Employee Benefit Plans

The Company has an Employee Stock Purchase Plan (the “ESPP”). For each quarterly offering period, eligible employees can elect to contribute from 1% to 15% of his or her compensation. The purchase price is the lesser of the fair market value on the first day of the offering period or the last day of the offering period. The maximum dollar amount any one employee can elect to contribute in an offering period is $10,000. During the year ended December 31, 2014, 2,092 shares of stock were purchased by employees of the Bank through the ESPP. 2,072 shares of stock were purchased by employees of the Bank through the ESPP for the year ended December 31, 2013.

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 $1.61 million, $1.57 million and $1.49 million for the years ended December 31, 2014, 2013 and 2012, respectively. The 2014, 2013 and 2012 discretionary contribution rates were 9% of qualified salaries.

During the year ended December 31, 2011, the ESOP purchased an additional 40,028 shares of common stock in the Company with a loan from the Company. The note payable bears interest at the prime rate subject to a floor of 5.0% with principal and interest payable annually for five consecutive years. The loan is collateralized by the unreleased shares of stock purchased as well as a certificate of deposit the Company holds at the Bank in the original amount of the note. The note payable and certificate of deposit are not included in the consolidated balance sheets. There was no interest income or expense recognized in the consolidated statements of income.

As the note payable is repaid by the ESOP, shares are released from collateral and allocated to qualified employees based on the proportion of principal and interest paid in the year to total principal and interest payments anticipated for the life of the loan. The number of shares released from collateral totaled 8,002; 8,360 and 8,724 shares for the years ended December 31, 2014, 2013 and 2012, respectively. The shares pledged as collateral are reported as a reduction of stockholder’s equity in the consolidated balance sheet. As shares are committed to be released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for earnings per share computations. Unallocated shares were 7,628; 15,630 and 23,990 as of December 31, 2014, 2013 and 2012, respectively. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings. Dividends on unallocated ESOP shares are used to reduce debt.

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. The Company obtains a quarterly independent appraisal of the shares of stock. As of December 31, 2014 and 2013, the shares held by the ESOP, fair value and maximum cash obligation were as follows:



	2014		2013
Shares held by the ESOP	419,044		394,323
Fair value per share	$	82.50	$	75.00
Maximum cash obligation	$	34,571,000	$	29,574,000

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 Company did not make a profit sharing plan contribution in the years ended December 31, 2014, 2013, and 2012. The Company made matching contributions under its 401(k) plan of $0.16 million in 2014, $0.15 million in 2013, and $0.14 million in 2012 and each such amount is included in salaries and employee benefits expense.

The Company provides a deferred compensation program for executive officers. This program allows executive officers to elect to defer a portion of their salaried compensation for payment by the Company at a subsequent date. The executive officers can defer up to 30% of their base compensation and up to 100% of any bonus into the deferral plan. Any amount so deferred is credited to the executive officer’s deferred compensation account and converted to units equivalent in value to the fair market value of a share of stock in Hills Bancorporation. The “stock units” are book entry only and do not represent an actual purchase of stock. The executive officer’s account is adjusted each year for dividends paid and the change in the market value of Hills Bancorporation stock. The deferrals and earnings grow tax deferred until withdrawn from the plan. Earnings credited to the individual’s accounts are recorded as compensation expense when earned. The deferred compensation liability is recorded in other liabilities and totals $5.04 million and $4.63 million at December 31, 2014 and 2013, respectively. Expense related to the deferred compensation plan was $0.54 million for 2014, $0.39 million for 2013 and $0.45 million for 2012 and is included in salaries and employee benefits expense.

