EX-13 2 exhibit1312-31x16.htm EXHIBIT 13
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 |

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| 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.

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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.
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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 |

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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).
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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 |

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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 |

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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%.

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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.
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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 and 2014, 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
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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:
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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.
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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.
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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.
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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 |  |  |  |

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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.
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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 | %

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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,
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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.
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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 30 th, 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.
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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.
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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 S ixteen 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
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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.
24

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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 408,406 |  |  | 14.7 | % |  | 240,397 |  |  | 8.625 | % |  | 292,658 |  |  | 10.5 | % |  | 278,722 |  |  | 10.0 | %
City National Bank | 338,675 |  |  | 12.2 | % |  | 238,741 |  |  | 8.625 | % |  | 290,641 |  |  | 10.5 | % |  | 276,801 |  |  | 10.0 | %
Tier 1 Leverage Ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 387,677 |  |  | 10.1 | % |  | 153,864 |  |  | 4.000 | % |  | 153,864 |  |  | 4.0 | % |  | 192,330 |  |  | 5.0 | %
City National Bank | 318,872 |  |  | 8.3 | % |  | 153,088 |  |  | 4.000 | % |  | 153,088 |  |  | 4.0 | % |  | 191,359 |  |  | 5.0 | %
(*) Represents the minimum required capital levels as of January 1, 2019 when Basel III Capital Rules have been fully phased in.

December 31, 2015: | 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
CET 1 Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | $ | 345,620 |  |  | 13.7 | % |  | $ | 113,919 |  |  | 4.5 | % |  | $ | 177,207 |  |  | 7.0 | % |  | $ | 164,549 |  |  | 6.5 | %
City National Bank | 264,812 |  |  | 10.5 | % |  | 113,209 |  |  | 4.5 | % |  | 176,103 |  |  | 7.0 | % |  | 163,524 |  |  | 6.5 | %
Tier 1 Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 361,620 |  |  | 14.3 | % |  | $ | 151,891 |  |  | 6.0 | % |  | $ | 215,180 |  |  | 8.5 | % |  | $ | 202,522 |  |  | 8.0 | %
City National Bank | 288,752 |  |  | 11.5 | % |  | 150,945 |  |  | 6.0 | % |  | 213,839 |  |  | 8.5 | % |  | 201,260 |  |  | 8.0 | %
Total Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 382,180 |  |  | 15.1 | % |  | 202,522 |  |  | 8.0 | % |  | 265,810 |  |  | 10.5 | % |  | 253,152 |  |  | 10.0 | %
City National Bank | 308,804 |  |  | 12.3 | % |  | 201,260 |  |  | 8.0 | % |  | 264,154 |  |  | 10.5 | % |  | 251,575 |  |  | 10.0 | %
Tier 1 Leverage Ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 361,620 |  |  | 10.2 | % |  | 142,521 |  |  | 4.0 | % |  | 142,521 |  |  | 4.0 | % |  | 178,151 |  |  | 5.0 | %
City National Bank | 288,752 |  |  | 8.1 | % |  | 141,874 |  |  | 4.0 | % |  | 141,874 |  |  | 4.0 | % |  | 177,343 |  |  | 5.0 | %

As of December 31, 2016, 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, 2016, management believes that City Holding and City National meet all capital adequacy requirements.
25

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 impacts to its financial performance in the period in which these legal actions are determined to be probable and reasonably estimated. There can be no assurance that current actions will have immaterial results, 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.
26

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, 2016 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, 2016, 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, 2017

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

27

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 and subsidiaries
We have audited City Holding Company and subsidiaries’ internal control over financial reporting as of December 31, 2016, 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 and subsidiaries’ 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 the 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 and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, 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 of City Holding Company and subsidiaries as of December 31, 2016 and 2015, 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, 2016 of City Holding Company and subsidiaries and our report dated February 27, 2017, expressed an unqualified opinion thereon.

| /s/ Ernst & Young LLP
Charleston, West Virginia |
February 27, 2017 |

28

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 and subsidiaries
We have audited the accompanying consolidated balance sheets of City Holding Company and subsidiaries as of December 31, 2016 and 2015, 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, 2016. 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, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), City Holding Company and subsidiaries' internal control over financial reporting as of December 31, 2016, 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, 2017 expressed an unqualified opinion thereon.

| /s/ Ernst & Young LLP
Charleston, West Virginia |
February 27, 2017 |

29

PART I, ITEM 1 – FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)

| December 31, 2016 | December 31, 2015
Assets |  |
Cash and due from banks | $ | 62,263 |  | $ | 58,829 |
Interest-bearing deposits in depository institutions | 25,876 |  | 11,284 |
Cash and Cash Equivalents | 88,139 |  | 70,113 |
Investment securities available for sale, at fair value | 450,083 |  | 369,466 |
Investment securities held-to-maturity, at amortized cost (approximate fair value at December 31, 2016 and 2015 - $76,445 and $90,810, respectively) | 75,169 |  | 88,937 |
Other securities | 14,352 |  | 12,915 |
Total Investment Securities | 539,604 |  | 471,318 |
Gross loans | 3,046,226 |  | 2,862,534 |
Allowance for loan losses | (19,730 | ) | (19,251 | )
Net Loans | 3,026,496 |  | 2,843,283 |
Bank owned life insurance | 100,732 |  | 97,919 |
Premises and equipment, net | 75,165 |  | 77,271 |
Accrued interest receivable | 8,408 |  | 7,432 |
Deferred tax asset, net | 28,043 |  | 29,974 |
Goodwill and other intangible assets, net | 79,135 |  | 79,792 |
Other assets | 38,681 |  | 36,957 |
Total Assets | $ | 3,984,403 |  | $ | 3,714,059 |
Liabilities |  |
Deposits: |  |
Noninterest-bearing | $ | 672,286 |  | $ | 621,073 |
Interest-bearing: |  |
Demand deposits | 695,891 |  | 679,735 |
Savings deposits | 822,057 |  | 765,611 |
Time deposits | 1,041,419 |  | 1,017,556 |
Total Deposits | 3,231,653 |  | 3,083,975 |
Short-term borrowings: |  |
Federal Home Loan Bank advances | 64,100 |  | 13,000 |
Securities sold under agreements to repurchase | 184,205 |  | 141,869 |
Long-term debt | 16,495 |  | 16,495 |
Other liabilities | 45,512 |  | 39,448 |
Total Liabilities | 3,541,965 |  | 3,294,787 |
Shareholders’ Equity |  |
Preferred stock, par value $25 per share: 500,000 shares authorized; none issued | — |  | — |
Common stock, par value $2.50 per share: 50,000,000 shares authorized; 18,606,944 shares and 18,499,282 shares issued at December 31, 2016 and December 31, 2015, respectively, less 3,478,511 and 3,319,067, shares in treasury, respectively | 46,518 |  | 46,249 |
Capital surplus | 112,873 |  | 106,269 |
Retained earnings | 417,017 |  | 390,690 |
Treasury stock | (126,958 | ) | (120,104 | )
Accumulated other comprehensive income (loss): |  |
Unrealized gains on securities available-for-sale | (2,352 | ) | 927 |
Underfunded pension liability | (4,660 | ) | (4,759 | )
Total Accumulated Other Comprehensive Loss | (7,012 | ) | (3,832 | )
Total Shareholders’ Equity | 442,438 |  | 419,272 |
Total Liabilities and Shareholders’ Equity | $ | 3,984,403 |  | $ | 3,714,059 |

