EX-13 2 exhibit1312-31x16.htm EXHIBIT 13 Exhibit
Selected Financial Data                                     Exhibit 13
Table One
Five-Year Financial Summary
(in thousands, except per share data)
 
2016
2015 (3)
2014
2013 (2)
2012 (1)
Summary of Operations
 
 
 
 
 
Total interest income
$
132,152

$
127,074

$
129,566

$
138,539

$
112,212

Total interest expense
13,207

11,830

11,960

13,301

14,450

Net interest income
118,945

115,244

117,606

125,238

97,762

Provision for loan losses
4,395

6,988

4,054

6,848

6,375

Total non-interest income
58,825

67,206

58,722

58,006

55,257

Total non-interest expenses
96,164

92,951

95,041

102,906

87,401

Income before income taxes
77,211

82,511

77,233

73,490

59,243

Income tax expense
25,083

28,414

24,271

25,275

20,298

Net income available to common  shareholders
52,128

54,097

52,962

48,215

38,945

 
 
 
 
 
 
Per Share Data
 
 
 
 
 
Net income basic
$
3.46

$
3.54

$
3.40

$
3.07

$
2.63

Net income diluted
3.45

3.53

3.38

3.04

2.61

Cash dividends declared
1.72

1.68

1.60

1.48

1.40

Book value per share
29.25

27.62

25.79

24.61

22.47

 
 
 
 
 
 
Selected Average Balances
 
 
 
 
 
Total loans
$
2,920,837

$
2,691,304

$
2,593,597

$
2,523,755

$
2,041,876

Securities
495,206

383,685

365,904

360,860

409,431

Interest-earning assets
3,426,158

3,084,722

2,968,706

2,905,783

2,489,072

Deposits
3,166,817

2,947,543

2,824,985

2,821,573

2,338,891

Long-term debt
16,495

16,495

16,495

16,495

16,495

Total shareholders’ equity
431,031

415,051

395,940

373,102

325,073

Total assets
3,835,081

3,564,730

3,404,818

3,378,351

2,837,234

 
 
 
 
 
 
Selected Year-End Balances
 
 
 
 
 
Net loans
$
3,026,496

$
2,843,283

$
2,631,916

$
2,585,622

$
2,127,560

Securities
539,604

471,318

354,686

370,120

402,039

Interest-earning assets
3,611,706

3,345,136

3,016,477

2,986,194

2,574,684

Deposits
3,231,653

3,083,975

2,872,787

2,785,133

2,409,316

Long-term debt
16,495

16,495

16,495

16,495

16,495

Total shareholders’ equity
442,438

419,272

390,853

387,623

333,274

Total assets
3,984,403

3,714,059

3,461,633

3,368,238

2,917,466

 
 
 
 
 
 
Performance Ratios
 
 
 
 
 
Return on average assets
1.36
%
1.52
%
1.56
%
1.43
%
1.37
%
Return on average equity
12.1

13.0

13.4

12.9

12.0

Return on average tangible common equity
14.8

15.8

16.5

16.2

14.7

Net interest margin
3.50

3.76

3.98

4.33

3.96

Efficiency ratio
54.8

53.7

53.7

55.8

57.2

Dividend payout ratio
49.7

47.5

47.1

48.2

53.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

1


 
Asset Quality
 
 
 
 
 
 
Net charge-offs to average loans
0.13
%
0.29
%
0.18
%
0.20
%
0.34
%
 
Provision for loan losses to average loans
0.15

0.26

0.16

0.27

0.31

 
Allowance for loan losses to nonperforming loans
140.10

110.37

127.62

90.25

96.59

 
Allowance for loan losses to total loans
0.65

0.67

0.76

0.79

0.88

 
 
 
 
 
 
 
 
Consolidated Capital Ratios
 
 
 
 
 
 
CET 1 Capital
13.3
%
13.7
%
*
*
*
 
Tier 1 Capital
13.9

14.3

13.4

13.0

13.0

 
Total Capital
14.7

15.1

14.2

13.8

13.9

 
Tier 1 Leverage
10.1

10.2

9.9

9.8

9.8

 
Average equity to average assets
11.2

11.6

11.6

11.0

11.5

 
Tangible equity to tangible assets (end of period)
9.3

9.3

9.3

9.5

9.4

 
 
 
 
 
 
 
 
Full-time equivalent employees
847

853

889

923

843

 
 
 
 
 
 
 
 
*Basel III CET 1 ratio requirements were effective beginning January 1, 2015 and were not required for prior periods.
 
 
 
 
 
 
 
 
(1) - In May 2012, the Company acquired Virginia Savings Bancorp, Inc. and its wholly owned subsidiary, Virginia Savings Bank.
 
(2) - In January 2013, the Company acquired Community Financial Corporation and its wholly owned subsidiary, Community Bank.
 
(3) - In January 2015, the Company sold its insurance operations, CityInsurance. In November 2015, the Company acquired three branches in Lexington, Kentucky from American Founder's Bank.
 


2


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 85 bank branches in West Virginia (57), Virginia (14), Kentucky (11) and Ohio (3). City National provides credit, deposit, and trust and investment management services to its customers in a broad geographical area that includes many rural and small community markets in addition to larger cities including Charleston (WV), Huntington (WV), Martinsburg (WV), Winchester (VA), Staunton (VA), Virginia Beach (VA), Ashland (KY) and Lexington (KY). 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 (Charleston/Huntington MSA, Beckley/Lewisburg Counties, Staunton MSA and Winchester, VA/WV Eastern Panhandle counties). In addition to its branch network, City National's delivery channels include automated-teller-machines ("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. 

In January 2015 the Company sold its insurance operations, CityInsurance, to The Hilb Group effective January 1, 2015. As a result of this sale, the Company recognized a one-time after tax gain of $5.8 million in the first quarter of 2015.

On November 6, 2015, the Company purchased three branch locations from American Founders Bank, Inc. (“AFB”) located in Lexington, Kentucky. The Company acquired approximately $119 million in performing loans and assumed deposit liabilities of approximately $145 million. The Company paid AFB a deposit premium of 5.5% on non-time deposits and 1.0% on premium loan balances acquired.
 
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: (i) the determination of the allowance for loan losses, (ii) income taxes and (iii) 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 Company's 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 various state taxing authorities for the years ended December 31, 2013 through 2015. 


3


The Company values purchased credit-impaired loans at fair value in accordance with Accounting Standards Codification ("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. 


