EX-13 2 exhibit1312-31x14.htm EXHIBIT 13 Exhibit 13 12-31-14
Selected Financial Data                                     Exhibit 13
Table One
Five-Year Financial Summary
(in thousands, except per share data)
 
2014
2013
2012
2011
2010
Summary of Operations
 
 
 
 
 
Total interest income
$
129,566

$
138,539

$
112,212

$
112,888

$
121,916

Total interest expense
11,960

13,301

14,450

20,758

27,628

Net interest income
117,606

125,238

97,762

92,130

94,288

Provision for loan losses
4,054

6,848

6,375

4,600

7,093

Total other income
58,722

58,006

55,257

54,860

48,939

Total other expenses
95,041

102,906

87,401

81,141

78,721

Income before income taxes
77,233

73,490

59,243

61,249

57,413

Income tax expense
24,271

25,275

20,298

20,571

18,453

Net income available to common  shareholders
52,962

48,215

38,945

40,678

38,960

 
 
 
 
 
 
Per Share Data
 
 
 
 
 
Net income basic
$
3.40

$
3.07

$
2.63

$
2.68

$
2.48

Net income diluted
3.38

3.04

2.61

2.67

2.47

Cash dividends declared
1.60

1.48

1.40

1.37

1.36

Book value per share
25.79

24.61

22.47

21.05

20.31

 
 
 
 
 
 
Selected Average Balances
 
 
 
 
 
Total loans
$
2,593,597

$
2,523,755

$
2,041,876

$
1,899,388

$
1,820,588

Securities
365,904

360,860

409,431

454,513

507,915

Interest-earning assets
2,968,706

2,905,783

2,489,072

2,391,484

2,348,258

Deposits
2,824,985

2,821,573

2,338,891

2,221,414

2,190,324

Long-term debt
16,495

16,495

16,495

16,495

16,876

Shareholders’ equity
395,940

373,102

325,073

316,161

316,030

Total assets
3,404,818

3,378,351

2,837,234

2,701,720

2,654,497

 
 
 
 
 
 
Selected Year-End Balances
 
 
 
 
 
Net loans
$
2,631,916

$
2,585,622

$
2,127,560

$
1,953,694

$
1,846,776

Securities
354,686

370,120

402,039

396,175

453,585

Interest-earning assets
3,016,477

2,986,194

2,574,684

2,374,804

2,334,921

Deposits
2,872,787

2,785,133

2,409,316

2,221,268

2,171,375

Long-term debt
16,495

16,495

16,495

16,495

16,495

Shareholders’ equity
390,853

387,623

333,274

311,134

314,861

Total assets
3,461,633

3,368,238

2,917,466

2,777,109

2,637,295

 
 
 
 
 
 
Performance Ratios
 
 
 
 
 
Return on average assets
1.56
%
1.43
%
1.37
%
1.51
%
1.47
%
Return on average equity
13.38

12.92

11.98

12.87

12.33

Return on average tangible common equity
16.49

16.20

14.74

15.66

15.02

Net interest margin
3.98

4.33

3.96

3.89

4.06

Efficiency ratio
53.72

55.82

57.16

55.87

52.93

Dividend payout ratio
47.06

48.21

53.23

51.12

54.84

 
 
 
 
 
 
Asset Quality
 
 
 
 
 
Net charge-offs to average loans
0.17
%
0.20
%
0.34
%
0.18
%
0.41
%
Provision for loan losses to average loans
0.16

0.27

0.31

0.24

0.39


1


Allowance for loan losses to nonperforming loans
128.10

90.25

96.59

87.76

156.39

Allowance for loan losses to total loans
0.76

0.79

0.88

0.98

0.98

 
 
 
 
 
 
Consolidated Capital Ratios
 
 
 
 
 
Total
14.19
%
13.84
%
13.85
%
14.07
%
14.81
%
Tier I Risk-based
13.36

13.00

12.97

13.12

13.88

Tier I Leverage
9.89

9.80

9.82

10.18

10.54

Average equity to average assets
11.63

11.04

11.46

11.70

11.91

Tangible equity to tangible assets (end of period)
9.35

9.49

9.40

9.37

10.01

 
 
 
 
 
 
Full-time equivalent employees
889

923

843

795

805



2


TWO-YEAR SUMMARY OF
COMMON STOCK PRICES AND DIVIDENDS

 
Cash Dividends
Per Share
 
Market
Low
 
High
2014
 
 
 
 
 
Fourth Quarter
$
0.40

 
$
41.88

 
$
46.95

Third Quarter
0.40

 
41.20

 
46.44

Second Quarter
0.40

 
41.74

 
46.43

First Quarter
0.40

 
42.15

 
46.69

 
 
 
 
 
 
2013
 
 
 
 
 
Fourth Quarter
$
0.37

 
$
41.87

 
$
49.21

Third Quarter
0.37

 
40.04

 
46.13

Second Quarter
0.37

 
36.87

 
40.43

First Quarter
0.37

 
36.07

 
40.05


*As more fully discussed under the caption Liquidity in Management’s Discussion and Analysis and in Note Nineteen of the Notes to Consolidated Financial Statements, the Company’s ability to pay dividends to its shareholders is dependent upon the ability of City National to pay dividends to City Holding (“Parent Company”).
 
The Company’s common stock trades on the NASDAQ Global Select Market under the symbol CHCO. The above table sets forth the cash dividends paid per share and information regarding the market prices per share of the Company’s common stock for the periods indicated. The price ranges are based on transactions as reported on the NASDAQ stock market. At February 25, 2015, there were 2,847 shareholders of record.


3


MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
CITY HOLDING COMPANY
 
City Holding Company (the “Company”), a West Virginia corporation headquartered in Charleston, West Virginia, is a registered financial holding company under the Bank Holding Company Act and conducts its principal activities through its wholly owned subsidiary, City National Bank of West Virginia ("City National"). City National is a retail and consumer-oriented community bank with 82 banking offices in West Virginia (57), Virginia (14), Kentucky (8) and Ohio (3). City National provides credit, deposit, and trust and investment management services to its customers. In addition to its branch network, City National's delivery channels include ATMs, mobile banking, debit cards, interactive voice response systems, and Internet technology. The Company’s business activities are currently limited to one reportable business segment, which is community banking. City National has approximately 11% of the deposit market share in the counties of West Virginia it serves. In the Company’s key markets, the Company’s primary subsidiary, City National, generally ranks in the top three relative to deposit market share and the top two relative to branch share.

On January 10, 2013, the Company acquired Community Financial Corporation and its wholly owned subsidiary, Community Bank (collectively, "Community"). As a result of this acquisition, the Company acquired eight branches along the I-81 corridor in western Virginia and two branches in Virginia Beach, Virginia. On September 5, 2013, the Company announced the closure of the Lake James branch, which was a branch acquired as a result of this acquisition. On May 31, 2012, the Company acquired Virginia Savings Bancorp, Inc. and its wholly owned subsidiary, Virginia Savings Bank (collectively, "Virginia Savings"). As a result of this acquisition, the Company acquired five branches which expanded its footprint into Virginia.
 
CRITICAL ACCOUNTING POLICIES
 
The accounting policies of the Company conform to U.S. generally accepted accounting principles and require management to make estimates and develop assumptions that affect the amounts reported in the financial statements and related footnotes. These estimates and assumptions are based on information available to management as of the date of the financial statements. Actual results could differ significantly from management’s estimates. As this information changes, management’s estimates and assumptions used to prepare the Company’s financial statements and related disclosures may also change. The most significant accounting policies followed by the Company are presented in Note One of the Notes to Consolidated Financial Statements included herein. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, income taxes, other-than-temporary impairment on investment securities and purchased credit-impaired loans to be the accounting areas that require the most subjective or complex judgments and, as such, could be most subject to revision as new information becomes available.

The Allowance and Provision for Loan Losses section of this Annual Report to Shareholders provides management’s analysis of the Company’s allowance for loan losses and related provision. The allowance for loan losses is maintained at a level that represents management’s best estimate of probable losses in the loan portfolio. Management’s determination of the appropriateness of the allowance for loan losses is based upon an evaluation of individual credits in the loan portfolio, historical loan loss experience, current economic conditions, and other relevant factors. This determination is inherently subjective, as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses related to loans considered to be impaired is generally evaluated based on the discounted cash flows using the impaired loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. 

The Income Taxes section of this Annual Report to Shareholders provides management’s analysis of the Company’s income taxes.  The Company is subject to federal and state income taxes in the jurisdictions in which it conducts business.  In computing the provision for income taxes, management must make judgments regarding interpretation of laws in those jurisdictions.  Because the application of tax laws and regulations for many types of transactions is susceptible to varying interpretations, amounts reported in the financial statements could be changed at a later date upon final determinations by taxing authorities.  On a quarterly basis, the Company estimates its annual effective tax rate for the year and uses that rate to provide for income taxes on a year-to-date basis.  The amount of unrecognized tax benefits could change over the next twelve months as a result of various factors.   

The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2011 through 2013. 