See notes to consolidated financial statements.
30

CONSOLIDATED STATEMENTS OF INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands, except earnings per share data)

| Year Ended December 31
| 2016 | 2015 | 2014
Interest Income |  |  |
Interest and fees on loans | $ | 118,138 |  | $ | 115,107 |  | $ | 116,658 |
Interest on investment securities: |  |  |
Taxable | 12,392 |  | 10,830 |  | 11,766 |
Tax-exempt | 1,622 |  | 1,137 |  | 1,142 |
Total Interest Income | 132,152 |  | 127,074 |  | 129,566 |
Interest Expense |  |  |
Interest on deposits | 12,052 |  | 10,886 |  | 11,012 |
Interest on short-term borrowings | 472 |  | 327 |  | 342 |
Interest on long-term debt | 683 |  | 617 |  | 606 |
Total Interest Expense | 13,207 |  | 11,830 |  | 11,960 |
Net Interest Income | 118,945 |  | 115,244 |  | 117,606 |
Provision for loan losses | 4,395 |  | 6,988 |  | 4,054 |
Net Interest Income After Provision for Loan Losses | 114,550 |  | 108,256 |  | 113,552 |
Non-interest Income |  |  |
Gains on sale of investment securities | 3,513 |  | 2,130 |  | 1,156 |
Service charges | 26,703 |  | 26,316 |  | 26,583 |
Bankcard revenue | 16,515 |  | 15,894 |  | 15,063 |
Insurance commissions | — |  | — |  | 5,978 |
Trust and investment management fee income | 5,573 |  | 5,124 |  | 4,614 |
Bank owned life insurance | 3,326 |  | 3,374 |  | 3,070 |
Gain on sale of insurance division | — |  | 11,084 |  | — |
Other income | 3,195 |  | 3,284 |  | 2,258 |
Total Non-interest Income | 58,825 |  | 67,206 |  | 58,722 |
Non-interest Expense |  |  |
Salaries and employee benefits | 50,883 |  | 47,847 |  | 51,749 |
Occupancy and equipment | 11,095 |  | 10,277 |  | 9,990 |
Depreciation | 6,235 |  | 6,088 |  | 6,087 |
FDIC insurance expense | 1,622 |  | 1,794 |  | 1,647 |
Advertising | 2,606 |  | 2,446 |  | 3,274 |
Bankcard expenses | 4,154 |  | 3,691 |  | 3,750 |
Postage, delivery, and statement mailings | 2,080 |  | 2,123 |  | 2,211 |
Office supplies | 1,364 |  | 1,350 |  | 1,595 |
Legal and professional fees | 2,186 |  | 1,962 |  | 1,854 |
Telecommunications | 1,813 |  | 1,765 |  | 1,876 |
Repossessed asset losses, net of expenses | 890 |  | 1,264 |  | 579 |
Merger related costs | — |  | 598 |  | — |
Other expenses | 11,236 |  | 11,746 |  | 10,429 |
Total Non-interest Expense | 96,164 |  | 92,951 |  | 95,041 |
Income Before Income Taxes | 77,211 |  | 82,511 |  | 77,233 |

31

Income tax expense | 25,083 |  | 28,414 |  | 24,271 |
Net Income Available to Common Shareholders | $ | 52,128 |  | $ | 54,097 |  | $ | 52,962 |
Average shares outstanding, basic | 14,900 |  | 15,123 |  | 15,403 |
Effect of dilutive securities | 13 |  | 48 |  | 85 |
Average shares outstanding, diluted | 14,913 |  | 15,171 |  | 15,488 |
Basic earnings per common share | $ | 3.46 |  | $ | 3.54 |  | $ | 3.40 |
Diluted earnings per common share | $ | 3.45 |  | $ | 3.53 |  | $ | 3.38 |
Dividends declared per common share | $ | 1.72 |  | $ | 1.68 |  | $ | 1.60 |

See notes to consolidated financial statements.
32

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)

| Year Ended December 31
| 2016 | 2015 | 2014
Net income available to common shareholders | $ | 52,128 |  | $ | 54,097 |  | $ | 52,962 |
Available-for-Sale Securities |  |  |
Unrealized (loss) gain on available-for-sale securities arising during period | (1,685 | ) | 1,713 |  | 6,388 |
Reclassification adjustment for net gains | (3,513 | ) | (2,130 | ) | (1,156 | )
Other comprehensive (loss) income related to available-for-sale securities | (5,198 | ) | (417 | ) | 5,232 |
Defined Benefit Pension Plan |  |  |
Amortization of actuarial net gains | 847 |  | 975 |  | 669 |
Recognition of unrealized losses | (690 | ) | (40 | ) | (4,584 | )
Change in underfunded pension liability | 157 |  | 935 |  | (3,915 | )
Other comprehensive (loss) income before income taxes | (5,041 | ) | 518 |  | 1,317 |
Tax effect | 1,861 |  | (191 | ) | (486 | )
Other comprehensive (loss) income, net of tax | (3,180 | ) | 327 |  | 831 |
Comprehensive income, net of tax | $ | 48,948 |  | $ | 54,424 |  | $ | 53,793 |