FINANCIAL SUMMARY
 
The Company’s financial performance over the previous three years is summarized in the following table:
 
2016
2015
2014
 
 
 
 
Net income available to common shareholders (in thousands)
$
52,128

$
54,097

$
52,962

Earnings per common share, basic
$
3.46

$
3.54

$
3.40

Earnings per common share, diluted
$
3.45

$
3.53

$
3.38

ROA*
1.36
%
1.52
%
1.56
%
ROE*
12.1
%
13.0
%
13.4
%
ROATCE*
14.8
%
15.8
%
16.5
%

*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 tax equivalent net interest income increased $4.0 million, or 3.4%, from $115.9 million in 2015 to $119.8 million in 2016 (see Net Interest Income).  The Company’s provision for loan losses decreased $2.6 million from $7.0 million in 2015 to $4.4 million in 2016 (see Allowance and Provision for Loan Losses). Offsetting the aforementioned increase in tax-equivalent net interest income and decrease in provision for loan losses were a decrease in non-interest income of $8.4 million and an increase in non-interest expense of $3.2 million (see Non-Interest Income and Expense). As a result, the Company's net income decreased $2.0 million from $54.1 million in 2015 to $52.1 million in 2016 and the Company achieved a return on assets of 1.36%, a return on tangible equity of 14.8% and an efficiency ratio of 54.8%.

BALANCE SHEET ANALYSIS
 
Selected balance sheet fluctuations are summarized in the following table (in millions):
 
December 31,
 
 
 
2016
2015
$ Change
% Change
 
 
 
 
 
Gross loans
$
3,046.2

$
2,862.5

$
183.7

6.4
 %
Investment securities
539.6

471.3

68.3

14.5

Premises and equipment, net
75.2

77.3

(2.1
)
(2.7
)
Goodwill and other intangible assets, net
79.1

79.8

(0.7
)
(0.9
)
 
 
 
 
 
Total deposits
3,231.7

3,084.0

147.7

4.8

Short-term borrowings
248.3

154.9

93.4

60.3

Long-term debt
16.5

16.5



Shareholders' equity
442.4

419.3

23.1

5.5



4


Gross loans increased $184 million, or 6.4%, from $2.86 billion at December 31, 2015 to $3.05 billion at December 31, 2016. Commercial loans increased $122.3 million (9.4%) and residential real estate loans increased $68.3 million (4.9%) from December 31, 2015 to December 31, 2016. A significant portion of the increase in commercial loans during 2016 were in the Columbus, Ohio and Charlotte, North Carolina markets and were diversified across a broad base of industry types, such as multi-family housing, properties leased to the government, nursing homes, grocery and retail stores, and other commercial and industrial loans.

Investment securities increased $68 million, or 14.5%, from $471 million at December 31, 2015, to $540 million at December 31, 2016. During 2016, in conjunction with its interest rate risk management strategy, the Company elected to grow investment balances and reduce cash balances to enhance net interest income. As part of this strategy, the Company purchased tax-exempt municipal securities to improve its earnings by lowering its effective income tax rate. Additionally, the Company intends to use the net proceeds from its current at-the-market common stock offering to support loan growth, bolster regulatory capital, and provide cash for possible future acquisitions. Pending this use, the proceeds have been invested by the Company in various investment securities.

Premises and equipment, net decreased $2 million, or 2.7%, from $77 million at December 31, 2015 to $75 million at December 31, 2016. Goodwill and other intangible assets, net decreased $1 million.

Total deposits increased $148 million, or 4.8%, from $3.08 billion at December 31, 2015 to $3.23 billion at December 31, 2016, partially due to a new customer relationship, which had a total deposit balance of $80 million as of December 31, 2016. This customer relationship does not represent a significant risk to the Company's liquidity, as withdrawals by this customer may be offset by short-term borrowings. Exclusive of this new customer relationship in the 2016, the remainder of the increase is due to growth in non-interest bearing deposits of $26 million, growth in time deposits of $24 million, growth in interest bearing demand deposits of $16 million and growth in savings deposit accounts of $1 million.

Short-term borrowings increased $93 million, or 60.3%, from December 31, 2015 to December 31, 2016, primarily due to an increase in short-term FHLB advances. This increase was to help fund loan and investment growth in 2016. Long-term debt balances remained flat at $16.5 million

Shareholders' equity increased $23.1 million from December 31, 2015 to December 31, 2016 (see Capital Resources). 



5



TABLE TWO
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME
(In thousands)
 
 
2016
 
2015
 
2014
 
Average Balance
Interest
Yield/
Rate
 
Average Balance
Interest
Yield/
Rate
 
Average Balance
Interest
Yield/
Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Loan portfolio(1):
 
 
 
 
 
 
 
 
 
 
 
Residential real estate(2),(3)
$
1,565,079

$
60,736

3.88
%
 
$
1,474,631

$
57,692

3.91
%
 
$
1,384,677

$
55,627

4.02
%
Commercial, financial, and agriculture(3),(4)
1,318,094

52,812

4.01

 
1,175,707

52,177

4.44

 
1,163,449

54,799

4.71

Installment loans to individuals(3),(5)
37,664

2,917

7.75

 
40,966

3,442

8.40

 
45,471

4,045

8.90

Previously securitized loans(6)

1,673


 

1,796


 

2,187


     Total loans
2,920,837

118,138

4.04

 
2,691,304

115,107

4.28

 
2,593,597

116,658

4.50

Securities:
 
 
 
 
 
 
 
 
 
 
 
   Taxable
444,110

12,392

2.79

 
352,296

10,830

3.07

 
337,440

11,766

3.49

   Tax-exempt(7)
51,096

2,494

4.88

 
31,389

1,749

5.57

 
28,464

1,757

6.17

     Total securities
495,206

14,886

3.01

 
383,685

12,579

3.28

 
365,904

13,523

3.70

Deposits in depository institutions
10,115



 
9,733



 
9,205



     Total interest-earning assets
3,426,158

133,024

3.88

 
3,084,722

127,686

4.14

 
2,968,706

130,181

4.39

Cash and due from banks
95,295

 
 
 
180,965

 
 
 
130,183

 
 
Bank premises and equipment
76,056

 
 
 
76,136

 
 
 
80,459

 
 
Other assets
257,525

 
 
 
243,902

 
 
 
246,618

 
 
   Less: allowance for loan losses
(19,953
)
 
 
 
(20,995
)
 
 
 
(21,148
)
 
 
Total assets
$
3,835,081

 
 
 
$
3,564,730

 
 
 
$
3,404,818

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing demand deposits
$
685,399

615

0.09
%
 
$
644,961

505

0.08
%
 
$
614,489

615

0.10
%
Savings deposits
772,296

975

0.13

 
706,926

712

0.10

 
632,510

784

0.12

Time deposits(3)
1,029,172

10,462

1.02

 
1,005,232

9,669

0.96

 
1,046,925

9,613

0.92

Short-term borrowings
176,065

472

0.27

 
145,199

327

0.23

 
133,769

342

0.26

Long-term debt
16,495

683

4.14

 
16,495

617

3.74

 
16,495

606

3.67

     Total interest-bearing liabilities
2,679,427

13,207

0.49

 
2,518,813

11,830

0.47

 
2,444,188

11,960

0.49

Noninterest-bearing demand deposits
679,950

 
 
 
590,424

 
 
 
531,061

 
 
Other liabilities
44,673

 
 
 
40,442

 
 
 
33,629

 
 
Total shareholders’ equity
431,031

 
 
 
415,051

 
 
 
395,940

 
 
