EMPLOYEE BENEFIT PLANS

Pursuant to the terms of the City Holding Company 2013 Incentive Plan (the "2013 Plan"), 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 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 under the 2013 Plan upon the exercise of stock options, SARs and stock awards, subject to certain limitations. 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 December 31, 2018, 532,552 shares were still available to be issued under the 2013 Plan.

Each award from the 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. Upon a change-in-control of the Company, as defined in the 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 two factors:


(1)	The Company's three-year average return on assets ("ROA") during the three-year performance period relative to the ROA for the selected peer companies.


(a)	For the three-year performance at or below the 25th percentile, 0%of the grant will vest;at the 50th percentile, 100% of the grant will vest; at the 100th percentile, 200% of the grant will vest.


(b)	The amount vested will be interpolated accordingly for performance between the 25th and 50th percentile and the 50th and 100th percentile.


(2)	The Company's total shareholder return ("TSR") during the three-year performance period relative to the TSR of the selected peer companies.


(a)	The ultimate vesting of PSUs will be increased or decreased as determined by a modifier based on the Company's TSR relative to the selected peer companies.


(b)	For relative TSR at or below the 25th percentile, the number of PSUs vested will be reduced by 25%; at the 50th percentile the vesting will not be adjusted; at or above the 75th percentile, the vesting will be increased by 25%.


(b)	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:



	2018					2017				2016
	Options		Weighted-Average Exercise Price			Options		Weighted-Average Exercise Price		Options		Weighted-Average Exercise Price
Outstanding at January 1	87,605		$	47.15		86,613		$	41.08	95,015		$	38.38
Granted	—		—			17,631		66.32		24,348		43.73
Exercised	(29,633	)	(39.31		)	(16,639	)	35.91		(32,750	)	35.28
Forfeited	—		—			—		—		—		—
Outstanding at December 31	57,972		$	51.15		87,605		$	47.15	86,613		$	41.08

Exercisable at end of year	2,697		$	45.13		7,887		$	37.37	3,000		$	29.45

Nonvested at beginning of year	79,718		48.08			83,613		41.47		75,265		39.38
Granted during the year	—		—			17,631		66.32		24,348		43.73
Vested during the year	(24,443	)	40.58			(21,526	)	37.31		(16,000	)	35.09
Forfeited during the year	—		—			—		—		—		—
Nonvested at end of year	55,275		$	51.40		79,718		$	48.08	83,613		$	41.47

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



	For the year ended December 31,
	2018		2017		2016
Proceeds from stock option exercises	$	1,164	$	597	$	1,155
Intrinsic value of stock options exercised	944		481		551

Stock-based compensation expense associated with stock options	$	178	$	246	$	240
Income tax benefit recognized related to stock-based compensation	19		42		36

At period-end:	2018
Unrecognized stock-based compensation expense	$	204
Weighted average period in which the above amount is expected to be recognized	2.0		years

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 2018, 2017 and 2016, all shares issued in connection with stock option exercises and restricted stock awards 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 December 31, 2018, the criteria were probable of being met.

Additional information regarding the Company's stock options outstanding and exercisable at December 31, 2018, is provided in the following table:



Ranges of Exercise Prices	No. of Options Outstanding	Weighted-Average Exercise Price		Weighted-Average Remaining Contractual Life (Months)	Aggregate Intrinsic Value (in thousands)		No. of Options Currently Exercisable	Weighted-Average Exercise Price of Options Currently Exercisable		Weighted-Average Remaining Contractual Life (Months)	Aggregate Intrinsic Value of Options Currently Exercisable (in thousands)
$ 35.00 - 39.99	38	$	37.74	4.2	$	1	38	$	37.74	4.2	$	1
40.00 - 44.99	30,676	43.87		6.8	728		1,675	44.43		5.2	39
45.00 - 49.99	9,627	46.61		6.2	202		984	46.61		6.2	21
50.00 - 69.99	17,631	66.32		8.2	22		—	—		—	—
	57,972				$	953	2,697				$	61

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 by the Company:



	For the year ended December 31,
	2017		2016

Risk-free interest rate	2.12	%	1.43	%
Expected dividend yield	2.60	%	3.86	%
Volatility factor	25.80	%	30.76	%
Expected life of option	7.0 years		7.0 years

Restricted Shares

The Company measures 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 charged to expense over the respective vesting periods.