See notes to consolidated financial statements.
33

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
CITY HOLDING COMPANY AND SUBSIDIARIES
(dollars in thousands)

| Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity
Balances at December 31, 2013 | $ | 46,249 |  | $ | 107,596 |  | $ | 333,970 |  | $ | (95,202 | ) | $ | (4,990 | ) | $ | 387,623 |
Net income available to common shareholders |  |  | 52,962 |  |  |  | 52,962 |
Other comprehensive income |  |  |  |  | 831 |  | 831 |
Cash dividends declared ($1.60 per share) |  |  | (24,721 | ) |  |  | (24,721 | )
Stock-based compensation expense, net |  | 64 |  |  | 1,471 |  |  | 1,535 |
Exercise of 20,000 stock options |  | (290 | ) |  | 870 |  |  | 580 |
Purchase of 650,799 treasury shares |  |  |  | (27,957 | ) |  | (27,957 | )
Balances at December 31, 2014 | $ | 46,249 |  | $ | 107,370 |  | $ | 362,211 |  | $ | (120,818 | ) | $ | (4,159 | ) | $ | 390,853 |

| Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity
Balances at December 31, 2014 | $ | 46,249 |  | $ | 107,370 |  | $ | 362,211 |  | $ | (120,818 | ) | $ | (4,159 | ) | $ | 390,853 |
Net income available to common shareholders |  |  | 54,097 |  |  |  | 54,097 |
Other comprehensive income |  |  |  |  | 327 |  | 327 |
Cash dividends declared ($1.68 per share) |  |  | (25,618 | ) |  |  | (25,618 | )
Stock-based compensation expense, net |  | 266 |  |  | 1,527 |  |  | 1,793 |
Exercise of 81,500 stock options |  | (602 | ) |  | 3,581 |  |  | 2,979 |
Exercise of 61,796 warrants |  | (765 | ) |  | 2,661 |  |  | 1,896 |
Purchase of 150,385 treasury shares |  |  |  | (7,055 | ) |  | (7,055 | )
Balances at December 31, 2015 | $ | 46,249 |  | $ | 106,269 |  | $ | 390,690 |  | $ | (120,104 | ) | $ | (3,832 | ) | $ | 419,272 |

| Common Stock | Capital Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity
Balances at December 31, 2015 | $ | 46,249 |  | $ | 106,269 |  | $ | 390,690 |  | $ | (120,104 | ) | $ | (3,832 | ) | $ | 419,272 |
Net income available to common shareholders |  |  | 52,128 |  |  |  | 52,128 |
Other comprehensive income |  |  |  |  | (3,180 | ) | (3,180 | )
Cash dividends declared ($1.72 per share) |  |  | (25,801 | ) |  |  | (25,801 | )
Stock-based compensation expense, net |  | 273 |  |  | 1,745 |  |  | 2,018 |
Issuance of 107,662 shares of common stock | 269 |  | 6,595 |  |  |  |  | 6,864 |
Exercise of 32,750 stock options |  | (264 | ) |  | 1,419 |  |  | 1,155 |
Purchase of 231,132 treasury shares |  |  |  | (10,018 | ) |  | (10,018 | )
Balances at December 31, 2016 | $ | 46,518 |  | $ | 112,873 |  | $ | 417,017 |  | $ | (126,958 | ) | $ | (7,012 | ) | $ | 442,438 |

See notes to consolidated financial statements.
34

CONSOLIDATED STATEMENTS OF CASH FLOWS
CITY HOLDING COMPANY AND SUBSIDIARIES
(in thousands)

| Year Ended December 31
| 2016 | 2015 | 2014
Net income available to common shareholders | $ | 52,128 |  | $ | 54,097 |  | $ | 52,962 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Amortization and accretion | 838 |  | (4,589 | ) | (4,654 | )
Provision for loan losses | 4,395 |  | 6,988 |  | 4,054 |
Depreciation of premises and equipment | 6,235 |  | 6,088 |  | 6,087 |
Deferred income tax expense | 3,817 |  | 6,627 |  | 4,585 |
Net periodic employee benefit cost | 515 |  | 836 |  | 500 |
Realized investment securities gains | (3,978 | ) | (2,130 | ) | (1,156 | )
Net investment securities impairment losses | 465 |  | — |  | — |
Stock-based compensation expense | 2,018 |  | 1,793 |  | 1,535 |
Increase in value of bank-owned life insurance | (3,071 | ) | (3,374 | ) | (3,069 | )
Proceeds from bank-owned life insurance | 258 |  | 571 |  | — |
Originations of loans held for sale | (17,981 | ) | (17,849 | ) | (8,763 | )
Proceeds from loans held for sale | 16,572 |  | 18,668 |  | 8,319 |
Gain on sale of loans | (374 | ) | (367 | ) | (187 | )
Gain on sale of insurance division | — |  | (11,084 | ) | — |
Asset write down | 444 |  | 1,449 |  | — |
Change in accrued interest receivable | (976 | ) | (375 | ) | 40 |
Change in other assets | (1,556 | ) | (976 | ) | (8,262 | )
Change in other liabilities | 5,581 |  | (8,478 | ) | 1,363 |
Net Cash Provided by Operating Activities | 65,330 |  | 47,895 |  | 53,354 |
Proceeds from sales of securities available-for-sale | 30,850 |  | 389 |  | 6,714 |
Proceeds from maturities and calls of securities available-for-sale | 78,720 |  | 55,726 |  | 48,983 |
Proceeds from maturities and calls of securities held-to-maturity | 13,479 |  | 13,191 |  | 6,501 |
Purchases of securities available-for-sale | (196,150 | ) | (175,271 | ) | (31,295 | )
Purchases of securities held-to-maturity | — |  | (10,392 | ) | (10,226 | )
Net increase in loans | (183,511 | ) | (100,130 | ) | (43,714 | )
Purchases of premises and equipment | (5,517 | ) | (3,014 | ) | (2,323 | )
Disposals of premises and equipment | 836 |  | 141 |  | 649 |
Proceeds from sale of CityInsurance | — |  | 15,250 |  | — |
Acquisition of American Founders Bank, Inc., including cash acquired of $561 | — |  | 20,030 |  | — |
Net Cash Used in Investing Activities | (261,293 | ) | (184,080 | ) | (24,711 | )
Net increase in noninterest-bearing deposits | 200,984 |  | 52,230 |  | 52,237 |
Net (decrease) increase in interest-bearing deposits | (52,714 | ) | 18,544 |  | 36,203 |
Net increase (decrease) in short-term borrowings | 93,436 |  | 14,780 |  | (2,867 | )
Issuance of common stock | 6,864 |  | — |  | — |
Purchases of treasury stock | (10,018 | ) | (7,055 | ) | (27,957 | )
Proceeds from exercise of stock options | 1,155 |  | 2,979 |  | 580 |
Proceeds from exercise of warrants | — |  | 1,896 |  | — |
Dividends paid | (25,718 | ) | (25,304 | ) | (24,487 | )
Net Cash Provided by Financing Activities | 213,989 |  | 58,070 |  | 33,709 |
Increase (Decrease) in Cash and Cash Equivalents | 18,026 |  | (78,115 | ) | 62,352 |
Cash and cash equivalents at beginning of period | 70,113 |  | 148,228 |  | 85,876 |
Cash and Cash Equivalents at End of Period | $ | 88,139 |  | $ | 70,113 |  | $ | 148,228 |

See notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CITY HOLDING COMPANY AND SUBSIDIARIES
NOTE ONE – SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Summary of Significant Accounting and Reporting Policies: The accounting and reporting policies of City Holding Company and its subsidiaries (the “Company”) conform with 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. Actual results could differ from management’s estimates. The following is a summary of the more significant policies.
Principles of Consolidation: The consolidated financial statements include the accounts of City Holding Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity in conformity with U. S. generally accepted accounting principles. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when an enterprise has both the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The enterprise with a controlling financial interest, known as the primary beneficiary, consolidates the VIE. The Company’s wholly owned subsidiary, City Holding Capital Trust III, is a VIE for which the Company is not the primary beneficiary. Accordingly, the accounts of this entity are not included in the Company’s consolidated financial statements.
Certain amounts in the prior year financial statements have been reclassified to conform to the current year presentation. Such reclassifications had no impact on shareholders’ equity or net income for any period.
Description of Principal Markets and Services: The Company is a registered financial holding company under the Bank Holding Company Act headquartered in Charleston, West Virginia, 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 banking offices in West Virginia, Virginia, Kentucky and southeastern Ohio. 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 conducts its business activities through one reportable business segment - community banking.
Cash and Due from Banks: The Company considers cash, due from banks, and interest-bearing deposits in depository institutions as cash and cash equivalents. City National is required to maintain an average reserve balance with the Federal Reserve Bank of Richmond to compensate for services provided by the Federal Reserve and to meet statutory required reserves for demand deposits.
Securities: Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Company has the ability at the time of purchase to hold debt securities to maturity, they are classified as investment securities held-to-maturity and are stated at amortized cost, adjusted for amortization of premiums and accretion of discounts. Debt securities which the Company may not hold to maturity are classified as investment securities available-for-sale along with the Company’s investment in equity securities. Securities available-for-sale are carried at fair value, with the unrealized gains and losses, net of tax, reported in comprehensive income. Securities classified as available-for-sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other factors.
The Company utilizes a third party pricing service provider to value its investment portfolio. Annually, the Company obtains an independent auditor’s report from its third party pricing service provider regarding its controls over valuation of investment securities. Although an unqualified opinion regarding the design and operating effectiveness of controls was issued, the report did contain caveats and disclaimers regarding the pricing information, such as the Company should review market values for reasonableness. On a quarterly basis, the Company selects a sample of its debt securities and reprices those securities with a third party that is independent of the primary pricing service provider to verify the reasonableness of the fair values.
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Also, 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, among 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 such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; (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 market value of these 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 credit worthiness 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 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 impairment charges in the future.
The specific identification method is used to determine the cost basis of securities sold. Certain investment securities that do not have readily determinable fair values and for which the Company does not exercise significant influence are carried at cost and classified as other investment securities on the Consolidated Balance Sheets. These cost-method investments are reviewed for impairment at least annually or sooner if events or changes in circumstances indicate the carrying value may not be recoverable.
Loans: Loans, excluding previously securitized loans, which are discussed separately below, are reported at the principal amount outstanding, net of unearned income. Portfolio loans include those for which management has the intent and City has the ability to hold for the foreseeable future, or until maturity or payoff. The foreseeable future is based upon management’s judgment of current business strategies and market conditions, the type of loan, asset/liability management, and liquidity.
Interest income on loans is accrued and credited to operations based upon the principal amount outstanding, using methods that generally result in level rates of return. Loan origination fees, and certain direct costs, are deferred and amortized as an adjustment to the yield over the term of the loan. The accrual of interest income generally is discontinued when a loan becomes 90 days past due as to principal or interest for all loan types. However, any loan may be placed on non-accrual if the Company receives information that indicates that it is probable a borrower will be unable to meet the contractual terms of their respective loan agreement. Other indicators considered for placing a loan on non-accrual status include the borrower’s involvement in bankruptcies, foreclosures, repossessions, litigation and any other situation resulting in doubt as to whether full collection of contractual principal and interest is attainable. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed, and interest accrued in prior years is charged to the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and related accrued interest, and the loan is in process of collection.
Generally for all loan classes, interest income during the period the loan is non-performing is recorded on a cash basis after recovery of principal is reasonably assured. Cash payments received on nonperforming loans are typically applied directly against the outstanding principal balance until the loan is fully repaid. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Generally, all loan types are considered past due when the contractual terms of a loan are not met and the borrower is 30 days or more past due on a payment. Furthermore, residential and home equity loans are generally subject to charge-off when the loan becomes 120 days past due, depending on the estimated fair value of the collateral less cost to dispose, versus the outstanding loan balance. Commercial loans are generally charged off when the loan becomes 120 days past due and consumer loans are generally charged off when the loan becomes 120 days past due.
Acquired Loans: In determining the estimated fair value of the acquired loans, management considered several factors, such as estimated future credit losses, estimated prepayments, remaining lives of the acquired loans, estimated value of the underlying collateral and the present value of the cash flows expected to be received. For smaller loans not specifically reviewed, management grouped the loans into their respective homogeneous loan pool and applied a loss estimate accordingly.
Acquired loans are accounted for using one of the two following accounting standards:
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(1) | ASC Topic 310-20 is used to value loans that do not have evidence of credit quality deterioration. For these loans, the difference between the fair value of the loan and the amortized cost of the loan is amortized or accreted into income using the interest method.

(2) | ASC Topic 310-30 is used to value loans that have evidence of credit quality deterioration. 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.