Total liabilities and shareholders’ equity
$
3,835,081

 
 
 
$
3,564,730

 
 
 
$
3,404,818

 
 
Net interest income
 
$
119,817

 
 
 
$
115,856

 
 
 
$
118,221

 
Net yield on earning assets
 
 
3.50
%
 
 
 
3.76
%
 
 
 
3.98
%
 
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 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 Savings, Community and AFB:

 
2016
 
2015
 
2014
Residential real estate
$
698

 
$
893

 
$
884

Commercial, financial, and agriculture
1,505

 
4,830

 
4,404

Installment loans to individuals
112

 
275

 
715

Time deposits
592

 
687

 
785

     Total
$
2,907

 
$
6,685

 
$
6,788


6



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
2016 vs. 2015

The Company’s tax equivalent net interest income increased $4.0 million, or 3.4%, from $115.9 million in 2015 to $119.8 million in 2016. This increase was due primarily to an increase in average loan balances from organic growth ($127 million) and from loans associated with the acquisition of three branches in the Lexington, Kentucky market in November 2015 (approximately $102 million in loans) contributing additional net interest income of $9.0 million in 2016. In addition, higher average investment balances ($111.5 million) increased net interest income by $3.9 million. During 2016, in conjunction with its interest rate risk management strategy, the Company elected to grow investment balances and reduce cash balances to enhance net interest income. As part of this strategy, the Company purchased tax-exempt municipal securities to improve its earnings by lowering its effective income tax rate. As a result of this strategy, the Company's overnight borrowings increased during 2016 and the Company anticipates growing time deposits in 2017 to reduce overnight borrowings. These increases in net interest income were partially offset by lower accretion from fair value adjustments on recent acquisitions that decreased net interest income $3.8 million ($6.7 million in 2015 compared to $2.9 million in 2016) and margin compression, which lowered net interest income $3.9 million. The Company’s reported net interest margin decreased from 3.76% for the year ended December 31, 2015 to 3.50% for the year ended December 31, 2016. Excluding the favorable impact of the accretion from fair value adjustments on recent acquisitions, the net interest margin would have been 3.41% for the year ended December 31, 2016 and 3.54% for the year ended December 31, 2015. This decrease was primarily caused by loan yields (excluding accretion) compressing from 4.05% for the year ended December 31, 2015 to 3.96% for the year ended December 31, 2016 and by the yield on investment securities decreasing from 3.28% to 3.01% for the same period.

Average interest-earning assets increased $341 million from 2015 to 2016, due to increases in commercial, financial, and agriculture loans ($142 million), investment securities ($112 million) and residential real estate loans ($90 million).   Average interest-bearing liabilities increased $161 million from 2015 due to increases in savings deposits ($65 million), interest-bearing demand deposits ($40 million), short-term borrowings ($31 million), and time deposits ($24 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 Bank, Virginia Savings Bank and AFB 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.

 Year Ended
Loans
Time Deposits
Total
 
 
 
 
Actual
 
 
 
2014
$
6,003

$
785

$
6,788

2015
5,998

687

6,685

2016
2,315

592

2,907

 
 
 
 
Forecasted
 
 
 
2017
1,257

16

1,273

2018
981


981

2019
868


868

 

7


2015 vs. 2014
 
The Company’s tax equivalent net interest income decreased $2.4 million, or 2.0%, from $118.2 million in 2014 to $115.9 million in 2015. This decrease is due primarily to a decrease of 25 basis points in the yield on interest-earning assets from 4.39% in 2014 to 4.14% in 2015. During 2015, the Company continued to originate a significant portion of its commercial loans based on WSJ Prime or LIBOR and has elected to maintain fixed rate investment security balances below 15% of total assets. The Company believes that these measures will position its balance sheet to benefit from an increasing rate environment. The Company’s reported net interest margin decreased from 3.98% for the year ended December 31, 2014 to 3.76% for the year ended December 31, 2015. Excluding the favorable impact of the accretion from fair value adjustments on recent acquisitions, the net interest margin would have been 3.54% for the year ended December 31, 2015 and 3.75% for the year ended December 31, 2014. This decrease was primarily caused by loan yields compressing from 4.27% for the year ended December 31, 2014 to 4.05% for the year ended December 31, 2015.

Average interest-earning assets increased $116 million from 2014 to 2015, as increases attributable to residential real estate ($90 million), investment securities ($18 million) and deposits with depository institutions ($1 million) were partially offset by decreases in installment loans to individuals ($5 million).   Average interest-bearing liabilities increased $75 million from 2014 due to increases in savings deposits ($74 million), interest-bearing demand deposits ($30 million) and short-term borrowings ($11 million), partially offset by a decrease in time deposits ($42 million).

TABLE FOUR
RATE/VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND INTEREST EXPENSE
(In thousands)
 
2016 vs. 2015
Increase (Decrease)
Due to Change In:
2015 vs. 2014
Increase (Decrease)
Due to Change In:
 
Volume
Rate
Net
Volume
Rate
Net
Interest-earning assets:
 
 
 
 
 
 
Loan portfolio
 
 
 
 
 
 
   Residential real estate
$
3,539

$
(495
)
$
3,044

$
3,614

$
(1,549
)
$
2,065

   Commercial, financial, and agriculture
6,319

(5,684
)
635

572

(2,683
)
(2,111
)
   Installment loans to individuals
(277
)
(248
)
(525
)
(451
)
(663
)
(1,114
)
   Previously securitized loans

(123
)
(123
)

(391
)
(391
)
     Total loans
9,581

(6,550
)
3,031

3,735

(5,286
)
(1,551
)
Securities:
 
 
 
 
 
 
   Taxable
2,822

(1,260
)
1,562

518

(1,454
)
(936
)
   Tax-exempt(1)
1,098

(353
)
745

181

(189
)
(8
)
     Total securities
3,920

(1,613
)
2,307

699

(1,643
)
(944
)
Total interest-earning assets
$
13,501

$
(8,163
)
$
5,338

$
4,434

$
(6,929
)
$
(2,495
)
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
Interest-bearing demand deposits
$
32

$
78

$
110

$
30

$
(140
)
$
(110
)
   Savings deposits
66

197

263

92

(164
)
(72
)
   Time deposits
230

563

793

(383
)
439

56

   Short-term borrowings
70

75

145

29

(44
)
(15
)
   Long-term debt

66

66


11

11

     Total interest-bearing liabilities
$
398

$
979

$
1,377

$
(232
)
$
102

$
(130
)
Net Interest Income
$
13,103

$
(9,142
)
$
3,961

$
4,666

$
(7,031
)
$
(2,365
)