4


On a quarterly basis, the Company performs a review of investment securities to determine if any unrealized losses are other-than-temporarily impaired.  Management considers the following, amongst other things, in its determination of the nature of the unrealized losses, (i) the length of time and the extent to which the fair value has been less than cost; (ii) the financial condition, capital strength, and near–term (12 months) prospects of the issuer, including any specific events which may influence the operations of the issuer; (iii) the historical volatility in the market value of the investment and/or the liquidity or illiquidity of the investment; (iv) adverse conditions specifically related to the security, an industry, or a geographic area; or (v) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.  The Company continues to actively monitor the fair values of its investments along with the financial strength of the issuers behind these securities, as well as its entire investment portfolio.  Based on the market information available, the Company believes that (i) the declines in fair value are temporary, driven by fluctuations in the interest rate environment and not due to the creditworthiness of the issuers, (ii) the Company does not have the intent to sell any of the securities classified as available for sale, and (iii) it is more likely than not that the Company will not have to sell any such securities before a recovery of cost.  The Company cannot guarantee that such securities will recover and if additional information becomes available in the future to suggest that the losses are other-than-temporary, the Company may need to record additional impairment charges in future periods.

The Company values purchased credit-impaired loans at fair value in accordance with ASC Topic 310-30. In determining the estimated fair value, management considers several factors, such as estimated future credit losses, estimated prepayments, remaining lives of the acquired loans and the estimated value of the underlying collateral in determining the present value of the cash flows expected to be received. For these loans, the expected cash flows that exceed the fair value of the loan represent the accretable yield, which is recognized as interest income on a level-yield basis over the expected cash flow periods of the loans. The non-accretable difference represents the difference between the contractually required principal and interest payments and the cash flows expected to be collected based upon management's estimation. Subsequent decreases in the expected cash flows will require the Company to evaluate the need for additions to the Company's allowance for loan losses. Subsequent increases in the expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges with a corresponding adjustment to the accretable yield, which will result in the recognition of additional interest income over the remaining lives of the loans.

 
FAIR VALUE MEASUREMENTS
 
The Company determines the fair value of its financial instruments based on the fair value hierarchy established in ASC Topic 820, whereby the fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC Topic 820 establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The hierarchy classification is based on whether the inputs in the methodology for determining fair value are observable or unobservable. Observable inputs reflect market-based information obtained from independent sources (Level 1 or Level 2), while unobservable inputs reflect management’s estimate of market data (Level 3). Assets and liabilities that are actively traded and have quoted prices or observable market data require a minimal amount of subjectivity concerning fair value. Management’s judgment is necessary to estimate fair value when quoted prices or observable market data are not available.

            At December 31, 2014, approximately 8% of total assets, or $264 million, consisted of financial instruments recorded at fair value. Of this total, approximately 99% or $262 million of these financial instruments used valuation methodologies involving observable market data, collectively Level 1 and Level 2 measurements, to determine fair value. Approximately 1% or $2 million of these financial instruments were valued using unobservable market information or Level 3 measurements. The financial instruments valued using unobservable market information were pooled trust preferred investment securities classified as available-for-sale. At December 31, 2014, approximately $10 million of derivative liabilities were recorded at fair value using methodologies involving observable market data. The Company does not believe that any changes in the unobservable inputs used to value the financial instruments mentioned above would have a material impact on the Company’s results of operations, liquidity, or capital resources. See Note Twenty of the Notes to Consolidated Financial Statements for additional information regarding ASC Topic 820 and its impact on the Company’s financial statements.









5


FINANCIAL SUMMARY
 
The Company’s financial performance over the previous three years is summarized in the following table:
 
2014
2013
2012
 
 
 
 
Net income (in thousands)
$
52,962

$
48,215

$
38,945

Earnings per share, basic
$
3.40

$
3.07

$
2.63

Earnings per share, diluted
$
3.38

$
3.04

$
2.61

ROA*
1.56
%
1.43
%
1.37
%
ROE*
13.38
%
12.92
%
11.98
%
ROATCE*
16.49
%
16.20
%
14.74
%

*ROA (Return on Average Assets) is a measure of the effectiveness of asset utilization. ROE (Return on Average Equity) is a measure of the return on shareholders’ investment. ROATCE (Return on Average Tangible Common Equity) is a measure of the return on shareholders’ equity less intangible assets.

The Company's net income increased $4.7 million from 2013 due primarily to decreases of $2.8 million in the provision for loan losses, a decrease in non-interest expenses of $7.9 million due to the recognition of $5.5 million of acquisition and integration expenses associated with the completed acquisition of Community Financial Corporation in 2013 and a decrease of $2.4 million in other expenses (see Non-interest Income and Expense for more analysis of those fluctuations), and income tax expense (see Income Taxes).

            The Company’s tax equivalent net interest income decreased $7.7 million, or 6.1%, from $125.9 million in 2013 to $118.2 million in 2014.  This decrease is due to an expected decrease in accretion from the fair value adjustments related to the acquisitions of Virginia Savings and Community. The Company’s reported net interest margin decreased from 4.33% for the year ended December 31, 2013 to 3.98% for the year ended December 31, 2014 (see Net Interest Income).  The Company’s provision for loan losses decreased $2.8 million from $6.8 million in 2013 to $4.1 million in 2014 (see Allowance and Provision for Loan Losses).
 
BALANCE SHEET ANALYSIS
 
Selected balance sheet fluctuations are summarized in the following table (in millions):
 
December 31,
 
 
 
2014
2013
$ Change
% Change
 
 
 
 
 
Gross loans
$
2,652.1

$
2,606.2

$
45.9

1.8
 %
Investment securities
354.7

370.1

(15.4
)
(4.2
)
Premises and equipment, net
78.0

82.5

(4.5
)
(5.5
)
Goodwill and other intangible assets, net
74.2

75.1

(0.9
)
(1.2
)
 
 
 
 
 
Total deposits
2,872.8

2,785.1

87.7

3.1

Short-term borrowings
134.9

137.8

(2.9
)
(2.1
)
Long-term debt
16.5

16.5



Total shareholders' equity
390.9

387.6

3.3

0.9


Gross loans increased $46 million, or 1.8%, from December 31, 2013 to $2.65 billion at December 31, 2014, primarily due to an increase in residential real estate loans of $90 million (7.5%) that were partially offset by net decreases in commercial real estate loans of $20 million (1.9%), commercial and industrial ("C&I") loans of $16 million (10.6%) and consumer loans of$7 million (14.4%) (see Loans).

Investment securities decreased $15 million, or 4.2%, from $370 million at December 31, 2013, to $355 million at December 31, 2014.




Premises and equipment, net decreased $5 million, or 5.5%, from $83 million at December 31, 2013 to $78 million at December 31, 2014, primarily due to routine depreciation.

Goodwill and other intangible assets decreased $1 million as a result of amortization on the Company's core deposit intangible assets.

Total deposits increased $88 million, or 3.1%, from $2.79 billion at December 31, 2013 to $2.87 billion at December 31, 2014.

Short-term borrowings decreased $3 million, or 2.1%, from December 31, 2013 to December 31, 2014. All of the Company's short-term borrowings are customer repurchase agreements.

Long-term debt balances remained flat at $16.5 million

Shareholders' equity increased $3.3 million from December 31, 2013 to December 31, 2014 (see Capital Resources).
 

7


TABLE TWO
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(In thousands)
 
 
2014
 
2013
 
2012
 
Average Balance
Interest
Yield/
Rate
 
Average Balance
Interest
Yield/
Rate
 
Average Balance
Interest
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Loan portfolio(1):
 
 
 
 
 
 
 
 
 
 
 
Residential real estate(2),(3)
$
1,385,798

55,744

4.02
%
 
$
1,304,741

55,165

4.23
%
 
$
1,114,653

49,000

4.40
%
Commercial, financial, and agriculture(3),(4)
1,154,338

54,197

4.70

 
1,154,637

62,679

5.43

 
880,502

40,815

4.64

Installment loans to individuals(3),(5)
53,461

4,530

8.47

 
64,377

6,219

9.66

 
46,721

3,311

7.09

Previously securitized loans(6)

2,187


 

2,531


 

3,306


     Total loans
2,593,597

116,658

4.50

 
2,523,755

126,594

5.02

 
2,041,876

96,432

4.72

Securities:
 
 
 
 
 
 
 
 
 
 
 
   Taxable
337,440

11,766

3.49

 
330,225

10,697

3.24

 
371,092

14,285

3.85

   Tax-exempt(7)
28,464

1,757

6.17

 
30,635

1,885

6.15

 
38,339

2,218

5.79

     Total securities
365,904

13,523

3.70

 
360,860

12,582

3.49

 
409,431

16,503

4.03

Deposits in depository institutions
9,205



 
8,116



 
7,258



Federal funds sold



 
13,052

22

0.17

 
30,507

53

0.17

     Total interest-earning assets
2,968,706

130,181

4.39

 
2,905,783

139,198

4.79

 
2,489,072

112,988

4.54

Cash and due from banks
130,183

 
 
 
154,983

 
 
 
74,193

 
 
Bank premises and equipment
80,459

 
 
 
82,168

 
 
 
69,772

 
 
Other assets
246,618

 
 
 
255,544

 
 
 
223,783

 
 
   Less: allowance for loan losses
(21,148
)
 
 
 
(20,127
)
 
 
 
(19,586
)
 
 
Total assets
$
3,404,818

 
 
 
$
3,378,351

 
 