Allowance for Loan Losses: 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. These evaluations are conducted at least quarterly and more frequently if deemed necessary. The allowance for loan losses related to loans considered to be impaired is generally evaluated based on the discounted cash flows using the impaired loans' initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Loan losses are charged against the allowance and recoveries of amounts previously charged off are credited to the allowance. A provision for loan losses is charged to operations based on management’s periodic evaluation of the appropriateness of the allowance after considering factors noted above, among others.
In evaluating the appropriateness of its allowance for loan losses, the Company stratifies the loan portfolio into six major groupings, including commercial real estate, commercial and industrial, residential real estate, home equity, and others. Historical loss experience, as adjusted, is applied to the then outstanding balance of loans in each classification to estimate probable losses inherent in each segment of the portfolio. Historical loss experience is adjusted using a systematic weighted probability of potential risk factors that could result in actual losses deviating from prior loss experience. 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.
Additionally, all commercial loans within the portfolio are subject to internal risk grading. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process. Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of probable loss.
Premises and Equipment: Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed primarily by the straight-line method over the estimated useful lives of the assets. Depreciation of leasehold improvements is computed using the straight-line method over the lesser of the term of the respective lease or the estimated useful life of the respective asset. Maintenance and repairs are charged to expense as incurred, while improvements that extend the useful life of premises and equipment are capitalized and depreciated over the estimated remaining life of the asset.
Other Real Estate Owned: Other real estate owned (“OREO”) is comprised principally of commercial and residential real estate properties obtained in partial or total satisfaction of loan obligations. OREO acquired in settlement of indebtedness is included in Other Assets at the lower of estimated fair value of the asset, less estimated selling costs or the carrying amount of the loan. Changes to the value subsequent to transfer are recorded in non-interest expense, along with direct operating expenses. Gains or losses not previously recognized from sales of OREO are recognized in non-interest expense on the date of the sale. As of December 31, 2016 and 2015, the amount of OREO included in Other Assets was $4.6 million and $6.5 million, respectively.
Goodwill and Other Intangible Assets: Goodwill is the excess of the cost of an acquisition over the fair value of tangible and intangible assets acquired. Goodwill is not amortized. Intangible assets represent purchased assets that also lack physical substance, but can be separately distinguished from goodwill because of contractual or other legal rights or because
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the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. Intangible assets with determinable useful lives, such as core deposits, are amortized over their estimated useful lives.
The Company performs an annual review for impairment in the recorded value of goodwill and indefinite lived intangible assets. Goodwill is tested for impairment between the annual tests if an event occurs or circumstances change that more than likely reduce the fair value of a reporting unit below its carrying value. An indefinite-lived intangible asset is tested for impairment between the annual tests if an event occurs or circumstances change indicating that the asset might be impaired.
Securities Sold Under Agreements to Repurchase: Securities sold under agreements to repurchase are accounted for as collateralized financing transactions and are recorded at the amounts at which the securities were sold plus accrued interest. Securities sold primarily consists of U.S. government, federal agency, and municipal securities pledged as collateral under these financing arrangements and cannot be repledged or sold, unless replaced by the secured party.
Insurance Commissions: Commission revenue was recognized as of the effective date of the insurance policy or the date the customer was billed, whichever was later. The Company also received contingent commissions from insurance companies as additional incentive for achieving specified premium volume goals and/or the loss experience of the insurance placed by the Company. The Company maintained a reserve for commission adjustments based on estimated policy cancellations.
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.
Derivative Financial Instruments: The Company enters into derivative transactions principally to protect against the risk of adverse price or interest rate movements on the value of certain assets and liabilities and on future cash flows. All derivative instruments are carried at fair value on the balance sheet. As of December 31, 2016 and 2015, the Company has derivative instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. The change in the fair value of these derivative instruments is reflected in the statements of income. As of December 31, 2016, the Company also has a derivative instrument that is included in hedge relationships. This derivative consists of an interest rate swap used for interest rate management purposes on commercial real estate loans. The change in the fair value of these derivative instruments and net swap settlements are reflected in the statements as non-interest expense. The Company also has an interest rate swap for the purpose of hedging changes in LIBOR related to commercial real estate loans. Hedge ineffectiveness is assessed quarterly and any ineffectiveness is recorded as non-interest expense.
Trust Assets: Assets held in a fiduciary or agency capacity for customers are not included in the accompanying financial statements since such items are not assets of the Company.
Income Taxes: The consolidated provision for income taxes is based upon reported income and expense. Deferred income taxes are provided for temporary differences between financial reporting and tax bases of assets and liabilities, computed using enacted tax rates. The Company files a consolidated income tax return. The respective subsidiaries generally provide for income taxes on a separate return basis and remit amounts determined to be currently payable to the Parent Company.
The Company and its subsidiaries are subject to examinations and challenges from federal and state taxing authorities regarding positions taken in returns. Uncertain tax positions are initially recognized in the consolidated financial statements when it is more likely than not the position will be sustained upon examination. These positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority and assuming full knowledge of the position and all relevant facts by the taxing authority.
The Company invests in certain limited partnerships that operate qualified low-income housing tax credit developments. These investments are considered variable interest entities for which the Company is not the primary beneficiary. The tax credits are reflected in the Consolidated Statements of Income as a reduction in income tax expense. The unamortized amount of the investments is recorded within Other Assets within the Consolidated Balance Sheets. The Company’s investments in affordable housing limited partnerships were $0.3 million and $0.5 million at December 31, 2016 and 2015, respectively.
Advertising Costs: Advertising costs are expensed as incurred.
Stock-Based Compensation: Compensation expense related to stock options and restricted stock awards issued to employees is based upon the fair value of the award at the date of grant. The fair value of stock options is estimated utilizing a Black Scholes pricing model, while the fair value of restricted stock awards is based upon the stock price at the date of
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grant. Compensation expense is recognized on a straight line basis over the vesting period for options and the respective period for stock awards.
Basic and Diluted Earnings per Common Share: Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding, excluding participating securities. Diluted earnings per share is computed by dividing net income by the weighted-average number of shares outstanding, excluding participating securities, increased by the number of shares of common stock which would be issued assuming the exercise of stock options and other common stock equivalents.
Recent Accounting Pronouncements: In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This standard clarified the principles for recognizing revenue and developed a common revenue standard. The core principle of the standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. To achieve that core principle, an entity should apply the following steps: (i) identifying the contractor contracts with a customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract and (v) recognize revenue when (or as) the entity satisfies a performance obligation. This ASU will become effective for the Company on January 1, 2018. The Company's revenue is comprised of net interest income on financial assets and financial liabilities, which is explicitly excluded from the scope of ASU 2014-09, and non-interest income. The Company continues to evaluate the impact of ASU 2014-09 on the components of non-interest income, but does not believe it will have a material impact on the Company's financial statements. The Company anticipates adopting this standard with a cumulative effect adjustment to opening retained earnings (the modified retrospective approach), if such adjustment is deemed to be material.
In February 2015, the FASB issued ASU No. 2015-02, "Consolidation (Topic 810) - Amendments to the Consolidation Analysis." ASU 2015-02 eliminates the deferral of FAS 167 and makes changes to both the variable interest model and the voting model. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-02 did not have a material impact on the Company's financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-03 has not had a material impact on the Company's financial statements.
In April 2015, the FASB issued ASU No. 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provides guidance to clarify the customer’s accounting for fees paid in a cloud computing arrangement. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-05 has not had a material impact on the Company's financial statements.
In May 2015, the FASB issued ASU No. 2015-07, "Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)." ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The ASU also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-07 has not had a material impact on the Company's financial statements.
In September 2015, the FASB issued ASU No. 2015-16, "Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments." The amendments in ASU 2015-16 require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The effect on earnings of the adjustments as a result of the change to the provisional amounts will be calculated as if the accounting had been completed at the acquisition date. The amount that would've been recorded in the previous reporting periods will be presented separately on the face of the income statement or disclosed in the notes to the financial statements. This ASU became effective for the Company on January 1, 2016. The adoption of ASU 2015-16 has not had a material impact on the Company's financial statements.
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes." This standard requires that deferred tax liabilities and assets be classified as non-current on the balance sheet. This ASU will become effective for the Company for interim and annual periods on January 1, 2017 and early adoption is permitted. The adoption of ASU No. 2015-17 is not expected to have a material impact on the Company's financial statements.
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In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities." This standard makes several modifications to Subtopic 825-10 including the elimination of the available-for-sale classification of equity investments, and requires equity investments with readily determinable fair values to be measured at fair value with changes in fair value recognized in net income. This ASU will become effective for the Company for interim and annual periods on January 1, 2018. The adoption of ASU No. 2016-01 is not expected to have a material impact on the Company's financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This standard requires organizations to recognizing lease assets and lease liabilities on the balance sheet and disclose key information about leasing requirements for leases that were historically classified as operating leases under previous generally accepted accounting principals. This ASU will become effective for the Company for interim and annual periods on January 1, 2019. Management is currently assessing the impact of the adoption of ASU No. 2016-02.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share Based Accounting.” This standard makes several modifications to the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU will become effective for the Company for interim and annual periods on January 1, 2017. The adoption of ASU No. 2016-09 is not expected to have a material impact on the Company’s financial statements.
In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” This standard was issued to clarify Revenue from Contracts with Customers (Topic 606) related to: (i) identifying performance obligations; and (ii) the licensing implementation guidance. The effective date is the same as the effective date of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," as discussed above. ASU 2016-10 is not expected to have a significant impact on the Company's financial statements.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." This standard replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this update require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The new current expected credit losses model (CECL) will apply to the allowance for loan losses, available-for-sale and held to maturity debt securities, purchased financial assets with credit deterioration and certain off-balance sheet credit exposures. This ASU will become effective for the Company for interim and annual periods on January 1, 2020. Management is currently evaluating the potential impact of ASU No. 2016-13 on the Company's financial statements.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments." This amendment addresses existing diversity in practice regarding how certain receipts and payments are presented in the statement of cash flows. Issues addressed in this amendment include debt prepayment and extinguishment costs, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies, and separately identifiable cash flows and application of the predominance principle and their classifications in the statement of cash flows. This ASU will become effective for the Company for interim and annual periods on January 1, 2018. The adoption of ASU No. 2016-15 is not expected to have a material impact on the Company's financial statements.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory." This amendment improves the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Issues addressed in this amendment include the recognition of income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2016-16 is not expected to have a material impact on the Company's financial statements.
In December 2016, the FASB issued ASU No. 2016-20, "Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers." This amendment provides clarification for multiple aspects of Update 2014-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share Based Accounting” including the scope of guarantee fees, impairment testing of contract costs and the accrual of advertising costs. This ASU will become effective for the Company on January 1, 2018. The adoption of ASU No. 2016-20 is not expected to have a material impact on the Company's financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business." This amendment clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU
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will become effective for the Company on January 1, 2018. The adoption of ASU No. 2017-01 is not expected to have a material impact on the Company's financial statements.
Statements of Cash Flows: Cash paid for interest, including interest paid on long-term debt and trust preferred securities, was $13.1 million, $11.8 million, and $12.1 million in 2016, 2015, and 2014, respectively. During 2016, 2015 and 2014, the Company paid $16.3 million, $26.3 million, and $23.0 million, respectively, for income taxes.
During the twelve months 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 on the date of the transfer. The securities had an aggregate fair value of $83.4 million on the date of transfer.
NOTE TWO – ACQUISITION
On November 6, 2015, the Company purchased three branches in Lexington, Kentucky from American Founders Bank, Inc. ("AFB"), a wholly owned subsidiary of Financial Holdings, Inc. The Company agreed to pay: (i) a $5.2 million premium on the non-time deposits acquired (representing a 5.5% premium on average balance for the preceding twenty days), (ii) a $1.2 million premium on the loans acquired (representing a 1.0% premium on loan balances at the date of acquisition, plus certain adjustments) and (iii) $4.0 million for the one bank owned branch. The purchase added approximately $145 million in deposits and $119 million in loans.
Acquired Loans
The Company did not acquire any purchased credit-impaired loans as a result of the branch acquisition. The following table presents information regarding the noncredit-impaired loans acquired (in thousands):

