Employee Benefit Plans

Pursuant to the terms of the City Holding Company 2003 Incentive Plan and the City Holding Company 2013 Incentive Plan (the "2003 Plan” and "2013 Plan", respectively), the Compensation Committee of the Board of Directors, or its delegate, may, from time-to-time, grant stock options, stock appreciation rights (“SARs”), or stock awards to employees, directors and individuals who provide service to the Company (collectively, "Plan Participants"). The 2003 Plan expired in April of 2013 and the 2013 Plan was approved by the shareholders in April 2013. A maximum of 750,000 shares of the Company’s common stock may be issued upon the exercise of stock options, SARs and stock awards. These limitations may be adjusted in the event of a change in the number of outstanding shares of common stock by reason of a stock dividend, stock split or other similar event. Specific terms of options and SARs awarded, including vesting periods, exercise prices (stock price at date of grant) and expiration dates are determined at the date of grant and are evidenced by agreements between the Company and the awardee. The exercise price of the option grants equals the market price of the Company’s stock on the date of grant. All incentive stock options and SARs will be exercisable up to 10 years from the date granted and all options and SARs are exercisable for the period specified in the individual agreement. As of September 30, 2015, under the 2003 Plan and 2013 Plan, 438,515 stock options had been awarded and 241,596 restricted stock awards had been awarded, respectively.

Each award from the 2003 Plan and 2013 Plan is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Compensation Committee, or its delegate, determines. The option price for each grant is equal to the fair market value of a share of the Company’s common stock on the date of the grant. Options granted expire at such time as the Compensation Committee, or its delegate, determines at the date of the grant and in no event does the exercise period exceed a maximum of ten years. Upon a change-in-control of the Company, as defined in the 2003 Plan and 2013 Plan, all outstanding options and awards shall immediately vest.

Certain stock options and restricted stock awards have performance-based vesting requirements. These shares will vest in three separate annual installments of approximately 33.33% per installment on the third, fourth and fifth anniversaries of the grant date, subject further to performance-based vesting requirements. The performance-based vesting requirements are as follows:

* First Installment – the mean return on average assets of the Company (excluding merger and acquisition expenses and other nonrecurring items as determined by the Board of Directors of the Company) of the three years immediately prior to the vesting date is equal to or exceeds the median return on average assets over the 20 year period immediately preceding the vesting date of all FDIC insured depository institutions.

* Second Installment – the mean return on average assets of the Company (excluding merger and acquisition expenses and other nonrecurring items as determined by the Board of Directors of the Company) of the four years immediately prior to the vesting date is equal to or exceeds the median return on average assets over the 20 year period immediately preceding the vesting date of all FDIC insured depository institutions.

* Third Installment – the mean return on average assets of the Company (excluding merger and acquisition expenses and other nonrecurring items as determined by the Board of Directors of the Company) of the five years immediately prior to the vesting date is equal to or exceeds the median return on average assets over the 20 year period immediately preceding the vesting date of all FDIC insured depository institutions.

Stock Options

A summary of the Company’s stock option activity and related information is presented below:



	Nine months ended September 30,
	2015				2014
	Options		Weighted-Average Exercise Price		Options		Weighted-Average Exercise Price
Outstanding at January 1	167,554		$	36.74	173,601		$	35.26
Granted	12,961		46.41		13,953		44.43
Exercised	(71,750	)	37.01		(19,000	)	29.13
Forfeited	(4,000	)	31.66		—		—
Outstanding at September 30	104,765		$	37.95	168,554		$	36.71

Additional information regarding stock options outstanding and exercisable at September 30, 2015, is provided in the following table:



Ranges of Exercise Prices	No. of Options Outstanding	Weighted-Average Exercise Price	Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in thousands)		No. of Options Currently Exercisable	Weighted-Average Exercise Price of Options Currently Exercisable		Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value of Options Currently Exercisable (in thousands)
25.00 - 29.99	1,250	28.15	3.5	$	26	1,250	$	28.15	3.5	$	26
30.00 - 34.99	17,750	31.63	4.1	314		17,750	31.63		4.1	314
35.00 - 39.99	51,851	36.10	6.0	684		41,000	39.13		1.3	417
40.00 - 44.99	20,953	43.24	6.5	127		7,000	40.88		2.5	59
45.00 - 50.00	12,961	46.41	9.4	37		—	—		—	—
	104,765			$	1,188	67,000				$	816