 
$
2,837,234

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
614,489

615

0.10
%
 
$
603,844

712

0.12
%
 
$
534,211

697

0.13
%
   Savings deposits
632,510

784

0.12

 
599,574

864

0.14

 
479,760

759

0.16

   Time deposits(3)
1,046,925

9,613

0.92

 
1,103,945

10,782

0.98

 
909,951

12,021

1.32

   Short-term borrowings
133,769

342

0.26

 
127,679

325

0.25

 
121,780

312

0.26

   Long-term debt
16,495

606

3.67

 
16,495

618

3.75

 
16,495

661

4.01

     Total interest-bearing liabilities
2,444,188

11,960

0.49

 
2,451,537

13,301

0.54

 
2,062,197

14,450

0.70

Noninterest-bearing demand deposits
531,061

 
 
 
514,210

 
 
 
414,969

 
 
Other liabilities
33,629

 
 
 
39,502

 
 
 
34,995

 
 
Stockholders’ equity
395,940

 
 
 
373,102

 
 
 
325,073

 
 
Total liabilities and stockholders’ equity
$
3,404,818

 
 
 
$
3,378,351

 
 
 
$
2,837,234

 
 
Net interest income
 
118,221

 
 
 
125,897

 
 
 
98,538

 
Net yield on earning assets
 
 
3.98
%
 
 
 
4.33
%
 
 
 
3.96
%
 
1.For purposes of this table, non-accruing loans have been included in average balances and loan fees, which are immaterial, have been included in interest income.
2.Includes the Company's residential real estate and home equity-junior lien loan categories.
3.Included in the above table are the following amounts (in thousands) for the accretion of the fair value adjustments related to the acquisitions of Virginia Saving and Community:


8


 
2014
 
2013
 
2012
 
Virginia Savings
Community
Total
 
Virginia Savings
Community
Total
 
Virginia Savings
Community
Total
Residential real estate
$
427

457

884

 
$
970

805

1,775

 
$
718


718

Commercial, financial, and agriculture
504

3,900

4,404

 
2,397

7,861

10,258

 
1,622


1,622

Installment loans to individuals
154

561

715

 
145

1,241

1,386

 
75


75

Time deposits
535

250

785

 
542

682

1,224

 
179


179

     Total
1,620

5,168

6,788

 
4,054

10,589

14,643

 
2,594


2,594


4.Includes the Company’s commercial and industrial and commercial real estate loan categories.
5.Includes the Company’s consumer and DDA overdrafts loan categories.
6.Effective January 1, 2012, the carrying value of the Company's previously securitized loans was reduced to $0.
7.Computed on a fully federal tax-equivalent basis assuming a tax rate of approximately 35%.


NET INTEREST INCOME
2014 vs. 2013

The Company’s tax equivalent net interest income decreased $7.7 million, or 6.1%, from $125.9 million in 2013 to $118.2 million in 2014. This decrease is due primarily to an expected decrease in accretion from the fair value adjustments related to the acquisitions of Virginia Savings Bank and Community Bank ($6.8 million for the year ended December 31, 2014 and $14.6 million for the year ended December 31, 2013). The Company’s reported net interest margin decreased from 4.33% for the year ended December 31, 2013 to 3.98% for the year ended December 31, 2014. Excluding the favorable impact of the accretion from the fair value adjustments, the net interest margin would have been 3.75% for the year ended December 31, 2014 and 3.83% for the year ended December 31, 2013. The decrease was primarily caused by loan yields compressing from 4.48% for the year ended December 31, 2013 to 4.27% for the year ended December 31, 2014.

Average interest-earning assets increased $63 million from 2013 to 2014, as increases attributable to residential real estate ($81 million), investment securities ($5 million) and deposits with depository institutions ($1 million) were partially offset by decreases in installment loans to individuals ($11 million), and federal funds sold ($13 million).   Average interest-bearing liabilities decreased $7 million from 2013 due to a decrease in time deposits ($57 million), that was partially offset by increases in savings deposits ($33 million), interest-bearing demand deposits ($11 million) and short-term borrowings ($6 million).

The following table presents the actual and forecasted accretion related to the fair value adjustments on net interest income recorded as a result of the Community and Virginia Savings acquisitions (in thousands).  The amounts in the table below require management to make significant assumptions based on estimated future default, prepayment and discount rates.  Actual performance could be significantly different from that assumed, which could result in the actual results being materially different than those estimated below.

 
Virginia Savings
Community
 
 
Year Ended
Loan
Accretion
Certificates of Deposit
Loan
Accretion
Certificates of Deposit
Total
 
 
 
 
 
 
Actual
 
 
 
 
 
2012
$
2,415

$
179

$

$

$
2,594

2013
3,512

542

9,907

682

14,643

2014
1,085

536

4,918

249

6,788

 
 
 
 
 
 
Forecasted
 
 
 
 
 
2015
458

518

2,239

160

3,375

2016
271

497

1,373

48

2,189

2017
156


995


1,151

 




9


2013 vs. 2012
 
The Company’s tax equivalent net interest income increased $27.4 million, or 27.8%, from $98.5 million in 2012 to $125.9 million in 2013. This increase is due primarily to loan growth from the acquisition of Community as of January 9, 2013 and accretion of the fair value adjustments related to the acquisitions of Community and Virginia Savings. In addition, the average rate paid on interest bearing deposits decreased from 0.70% during 2012 to 0.54% during 2013, which was largely attributable to the average rate paid on time deposits declining from 1.32% during 2012 to 0.98% during 2013.

The Company’s reported net interest margin increased from 3.96% for the year ended December 31, 2012 to 4.33% for the year ended December 31, 2013. Excluding the positive impact of accretion relating to the Company's acquisitions, the net interest margin decreased slightly from 3.85% in 2012 and 3.83% for the year ended December 31, 2013.

Excluding the impact of the Community acquisition, average interest-earning assets increased $85 million from 2012 to 2013, as increases attributable to residential real estate ($85 million) and commercial loans ($67 million) were partially offset by a decrease in investment securities ($49 million) and federal funds sold ($17 million). Excluding the impact of the Community acquisition, average interest-bearing liabilities increased $90 million from 2012 due to increases in savings deposits ($47 million), interest-bearing demand deposits ($23 million) and time deposits ($15 million).

TABLE THREE
RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(In thousands)
 
2014 vs. 2013
Increase (Decrease)
Due to Change In:
2013 vs. 2012
Increase (Decrease)
Due to Change In:
 
Volume
Rate
Net
Volume
Rate
Net
Interest-earning assets:
 
 
 
 
 
 
Loan portfolio
 
 
 
 
 
 
   Residential real estate
$
3,427

$
(2,848
)
$
579

$
8,356

$
(2,191
)
$
6,165

   Commercial, financial, and agriculture
(16
)
(8,466
)
(8,482
)
12,707

9,157

21,864

   Installment loans to individuals
(1,055
)
(634
)
(1,689
)
1,251

1,657

2,908

   Previously securitized loans

(344
)
(344
)

(775
)
(775
)
     Total loans
2,356

(12,292
)
(9,936
)
22,314

7,848

30,162

Securities:
 
 
 
 
 
 
   Taxable
234

835

1,069

(1,573
)
(2,015
)
(3,588
)
   Tax-exempt(1)
(134
)
6

(128
)
(446
)
113

(333
)
     Total securities
100

841

941

(2,019
)
(1,902
)
(3,921
)
Federal funds sold
(22
)

(22
)
(30
)
(1
)
(31
)
Total interest-earning assets
$
2,434

$
(11,451
)
$
(9,017
)
$
20,265

$
5,945

$
26,210

 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
Interest-bearing demand deposits
$
13

$
(110
)
$
(97
)
$
91

$
(76
)
$
15

   Savings deposits
48

(128
)
(80
)
190

(85
)
105

   Time deposits
(557
)
(612
)
(1,169
)
2,563

(3,802
)
(1,239
)
   Short-term borrowings
16

1

17

15

(2
)
13

   Long-term debt

(12
)
(12
)

(43
)
(43
)
     Total interest-bearing liabilities
$
(480
)
$
(861
)
$
(1,341
)
$
2,859

$
(4,008
)
$
(1,149
)
Net Interest Income
$
2,914

$
(10,590
)
$
(7,676
)
$
17,406

$
9,953

$
27,359


1.
Fully federal taxable equivalent using a tax rate of approximately 35%.





10


NON-INTEREST INCOME AND NON-INTEREST EXPENSE
2014 vs. 2013

Selected income statement fluctuations are summarized in the following table (in millions):

 
For the year ended December 31,
 
 
 
2014
2013
$ Change
% Change
Net investment security gains
$
1.2

$
0.8

$
0.4

50.0
 %
Non-interest income, excluding net investment securities gains
57.6

57.2

$
0.4

0.7

Non-interest expense
95.0

102.9

$
(7.9
)
(7.7
)

During the year ended December 31, 2014, the Company realized investment gains of $1.2 million from the sale of certain equity positions related to community banks and bank holding companies.

Exclusive of net investment securities gains, non-interest income increased $0.4 million to $57.6 million for the year ended December 31, 2014 as compared to $57.2 million for the year ended December 31, 2013.  Bankcard revenues increased $1.5 million, or 11.4%, to $15.1 million and trust and investment management fee income increased $0.6 million, or 15.8%, to $4.6 million. These increases were partially offset by lower service charges on deposit accounts of $1.0 million, or 3.7%, and other income of $0.7 million, primarily due to lower demand for fixed rate mortgage products.