Outstanding balance | $ | 119,242 |
Less: fair value adjustment | (1,763 | )
Fair value of acquired noncredit-impaired loans | $ | 117,479 |

Acquired Deposits
The fair values of non-time deposits approximated their carrying value at the acquisition date. For time deposits, the fair values were estimated based on discounted cash flows, using interest rates that are currently being offered compared to the contractual interest rates. Based on this analysis, management recorded a premium on time deposits acquired of $0.1 million, which is being amortized over 3 years.
42

Core Deposit Intangible
The Company believes that the customer relationships with the deposits acquired have an intangible value. In connection with this branch acquisition, the Company recorded a core deposit intangible asset of $1.4 million. The core deposit intangible asset represents the value that the acquiree had with their deposit customers. The fair value was estimated based on a discounted cash flow methodology that considered type of deposit, deposit retention and the cost of the deposit base. The core deposit intangible is being amortized over 10 years.
Goodwill
The Company recorded approximately $6.8 million in goodwill as a result of this acquisition. The goodwill recorded in conjunction with the branch acquisition is expected to be deductible for tax purposes.
Merger Related Costs
During the year ended December 31, 2015, the Company incurred $0.6 million of merger-related costs in connection with the AFB branch acquisition.
NOTE THREE – RESTRICTIONS ON CASH AND DUE FROM BANKS
City National is required to maintain an average reserve balance with the Federal Reserve Bank of Richmond to compensate for services provided by the Federal Reserve and to meet statutory required reserves for demand deposits. The average amount of the reserve balance for the year ended December 31, 2016 was approximately $33.3 million.
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NOTE FOUR –INVESTMENTS
The aggregate carrying and approximate market values of securities follow (in thousands). Fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable financial instruments.