Proceeds from stock option exercises were $2.7 million and $0.6 million during the nine months ended September 30, 2015 and 2014, respectively. Shares issued in connection with stock option exercises are issued from available treasury shares. If no treasury shares are available, new shares would be issued from available authorized shares. During the nine months ended September 30, 2015 and 2014 all shares issued in connection with stock option exercises and restricted stock awards were issued from available treasury stock.

The total intrinsic value of stock options exercised was $0.7 million and $0.3 million during the nine months ended September 30, 2015 and 2014, respectively.

Stock-based compensation expense was approximately $0.2 million and $0.1 million for the nine months ended September 30, 2015 and 2014, respectively. Unrecognized stock-based compensation expense related to stock options approximated $0.5 million at September 30, 2015. At such date, the weighted-average period over which this unrecognized expense was expected to be recognized was 1.4 years.

The fair value of the options is estimated at the date of grant using a Black-Scholes option-pricing model. The following weighted average assumptions were used to estimate the fair value of options granted:



	Nine months ended September 30,
	2015		2014
Risk-free interest rate	1.95	%	2.42	%
Expected dividend yield	3.50	%	3.60	%
Volatility factor	45.40	%	48.75	%
Expected life of option	7.0 years		8.0 years

Restricted Shares

The Company records compensation expense with respect to restricted shares in an amount equal to the fair value of the common stock covered by each award on the date of grant. The restricted shares awarded become fully vested after various periods of continued employment from the respective dates of grant. The Company is entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Compensation is being charged to expense over the respective vesting periods.

Restricted shares are forfeited if officers and employees terminate prior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury share repurchases and any compensation cost previously recognized is reversed in the period of forfeiture. Recipients of restricted shares do not pay any cash consideration to the Company for the shares, have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested. Stock-based compensation expense related to restricted shares was approximately $0.9 million and $0.8 million for the nine months ended September 30, 2015 and 2014, respectively. Unrecognized stock-based compensation expense related to non-vested restricted shares was $3.1 million at September 30, 2015. At September 30, 2015, this unrecognized expense is expected to be recognized over 3.3 years based on the weighted average-life of the restricted shares.

A summary of the Company’s restricted shares activity and related information is presented below:



	Nine months ended September 30,
	2015				2014
	Restricted Awards		Average Market Price at Grant		Restricted Awards		Average Market Price at Grant
Outstanding at January 1	163,431				142,469
Granted	25,440		$	46.35	27,162		$	39.72
Forfeited/Vested	(17,050	)			(6,200	)
Outstanding at September 30	171,821				163,431

Benefit Plans

The Company provides retirement benefits to its employees through the City Holding Company 401(k) Plan and Trust (the “401(k) Plan”), which is intended to be compliant with Employee Retirement Income Security Act (ERISA) section 404(c). The Company’s total expense associated with the retirement benefit plan approximated $0.6 million for both the nine month periods ended September 30, 2015 and 2014.

The Company maintains two frozen defined benefit pension plans the (“Defined Benefit Plans”), which were inherited from the Company's acquisition of the plan sponsors (Horizon Bancorp, Inc. and Community Financial Corporation). The Company made contributions of approximately $0.3 million to the Defined Benefit Plans during each of the nine months ended September 30, 2015 and 2014, respectively.

The following table presents the components of the net periodic pension cost of the Defined Benefit Plans (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
Components of net periodic cost:
Interest cost	$	203		$	209		$	668		$	634
Expected return on plan assets	(234		)	(252		)	(757		)	(779		)
Net amortization and deferral	244			150			714			538
Net Periodic Pension Cost	$	213		$	107		$	625		$	393