During 2013, the Company recognized $5.5 million of acquisition and integration expenses associated with the completed acquisition of Community. Excluding these expenses, non-interest expenses decreased $2.4 million from $97.4 million for the year ended December 31, 2013 to $95.0 million for the year ended December 31, 2014. This decrease was largely attributable to a decline in other expense of $2.4 million due to a decrease in non-income based taxes as a result of the recognition of previously unrecognized tax position resulting from the close of the statute of limitations for previous tax years that was discrete to 2014. In addition, legal and professional fees also decreased $1.0 million from 2013 primarily due to lower legal settlements. Partially offsetting these decreases were increases in advertising expense ($0.6 million) and bankcard expense ($0.5 million).
 
2013 vs. 2012

Selected income statement fluctuations are summarized in the following table (in millions):
 
For the year ended December 31,
 
 
 
2013
2012
$ Change
% Change
Net investment security gains
$
0.8

$
1.0

$
(0.2
)
(20.0
)%
Non-interest income, excluding net investment securities gains
57.2

54.3

2.9

5.3

Non-interest expense
102.9

87.4

15.5

17.7


During the year ended December 31, 2013, the Company realized investment gains of $0.8 million associated with the calls of trust preferred securities and from the sale of certain equity positions related to community banks and bank holding companies.

Exclusive of net investment securities gains and losses, non-interest income increased $2.9 million to $57.2 million for the year ended December 31, 2013 as compared to $54.3 million for the year ended December 31, 2012. Service charges increased $1.2 million, or 4.5%, to $27.6 million and bankcard revenues increased $1.1 million, or 9.0%, to $13.5 million for the year ended December 31, 2013. These increases were primarily due to the acquisition of Community.

During 2013, the Company recognized $5.5 million of acquisition and integration expenses associated with the completed acquisition of Community. In comparison, during 2012, the Company recorded $4.7 million of acquisition and integration expenses associated with the completed acquisition of Virginia Savings and the impending acquisition of Community. Excluding these expenses, non-interest expenses increased $14.7 million from $82.7 million for the year ended December 31, 2012 to $97.4 million for the year ended December 31, 2013. Salaries and employee benefits increased $7.9 million due primarily to additional employees associated with the acquisition of Community. Normal annual salary increases, increased pension costs and increased incentive compensation accruals also contributed to the increase in salaries and

11


employee benefits. In addition, other expenses increased $2.0 million, occupancy and equipment expenses increased $1.7 million and depreciation expense increased $1.2 million. These increases were primarily attributable to the acquisition of Community and were in line with the Company's expectations. These increases were partially offset by a decrease in repossessed asset losses as a result of losses recognized in 2012.
 
INCOME TAXES
 
The Company recorded income tax expense of $24.3 million, $25.3 million and $20.3 million in 2014, 2013 and 2012, respectively. The Company’s effective tax rates for 2014, 2013 and 2012 were 31.4%, 34.4% and 34.3%, respectively. A reconciliation of the effective tax rate to the statutory rate is included in Note Fourteen of the Notes to Consolidated Financial Statements. During the year ended December 31, 2014, the Company reduced income tax expense by $1.8 million due to the recognition of previously unrecognized tax positions resulting from the close of the statute of limitations for previous tax years. Exclusive of this discrete item recognized in the year ended December 31, 2014, the Company's tax rate from operations was 33.8%. The Company anticipates that it will release $0.9 million from its unrecognized tax positions over the next 12 months.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company’s net deferred tax assets decreased from $42.2 million at December 31, 2013 to $36.8 million at December 31, 2014. The components of the Company’s net deferred tax assets are disclosed in Note Fourteen of the Notes to Consolidated Financial Statements. Realization of the most significant net deferred tax assets is primarily dependent on future events taking place that will reverse the current deferred tax assets. For example, realization of the deferred tax asset attributable to other-than-temporary impairment losses on securities, which have already been recognized in the Company’s financial statements, would be realized if the impaired securities were deemed to be “worthless” by the Internal Revenue Service ("IRS") or if the securities were sold and recognized for tax purposes.  The deferred tax asset and/or liability associated with unrealized securities losses is the tax impact of the unrealized gains and/or losses on the Company’s available for sale security portfolio.  At December 31, 2014 the Company had a deferred tax liability of $0.7 million and at December 31, 2013 the Company had a deferred tax asset of $1.2 million associated with unrealized securities losses and gains.  The impact of the Company’s unrealized gains and/or losses is noted in the Company’s Consolidated Statements of Changes in Shareholders’ Equity as an adjustment to Accumulated Other Comprehensive Income (Loss). The deferred tax liability at December 31, 2014 would be realized if the unrealized gains and/or losses on the Company’s securities were realized from sales or maturities of the related securities.  At December 31, 2014 and 2013, the Company had a deferred tax asset of $8.4 million and $9.5 million, respectively, associated with other-than-temporarily impaired securities.  The deferred tax asset at December 31, 2014 would be realized if the Company’s other-than-temporarily impaired securities were sold, or were deemed by the IRS to be “worthless.”  The deferred tax asset associated with the allowance for loan losses decreased slightly from $7.6 million at December 31, 2013 to $7.4 million at December 31, 2014. The deferred tax asset associated with the allowance for loan losses is expected to be realized as additional loan charge-offs, which have already been provided for within the Company’s financial statements, are recognized for tax purposes.  The deferred tax asset associated with the Company’s previously securitized loans is expected to be realized as the Company recognizes income for financial statement purposes from these loans in future periods. The deferred tax asset associated with these loans decreased from $5.2 million at December 31, 2013 to $4.7 million at December 31, 2014.  The deferred tax asset associated with the Company's intangible assets decreased to $4.9 million at December 31, 2014. The Company believes that it is more likely than not that each of the net deferred tax assets will be realized and that no valuation allowance is necessary as of December 31, 2014 or 2013.
 
RISK MANAGEMENT

Market risk is the risk of loss due to adverse changes in current and future cash flows, fair values, earnings or capital due to adverse movements in interest rates and other factors, including foreign exchange rates, underlying credit risk and commodity prices. Because the Company has no significant foreign exchange activities and holds no commodities, interest rate risk represents the primary risk factor affecting the Company’s balance sheet and net interest margin. Significant changes in interest rates by the Federal Reserve could result in similar changes in LIBOR interest rates, prime rates, and other benchmark interest rates that could affect the estimated fair value of the Company’s investment securities portfolio, interest paid on the Company’s short-term and long-term borrowings, interest earned on the Company’s loan portfolio and interest paid on its deposit accounts.

 The Company’s Asset and Liability Committee (“ALCO”) has been delegated the responsibility of managing the Company’s interest-sensitive balance sheet accounts to maximize earnings while managing interest rate risk. ALCO, comprised of various members of executive and senior management, is also responsible for establishing policies to monitor and limit the Company’s exposure to interest rate risk and to manage the Company’s liquidity position. ALCO satisfies its responsibilities

12


through quarterly meetings during which product pricing issues, liquidity measures, and interest sensitivity positions are monitored.

In order to measure and manage its interest rate risk, the Company uses an asset/liability management and simulation software model to periodically update the interest sensitivity position of the Company’s balance sheet. The model is also used to perform analyses that measure the impact on net interest income and capital as a result of various changes in the interest rate environment. Such analyses quantify the effects of various interest rate scenarios on projected net interest income.

The Company’s policy objective is to avoid negative fluctuations in net income or the economic value of equity of more than 15% within a 12-month period, assuming an immediate parallel increase or decrease of 400 basis points. The Company measures the long-term risk associated with sustained increases and decreases in rates through analysis of the impact to changes in rates on the economic value of equity.  Due to the current Federal Funds target rate of 25 basis points, the Company has chosen not to reflect a decrease of 25 basis points from current rates in its analysis.

The following table summarizes the sensitivity of the Company’s net income to various interest rate scenarios. The results of the sensitivity analyses presented below differ from the results used internally by ALCO in that, in the analyses below, interest rates are assumed to have an immediate and sustained parallel shock. The Company recognizes that rates are volatile, but rarely move with immediate and parallel effects. Internally, the Company considers a variety of interest rate scenarios that are deemed to be possible while considering the level of risk it is willing to assume in “worst-case” scenarios such as shown by the following:
Immediate Basis Point Change in Interest Rates
Implied Federal Funds Rate Associated with Change in Interest Rates
Estimated Increase (Decrease) in Net Income Over 12 Months
Estimated Increase (Decrease) in Economic Value of Equity
December 31, 2014
 
 
 
+400
4.25
%
+2.8
%
-4.1
 %
+300
3.25

+4.9

+1.8

+200
2.25

+5.0

+4.9

+100
1.25

+1.9

+2.9

 
 
 
 
December 31, 2013
 
 
 
+400
4.25
%
+3.3
%
-6.4
 %
+300
3.25

+4.3

-2.0

+200
2.25

+3.3

+0.6

+100
1.25

+0.6

+0.4


These estimates are highly dependent upon assumptions made by management, including, but not limited to, assumptions regarding the manner in which interest-bearing demand deposit and savings deposit accounts reprice in different interest rate scenarios, changes in the composition of deposit balances, pricing behavior of competitors, prepayments of loans and deposits under alternative rate environments, and new business volumes and pricing. As a result, there can be no assurance that the estimates above will be achieved in the event that interest rates increase during 2015 and beyond.  The estimates above do not necessarily imply that the Company will experience increases in net income if market interest rates rise.  The table above indicates how the Company’s net income and the economic value of equity behave relative to an increase or decrease in rates compared to what would otherwise occur if rates remain stable.

