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 restricted 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 Company's 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 under the 2013 Plan. 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 common 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, 2018, approximately 536,000 shares were still available to be issued under the 2013 Plan.

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 granted pursuant to the 2013 Plan 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. To meet the performance-based vesting requirement, the Company's mean return on average assets of the three, four and five year period prior to the respective vesting date must meet or exceed the median return on average assets over the 20 year period immediately preceding the vesting date of all FDIC insured depository institutions. The mean return on average assets excludes merger and acquisition expenses and other nonrecurring items as determined by the Board of Directors of the Company.

In 2018, the Board of Directors granted the named executive officers ("NEOs") of the Company restricted stock units ("RSUs") and performance share units ("PSUs"). The RSUs will vest in three separate annual installments of approximately 33.33% per installment on the first, second and third anniversaries of the grant date, subject to a two-year holding period. The PSUs will vest on the third anniversary of the grant date. The payout for the PSUs will be determined based on (1) the Company's three-year relative average return on assets ("ROA") during the three-year performance period relative to the ROA for the selected peer companies and (2) the Company's total shareholder return ("TSR") relative to the TSR of the selected peer companies during the three-year performance period. If the three-year relative ROA is at or below the 25th percentile, 0% of the PSU grant will be earned; at the 50th percentile, 100% of the PSU grant will be earned; or at the 100th percentile, 200% of the PSU grant will be earned. The amount vested will be interpolated accordingly for performance between the 25th and 50th percentile and the 50th and 100th percentile. The payout of the PSUs will be increased or decreased as determined by a modifier based on the Company's TSR. If the three-year relative TSR is at or below the 25th percentile, the number of PSUs granted will be reduced by 25%; at the 50th percentile, the number of PSUs granted will not be adjusted; or at or above the 75th percentile, the number of PSUs granted will be increased by 25%. The amount vested will be interpolated accordingly for performance between the 25th and 50th percentile and the 50th and 75th percentile.

Stock Options

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



	Nine months ended September 30,
	2018				2017
	Options		Weighted-Average Exercise Price		Options		Weighted-Average Exercise Price
Outstanding at January 1	87,605		$	47.15	86,613		$	41.08
Granted	—		—		17,631		66.32
Exercised	(29,133	)	39.47		(16,639	)	35.91
Outstanding at September 30	58,472		$	50.97	87,605		$	47.15

Exerciseable at September 30	3,197		$	42.82	7,887		$	37.37

Information regarding stock option exercises and stock-based compensation expense associated with stock options is provided in the following table (in thousands):



	Nine months ended September 30,
	2018		2017
Proceeds from stock option exercises	$	1,149	$	597
Intrinsic value of stock options exercised	944		481

Stock-based compensation expense associated with stock options	$	137	$	186

At period-end:	September 30, 2018
Unrecognized stock-based compensation expense associated with stock options	$	245
Weighted average period (in years) in which the above amount is expected to be
recognized	2.1

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, 2018 and 2017, all shares issued in connection with stock option exercises were issued from available treasury stock. For the stock options that have performance-based criteria, management has evaluated those criteria and has determined that, as of September 30, 2018, the criteria were probable of being met.

Additional information regarding stock options outstanding and exercisable at September 30, 2018 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)
$30.00 - $34.99	500	$	30.38	0.2	$	23	500	$	30.38	0.2	$	23
35.00 - 39.99	38	37.74		4.4	1		38	37.74		4.4	1
40.00 - 44.99	30,676	43.87		7.0	1,010		1,675	44.43		5.5	54
45.00 - 49.99	9,627	46.61		6.4	291		984	46.61		6.4	30
65.00 - 70.00	17,631	66.32		8.4	185		—	—		—	—
	58,472				$	1,510	3,197				$	108

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,
	2017
Risk-free interest rate	2.12	%
Expected dividend yield	2.60	%
Volatility factor	25.80	%
Expected life of option	7.0 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 the awardee officer or employee terminates his employment with the Company 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, and 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. For restricted shares that have performance-based criteria, management has evaluated those criteria and has determined that, as of September 30, 2018, the criteria were probable of being met.

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



	Nine months ended September 30,
	2018				2017
	Restricted Awards		Average Market Price at Grant		Restricted Awards		Average Market Price at Grant
Outstanding at January 1	170,033		$	44.34	182,122		$	39.40
Granted	28,363		69.94		27,339		64.42
Forfeited	—		—		(1,850	)	42.25
Vested	(48,104	)	37.31		(37,278	)	35.02
Outstanding at September 30	150,292		$	51.42	170,333		$	44.35

Information regarding stock-based compensation associated with restricted shares is provided in the following table (in thousands):



	Nine months ended September 30,
	2018		2017
Stock-based compensation expense associated with restricted shares	$	1,201	$	1,107

At period-end:	September 30, 2018
Unrecognized stock-based compensation expense associated with restricted shares	$	4,003
Weighted average period (in years) in which the above amount is expected to be
recognized	3.3

Shares issued in connection with restricted stock awards 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, 2018 and 2017, all shares issued in connection with restricted stock awards were issued from available treasury stock.

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 also 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). During 2017, the Company initiated the process to terminate the Community Defined Benefit plan. The Company anticipates making a $1.6 million contribution in late 2018 (which has been accrued as of September 30, 2018), when the termination process is expected to be completed.

The following table presents details of the Company's activities pursuant to these plans (in thousands):



	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Components of net periodic cost:
Interest cost	$	147		$	193		$	442		$	579
Expected return on plan assets	(270		)	(294		)	(810		)	(883		)
Net amortization and deferral	218			212			655			641
Settlement	—			—			151			—
Net Periodic Pension Cost	$	95		$	111		$	438		$	337

401(k) Plan expense	$	190		$	207		$	619		$	654

The components of net periodic benefit cost are included in the line item "Other Expenses" in the consolidated statements of income.