Restricted shares are generally forfeited if officers and employees terminate 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 the restricted shares that have performance-based criteria, management has evaluated those criteria and has determined that, as of December 31, 2018, the criteria were probable of being met.

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



	2018				2017				2016
	Restricted Awards		Average Market Price at Grant		Restricted Awards		Average Market Price at Grant		Restricted Awards		Average Market Price at Grant

Outstanding at January 1	170,033				180,622				172,921
Granted	28,363		$	69.94	28,839		$	64.42	30,601		$	46.39
Forfeited/Vested	(48,704	)			(39,428	)			(22,900	)
Outstanding at December 31	149,692				170,033				180,622

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



	For the year ended December 31,
	2018		2017		2016
Stock-based compensation expense associated with restricted shares	$	1,609	$	1,507	$	1,371

At period-end:	2018
Unrecognized stock-based compensation expense	$	3,594
Weighted average period in which the above amount is expected to be recognized	3.1		years

401(k) Plan

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). Information regarding the Company’s 401(k) plan is provided in the following table (dollars in thousands):



	For the year ended December 31,
	2018		2017		2016
Expense associated with the Company's 401(k) Plan	$	905	$	841	$	796

At period-end:
Number of shares of the Company's common stock held by the 401(k) Plan	229,276		228,662

Defined Benefit Plans

The Company maintains two 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 Horizon Defined Benefit Plan was frozen in 1999 and maintains a December 31st year-end for purposes of computing its benefit obligations. The Community Defined Benefit Plan was frozen in 2012 and was terminated during the year-ended December 31, 2018.

Primarily as a result of the interest rate environment over the past several years and mortality table revisions, the benefit obligation exceeded the estimated fair value of plan assets as of December 31, 2018 and December 31, 2017. The following table summarizes activity within the Company's Defined Benefit Plans (dollars in thousands):



	Pension Benefits
	2018			2017

Change in fair value of plan assets:
Fair value at beginning of measurement period	$	16,360		$	17,117
Actual gain (loss) on plan assets	(434		)	1,890
Contributions	1,509			—
Benefits paid	(5,394		)	(2,647		)
Fair value at end of measurement period	12,041			16,360

Change in benefit obligation:
Benefit obligation at beginning of measurement period	(18,488		)	(19,742		)
Interest cost	(590		)	(772		)
Actuarial (loss) gain	(1,488		)	(392		)
Assumption changes	825			(614		)
Benefits paid	5,394			2,647
Settlement loss	125			385
Benefit obligation at end of measurement period	(14,222		)	(18,488		)

Funded status	$	(2,181	)	$	(2,128	)

Weighted-average assumptions for benefit obligation:
Discount rate	4.10		%	3.38		%
Expected long-term rate of return	6.75		%	6.56		%

Weighted-average assumptions for net periodic pension cost:
Discount rate	3.38		%	4.02		%
Expected long-term rate of return	6.56		%	5.83		%

Based on the funding status of the Horizon Defined Benefit Plan, no contributions were required during the years ended December 31, 2018 and 2017, and no contributions are anticipated being required for the year ending December 31, 2019.

During 2017, the Company initiated the process to terminate the Community Defined Benefit plan. The Company made a $1.5 million terminal contribution in 2018 to terminate the plan.

The following table presents the components of the net periodic pension cost of the Company's Defined Benefit Plans, which is recognized in Other Expenses in the Consolidated Statements of Income (in thousands):



	2018			2017			2016

Components of net periodic benefit:
Interest cost	$	590		$	772		$	820
Expected return on plan assets	(1,080		)	(1,219		)	(1,154		)
Settlement	71			(104		)	—
Net amortization and deferral	890			849			849
Net Periodic Pension Cost	$	471		$	298		$	515

Amounts related to the Company's Defined Benefit Pension Plans recognized as a component of other comprehensive income were as follows (in thousands):



	2018			2017			2016
Net actuarial gain (loss)	$	(1,092	)	$	838		$	157
Deferred tax (expense) benefit	254			(1,211		)	(58		)
Other comprehensive income (loss), net of tax	$	(838	)	$	(373	)	$	99

Amounts recognized as a component of accumulated other comprehensive loss as of December 31, 2018 and 2017 were as follows (in thousands):



	2018			2017
Net actuarial loss	$	7,652		$	6,560
Deferred tax benefit	(1,781		)	(1,527		)
Amounts included in accumulated other comprehensive loss, net of tax	$	5,871		$	5,033

The following table summarizes the expected benefits to be paid in each of the next five years and in the aggregate for the five years thereafter (in thousands):



Plan Year Ending December 31,	Expected Benefits to be Paid

2019	$	1,012
2020	1,016
2021	1,010
2022	1,010
2023	1,016
2024 through 2027	4,958

The major categories of assets in the Company’s Defined Benefit Plans as of year-end are presented in the following table (in thousands). Assets are segregated by the level of the valuation inputs within the fair value hierarchy established by ASC Topic 820 utilized to measure fair value (See Note Nineteen).