Based upon the estimates above, the Company believes that its net income is positively correlated with increasing rates as compared to the level of net income the Company would expect if interest rates remain flat.
 
LIQUIDITY

The Company evaluates the adequacy of liquidity at both the Parent Company level and at the banking subsidiary level. At the Parent Company level, the principal source of cash is dividends from its banking subsidiary, City National. Dividends paid by City National to the Parent Company are subject to certain legal and regulatory limitations. Generally, any dividends in amounts that exceed the earnings retained by City National in the current year plus retained net profits for the preceding two years must be approved by regulatory authorities. At December 31, 2014, City National could pay dividends up to $12.0 million without prior regulatory permission.

During 2014, the Parent Company used cash obtained from the dividends received primarily to: (1) pay common dividends to shareholders and (2) remit interest payments on the Company’s junior subordinated debentures and (3) fund

13


repurchases of the Company's common shares.  Additional information concerning sources and uses of cash by the Parent Company is reflected in Note Twenty One of the Notes to Consolidated Financial Statements.

Over the next 12 months, the Parent Company has an obligation to remit interest payments approximating $0.6 million on the junior subordinated debentures held by City Holding Capital Trust III. Additionally, the Parent Company anticipates continuing the payment of dividends, which are expected to approximate $24.2 million on an annualized basis for 2015 based on common shareholders of record at December 31, 2014 and a dividend rate of $1.60 for 2015.  However, interest payments on the debentures can be deferred for up to five years under certain circumstances and dividends to shareholders can, if necessary, be suspended.  In addition to these anticipated cash needs, the Parent Company has operating expenses and other contractual obligations, which are estimated to require $1.1 million of additional cash over the next 12 months. As of December 31, 2014, the Parent Company reported a cash balance of $12.5 million and management believes that the Parent Company’s available cash balance, together with cash dividends from City National will be adequate to satisfy its funding and cash needs over the next twelve months.

Excluding the interest and dividend payments discussed above, the Parent Company has no significant commitments or obligations in years after 2015 other than the repayment of its $16.5 million obligation under the debentures held by City Holding Capital Trust III. However, this obligation does not mature until June 2038, or earlier at the option of the Parent Company. It is expected that the Parent Company will be able to obtain the necessary cash, either through dividends obtained from City National or the issuance of other debt, to fully repay the debentures at their maturity.

City National manages its liquidity position in an effort to effectively and economically satisfy the funding needs of its customers and to accommodate the scheduled repayment of borrowings. Funds are available to City National from a number of sources, including depository relationships, sales and maturities within the investment securities portfolio, and borrowings from the FHLB and other financial institutions. As of December 31, 2014, City National’s assets are significantly funded by deposits and capital. Additionally, City National maintains borrowing facilities with the FHLB and other financial institutions that are accessed as necessary to fund operations and to provide contingency funding mechanisms. As of December 31, 2014, City National has the capacity to borrow an additional $1.5 billion from the FHLB and other financial institutions under existing borrowing facilities. City National maintains a contingency funding plan, incorporating these borrowing facilities, to address liquidity needs in the event of an institution-specific or systemic financial industry crisis. Also, although it has no current intention to do so, City National could liquidate its unpledged securities, if necessary, to provide an additional funding source.  City National also segregates certain mortgage loans, mortgage-backed securities, and other investment securities in a separate subsidiary so that it can separately monitor the asset quality of these primarily mortgage-related assets, which could be used to raise cash through securitization transactions or obtain additional equity or debt financing if necessary.

 The Company manages its asset and liability mix to balance its desire to maximize net interest income against its desire to minimize risks associated with capitalization, interest rate volatility, and liquidity. With respect to liquidity, the Company has chosen a conservative posture and believes that its liquidity position is strong. As illustrated in the Consolidated Statements of Cash Flows, the Company generated $53.4 million of cash from operating activities during 2014, primarily from interest income received on loans and investments, net of interest expense paid on deposits and borrowings.

The Company has obligations to extend credit, but these obligations are primarily associated with existing home equity loans that have predictable borrowing patterns across the portfolio. The Company has investment security balances with carrying values that totaled $354.7 million at December 31, 2014, and that greatly exceeded the Company’s non-deposit sources of borrowing which totaled $151.4 million.

The Company’s net loan to asset ratio is 76.0% as of December 31, 2014 and deposit balances fund 83.0% of total assets as compared to 65.7% for its peers. Further, the Company’s deposit mix has a very high proportion of transaction and savings accounts that fund 53.3% of the Company’s total assets.  And, the Company uses time deposits over $250,000 to fund 2.4% of total assets compared to its peers, which fund 8.6% of total assets with such deposits.
 
INVESTMENTS
 
The Company’s investment portfolio decreased from $370 million at December 31, 2013 to $355 million at December 31, 2014.

The investment portfolio is structured to provide flexibility in managing liquidity needs and interest rate risk, while providing acceptable rates of return.


14


The majority of the Company’s investment securities continue to be mortgage-backed securities. The mortgage-backed securities in which the Company has invested are predominantly underwritten to the standards of, and guaranteed by government-sponsored agencies such as FNMA and FHLMC.

The Company's municipal bond portfolio of $42.1 million as of December 31, 2014 has an average tax equivalent yield of 5.65% with an average maturity of 7.2 years. The average dollar amount invested in each security is $0.4 million. The portfolio has 39% rated "A" or better and the remaining portfolio is unrated, as the issuances represented small issuances of revenue bonds. Additional credit support has been purchased for 21% of the portfolio, while 79% has no additional credit support. Management does underwrite 100% of the portfolio on an annual basis, using the same guidelines that are used to underwrite its commercial loans. Revenue bonds were 96% of the portfolio, while the remaining 4% were general obligation bonds. Geographically, the portfolio supports the Company's footprint, with 76% of the portfolio being from municipalities throughout West Virginia, and the remainder from communities in Ohio, Indiana and Kentucky.

TABLE FOUR
INVESTMENT PORTFOLIO

The carrying value of the Company's securities are presented in the following table (in thousands):

 
Carrying Values as of December 31,
 
2014
2013
2012
Securities available-for-sale:
 
 
 
    Obligations of states and political subdivisions
$
42,096

$
41,548

$
48,929

    U.S. Treasuries and U.S. government agencies
1,827

2,365

3,888

Mortgage-backed securities:
 
 
 
     U.S. government agencies
187,328

278,108

286,481

     Private label
1,704

2,197

3,272

Trust preferred securities
9,036

13,156

12,645

Corporate securities
7,317

9,128

15,947

     Total Debt Securities available-for-sale
249,308

346,502

371,162

Marketable equity  securities
3,213

4,673

4,186

Investment funds
1,522

1,485

1,774

      Total Securities Available-for-Sale
254,043

352,660

377,122

Securities held-to-maturity:
 
 
 
     Mortgage baked securities
86,742



    Trust preferred securities
4,044

4,117

13,454

      Total Securities Held-to-Maturity
90,786

4,117

13,454

Other investment securities:
 
 
 
   Non-marketable equity securities
9,857

13,343

11,463

       Total Other Investment Securities
9,857

13,343

11,463

 
 
 
 
Total Securities
$
354,686

$
370,120

$
402,039


During the year, the Company transferred certain securities from available-for-sale to held-to-maturity. The
non-cash transfers of securities into the held-to-maturity categories from available-for-sale were made at fair value, which was $83.4 million on the date of the transfer.

Included in non-marketable equity securities in the table above at December 31, 2014 are $1.8 million of Federal Home Loan Bank stock and $8.1 million of Federal Reserve Bank stock. At December 31, 2014, there were no securities of any non-governmental issuers whose aggregate carrying or estimated fair value exceeded 10% of shareholders’ equity.

    




15


The weighted average yield of the Company's investment portfolio is presented in the following table (dollars in thousands):
 
Within
After One But
After Five But
After
 
One Year
Within Five Years
Within Ten Years
Ten Years
 
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Securities available-for-sale:
 
 
 
 
 
 
 
 
    Obligations of states and political subdivisions
$
6,787

3.83
%
$
9,967

3.47
%
$
12,416

4.13
%
$
12,927

4.51
%
    U.S. Treasuries and U.S. government agencies
1,821

2.58



6

1.26



Mortgage-backed securities:
 
 
 
 
 
 
 
 
     U.S. government agencies
25

3.46

5,884

4.30

14,223

3.10

167,196

2.51

     Private label


427

4.51



1,277

2.56

Trust preferred securities






9,036

4.50

Corporate securities


2,128

6.25

2,079

5.02

3,109

6.09

     Total Debt Securities available-for-sale
8,633

3.57

18,406

4.08

28,724

3.68

193,545

2.79

Securities held-to-maturity:
 
 
 
 
 
 
 
 
  U.S. government agencies






86,742

2.94

Trust preferred securities






4,044

9.31

      Total Securities Held-to-Maturity






90,786

3.22

 
 
 
 
 
 
 
 
 
      Total  debt securities
$
8,633

3.57
%
$
18,406

4.08
%
$
28,724

3.68
%
$
284,331

2.93
%
  
Weighted-average yields on tax-exempt obligations of states and political subdivisions have been computed on a taxable-equivalent basis using the federal statutory tax rate of 35%.  Average yields on investments available-for-sale are computed based on amortized cost. Mortgage-backed securities have been allocated to their respective maturity groupings based on their contractual maturity.
 