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



8


Non-GAAP Financial Measures

Management of the Company uses measures in its analysis of the Company's performance other than those in accordance with generally accepted accounting principals in the United States of America ("GAAP"). These measures are useful when evaluating the underlying performance of the Company's operations. The Company's management believes that these non-GAAP measures enhance comparability of results with prior periods and demonstrate the effects of significant gains and charges in the current period. The Company's management believes that investors may use these non-GAAP financial measures to evaluate the Company's financial performance without the impact of these items that may obscure trends in the Company's performance. These disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they comparable to non-GAAP financial measures that may be presented by other companies. The following table reconciles fully taxable equivalent net interest income and fully taxable equivalent net interest income excluding accretion with net interest income as derived from the Company's financial statements (in thousands):


TABLE THREE
NON-GAAP FINANCIAL MEASURES
(In thousands)

 
2016
2015
2014
 
 
 
 
Net interest income ("GAAP")
$
118,945

$
115,244

$
117,606

Taxable equivalent adjustment
872

612

615

Net interest income, fully taxable equivalent
$
119,817

$
115,856

$
118,221

 
 
 
 
Average interest earning assets
$
3,426,158

$
3,084,722

$
2,968,706

Net interest margin
3.50
%
3.76
%
3.98
%
 
 
 
 
Net interest income ("GAAP")
$
118,945

$
115,244

$
117,606

Taxable equivalent adjustment
872

612

615

Accretion related to fair value adjustments
(2,907
)
(6,685
)
(6,788
)
Net interest income, fully taxable equivalent, excluding accretion
$
116,910

$
109,171

$
111,433

 
 
 
 
Average interest earning assets
$
3,426,158

$
3,084,722

$
2,968,706

Net interest margin (excluding accretion)
3.41
%
3.54
%
3.75
%

NON-INTEREST INCOME AND NON-INTEREST EXPENSE
2016 vs. 2015

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

 
For the year ended December 31,
 
 
 
2016
2015
$ Change
% Change
Net investment security gains
$
3.5

$
2.1

$
1.4

64.9
 %
Gain on sale of insurance division

11.1

(11.1
)
(100.0
)
Non-interest income, excluding net investment securities gains and gain on sale of insurance division
55.3

54.0

1.3

2.4

Non-interest expense
96.2

93.0

3.2

3.5


During the years ended December 31, 2016 and 2015, the Company realized investment gains of $3.5 million and $2.1 million, respectively, from the call or sale of trust preferred securities, which represented a partial recovery of impairment charges previously recognized. During the year ended December 31, 2015, the Company sold its insurance operations, CityInsurance, which resulted in the recognition of a pre-tax gain of $11.1 million.

9



Exclusive of these gains, non-interest income increased $1.3 million to $55.3 million for the year ended December 31, 2016 as compared to $54.0 million for the year ended December 31, 2015. This is primarily due to increases in bankcard revenue of $0.6 million, or 3.9%, trust revenues of $0.4 million, or 8.8% and service charges of $0.4 million, or 1.5%.

Non-interest expenses increased $3.2 million from the year ended December 31, 2015 to the year ended December 31, 2016. During 2015, the Company recognized $0.6 million of acquisition and integration expenses associated with the acquisition of three branches in Lexington, Kentucky. Excluding acquisition related expenses, non-interest expenses increased $3.8 million from $92.4 million for the year ended December 31, 2015 to $96.2 million for the year ended December 31, 2016. This increase was largely due to an increase in salaries and employee benefits ($2.1 million) due to salary adjustments and increased health insurance costs. In addition, non-interest expenses increased $1.7 million due to the annual operating costs of the three branches acquired in November 2015 and from an increase of $0.5 million in bankcard expenses due to increased transaction volumes.

2015 vs. 2014

Selected income statement fluctuations are summarized in the following table (dollars in millions):
 
For the year ended December 31,
 
 
 
2015
2014
$ Change
% Change
Net investment security gains
$
2.1

$
1.2

$
0.9

75.0
 %
Gain on sale of insurance division
11.1


11.1

100.0

Non-interest income, excluding net investment securities gains
54.0

57.6

(3.6
)
(6.3
)
Non-interest expense
93.0

95.0

(2.0
)
(2.1
)

During the year ended December 31, 2015, the Company sold its insurance operations, CityInsurance, which resulted in the recognition of a pre-tax gain of $11.1 million. Additionally, the Company realized investment gains of $2.1 million from the call of trust preferred securities which represented a partial recovery of impairment charges previously recognized. During the year ended December 31, 2104, 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 these gains, non-interest income excluding net investment securities gains and the gain on sale of the insurance division decreased $3.6 million to $54.0 million for the year ended December 31, 2015 as compared to $57.6 million for the year ended December 31, 2014. This decrease was primarily attributable to decreases in insurance commission revenues of $6.0 million, due to the sale of CityInsurance and service charges of $0.3 million, or 1.0%. These decreases were partially offset by increases of (i) other income of $1.0 million, primarily due to mortgage banking activities, (ii) bankcard revenue of $0.8 million, or 5.5%, and (iii) trust revenues of $0.5 million, or 11.1%.
During 2015, the Company recognized $0.6 million of acquisition and integration expenses associated with the completed acquisition of three branches from AFB. Excluding these expenses, non-interest expenses decreased $2.6 million from $95.0 million for the year ended December 31, 2014 to $92.4 million for the year ended December 31, 2015. Salaries and employee benefits decreased $3.9 million from 2014 largely as a result of the sale of CityInsurance and an overall reduction of retail branch staff. Additionally, advertising expenses decreased $0.8 million from 2014. These decreases were partially offset by increases in other expenses of $1.3 million and repossessed asset losses of $0.7 million. Other expenses increased primarily as a result of the write down of a partnership investment of $1.45 million in 2015.
INCOME TAXES
 
The Company recorded income tax expense of $25.1 million, $28.4 million and $24.3 million in 2016, 2015 and 2014, respectively. The Company’s effective tax rates for 2016, 2015 and 2014 were 32.5%, 34.4% and 31.4%, respectively. A reconciliation of the effective tax rate to the statutory rate is included in Note Thirteen of the Notes to Consolidated Financial Statements. During the years ended December 31, 2016, 2015 and2014, the Company reduced income tax expense by $0.5 million, $0.6 million and $1.8 million, respectively due to the recognition of previously unrecognized tax positions resulting from the close of the statute of limitations for previous tax years. In addition, as a result of differences between the book and tax basis of the assets that were sold in conjunction with the sale of CityInsurance, the Company’s income tax expense increased by $1.1 million. Exclusive of these items, the Company’s tax rate from operations was 33.2%, 33.6% and 33.8% for the years ended December 31, 2016, 2015 and 2014, respectively.