| December 31, 2016 | December 31, 2015
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value
Securities available-for-sale: |  |  |  |  |  |  |  |
U.S. Treasuries and U.S. |  |  |  |  |  |  |  |
government agencies | $ | 3 |  | $ | — |  | $ | — |  | $ | 3 |  | $ | 5 |  | $ | — |  | $ | — |  | $ | 5 |
Obligations of states and |  |  |  |  |  |  |  |
political subdivisions | 83,248 |  | 594 |  | 1,474 |  | 82,368 |  | 49,725 |  | 979 |  | 7 |  | 50,697 |
Mortgage-backed securities: |  |  |  |  |  |  |  |
U.S. government agencies | 335,867 |  | 1,507 |  | 6,560 |  | 330,814 |  | 287,933 |  | 2,285 |  | 2,021 |  | 288,197 |
Private label | 941 |  | 1 |  | — |  | 942 |  | 1,222 |  | 9 |  | — |  | 1,231 |
Trust preferred |  |  |  |  |  |  |  |
securities | 6,052 |  | 1,164 |  | 554 |  | 6,662 |  | 6,550 |  | 463 |  | 1,155 |  | 5,858 |
Corporate securities | 23,925 |  | 127 |  | 478 |  | 23,574 |  | 18,793 |  | 221 |  | 321 |  | 18,693 |
Total Debt Securities | 450,036 |  | 3,393 |  | 9,066 |  | 444,363 |  | 364,228 |  | 3,957 |  | 3,504 |  | 364,681 |
Marketable equity securities | 2,136 |  | 2,095 |  | — |  | 4,231 |  | 2,131 |  | 1,142 |  | — |  | 3,273 |
Investment funds | 1,525 |  | — |  | 36 |  | 1,489 |  | 1,525 |  | — |  | 13 |  | 1,512 |
Total Securities |  |  |  |  |  |  |  |
Available-for-Sale | $ | 453,697 |  | $ | 5,488 |  | $ | 9,102 |  | $ | 450,083 |  | $ | 367,884 |  | $ | 5,099 |  | $ | 3,517 |  | $ | 369,466 |

| December 31, 2016 | December 31, 2015
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value
Securities held-to-maturity |  |  |  |  |  |  |  |
U.S. government agencies | $ | 71,169 |  | $ | 1,346 |  | $ | 70 |  | $ | 72,445 |  | $ | 84,937 |  | $ | 1,949 |  | $ | 76 |  | $ | 86,810 |
Trust preferred securities | 4,000 |  | — |  | — |  | 4,000 |  | 4,000 |  | — |  | — |  | 4,000 |
Total Securities |  |  |  |  |  |  |  |
Held-to-Maturity | $ | 75,169 |  | $ | 1,346 |  | $ | 70 |  | $ | 76,445 |  | $ | 88,937 |  | $ | 1,949 |  | $ | 76 |  | $ | 90,810 |
Other investment securities: |  |  |  |  |  |  |  |
Non-marketable equity securities | $ | 14,352 |  | $ | — |  | $ | — |  | $ | 14,352 |  | $ | 12,915 |  | $ | — |  | $ | — |  | $ | 12,915 |
Total Other Investment |  |  |  |  |  |  |  |
Securities | $ | 14,352 |  | $ | — |  | $ | — |  | $ | 14,352 |  | $ | 12,915 |  | $ | — |  | $ | — |  | $ | 12,915 |

Marketable equity securities consist of investments made by the Company in equity positions of various community banks. Included within this portfolio are ownership positions in the following community bank holding companies: First National Corporation (FXNC) (4%) and Eagle Financial Services, Inc. (EFSI) (1.5%). Securities with limited marketability, such as stock in the Federal Reserve Bank ("FRB") or the Federal Home Loan Bank ("FHLB"), are carried at cost and are reported as non-marketable equity securities in the table above.
At December 31, 2016 and 2015, there were no securities of any non-governmental issuer whose aggregate carrying value or estimated fair value exceeded 10% of shareholders' equity.
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Certain investment securities owned by the Company were in an unrealized loss position (i.e., amortized cost basis exceeded the estimated fair value of the securities) as of December 31, 2016 and 2015. The following table shows the gross unrealized losses and fair value of the Company’s investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position (in thousands):

| December 31, 2016
| Less Than Twelve Months | Twelve Months or Greater | Total
| Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss
Securities available-for-sale: |  |  |  |  |  |
Obligations of states and political subdivisions | $ | 35,108 |  | $ | 1,474 |  | $ | — |  | $ | — |  | $ | 35,108 |  | $ | 1,474 |
Mortgage-backed securities: |  |  |  |  |  |
U.S. Government agencies | 225,530 |  | 6,099 |  | 8,527 |  | 461 |  | 234,057 |  | 6,560 |
Trust preferred securities | — |  | — |  | 4,971 |  | 554 |  | 4,971 |  | 554 |
Corporate securities | 14,306 |  | 478 |  | — |  | — |  | 14,306 |  | 478 |
Investment funds | 1,500 |  | 36 |  | — |  | — |  | 1,500 |  | 36 |
Total | $ | 276,444 |  | $ | 8,087 |  | $ | 13,498 |  | $ | 1,015 |  | $ | 289,942 |  | $ | 9,102 |

| December 31, 2015
| Less Than Twelve Months | Twelve Months or Greater | Total
| Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss | Estimated Fair Value | Unrealized Loss
Securities available-for-sale: |  |  |  |  |  |
Obligations of states and political subdivisions | $ | 2,406 |  | $ | 5 |  | $ | 128 |  | $ | 2 |  | $ | 2,534 |  | $ | 7 |
Mortgage-backed securities: |  |  |  |  |  |
U.S. Government agencies | 129,612 |  | 688 |  | 34,044 |  | 1,333 |  | 163,656 |  | 2,021 |
Trust preferred securities | — |  | — |  | 4,769 |  | 1,155 |  | 4,769 |  | 1,155 |
Corporate securities | 10,856 |  | 174 |  | 2,231 |  | 147 |  | 13,087 |  | 321 |
Investment funds | — |  | — |  | 1,488 |  | 13 |  | 1,488 |  | 13 |
Total | $ | 142,874 |  | $ | 867 |  | $ | 42,660 |  | $ | 2,650 |  | $ | 185,534 |  | $ | 3,517 |

