344    $ 90,584
                                                            ====================

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

Liabilities ............................................    $    309    $    235
                                                            --------------------
Redeemable common stock held by ESOP ...................      12,951      12,194
                                                            --------------------
Stockholders' equity:
  Capital stock ........................................      10,541      10,397
  Retained earnings ....................................      85,773      76,931
  Accumulated other comprehensive income ...............       4,721       3,021
                                                            --------------------
                                                             101,035      90,349
Less maximum cash obligation related to ESOP shares ....      12,951      12,194
                                                            --------------------
Total stockholders' equity .............................      88,084      78,155
                                                            --------------------
Total liabilities and stockholders' equity .............    $101,344    $ 90,584
                                                            ====================


                                       47
<PAGE>

                   CONDENSED STATEMENTS OF INCOME
            Years Ended December 31, 2002, 2001 and 2000
                       (Amounts In Thousands)
<TABLE>
                                                        2002         2001       2000
--------------------------------------------------------------------------------------
<S>                                                   <C>         <C>         <C>
Interest on investment securities .................   $     25    $     32    $     30
Dividends received from subsidiary ................      2,623       2,392       2,170
Other expenses ....................................        (80)       (112)       (119)
                                                      --------------------------------
        Income before income tax benefit and
        equity in subsidiary's undistributed income      2,568       2,312       2,081
Income tax benefit ................................         23          29          43
                                                      --------------------------------
                                                         2,591       2,341       2,124
Equity in subsidiary's undistributed income .......      8,873       7,803       7,242
                                                      --------------------------------
        Net income ................................   $ 11,464    $ 10,144    $  9,366
                                                      ================================
</TABLE>

                                       48
<PAGE>


           CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31,
                               2002, 2001 and 2000

                             (Amounts In Thousands)
<TABLE>

                                                                2002        2001        2000
----------------------------------------------------------------------------------------------
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
  Net income ..............................................   $ 11,464    $ 10,144    $  9,366
  Noncash items included in net income:
    Undistributed income of subsidiary ....................     (8,873)     (7,803)     (7,242)
    (Increase) decrease in other assets ...................          8         (43)        304
    Increase (decrease) in liabilities ....................         73         (13)        (76)
                                                              --------------------------------
        Net cash provided by operating activities .........      2,672       2,285       2,352
                                                              --------------------------------
Cash flows from investing activities:
  Proceeds from maturities of investment securities .......        250         250          --
  Purchase of investment securities .......................       (243)       (271)         --
                                                              --------------------------------
        Net cash provided by (used in) investing activities          7         (21)         --
                                                              --------------------------------
Cash flows from financing activities:
  Stock issued (redeemed) .................................         97         157         (23)
  Income tax benefits related to stock based
    compensation ..........................................         47          43           6
  Dividends paid ..........................................     (2,622)     (2,392)     (2,171)
                                                              --------------------------------
        Net cash (used in) financing activities ...........     (2,478)     (2,192)     (2,188)
                                                              --------------------------------
        Increase in cash ..................................        201          72         164
Cash balance:
  Beginning ...............................................      1,655       1,583       1,419
                                                              --------------------------------
  Ending ..................................................   $  1,856    $  1,655    $  1,583
                                                              ================================
</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
$25,960,000.  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.

                                       49
<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, 2002 and 2001
is as follows:

                                                              2002      2001
                                                          ----------------------
                                                          (Amounts In Thousands)
Firm loan commitments and unused portion
  of lines of credit:
  Home equity loans ......................................   $ 6,923   $ 5,819
  Credit card participations .............................    15,057    14,050
  Commercial, real estate and home construction ..........    51,272    44,880
  Commercial lines .......................................    39,008    52,860
  Outstanding letters of credit ..........................    12,650    12,569

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.