	Total		Level 1		Level 2		Level 3
2018
Cash and cash equivalents	$	12,041	$	12,041	$	—	$	—
Total	$	12,041	$	12,041	$	—	$	—

2017
Cash and cash equivalents	$	1,202	$	1,202	$	—	$	—
Mutual funds/Investment funds	5,421		5,206		215		—
Common stocks	5,575		3,763		1,812		—
Mortgage-backed securities	301		—		301		—
U.S. Treasuries	1,277		—		1,277		—
Corporate bonds	1,223		—		1,223		—
Alternative investments**	1,361		759		—		—
Total	$	16,360	$	10,930	$	4,828	$	—
** Includes an investment of $602 at December 31, 2017 that has not been categorized in the fair value hierarchy, as permitted by ASU No. 2015-07.

Horizon Defined Benefit Plan (Investment Strategy)

During the fourth quarter of 2018, the Company changed the administrator of The Horizon Defined Benefit Plan to its trust department. The Company's pension committee is in the process of revising the plan's investment strategy and it anticipates adopting a similar investment strategy, with a target allocation of 75% equity securities and 25% fixed income securities. Pending the adoption of the revised investment strategy, the plan assets are being held in a low-risk, cash and cash equivalent investment.

Previously, the overall investment return goal was to achieve a return greater than a blended mix of the S&P 500 and the Barclay's Capital Aggregate Bond Index, which is tailored to the same asset mix of the retirement plan assets, by 0.5% annualized after fees over a rolling five years moving average basis. In order to achieve a prudent level of portfolio diversification, the securities of any one company are not to exceed more than 15% of the cost and/or market value of the total retirement plan assets, and no more than 25% of the total retirement plan assets are to be invested in any one industry (other than securities of the U.S. government or agencies thereof). At December 31, 2017, the plan assets were invested in equity securities (48%), fixed income securities (25%), cash and cash equivalents (15%), and alternative investments (12%). Prior to the asset transfer in 2018, plan assets were invested in equity securities (44%), fixed income securities (21%), cash and cash equivalents (26%), and alternative investments (9%), which were in the allowable allocation range under the previous policy. The pension committee anticipates adopting a similar strategy.

Pentegra Defined Benefit Plan

The Company and its subsidiary participate in the Pentegra Defined Benefit Plan for Financial Institutions ("The Pentegra DB Plan"), a tax-qualified defined benefit pension plan. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers. The funded statuses below are as of July 1, 2018 (the latest available valuation report). It is the policy of the Company to fund the normal cost of the Pentegra DB Plan on an annual basis. Other than for normal plan expenses, no contributions were required for the years ended December 31, 2018, 2017 and 2016. The benefits of the original Pentegra Defined Benefit Plan were frozen prior to the acquisition of Classic Bancshares ("Classic") in 2005, and the benefits of the Poage Pentegra Defined Benefit Plan were frozen prior to the acquisition of Poage in 2018. It is the intention of the Company to fund benefit amounts when assets of the plan are not sufficient.



Pentegra DB Plan's Employer Identification Number	13-5645888
Plan Number	333

Funded status for plan inherited with Classic acquisition	93.01%
Funded status for plan inherited with Poage acquisition	98.11%

Employment Contracts

The Company has entered into employment contracts with certain of its current executive officers. The employment contracts provide for, among other things, the payment of termination compensation in the event an executive officer either voluntarily or involuntarily terminates his employment with the Company for other than "Just Cause" as defined in the applicable employment contract. Certain of the employment contracts provide for a termination benefit that became fully vested in 2005 and is payable if and when the executive officer terminates his employment with the Company. The termination benefit grows each year at an amount equal to the one-year constant maturity treasury rate and cannot be forfeited except where the executive officer personally profits from willful fraudulent activity that materially and adversely affects the Company. The costs of this vested termination benefit have been fully accrued and expensed by the Company as of December 31, 2018. The liability was $2.1 million and $2.0 million at December 31, 2018 and 2017, respectively.