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

10


decreased from $30.0 million at December 31, 2015 to $28.0 million at December 31, 2016. The components of the Company’s net deferred tax assets are disclosed in Note Thirteen 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 when the securities were sold and the loss could be 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, 2016 the Company had a deferred tax asset of $1.3 million and at December 31, 2015, the Company had a deferred tax liability of $0.6 million associated with unrealized securities losses and gains. The impact of the Company’s unrealized gains is noted in the Company’s Consolidated Statements of Changes in Shareholders’ Equity as an adjustment to Accumulated Other Comprehensive Income (Loss).  This deferred tax asset would be realized if the unrealized securities losses on the Company's securities were realized from either the sales or maturities of the related securities. At December 31, 2016 and 2015, the Company had a deferred tax asset of $3.8 million and $6.7 million, respectively, associated with other-than-temporarily impaired securities.  The deferred tax asset at December 31, 2016 would be realized if the Company’s other-than-temporarily impaired securities were sold, or were deemed "worthless" in accordance with the IRS tax code.  The deferred tax asset associated with the allowance for loan losses decreased slightly from $7.4 million at December 31, 2015 to $7.3 million at December 31, 2016. 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 $4.3 million at December 31, 2015 to $4.0 million at December 31, 2016.  The deferred tax asset associated with the Company's intangible assets decreased to $1.3 million at December 31, 2016. The Company believes that it is more likely than not that each of the deferred tax assets will be realized and that no valuation allowance was necessary as of December 31, 2016 or 2015.
 
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 materially 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 utilizes derivative instruments, primarily interest rate swaps, to help manage its interest rate risk on commercial loans.

 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 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 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.

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:

11


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
December 31, 2016
 
 
+400
4.75
 %
+8.0
 %
+300
3.75

+9.9

+200
2.75

+9.7

+100
1.75

+6.2

-50
0.25

-6.1

-100
(0.25
)
-9.5

 
 
 
December 31, 2015
 
 
+400
4.50
 %
+6.0
 %
+300
3.50

+7.5

+200
2.50

+6.8

+100
1.50

+3.3


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 2017 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 or decrease.
 
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, 2016, City National could pay dividends up to $57.5 million without prior regulatory permission.

On December 19, 2016, the Company announced that it had filed a prospectus supplement to its existing shelf registration statement on Form S-3 for the sale of its common stock having an aggregate value of up to $55 million through an “at-the-market” equity offering program. The Company intends to use the net proceeds from the offering to support loan growth, bolster regulatory capital, and provide cash for possible future acquisitions. Pending this use, the proceeds will be invested by the Company in various investment securities. During the year ended December 31, 2016, the Company sold approximately 108,000 common shares at a weighted average price of $66.21, net of broker fees. Through February 24, 2017, the Company has sold approximately 548,000 common shares at a weighted average price of $64.82, net of broker fees. These shares include shares sold, but not settled with the purchaser as of February 24, 2017.

During 2016, the Parent Company used cash obtained from the dividends received primarily to: (1) pay common dividends to shareholders, (2) remit interest payments on the Company’s junior subordinated debentures and (3) fund repurchases of the Company's common shares.  Additional information concerning sources and uses of cash by the Parent Company is reflected in Note Twenty of the Notes to Consolidated Financial Statements.

Over the next 12 months, the Parent Company has an obligation to remit interest payments approximating $0.7 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 $26.3 million on an annualized basis for 2017 based

12


on common shareholders of record at December 31, 2016 at a dividend rate of $1.72 for 2017.  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 $1.3 million of additional cash over the next 12 months. As of December 31, 2016, the Parent Company reported a cash balance of $26.5 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 2017 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 Federal Home Loan Bank ("FHLB") and other financial institutions. As of December 31, 2016, City National’s assets are significantly funded by deposits and capital. City National maintains borrowing facilities with the FHLB and other financial institutions that can be accessed as necessary to fund operations and to provide contingency funding mechanisms. As of December 31, 2016, City National had the capacity to borrow an additional $1.6 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 $65.3 million of cash from operating activities during 2016, 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 $539.6 million at December 31, 2016, and that greatly exceeded the Company’s non-deposit sources of borrowing, which totaled $264.8 million.

The Company’s net loan to asset ratio is 76.0% as of December 31, 2016 and deposit balances fund 81.1% of total assets as compared to 67.5% for its peers (Bank Holding Company Peer Group with assets ranging from $3 billion to $10 billion). Further, the Company’s deposit mix has a very high proportion of transaction and savings accounts that fund 55.0% of the Company’s total assets and the Company uses time deposits over $250,000 to fund 2.6% of total assets compared to its peers, which fund 12.5% of total assets with such deposits.
 
INVESTMENTS
 
The Company’s investment portfolio increased $68 million, or 14.5%, from $471 million at December 31, 2015, to $540 million at December 31, 2016. During 2016, in conjunction with its interest rate risk management strategy, the Company elected to grow investment balances (primarily mortgage-backed and municipal securities) and reduce cash balances to enhance net interest income. As part of this strategy, the Company purchased tax-exempt municipal securities to improve its earnings by lowering its effective income tax rate. Additionally, the Company intends to use the net proceeds from the current at-the-market common stock offering to support loan growth, bolster regulatory capital, and provide cash for possible future acquisitions. Pending this use, the proceeds have been invested by the Company in various investment securities.

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


13


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 Fannie Mae ("FNMA") and Freddie Mac ("FHLMC").

The Company's municipal bond portfolio of $82.4 million as of December 31, 2016 has an average tax equivalent yield of 4.64% with an average maturity of 12.5 years. The average dollar amount invested in each security is $0.5 million. The portfolio has 64% rated "A" or better and the remaining portfolio is unrated, as the issuances represented small issuances of revenue bonds. Additional credit support was been purchased by the issuer for 37% of the portfolio, while 63% 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 72% of the portfolio, while the remaining 28% were general obligation bonds. Geographically, the portfolio supports the Company's footprint, with 71% of the portfolio being from municipalities throughout West Virginia, and the remainder from communities in Ohio, Indiana, Kentucky and various other states.

TABLE FIVE
INVESTMENT PORTFOLIO

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

 
Carrying Values as of December 31,
 
2016
2015
2014
Securities available-for-sale:
 
 
 
    Obligations of states and political subdivisions
$
82,368

$
50,697

$
42,096

    U.S. Treasuries and U.S. government agencies
3

5

1,827

Mortgage-backed securities:
 
 
 
     U.S. government agencies
330,814

288,197

187,328

     Private label
942

1,231

1,704

Trust preferred securities
6,662

5,858

9,036

Corporate securities
23,574

18,693

7,317

     Total Debt Securities available-for-sale
444,363

364,681

249,308

Marketable equity  securities
4,231

3,273

3,213

Investment funds
1,489

1,512

1,522

      Total Securities Available-for-Sale
450,083

369,466

254,043

Securities held-to-maturity:
 
 
 
    Mortgage backed securities
71,169

84,937

86,742

    Trust preferred securities
4,000

4,000

4,044

      Total Securities Held-to-Maturity
75,169

88,937

90,786

Other investment securities:
 
 
 
   Non-marketable equity securities
14,352

12,915

9,857

       Total Other Investment Securities
14,352

12,915

9,857

 
 
 
 
Total Securities
$
539,604

$
471,318

$
354,686


During the year ended December 31, 2014, 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, 2016 are $6.2 million of Federal Home Loan Bank stock and $8.2 million of Federal Reserve Bank stock. At December 31, 2016, there were no securities of any non-governmental issuers whose aggregate carrying or estimated fair value exceeded 10% of shareholders’ equity.