Standby  letters of credit  are  conditional  commitments  issued by the Bank to
guarantee the performance of a customer to a third party.  Those  guarantees are
primarily  issued to support  public and  private  borrowing  arrangements  and,
generally,  have terms of one year, or less. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loans to
customers.  The Bank holds  collateral,  which may include accounts  receivable,
inventory,  property,  equipment,  and income-producing  properties,  supporting
those  commitments  if deemed  necessary.  In the event  the  customer  does not
perform in accordance with the terms of the agreement with the third party,  the
Bank would be required to fund the commitment.  The maximum  potential amount of
future  payments  the  Bank  could be  required  to make is  represented  by the
contractual  amount shown in the summary above.  If the commitment is funded the
Bank would be entitled to seek recovery from the customer.  At December 31, 2002
and 2001 no amounts have been recorded as liabilities  for the Bank's  potential
obligations under these guarantees.

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

                                                  Quarter Ended
                                 -----------------------------------------------
                                  March     June    September December    Year
                                 -----------------------------------------------
2002:
------------------------------
Total interest income ........   $15,521   $15,928   $16,510   $16,602   $64,561
Net interest income after
provisions for loan losses ...     7,295     7,798     8,318     7,560    30,971
Net income ...................     2,623     2,673     3,236     2,932    11,464
Basic earnings per share .....      1.75      1.78      2.15      1.97      7.65
Diluted earnings per share ...      1.74      1.76      2.14      1.94      7.58

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

                                       50
<PAGE>

Part II

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

None

Part III

Item 10.   Directors and Executive Officers of the Registrant

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

The following  table sets forth the name,  age and  principal  occupation of the
Executive  Officers of the  Registrant  and Executive  Officers of the Bank. All
officers of the Registrant and the Bank are elected  annually for one-year terms
of office.
<TABLE>
                                                                                                             Year First
                                                                                                               Elected
                                                   Position With Registrant Or Bank And                      Officer Of
                                                    Principal Occupation And Employment                      Registrant
         Name             Age                           During The Past Five Years                             (Bank)
--------------------------------------------------------------------------------------------------------------------------
<S>                       <C>  <C>                                                                          <C>
Dwight O. Seegmiller      50    Director of Registrant and Bank; President, Registrant and Bank             1986 (1975)

Willis M. Bywater         64    Director of Registrant and Bank; Chairman of the Board, Bank;               1997 (1997)
                                Vice President of the Registrant; Executive Officer and Shareholder
                                of Economy Advertising Company

James G. Pratt            54    Treasurer of Registrant; Senior Vice President and Chief Financial          1985 (1982)
                                Officer from January 1986 to present

Thomas J. Cilek           56    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 and
          Related Shareholders Matters

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

Item 13.   Certain Relationships and Related Transactions

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

Part III

Item 14.   Controls and Procedures

Within  the  ninety  days  prior to the  filing of this  report,  the  Company's
management,  under  the  supervision  and with the  participation  of the  Chief
Executive  Officer and Chief Financial  Officer,  evaluated the effectiveness of
the design and operation of the Company's disclosure controls and procedures, as
defined in Rule 13a-14 under the Securities  Exchange Act of 1934. Based on that
evaluation,  the Chief Executive  Officer and Chief Financial  Officer concluded
that the Company's disclosure controls and procedures were adequate.  There were
no significant changes (including  corrective actions with regard to significant
deficiencies or material  weaknesses) in the Company's  internal  controls or in
other factors subsequent to the date of the evaluation that would  significantly
affect those controls.

                                       51
<PAGE>

Part IV

Item 15.   Exhibits, Financial Statements, Schedules and Reports on Form 8-K
<TABLE>
                                                                                                              Form 10-K
                                                                                                              Reference
                                                                                                              -------------
<S>                                                                                                           <C>
(a)  1.  Financial Statements

         Independent auditor's report on the financial statements                                                       42
         Consolidated balance sheets as of December 31, 2002 and 2001                                                   43
         Consolidated statements of income for the years ended December 31, 2002, 2001 and 2000                         44
         Consolidated statements of comprehensive income for the years ended
         December 31, 2002, 2001 and 2000                                                                               45
         Consolidated statements of stockholders' equity for the years ended
         December 31, 2002, 2001 and 2000                                                                               46
         Consolidated statements of cash flows for the years ended December 31, 2002,
         2001 and 2000                                                                                             47 - 48
         Notes to financial statements                                                                             49 - 70

(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, 2001 is incorporated by reference.

