Employee Benefit Plans

12 Months Ended

Dec. 31, 2022

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 90% 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 a year is $9,000. During the year ended December 31, 2022, 6,637 shares of stock were purchased by employees of the Bank through the ESPP. 7,334 shares of stock were purchased by employees of the Bank through the ESPP for the year ended December 31, 2021.

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 $1.28 million, $1.27 million and $1.27 million for the years ended December 31, 2022, 2021 and 2020, respectively. The 2022, 2021 and 2020 discretionary contribution rate was 4.5% of qualified salaries.

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, 2022 and 2021, the shares held by the ESOP, fair value and maximum cash obligation were as follows:


	2022		2021
Shares held by the ESOP	708,488		735,482
Fair value per share	$	72.00	$	68.00
Maximum cash obligation	$	51,011,000	$	50,013,000

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 made a 4.50% or $1.28 million contribution to the profit sharing plan for the year ended December 31, 2022. The Company made a 4.50% or $1.27 million contribution to the profit sharing plan for the year ended December 31, 2021. The Company made a 4.50% or $1.27 million contribution to the profit sharing plan for the year ended December 31, 2020. The Company made matching contributions under its 401(k) plan of $0.27 million in 2022, $0.26 million in 2021, and $0.26 million in 2020 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 $0.15 million and $1.94 million at December 31, 2022 and 2021, respectively. Expense related to the deferred compensation plan was $0.06 million for 2022, $0.25 million for 2021 and $(0.02) million for 2020 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 $4.10 million and $4.08 million at December 31, 2022 and 2021, respectively. Expense related to the directors’ deferred compensation plan was $0.29 million for 2022, $0.38 million for 2021 and $(0.09) million for 2020 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 250,000 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 and officers' rights under the plan vest over a five-year period from the date of the grant.

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 the date of grant on May 14, 2019 include the risk-free interest rate of 2.39%, expected option life of 7.5 years, expected volatility of 33% and expected dividends of 1.23%.

There were no stock options granted in 2022 and 2021 and 5,805 in 2019. The weighted-average fair value of options granted in 2019 was $21.31 per share. The intrinsic value of options exercised was $0.26 million, $0.00 million and $0.00 million for 2022, 2021 and 2020, respectively.

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, 2019	13,025	$	45.92	5.41	248
Granted	—
Exercised	—
Balance, December 31, 2020	13,025	$	45.92	4.47	216
Granted	—
Exercised	—
Balance, December 31, 2021	13,025	$	45.92	3.47	288
Granted	—
Exercised	(7,220)
Balance, December 31, 2022	5,805	$	62.00	6.4	$	58

Other pertinent information related to the options outstanding at December 31, 2022 is as follows:


Exercise Price	Number Outstanding	Remaining Contractual Life	Number Exercisable
62.00	5,805	77 months	—
	5,805		—

As of December 31, 2022, the outstanding options have a weighted-average exercise price of $62.00 per share and a weighted average remaining contractual term of 6.40 years. There was $0.04 million in unrecognized compensation cost for stock options granted under the plan as of December 31, 2022. The cost is expected to be recognized over a weighted-average period of 1.40 years. As of December 31, 2022, there were zero vested option shares.

As of December 31, 2022, 197,245 shares were available for stock options and awards under the 2020 Stock Option and Incentive Plan (2020 Plan). The 2010 Stock Option and Incentive Plan (2010 Plan) was discontinued upon the approval of the 2020 Plan in April 2020. No stock options or stock awards will be issued from the 2010 Plan after April 2020. The Compensation and Incentive Stock Committee is also authorized to grant awards of restricted common stock. A summary of the restricted stock option activity for the year ended December 31, 2022 is as follows:


	2020 Stock Option and Incentive Plan		2010 Stock Option and Incentive Plan
	Number of Shares	Weighted Average Grant Date Fair Value	Number of Shares	Weighted Average Grant Date Fair Value
Balance, December 31, 2021	208,543		29,316
Authorization of shares	—		—
Granted	18,935	$71.94	—	$0.00
Forfeited	7,637	$65.57	5,090	$56.98
Balance, December 31, 2022	197,245		34,406

The Company authorized the issuance of 18,935 shares in 2022, 24,513 shares in 2021, and 20,427 shares in 2020 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, 2022, 2021 and 2020 was $0.88

million, $0.92 million and $0.95 million, respectively. 6,800, 12,800 and 10,800 shares of the restricted common stock shares awarded in December 31, 2022, 2021 and 2020, are subject to forfeiture upon termination of the employee's employment with the Company within eight years of the award.