    

14


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
$
2,193

3.43
%
$
13,688

3.60
%
$
13,245

3.34
%
$
53,242

3.15
%
U.S. Treasuries and U.S. government agencies


3

1.36





Mortgage-backed securities:
 
 
 
 
 
 
 
 
     U.S. government agencies
18

2.92

1,809

4.08

39,599

2.34

289,388

2.32

     Private label


99

4.16



843

3.07

Trust preferred securities






6,662

3.12

Corporate securities


2,032

6.25

18,318

5.03

3,224

6.09

     Total Debt Securities available-for-sale
2,211

3.43

17,631

3.96

71,162

3.22

353,359

2.50

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






71,169

2.69

Trust preferred securities






4,000

9.30

      Total Securities Held-to-Maturity






75,169

3.04

 
 
 
 
 
 
 
 
 
      Total  debt securities
$
2,211

3.43
%
$
17,631

3.96
%
$
71,162

3.22
%
$
428,528

2.59
%
  
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.
 
TABLE SIX
LOAN PORTFOLIO

The composition of the Company’s loan portfolio as of the dates indicated follows (in thousands):
 
2016
2015
2014
2013
2012
 
 
 
 
 
 
Residential real estate
$
1,451,462

$
1,383,133

$
1,294,576

$
1,204,450

$
1,031,435

Home equity
141,965

147,036

145,604

146,090

143,110

Commercial and industrial
185,667

165,340

140,548

156,777

116,645

Commercial real estate
1,229,516

1,127,581

1,028,755

1,048,573

814,064

Consumer
32,545

36,083

39,705

46,402

36,564

DDA overdrafts
5,071

3,361

2,802

3,905

4,551

Gross loans
$
3,046,226

$
2,862,534

$
2,651,990

$
2,606,197

$
2,146,369


Loan balances increased $184 million from December 31, 2015 to December 31, 2016 (see details below).

Residential real estate loans increased $68 million from December 31, 2015. Residential real estate loans represent loans to consumers that are secured by a first lien on residential property.  Residential real estate loans provide for the purchase or refinance of a residence and first-lien home equity loans allow consumers to borrow against the equity in their home.  These loans primarily consist of single family 3 and 5 year adjustable rate mortgages with terms that amortize up to 30 years. City National also offers fixed-rate residential real estate loans that are sold in the secondary market that are not included on the Company's balance sheet and City National does not retain the servicing rights to these loans.  Residential mortgage loans are generally underwritten to comply with Fannie Mae guidelines, while the home equity loans are underwritten with typically less documentation, but with lower loan-to-value ratios and shorter maturities. At December 31, 2016, $14 million of the residential real estate loans were for properties under construction.


15


Home equity loans decreased $5 million from December 31, 2015 to $142 million at December 31, 2016. City National's home equity loans represent loans to consumers that are secured by a second (or junior) lien on a residential property.  Home equity loans allow consumers to borrow against the equity in their home without paying off an existing first lien.  These loans consist of home equity lines of credit ("HELOC") and amortized home equity loans that require monthly installment payments.  Home equity loans are underwritten with less documentation, lower loan-to-value ratios and for shorter terms than residential real estate loans.  The amount of credit extended is directly related to the value of the real estate at the time the loan is made. 

The commercial and industrial ("C&I") loan 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 increased $20 million to $185.7 million at December 31, 2016.

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 C&I loans, but have different collateral risk. Commercial real estate loans increased $102 million to $1.23 billion at December 31, 2016.  A significant portion of the increase in commercial loans during 2016 were in the Columbus, Ohio and Charlotte, North Carolina markets and were diversified across a broad base of industry types, such as multi-family housing, properties leased to the government, nursing homes, grocery and retail stores, and other commercial and industrial loans. At December 31, 2016, $13 million of the commercial real estate loans were for commercial properties under construction. 

The Company categorizes commercial loans by industry according to the North American Industry Classification System (NAICS) to monitor the portfolio for possible concentrations in one or more industries. As of December 31, 2016, City National's loans to borrowers within the Lessors of Nonresidential Buildings categories exceeded 10% of total loans (13%). No other industry classification exceeded 10% of total loans as of December 31, 2016.

Consumer loans may be secured by automobiles, boats, recreational vehicles and other personal property. City National 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 $4 million during 2016.  

The following table shows the scheduled maturity of loans outstanding as of December 31, 2016 (in thousands):
 
Within One Year
After One But Within Five Years
After Five Years
Total
 
 
 
 
 
Residential real estate
$
148,071

$
509,101

$
794,290

$
1,451,462

Home equity
23,670

43,835

74,460

141,965

Commercial and industrial
84,823

93,487

7,357

185,667

Commercial real estate
302,393

558,354

368,769

1,229,516

Consumer
18,062

18,789

765

37,616

Total loans
$
577,019

$
1,223,566

$
1,245,641

$
3,046,226

 
 
 
 
 
 
 
 
 
 
Loans maturing after one year with interest rates that are:
 
 
 
 
Fixed until maturity
$
365,499

 
 
 
Variable or adjustable
2,103,708

 
 
 
Total
$
2,469,207


 
 

16



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.

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 analysis of the appropriateness of the ALLL, the Company recorded a provision for loan losses of $4.4 million, $7.0 million and $4.1 million for the years ended December 31, 2016, 2015 and 2014, respectively. The decrease from 2015 to 2016 is primarily due to the provision recorded in 2015 related to a certain commercial borrower engaged in the mining and energy sectors (per NAICS) which filed for bankruptcy during 2015.
 
The provision for loan losses recorded in 2016 reflects the impact of several factors, including the growth in the loan portfolio and changes in the quality of the portfolio. Additionally, during the fourth quarter of 2016, a commercial customer of the Company with a hotel and motel related credit whose business is located in North Central West Virginia experienced a downfall in occupancy rates as a result of a slowdown in the oil and gas industry. As a result, the Company increased the allowance for loan losses in the fourth quarter in relation to this loan. Beyond this particular loan, the Company has very limited exposure to the oil and gas industry and does not have any direct loans to any oil and gas operations. Changes in the amount of the allowance and related provision are 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 the adequacy of its ALLL adequately provides for probable losses inherent 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 $3.9 million for the year ended December 31, 2016 compared to $7.8 million for the year ended December 31, 2015.  The decrease in net charge-offs can be attributable to the commercial borrower that declared bankruptcy in 2015 discussed above. Net charge-offs in 2016 consisted primarily of net charge-offs on residential real estate loans of $1.5 million, commercial real estate loans of $1.2 million and DDA overdraft loans of $0.6 million.  

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, 2016 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.