         Exhibit 11 - Statement Re Computation of Basic and Diluted Earnings Per
         Share is attached on Page 80.

         Exhibit 21 - Subsidiaries of the Registrant is attached on Page 81.

         Exhibit 23 - Consent of Accountants is attached on Page 82.

(b)      Reports on Form 8-K:

         The Registrant  filed no reports on Form 8-K for the three months ended
         December 31, 2002.
</TABLE>

                                       52
<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 21, 2003      By  /s/  Dwight O. Seegmiller
      --------------      ------------------------------------------------------
                          Dwight O. Seegmiller, Director and President

Date  March 21, 2003      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.

                           DIRECTORS OF THE REGISTRANT

Date  March 21, 2003                              By  /s/  Willis M. Bywater
      ---------------------------                 ------------------------------
                                                  Willis M. Bywater, Director

Date  March 21, 2003                              By  /s/  Thomas J. Gill
      ---------------------------                 ------------------------------
                                                  Thomas J. Gill, Director

Date  March 21, 2003                              By  /s/  David H. Gringer
      ---------------------------                 ------------------------------
                                                  Donald H. Gringer, Director

Date  March 21, 2003                              By  /s/  Michael E. Hodge
      ---------------------------                 ------------------------------
                                                  Michael E. Hodge, Director

Date  March 21, 2003                              By  /s/  Richard W. Oberman
      ---------------------------                 ------------------------------
                                                  Richard W. Oberman, Director

Date  March 21, 2003                              By  /s/  Theodore H. Pacha
      ---------------------------                 ------------------------------
                                                  Theodore H. Pacha, Director

Date  March 21, 2003                              By  /s/  Ann M. Rhodes
      --------------------------                  ------------------------------
                                                  Ann M. Rhodes, Director

Date  March 21, 2003                              By  /s/  Ronald E. Stutsman
      --------------------------                  ------------------------------
                                                  Ronald E. Stutsman, Director

Date  March 21, 2003                              By  /s/  Sheldon E. Yoder
      --------------------------                  ------------------------------
                                                  Sheldon E. Yoder, Director


                                       53
<PAGE>

                                 CERTIFICATIONS

I, Dwight O. Seegmiller, certify that:

1.   I have reviewed this annual report on Form 10-K of Hills Bancorporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:    March 21, 2003                          By  /s/  Dwight O. Seegmiller
         --------------                          -------------------------------
                                                 Dwight O. Seegmiller, President


                                       54
<PAGE>

                                 CERTIFICATIONS

I, James G. Pratt, certify that:

1.   I have reviewed this annual report on Form 10-K of Hills Bancorporation;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of  registrant's  board of directors (or persons  performing  the
     equivalent function):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual  report  whether or not there were  significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date:    March 21, 2003   By  /s/  James G. Pratt
         --------------   ------------------------------------------------------
                          James G. Pratt, Treasurer and Chief Accounting Officer


                                       55
<PAGE>
                              HILLS BANCORPORATION

                       ANNUAL REPORT ON FORM 10-K FOR THE

                       FISCAL YEAR ENDED DECEMBER 31, 2002

                                  EXHIBIT INDEX
<TABLE>
                                                                                                     Page Number
                                                                                                  In The Sequential
  Exhibit                                                                                          Numbering System
  Number                                       Description                                        For 2002 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
    99.1    Section 906 Certification by Dwight O. Seegmiller
    99.2    Section 906 Certification by James G. Pratt

</TABLE>

                                       56