LOANS
TABLE FIVE
LOAN PORTFOLIO

The composition of the Company’s loan portfolio as of the dates indicated follows (in thousands):
 
2014
2013
2012
2011
2010
 
 
 
 
 
 
Residential real estate
$
1,294,576

$
1,204,450

$
1,031,435

$
929,788

$
882,780

Home equity – junior liens
145,604

146,090

143,110

141,797

143,761

Commercial and industrial
132,641

148,302

108,739

130,899

134,612

Commercial real estate
1,036,738

1,057,048

821,970

732,146

661,758

Consumer
39,705

46,402

36,564

35,845

38,424

DDA overdrafts
2,802

3,905

4,551

2,628

2,876

Previously securitized loans




789

Gross loans
$
2,652,066

$
2,606,197

$
2,146,369

$
1,973,103

$
1,865,000


Loan balances increased $46 million from December 31, 2013 to December 31, 2014. Residential real estate loans increased $90 million, or 7.5%, from $1.20 billion at December 31, 2013 to $1.29 billion at December 31, 2014.   Residential real estate loans represent loans to consumers for the purchase or refinance of a residence. These loans primarily consist of single family 1, 3, 5 and 10 year adjustable rate mortgages with terms that amortize the loans over periods from 15 to 30 years secured by first liens.  The Company’s mortgage products do not include sub-prime, interest only, or option adjustable rate mortgage products.  At December 31, 2014, $23 million of the residential real estate loans were for properties under construction. The Company’s home equity loans are underwritten differently than 1-4 family residential mortgages with typically less

16


documentation but lower loan-to-value ratios.  Home equity loans consist of lines of credit, short-term fixed amortizing loans and adjustable rate loans.  

Junior lien home equity loans remained flat at $146 million during 2014.  The Company's junior lien home equity loans are underwritten differently than 1-4 family residential mortgages, with typically less documentation but lower loan-to-value ratios and include both home equity loans and lines-of-credit. This type of lending, which is secured by a junior lien on the borrower's residence, allows customers to borrow against the equity in their home. Real estate market values as of the time the loan or line is granted directly affect the amount of credit extended. Junior lien home equity loans consist of lines-of-credit, short-term fixed amortizing loans and adjustable rate loans.

The C&I portfolio consists of loans to corporate borrowers primarily in small to mid-size industrial and commercial companies. Collateral securing these loans includes equipment, machinery, inventory, receivables and vehicles. C&I loans are considered to contain a higher level of risk than other loan types, although care is taken to minimize these risks. Numerous risk factors impact this portfolio, including industry specific risks such as economy, new technology, labor rates and cyclicality, as well as customer specific factors, such as cash flow, financial structure, operating controls and asset quality. C&I loans decreased $16 million, or 10.6%, from $148 million at December 31, 2013 to $133 million at December 31, 2014.

Commercial real estate loans consist of commercial mortgages, which generally are secured by nonresidential and multi-family residential properties, including hotel/motel and apartment lending. Commercial real estate loans are to many of the same customers and carry similar industry risks as the commercial and industrial loans ("C&I"). Commercial real estate loans decreased $20 million, or 1.9%, from $1.06 billion at December 31, 2013 to $1.04 billion at December 31, 2014.  During 2014 a variety of factors have led to the decline in commercial real estate and C&I loans - a $14 million participation loan was repurchased by the lead bank; a $9 million loan from an acquisition that was classified as substandard was repaid in full; a financially weak $9 million loan was refinanced by a smaller competitor that provided the borrower a cash out option; a more competitive lending environment; and various lines of credit experienced balance reductions. However, during the second half of 2014, the Company did experience an increase in commercial real estate loan balances, which increased $25 million from June 30, 2014 to December 31, 2014. At December 31, 2014, $29 million of the commercial real estate loans were for commercial properties under construction. 

The Company categorizes commercial loans by industry according to the Standard Industry Classification System (SIC) to monitor the portfolio for possible concentrations in one or more industries. As of December 31, 2014, the Company did not have an industry classification that exceeded 10% of total loans.

Consumer loans may be secured by automobiles, boats, recreational vehicles and other personal property. The Company monitors the risk associated with these types of loans by monitoring such factors as portfolio growth, lending policies and economic conditions. Underwriting standards are continually evaluated and modified based upon these factors. Consumer loans decreased $7 million during 2014.  The majority of this decrease is attributable to the Company's decision to strategically reduce the portfolio of indirect automobile loans acquired with the Community acquisition. These loans have higher loss percentages compared to the Company’s historical consumer portfolio and accounted for approximately $6 million of the decrease in 2014.
 

17


The following table shows the scheduled maturity of loans outstanding as of December 31, 2014 (in thousands):
 
Within One Year
After One But Within Five Years
After Five Years
Total
 
 
 
 
 
Residential real estate
$
184,033

$
521,210

$
589,333

$
1,294,576

Home equity – junior liens
29,030

64,384

52,190

145,604

Commercial and industrial
65,056

63,190

4,395

132,641

Commercial real estate
290,843

513,119

232,776

1,036,738

Consumer
20,876

20,959

672

42,507

Total loans
$
589,838

$
1,182,862

$
879,366

$
2,652,066

 
 
 
 
 
 
 
 
 
 
Loans maturing after one year with interest rates that are:
 
 
 
 
Fixed until maturity
 
$
457,271

 
 
Variable or adjustable
 
1,604,957

 
 
Total
 
$
2,062,228

 
 

ALLOWANCE AND PROVISION FOR LOAN LOSSES

Management systematically monitors the loan portfolio and the appropriateness of the allowance for loan losses (“ALLL”) on a quarterly basis to provide for probable losses incurred in the portfolio. Management assesses the risk in each loan type based on historical delinquency and loss trends, the general economic environment of its local markets, individual loan performance, and other relevant factors. Individual credits in excess of $1 million are selected at least annually for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the appropriateness of the allowance. Due to the nature of commercial lending, evaluation of the appropriateness of the allowance as it relates to these loan types is often based more upon specific credit review, with consideration given to the potential impairment of certain credits and historical loss rates, adjusted for general economic conditions and other inherent risk factors. Conversely, due to the homogeneous nature of the real estate and installment portfolios, the portions of the allowance allocated to those portfolios are primarily based on prior loss history of each portfolio, adjusted for general economic conditions and other inherent risk factors. Risk factors considered by the Company in completing this analysis include: (1) unemployment and economic trends in the Company’s markets, (2) concentrations of credit, if any, among any industries, (3) trends in loan growth, loan mix, delinquencies, losses or credit impairment, (4) adherence to lending policies and others. Each risk factor is designated as low, moderate/increasing, or high based on the Company’s assessment of the risk to loss associated with each factor. Each risk factor is then weighted to consider probability of occurrence.

In evaluating the appropriateness of the allowance for loan losses, management considers both quantitative and qualitative factors. Quantitative factors include actual repayment characteristics and loan performance, cash flow analyses, and estimated fair values of underlying collateral. Qualitative factors generally include overall trends within the portfolio, composition of the portfolio, changes in pricing or underwriting, seasoning of the portfolio, and general economic conditions.

The allowance not specifically allocated to individual credits is generally determined by analyzing potential exposure and other qualitative factors that could negatively impact the overall credit risk of the loan portfolio.  Loans not individually evaluated for impairment are grouped by pools with similar risk characteristics and the related historical loss rates are adjusted to reflect current inherent risk factors, such as unemployment, overall economic conditions, concentrations of credit, loan growth, classified and impaired loan trends, staffing, adherence to lending policies, and loss trends.

Determination of the allowance for loan losses is subjective in nature and requires management to periodically reassess the validity of its assumptions. Differences between actual losses and estimated losses are assessed such that management can timely modify its evaluation model to ensure that adequate provision has been made for risk in the total loan portfolio.

As a result of the Company’s quarterly analysis of the appropriateness of the ALLL, the Company recorded a provision for loan losses of $4.1 million, $6.8 million and $6.4 million for the years ended December 31, 2014, 2013 and 2012, respectively.
 
The provision for loan losses recorded in 2014 reflects the modest growth in the loan portfolio, changes in the quality of the portfolio, and general improvement in the Company's historical loss rates used to compute the allowance not

18


specifically allocated to individual credits. Additionally, the improvement in non-performing assets also contributed to a lower provision for loan losses during 2014. Changes in the allowance for loan losses is based on the Company’s detailed systematic methodology and are directionally consistent with changes in the composition and quality of the Company’s loan portfolio.  The Company believes its methodology for determining its ALLL adequately provides for probable losses incurred in the loan portfolio and produces a provision and allowance for loan losses that is directionally consistent with changes in asset quality and loss experience. 

The Company had net charge-offs of $4.5 million for the year ended December 31, 2014 compared to $5.1 million for the year ended December 31, 2013.  Net charge-offs in 2014 consisted primarily of net charge-offs on commercial real estate of $1.8 million and residential real estate of $1.6 million for the year ended December 31, 2014.  

The Company’s ratio of non-performing assets to total loans and other real estate owned decreased from 1.20% at December 31, 2013 to 0.90% at December 31, 2014.  Excluded from this ratio are purchased credit-impaired loans which continue to perform in accordance with the estimated expectations developed as of the date of each acquisition. Such loans would be considered nonperforming loans if the loan’s performance deteriorates below the initial expectations. Total past due loans decreased from $19.5 million, or 0.75% of total loans outstanding, at December 31, 2013 to $10.7 million, or 0.40% of total loans outstanding, at December 31, 2014. Acquired past due loans represent approximately 32% of total past due loans and have declined $13.0 million, or 79%, since March 31, 2013.