The Company also provides a deferred compensation program for its Board of Directors. Under the plan, each director may elect to defer up to 50% of such director’s cash compensation from retainers and meeting fees for payment by the Company at a subsequent date. Any amount so deferred is credited to the director’s deferred compensation account and converted to units equivalent in value to the fair market value of a share of stock in Hills Bancorporation. The “stock units” are book entry only and do not represent an actual purchase of stock. The director’s account is adjusted each year for dividends paid and the change in the market value of Hills Bancorporation stock. The deferred compensation liability for the directors’ plan is recorded in other liabilities and totaled $2.26 million and $2.10 million at December 31, 2014 and 2013, respectively. Expense related to the directors’ deferred compensation plan was $0.23 million for 2014, $0.17 million for 2013 and $0.20 million for 2012 and is included in other noninterest expense.

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 restricted stock awards. Under the plan, the aggregate number of options and shares granted cannot exceed 94,000 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. Director options granted on or before December 31, 2006 may be exercised immediately. Director options granted on or after January 1, 2007, and officers' rights under the plan vest over a five-year period from the date of the grant.

A summary of the stock options is as follows:



	Number of Shares		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value (In Thousands)
Balance, December 31, 2011	18,840		$	36.60	2.51	$	690
Granted	5,110
Exercised	(5,965	)
Balance, December 31, 2012	17,985		47.62		4.25	856
Granted	—
Exercised	(5,355	)
Balance, December 31, 2013	12,630		53.95		4.72	681
Granted	—
Exercised	(2,940	)
Balance, December 31, 2014	9,690		$	59.85	5.03	$	580

There were 5,110 stock options granted in 2012 and no stock options granted in 2013 or 2014. The weighted-average fair value of options granted in 2012 was $24.89 per share. The intrinsic value of options exercised was $0.10 million, $0.18 million and $0.23 million for 2014, 2013 and 2012, respectively.

The fair value of each option is estimated as of the date of grant using a Black Scholes option pricing model. The expected lives of options granted incorporate historical employee exercise behavior. The risk-free rate for periods that coincide with the expected life of the options is based on the ten year interest rate swap rate as published by the Federal Reserve Bank on the date of issuance. Expected volatility is based on volatility levels of the Company’s peers’ common stock as the Company’s stock has limited trading activity. Expected dividend yield was based on historical dividend rates. Significant assumptions at date of grant include:



	2014	2013	October 9, 2012		April 24, 2012
Risk-free interest rate	n/a	n/a	1.77	%	2.08	%
Expected option life	n/a	n/a	7.5 years		7.5 years
Expected volatility	n/a	n/a	39.50	%	39.80	%
Expected dividends	n/a	n/a	1.64	%	1.64	%

Other pertinent information related to the options outstanding at December 31, 2014 is as follows:



Exercise Price		Number Outstanding	Remaining Contractual Life	Number Exercisable
$	52.00	4,580	28 months	4,580
66.00		3,610	88 months	—
69.00		1,500	94 months	—
		9,690		4,580

As of December 31, 2014, the outstanding options have a weighted-average exercise price of $59.85 per share and a weighted average remaining contractual term of 5.03 years. There was $0.06 million in unrecognized compensation cost for stock options granted under the plan as of December 31, 2014. This cost is expected to be recognized over a weighted-average period of 2.45 years.

As of December 31, 2014, the vested options totaled 4,580 shares with a weighted-average exercise price of $52.00 per share and a weighted-average remaining contractual term of 2.33 years. There were 4,580 shares that vested in 2012 and no shares that vested in 2013 or 2014. The fair value of the 4,580 options vested during 2012 was $0.31 million.

As of December 31, 2014, 61,186 shares were available for stock options and awards. The Compensation and Incentive Stock Committee is also authorized to grant awards of restricted common stock, and it authorized the issuance of 9,572 shares of common stock in 2014, 3,584 shares in 2013 and 6,885 shares in 2012 to certain employees. The vesting period for these awards is five years and the Bank amortizes the expense on a straight line basis during the vesting period. The expense relating to these awards for the years ended December 31, 2014, 2013 and 2012 was $0.26 million, $0.21 million and $0.17 million, respectively. In 2014, 5,400 shares of the restricted common stock shares awarded are subject to forfeiture upon termination of the employee's employment with the Company within eight years of the award.