17


TABLE SEVEN
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
    
An analysis of changes in the Company's allowance for loan losses follows (dollars in thousands):

 
2016
2015
2014
2013
2012
 
 
 
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
19,251

$
20,074

$
20,575

$
18,809

$
19,409

 
 
 
 
 
 
Charge-offs:
 
 
 
 
 
Commercial and industrial
(148
)
(5,768
)
(323
)
(1,040
)
(226
)
Commercial real estate
(1,676
)
(580
)
(2,001
)
(2,187
)
(4,604
)
Residential real estate
(1,734
)
(1,144
)
(1,762
)
(2,181
)
(1,030
)
Home equity
(390
)
(312
)
(309
)
(295
)
(1,355
)
Consumer
(126
)
(210
)
(188
)
(454
)
(190
)
DDA overdrafts
(1,412
)
(1,414
)
(1,415
)
(1,483
)
(1,522
)
Total charge-offs
(5,486
)
(9,428
)
(5,998
)
(7,640
)
(8,927
)
 
 
 
 
 
 
Recoveries:
 
 
 
 
 
Commercial and industrial
14

74

89

84

32

Commercial real estate
487

366

113

785

289

Residential real estate
187

199

187

234

22

Home equity




18

Consumer
118

186

204

327

135

DDA overdrafts
764

792

850

1,128

1,456

Total recoveries
1,570

1,617

1,443

2,558

1,952

Net charge-offs
(3,916
)
(7,811
)
(4,555
)
(5,082
)
(6,975
)
Provision for loan losses
4,232

6,435

3,771

6,251

6,375

Provision for acquired loans
163

553

283

597


Balance at end of period
$
19,730

$
19,251

$
20,074

$
20,575

$
18,809

 
 
 
 
 
 
As a Percent of Average Total Loans:
 
 
 
 
 
Net charge-offs
0.13
%
0.29
%
0.18
%
0.20
%
0.34
%
Provision for loan losses
0.15
%
0.26
%
0.16
%
0.27
%
0.31
%
As a Percent of Non-Performing Loans:
 
 
 
 
 
Allowance for loan losses
140.10
%
110.37
%
127.62
%
90.25
%
96.59
%



18


TABLE EIGHT
NON-ACCRUAL AND PAST-DUE LOANS

The Company's nonperforming assets and past-due loans were as follows (dollars in thousands):
 
2016
2015
2014
2013
2012
Non-accrual loans
$
13,701

$
16,948

$
15,306

$
22,361

$
19,194

Accruing loans past due 90 days or more
382

495

423

436

280

   Total non-performing loans
$
14,083

$
17,443

$
15,729

$
22,797

$
19,474

Other real estate owned ("OREO")
4,588

6,519

8,180

8,470

8,162

Total non-performing assets
$
18,671

$
23,962

$
23,909

$
31,267

$
27,636

 
 
 
 
 
 
As a Percentage of Total Loans and OREO
 
 
 
 
 
Non-performing assets
0.61
%
0.84
%
0.90
%
1.20
%
1.28
%
 
 
 
 
 
 
 
2016
2015
2014
2013
2012
Past-due loans
$
8,594

$
9,164

$
10,666

$
19,492

$
12,969

 
 
 
 
 
 
As a Percentage of Total Loans
 
 
 
 
 
Past-due loans
0.28
%
0.32
%
0.40
%
0.75
%
0.60
%
 
The Company’s ratio of non-performing assets to total loans and other real estate owned decreased from 0.84% at December 31, 2015 to 0.61% at December 31, 2016.  Excluded from these ratios and balances are purchased credit-impaired loans which continue to perform in accordance with the estimated expectations. Such loans would be considered nonperforming loans if any such loan’s performance deteriorates below the initial expectations. Total past due loans decreased from $9.2 million, or 0.32% of total loans outstanding, at December 31, 2015 to $8.6 million, or 0.28% of total loans outstanding, at December 31, 2016.

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.
 
TABLE NINE
IMPAIRED LOANS

Information pertaining to the Company's impaired loans is included in the following table (in thousands):
 
2016
2015
Impaired loans with a valuation allowance
$
2,832

$

Impaired loans with no valuation allowance
4,749

8,482

Total impaired loans
$
7,581

$
8,482

 
 
 
Allowance for loan losses allocated to impaired loans
$
665

$


Impaired loan with a valuation allowance at the end of 2016 was comprised of one commercial borrowing
relationship that was evaluated during that year and determined that an allowance was necessary, as the present value of expected cash flows was less than the outstanding amount of the loan. During 2015, there were no loans that were evaluated during that year and determined that an allowance was not necessary, as the estimated fair value of the collateral was greater than the outstanding amount of the loan.

If the Company's non-accrual and impaired loans had been current in accordance with their original terms, approximately $0.4 million, $0.8 million, and $0.5 million of interest income would have been recognized during 2016, 2015 and 2014,

19


respectively.  There were no commitments to provide additional funds on non-accrual, impaired, or other potential problem loans at December 31, 2016 and 2015.  

TABLE TEN
RESTRUCTURED LOANS

The following table sets forth the Company’s troubled debt restructurings ("TDRs") at December 31, 2016 and 2015 (in thousands):

 
Accruing
Non-Accruing
Total
December 31, 2016
 
 
 
Commercial and industrial
$
42

$

$
42

Commercial real estate
5,525


5,525

Residential real estate
20,424

391

20,815

Home equity
3,105

30

3,135

Consumer



 
$
29,096

$
421

$
29,517

 
 
 
 
December 31, 2015
 
 
 
Commercial and industrial
$
58

$

$
58

Commercial real estate
1,746


1,746

Residential real estate
17,796

191

17,987

Home equity
2,659

34

2,693

Consumer



 
$
22,259

$
225

$
22,484


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 Company's troubled debt restructurings ("TDRs") related to its borrowers who had filed for Chapter 7 bankruptcy protection make up 81% of the Company's total TDRs as of December 31, 2016. The average age of these TDRs was 11.6 years; the average current balance as a percentage of the original balance was 67.9%; and the average loan-to-value ratio was 65.9% as of December 31, 2016. Of the total 482 Chapter 7 related TDRs, 39 had an estimated loss exposure based on the current balance and appraised value at December 31, 2016.



20


TABLE ELEVEN
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):
 
2016
2015
2014
2013
2012
 
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
$
4,206

6
%
$
3,271

6
%
$
1,582

5
%
$
1,139

6
%
$
498

5
%
Commercial real estate
6,573

40
%
6,985

39
%
8,845

39
%
10,775

40
%
10,440

38
%
Residential real estate
6,680

48
%
6,778

48
%
7,208

49
%
6,057

46
%
5,229

48
%
Home equity
1,417

5
%
1,463

5
%
1,495

5
%
1,672

6
%
1,699

7
%
Consumer
82

1
%
97

2
%
85

2
%
77

2
%
81

2
%
DDA overdrafts
772

%
657

%
859

%
855

%
862

%
Allowance for Loan Losses
$
19,730

100
%
$
19,251

100
%
$
20,074

100
%
$
20,575

100
%
$
18,809

100
%

The allowance allocated to the commercial and industrial loan portfolio increased $0.9 million from $3.3 million at December 31, 2015 to $4.2 million at December 31, 2016. The increase is primarily attributable to an increase in the amount of loans classified as substandard as well as loan growth in this portfolio.