The allowance allocated to the commercial real estate loan portfolio decreased $1.9 million, or 17.2%, from $10.8 million at December 31, 2013 to $8.9 million at December 31, 2014. This decrease is primarily attributable to improvements in historical loss rates in the portfolio.

The allowance related to the commercial and industrial loan portfolio increased from $1.1 million at December 31, 2013 to $1.6 million at December 31, 2014. The increase is primarily attributable to an increase in the amount of loans classified as substandard in this portfolio.

The allowance allocated to the residential real estate portfolio increased $1.2 million from $6.1 million at December 31, 2013 to $7.2 million at December 31, 2014. The increase is primarily attributable to the growth in the portfolio, as well as an increase in the historical loss rate associated with this portfolio.

The allowance allocated to the home equity decreased $0.2 million from December 31, 2013. Consumer and overdraft loan portfolios at December 31, 2014 did not significantly change from December 31, 2013.

Based on the Company’s analysis of the appropriateness of the allowance for loan losses and in consideration of the known factors utilized in computing the allowance, management believes that the allowance for loan losses as of December 31, 2014, is adequate to provide for probable losses inherent in the Company’s loan portfolio. Future provisions for loan losses will be dependent upon trends in loan balances including the composition of the loan portfolio, changes in loan quality and loss experience trends, and recoveries of previously charged-off loans, among other factors.






















19


TABLE SIX
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
    
An analysis of changes in the allowance for loan losses follows (in thousands):

 
2014
2013
2012
2011
2010
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
20,575

$
18,809

$
19,409

$
18,224

$
18,541

 
 
 
 
 
 
Charge-offs:
 
 
 
 
 
Commercial and industrial
323

1,040

226

522

73

Commercial real estate
1,925

2,187

4,604

1,989

3,304

Residential real estate
1,762

2,181

1,030

1,367

1,607

Home equity
309

295

1,355

1,089

930

Consumer
188

454

190

164

86

DDA overdrafts
1,415

1,483

1,522

1,712

3,638

Total charge-offs
5,922

7,640

8,927

6,843

9,638

 
 
 
 
 
 
Recoveries:
 
 
 
 
 
Commercial and industrial
89

84

32

23

27

Commercial real estate
113

785

289

1,981

415

Residential real estate
187

234

22

29

74

Home equity


18

7

26

Consumer
204

327

135

136

129

DDA overdrafts
850

1,128

1,456

1,252

1,557

Total recoveries
1,443

2,558

1,952

3,428

2,228

Net charge-offs
4,479

5,082

6,975

3,415

7,410

Provision for loan losses
3,771

6,251

6,375

4,600

7,093

Provision for acquired loans
283

597




Balance at end of period
$
20,150

$
20,575

$
18,809

$
19,409

$
18,224

 
 
 
 
 
 
As a Percent of Average Total Loans:
 
 
 
 
 
Net charge-offs
0.17
%
0.20
%
0.34
%
0.18
%
0.41
%
Provision for loan losses
0.16
%
0.27
%
0.31
%
0.24
%
0.39
%
As a Percent of Non-Performing Loans:
 
 
 
 
 
Allowance for loan losses
128.10
%
90.25
%
96.59
%
87.76
%
156.39
%

TABLE SEVEN
NON-ACCRUAL, PAST-DUE AND RESTRUCTURED LOANS

Nonperforming assets at December 31 follows (in thousands):

 
2014
2013
2012
2011
2010
Non-accrual loans
$
15,307

$
22,361

$
19,194

$
21,951

$
10,817

Accruing loans past due 90 days or more
423

436

280

166

782

Previously securitized loans past due 90 days or more




54

Total non-performing loans
$
15,730

$
22,797

$
19,474

$
22,117

$
11,653

 

20


On non-accrual and impaired loans, approximately $0.5 million, $0.6 million, and $1.0 million of interest income would have been recognized during 2014, 2013 and 2012, respectively, if such loans had been current in accordance with their original terms.  There were no commitments to provide additional funds on non-accrual, impaired, or other potential problem loans at December 31, 2014 and 2013.  

Interest on loans is accrued and credited to operations based upon the principal amount outstanding.  The accrual of interest income is generally discontinued when a loan becomes 90 days past due as to principal or interest unless the loan is well collateralized and in the process of collection.  When interest accruals are discontinued, interest credited to income in the current year that is unpaid and deemed uncollectible is charged to operations.  Prior-year interest accruals that are unpaid and deemed uncollectible are charged to the allowance for loan losses, provided that such amounts were specifically reserved.
 
Information pertaining to impaired loans is included in the following table (in thousands):

 
2014
2013
Impaired loans with a valuation allowance
$
1,392

$
3,416

Impaired loans with no valuation allowance
5,377

9,178

Total impaired loans
$
6,769

$
12,594

 
 
 
Allowance for loan losses allocated to impaired loans
$
252

$
880


The impaired loans with a valuation allowance were comprised of two commercial borrowing relationships that were evaluated during the year and determined that an allowance was necessary.

Regulatory guidance requires loans to be accounted for as collateral-dependent loans when borrowers have filed Chapter 7 bankruptcy, the debt has been discharged by the bankruptcy court and the borrower has not reaffirmed the debt.  The filing of bankruptcy is deemed to be evidence that the borrower is in financial difficulty and the discharge of the debt by the bankruptcy court is deemed to be a concession granted to the borrower.

The following table sets forth the Company’s troubled debt restructurings ("TDRs") at December 31, 2014 and 2013 (in thousands):

 
Accruing
Non-Accruing
Total
December 31, 2014
 
 
 
Commercial and industrial
$
73


$
73

Commercial real estate
2,263


2,263

Residential real estate
17,946

545

18,491

Home equity
2,673

15

2,688

Consumer



 
$
22,955

$
560

$
23,515

 
 
 
 
December 31, 2013
 
 
 
Commercial and industrial
$
88


$
88

Commercial real estate
1,783


1,783

Residential real estate
18,651

1,693

20,344

Home equity
2,859

14

2,873

Consumer
0


0

 
$
23,381

$
1,707

$
25,088









21


TABLE EIGHT
ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

The allocation of the allowance for loan losses and the percent of loans in each category to total loans is shown in the table below (dollars in thousands):
 
2014
2013
2012
2011
2010
 
Amount
Percent of Loans in Each Category to Total Loans
Amount
Percent of Loans in Each Category to Total Loans
Amount
Percent of Loans in Each Category to Total Loans
Amount
Percent of Loans in Each Category to Total Loans
Amount
Percent of Loans in Each Category to Total Loans
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
1,582

5
%
$
1,139

6
%
$
498

5
%
$
590

7
%
$
1,864

7
%
Commercial real estate
8,921

39
%
10,775

40
%
10,440

38
%
11,666

37
%
8,488

35
%
Residential real estate
7,208

49
%
6,057

46
%
5,229

48
%
4,839

47
%
5,337

48
%
Home equity - junior liens
1,495

5
%
1,672

6
%
1,699

7
%
1,525

7
%
1,452

8
%
Consumer
85

2
%
77

2
%
81

2
%
88

2
%
95

2
%
DDA overdrafts
859

%
855

%
862

%
701

%
988

%
Allowance for Loan Losses
$
20,150

100
%
$
20,575

100
%
$
18,809

100
%
$
19,409

100
%
$
18,224

100
%

PREVIOUSLY SECURITIZED LOANS

As of December 31, 2014 and 2013, the carrying value of the remaining previously securitized loans was zero, while the actual contractual balances of these loans were $4.9 million and $6.2 million, respectively. During the years ended December 31, 2014, 2013 and 2012, the Company recognized $2.2 million, $2.5 million and $3.3 million, respectively, of interest income on its previously securitized loans.
  
GOODWILL
 
The Company evaluates the recoverability of goodwill and indefinite lived intangible assets annually as of November 30th, or more frequently if events or changes in circumstances warrant, such as a material adverse change in the business. Goodwill is considered to be impaired when the carrying value of a reporting unit exceeds its estimated fair value. Indefinite-lived intangible assets are considered impaired if their carrying value exceeds their estimated fair value. As described in Note One of the Notes to Consolidated Financial Statements, the Company conducts its business activities through one reportable business segment – community banking. Fair values are estimated by reviewing the Company’s stock price as it compares to book value and the Company’s reported earnings.  In addition, the impact of future earnings and activities are considered in the Company’s analysis.  The Company had $71.4 million of goodwill at both December 31, 2014 and 2013, and no impairment was required to be recognized in 2014 or 2013, as the fair value of the Company continues to exceed its book value.
 
CERTIFICATES OF DEPOSIT
 
Scheduled maturities of time certificates of deposit of $250,000 or more outstanding at December 31, 2014, are summarized in Table Nine (in thousands). The Company has time certificates of deposit of $250,000 or more totaling $83.2 million (approximately 8% of total time deposits).  