The allowance allocated to the commercial real estate loan portfolio decreased $0.4 million from $7.0 million at December 31, 2015 to $6.6 million at December 31, 2016. This decrease is primarily attributable to improvements in the historical loss rates in the portfolio.

The allowance allocated to the residential real estate portfolio decreased $0.1 million from $6.8 million at December 31, 2015 to $6.7 million at December 31, 2016. The decrease is primarily attributable to improvements in the historical loss rates in the portfolio.

The allowance allocated to the home equity remained flat at $1.4 million at December 31, 2016. Consumer and overdraft loan portfolios at December 31, 2016 did not significantly change from December 31, 2015.

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 approximately $76 million of goodwill at December 31, 2016 and 2015, respectively, and no impairment was required to be recognized in 2016 or 2015, as the estimated fair value of the Company has continued to exceed its book value.
 


21


CERTIFICATES OF DEPOSIT
 
Scheduled maturities of time certificates of deposit that meet or exceed the FDIC insurance limit of $250,000 or more at December 31, 2016 are summarized in the table below (in thousands). The Company has time certificates of deposit of $250,000 or more totaling $104.8 million (approximately 10% of total time deposits).  

TABLE TWELVE
MATURITY DISTRIBUTION OF CERTIFICATES OF DEPOSIT OF $250,000 OR MORE
 
Amounts
Percentage
 
 
 
Three months or less
$
9,245

9
%
Over three months through six months
11,300

11
%
Over six months through twelve months
29,716

28
%
Over twelve months
54,535

52
%
Total
$
104,796

100
%

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, 2016, approximately 12% of total assets, or $466 million, consisted of financial instruments recorded at fair value. Of this total, approximately 99% or $463 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 $3 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, 2016, approximately $15 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 Nineteen of the Notes to Consolidated Financial Statements for additional information regarding ASC Topic 820 and its impact on the Company’s financial statements.

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 certificates of deposit, 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. Capital and operating leases between the Company and the lessor have stated expiration dates and renewal terms.



22


TABLE THIRTEEN
CONTRACTUAL OBLIGATIONS

The composition of the Company's contractual obligations as of December 31, 2016 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
$
672,286

$

$

$

$
672,286

Interest-bearing demand deposits(1)
696,525




696,525

Savings deposits(1)
823,358




823,358

Time deposits(1)
495,066

458,428

106,307

431

1,060,232

Short-term borrowings(1)
288,743




288,743

Long-term debt(1)
718

1,436

1,436

28,701

32,291

Real estate leases
1,034

1,674

1,222

5,792

9,722

Total Contractual Obligations
$
2,977,730

$
461,538

$
108,965

$
34,924

$
3,583,157

 
(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, 2016. 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, 2016 was $1.7 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 Sixteen of the Notes to Consolidated Financial Statements, the Company has also entered into agreements with its customers to extend credit or to provide conditional commitments to provide payment on drafts presented in accordance with the terms of the underlying credit documents (including standby and commercial letters of credit). The Company also provides overdraft protection to certain demand deposit customers that represent an unfunded commitment. As a result of the Company’s off-balance sheet arrangements for 2016 and 2015, 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.
 
CAPITAL RESOURCES
 
During 2016, Shareholders’ Equity increased $23 million, or 5.5%, from $419 million at December 31, 2015 to $442 million at December 31, 2016.  This increase was primarily due to net income of $52 million and the issuance of common shares of $7 million, partially offset by cash dividends declared of $26 million and common stock repurchases for treasury of $10 million.

During the year ended December 31, 2016, the Company repurchased approximately 231,000 common shares at a weighted average price of $43.34. 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. At December 31, 2016, the Company could repurchase approximately 402,000 shares under the current plan.

On December 19, 2016, the Company announced that it had filed a prospectus supplement to its existing shelf registration statement on Form S-3 for the sale of its common stock having an aggregate value of up to $55 million through an "at-the-market" equity offering program. The Company intends to use the net proceeds from the offering to support loan growth, bolster regulatory capital, and provide cash for possible future acquisitions. Pending this use, the proceeds will be invested by the Company in various investment securities. During the year ended December 31, 2016, the Company sold approximately 108,000

23


shares at a weighted average price of $66.21, net of broker fees. Through February 24, 2017, the Company has sold approximately 548,000 common shares at a weighted average price of $64.82, net of broker fees. These shares include shares sold, but not settled with the purchaser as of February 24, 2017.

In July 2013, the Federal Reserve published the final rules that established a new comprehensive capital framework for banking organizations, commonly referred to as Basel III. These final rules substantially revised the risk-based capital requirements applicable to bank holding companies and depository institutions. The final rule became effective January 1, 2015 for smaller, non-complex banking organizations with full implementation by January 1, 2019.

Regulatory guidelines require the Company to maintain a minimum common equity tier I ("CET 1") capital ratio of 5.125% and a total capital to risk-adjusted assets ratio of 8.625%, with at least one-half of capital consisting of tangible common stockholders’ equity and a minimum Tier I leverage ratio of 6.625%. 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 CET 1, total capital, Tier I capital, and leverage ratios of 5.125%, 8.625%, 6.625%, and 4.0%, respectively. To be classified as “well capitalized,” City National must maintain CET 1, total capital, Tier I capital, and leverage ratios of 6.5%, 10.0%, 8.0%, and 5.0%, respectively.

When fully phased in on January 1, 2019, the Basel III Capital Rules will require City Holding and City National to maintain (i) a minimum ratio of CET 1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% CET 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets (as compared to a current minimum leverage ratio of 3.0% for banking organizations that either have the highest supervisory rating or have implemented the appropriate federal regulatory authority's risk-adjusted measure for market risk).

The implementation of the capital conservation buffer began on January 1, 2016 at the 0.625% level and will be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET 1 capital to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and does not have any current applicability to City Holding Company or City National Bank.


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The Company’s regulatory capital ratios for both City Holding and City National are illustrated in the following table:
December 31, 2016
Actual
 
Minimum Required - Basel III Phase-In Schedule
 
Minimum Required - Basel III Fully Phased-In (*)
 
Required to be Considered Well Capitalized
Capital Amount
 
Ratio
 
Capital Amount
 
Ratio
 
Capital Amount
 
Ratio
 
Capital Amount
 
Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CET 1 Capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     City Holding Company
$
371,677

 
13.3
%
 
$
142,845

 
5.125
%
 
$
195,105

 
7.0
%
 
$
181,169

 
6.5
%
     City National Bank
310,912

 
11.2
%
 
141,860

 
5.125
%
 
193,761

 
7.0
%
 
179,921

 
6.5
%
Tier 1 Capital
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     City Holding Company
387,677

 
13.9
%
 
184,653

 
6.625
%
 
236,913

 
8.5
%
 
222,977

 
8.0
%
     City National Bank
318,872

 
11.5
%
 
183,381

 
6.625
%
 
235,281

 
8.5
%
 
221,441

 
8.0
%
Total Capital