22


TABLE NINE
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT OF $250,000 OR MORE
 
Amounts
Percentage
 
 
 
Three months or less
$
7,915

10
%
Over three months through six months
5,965

7
%
Over six months through twelve months
20,664

25
%
Over twelve months
48,678

58
%
Total
$
83,222

100
%

CONTRACTUAL OBLIGATIONS
 
The Company has various financial obligations that may require future cash payments according to the terms of the obligations. Demand, both noninterest- and interest-bearing, and savings deposits are, generally, payable immediately upon demand at the request of the customer. Therefore, the contractual maturity of these obligations is presented in the following table as “less than one year.” Time deposits, typically CDs, are customer deposits that are evidenced by an agreement between the Company and the customer that specify stated maturity dates and early withdrawals by the customer are subject to penalties assessed by the Company. Short-term borrowings and long-term debt represent borrowings of the Company and have stated maturity dates. The Company is not a party to any material capital or operating leases as of December 31, 2014.

TABLE TEN
CONTRACTUAL OBLIGATIONS

The composition of the Company's contractual obligations as of December 31, 2014 is presented in the following table (in thousands):
 
Contractual Maturity in
 
Less than One Year
Between One and Three Years
Between Three and Five Years
Greater than Five Years
Total
 
 
 
 
 
 
Noninterest-bearing demand deposits
$
545,465

$

$

$

$
545,465

Interest-bearing demand deposits(1)
640,469




640,469

Savings deposits(1)
661,416




661,416

Time deposits(1)
506,596

304,510

236,500

561

1,048,167

Short-term borrowings(1)
135,276




135,276

Long-term debt(1)
617

1,234

1,234

12,356

15,441

Total Contractual Obligations
$
2,489,839

$
305,744

$
237,734

$
12,917

$
3,046,234

 
(1)
Includes interest on both fixed- and variable-rate obligations. The interest associated with variable-rate obligations is based upon interest rates in effect at December 31, 2014. The contractual amounts to be paid on variable-rate obligations are affected by market interest rates that could materially affect the contractual amounts to be paid.

The Company’s liability for uncertain tax positions at December 31, 2014 was $2.4 million pursuant to ASC Topic 740.  This liability represents an estimate of tax positions that the Company has taken in its tax returns that may ultimately not be sustained upon examination by tax authorities.  As the ultimate amount and timing of any future cash settlements cannot be predicted with reasonable reliability, this estimated liability has been excluded from the contractual obligations table.
 
OFF–BALANCE SHEET ARRANGEMENTS
 
As disclosed in Note Seventeen of the Notes to Consolidated Financial Statements, the Company has also entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit. As a result of the Company’s off-balance sheet arrangements for 2014 and 2013, no material revenue, expenses, or cash flows were recognized.  In addition, the Company had no other indebtedness or retained interests nor entered into agreements to extend credit or provide conditional payments pursuant to standby and commercial letters of credit.
 

23


CAPITAL RESOURCES
 
During 2014, Shareholders’ Equity increased $3 million, or 0.8%, from $388 million at December 31, 2013 to $391 million at December 31, 2014.  This increase was primarily due to net income of $53 million and equity award vesting and exercises of $2 million, partially offset by common stock repurchases for treasury of $28 million and cash dividends declared of $25 million.

During the year ended December 31, 2014, the Company repurchased approximately 651,000 common shares at a weighted average price of $42.96. On September 24, 2014, the Company announced that the Board of Directors authorized the Company to buy back up to 1,000,000 shares of its common shares (approximately 7% of outstanding shares) in open market transactions at prices that are accretive to the earnings per share of continuing shareholders. No time limit was placed on the duration of the share repurchase program. As part of this authorization, the Company rescinded repurchases of additional shares under a repurchase program plan approved in July 2011. The Company had repurchased approximately 980,000 shares under the July 2011 Stock Repurchase Plan. At December 31, 2014, the Company could repurchase approximately 784,000 shares under the current plan.

Regulatory guidelines require the Company to maintain a minimum total capital to risk-adjusted assets ratio of 8.0%, with at least one-half of capital consisting of tangible common stockholders’ equity and a minimum Tier I leverage ratio of 4.0%. Similarly, City National is also required to maintain minimum capital levels as set forth by various regulatory agencies. Under capital adequacy guidelines, City National is required to maintain minimum total capital, Tier I capital, and leverage ratios of 8.0%, 4.0%, and 4.0%, respectively. To be classified as “well capitalized,” City National must maintain total capital, Tier I capital, and leverage ratios of 10.0%, 6.0%, and 5.0%, respectively.
 
The Company’s regulatory capital ratios for both City Holding and City National are illustrated in the following table:

 
 
 
Actual
 
 
Well
December 31,
 
Minimum
Capitalized
2014
2013
City Holding:
 
 
 
 
Total
8.0
%
10.0
%
14.2
%
13.8
%
Tier I Risk-based
4.0
%
6.0
%
13.4
%
13.0
%
Tier I Leverage
4.0
%
5.0
%
9.9
%
9.8
%
City National:
 
 
 
 
Total
8.0
%
10.0
%
12.7
%
12.2
%
Tier I Risk-based
4.0
%
6.0
%
11.9
%
11.4
%
Tier I Leverage
4.0
%
5.0
%
8.8
%
8.6
%

As of December 31, 2014, management believes that City Holding Company, and its banking subsidiary, City National, were “well capitalized.”  City Holding is subject to regulatory capital requirements administered by the Federal Reserve, while City National is subject to regulatory capital requirements administered by the OCC and the FDIC.  Regulatory agencies can initiate certain mandatory actions if either City Holding or City National fails to meet the minimum capital requirements, as shown above.  As of December 31, 2014, management believes that City Holding and City National meet all capital adequacy requirements.

Basel III Capital Rules became effective January 1, 2015. In July 2013, the Federal Reserve published final rules establishing a new comprehensive capital framework for U. S. banking organizations. The rules implement the framework known as "Basel III" for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The Basel III Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions compared to the current U.S. risk-based capital rules. The Basel III Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The Basel III Capital Rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach. The Basel III Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal agencies' rules. The Basel III Capital Rules are effective for the Company on January 1, 2015 (subject to a phase-in period for certain provisions).




Management believes that, as of December 31, 2014, City Holding Company and its banking subsidiary, City National, would meet all capital adequacy requirements under Basel III on a fully phased-in basis as if such requirements had been in effect.
 
LEGAL ISSUES
 
The Company is engaged in various legal actions that it deems to be in the ordinary course of business. As these legal actions are resolved, the Company could realize positive and/or negative impact to its financial performance in the period in which these legal actions are ultimately decided. There can be no assurance that current actions will have immaterial results, either positive or negative, or that no material actions may be presented in the future.

RECENT ACCOUNTING PROCOUNCEMENTS AND DEVELOPMENTS
 
Note One, “Recent Accounting Pronouncements,” of the Notes to Consolidated Financial Statements discusses recently issued new accounting pronouncements and their expected impact on the Company’s consolidated financial statements.
 





REPORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of City Holding Company is responsible for the preparation, integrity, and fair presentation of the consolidated financial statements included in this annual report.  The consolidated financial statements of City Holding Company have been prepared in accordance with U.S. generally accepted accounting principles and, necessarily include some amounts that are based on the best estimates and judgments of management.

The management of City Holding Company is responsible for establishing and maintaining adequate internal control over financial reporting that is designed to produce reliable financial statements in conformity with U.S. generally accepted accounting principles.  The system of internal control over financial reporting is evaluated for effectiveness by management and tested for reliability through a program of internal audits with actions taken to correct potential deficiencies as they are identified.  Because of inherent limitations in any internal control system, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls.  Accordingly, even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation.  Further, because of changes in conditions, internal control effectiveness may vary over time.

Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2014 based upon the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework (2013 Framework). Based on our assessment, management believes that, as of December 31, 2014, the Company's system of internal control over financial reporting is effective based on those criteria.  Ernst & Young, LLP, the Company’s independent registered public accounting firm, has issued an attestation report on the effectiveness of internal control over financial reporting. This report appears on page 27.

February 27, 2015

s/ Charles R. Hageboeck
 
/s/ David L. Bumgarner
 
Charles R. Hageboeck
 
David L. Bumgarner
 
President & Chief Executive Officer
 
Chief Financial Officer
 


26


REPORT OF ERNST & YOUNG LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING

Audit Committee of the Board of Directors and the
Shareholders of City Holding Company
 
We have audited City Holding Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). City Holding Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control Over Financial Reporting. Our responsibility is to express an opinion on City Holding Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, City Holding Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2014 of City Holding Company and our report dated February 27, 2015 expressed an unqualified opinion thereon.
 

 
 
/s/ Ernst & Young LLP
Charleston, West Virginia
 
February 27, 2015
 


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REPORT OF ERNST & YOUNG LLP INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ON CONSOLIDATED FINANCIAL STATEMENTS

Audit Committee of the Board of Directors and the
Shareholders of City Holding Company
 
We have audited the accompanying consolidated balance sheets of City Holding Company and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014.  These financial statements are the responsibility of City Holding Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of City Holding Company and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
 
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), City Holding Company's internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 2015 expressed an unqualified opinion thereon.
 
 
/s/ Ernst & Young LLP
Charleston, West Virginia
 
February 27, 2015
 



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PART I, ITEM 1 – FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)
 
December 31, 2014
December 31, 2013
Assets
 
 
Cash and due from banks
$
138,503

$
75,999

Interest-bearing deposits in depository institutions
9,725

9,877

          Cash and Cash Equivalents
148,228

85,876

 
 
 
Investment securities available for sale, at fair value
254,043

352,660

Investment securities held-to-maturity, at amortized cost (approximate fair value at December 31, 2014 and 2013 - $94,191 and $5,335, respectively)
90,786