During the year ended December 31, 2016 the Company had $0.5 million in credit-related net investment impairment losses. During the years ended December 31, 2015 and 2014 the Company recorded no credit-related net investment impairment losses. The charges deemed to be other-than-temporary were related to pooled bank trust preferred securities and were based on the Company’s quarterly reviews of its investment securities for indications of losses considered to be other-than-temporary. At December 31, 2016, the cumulative amount of credit-related investment impairment losses that have been recognized by the Company on investments that remain in the Company's investment portfolio as of that date was $10.2 million ($8.6 million related to the Company's debt securities and $1.6 million related to the Company's equity securities).
Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other-than-temporary would be reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers, among other things (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 such as changes in technology that may impair the earnings potential of the investment or the discontinuance of a segment of the business that may affect the future earnings potential; (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 to sell the investment security and if it’s more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, management also employs a continuous monitoring process in regards to its marketable equity securities, specifically its portfolio of regional community bank holdings. Although the regional community bank stocks that are owned by the Company are publicly traded,
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the trading activity for these stocks is minimal, with trading volumes of less than 0.3% of each respective company being traded on a daily basis. As part of management’s review process for these securities, management reviews the financial condition of each respective regional community bank for any indications of financial weakness.
Management has the ability and intent to hold the securities classified as held-to-maturity until they mature, at which time the Company expects to receive full value for the securities. Furthermore, as of December 31, 2016, management does not intend to sell an impaired security and it is not more than likely that it will be required to sell the security before the recovery of its amortized cost basis. The unrealized losses on debt securities are primarily the result of interest rate changes, credit spread fluctuations on agency-issued mortgage related securities, general financial market uncertainty and unprecedented market volatility. These conditions will not prohibit the Company from receiving its contractual principal and interest payments on its debt securities. The fair value is expected to recover as the securities approach their maturity date or repricing date. As of December 31, 2016, management believes the unrealized losses detailed in the table above are temporary and no additional impairment loss has been recognized in the Company’s consolidated income statement. Should the impairment of any of these securities become other-than-temporary, the cost basis of the investment will be reduced and the resulting loss will be recognized in net income in the period the other-than-temporary impairment is identified, while any noncredit loss will be recognized in other comprehensive income.
The amortized cost and estimated fair value of debt securities at December 31, 2016, by contractual maturity, are shown in the following table (in thousands). Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties. Mortgage-backed securities have been allocated to their respective maturity groupings based on their contractual maturity.

| Cost | Estimated Fair Value
Securities Available-for-Sale |  |
Due in one year or less | $ | 2,287 |  | $ | 2,211 |
Due after one year through five years | 25,632 |  | 17,632 |
Due after five years through ten years | 64,842 |  | 71,162 |
Due after ten years | 357,275 |  | 353,358 |
| $ | 450,036 |  | $ | 444,363 |
Securities Held-to-Maturity |  |
Due in one year or less | $ | — |  | $ | — |
Due after one year through five years | — |  | — |
Due after five years through ten years | — |  | — |
Due after ten years | 75,169 |  | 76,445 |
| $ | 75,169 |  | $ | 76,445 |

Gross gains and gross losses realized by the Company from investment security transactions are summarized in the table below (in thousands):

| For the year ended December 31,
| 2016 | 2015 | 2014
Gross realized gains | $ | 3,978 |  | $ | 2,142 |  | $ | 1,256 |
Gross realized losses | (465 | ) | (12 | ) | (100 | )
Investment security gains (losses) | $ | 3,513 |  | $ | 2,130 |  | $ | 1,156 |

The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $337 million and $291 million at December 31, 2016 and 2015, respectively.
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NOTE FIVE –LOANS
The following summarizes the Company’s major classifications for loans (in thousands):

| December 31, 2016 | December 31, 2015
Residential real estate | $ | 1,451,462 |  | $ | 1,383,133 |
Home equity | 141,965 |  | 147,036 |
Commercial and industrial | 185,667 |  | 165,340 |
Commercial real estate | 1,229,516 |  | 1,127,581 |
Consumer | 32,545 |  | 36,083 |
DDA overdrafts | 5,071 |  | 3,361 |
Gross loans | 3,046,226 |  | 2,862,534 |
Allowance for loan losses | (19,730 | ) | (19,251 | )
Net loans | $ | 3,026,496 |  | $ | 2,843,283 |

Construction loans of $14.2 million and $13.1 million are included within residential real estate loans at December 31, 2016 and December 31, 2015, respectively. Construction loans of $12.8 million and $12.6 million are included within commercial real estate loans at December 31, 2016 and December 31, 2015, respectively. The Company’s commercial and residential real estate construction loans are primarily secured by real estate within the Company’s principal markets. These loans were originated under the Company’s loan policy, which is focused on the risk characteristics of the loan portfolio, including construction loans. Adequate consideration has been given to these loans in establishing the Company’s allowance for loan losses.
The following table details the loans acquired in conjunction with the Virginia Savings, Community and AFB acquisitions (in thousands). These loans were originally underwritten by the acquiree in accordance with the acquiree's underwriting guidelines. As loans come up for renewal, extension, etc., the loans are underwritten in accordance withe the Company's underwriting guidelines and are thus not reflected in the table below.

| Virginia Savings | Community | AFB | Total
December 31, 2016 |  |  |  |
Outstanding loan balance | $ | 23,714 |  | $ | 149,488 |  | $ | 85,120 |  | $ | 258,322 |
Credit-impaired loans: |  |  |  |
Carrying value | 1,700 |  | 8,857 |  | — |  | 10,557 |
Contractual principal and interest | 1,895 |  | 11,157 |  | — |  | 13,052 |
December 31, 2015 |  |  |  |
Outstanding loan balance | $ | 28,914 |  | $ | 181,545 |  | $ | 112,862 |  | $ | 323,321 |
Credit-impaired loans: |  |  |  |
Carrying value | 1,707 |  | 12,899 |  | — |  | 14,606 |
Contractual principal and interest | 1,965 |  | 16,362 |  | — |  | 18,327 |

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Changes in the accretable yield and the carrying amount of the purchased credit-impaired loans is as follows (in thousands):

| December 31, 2016 | December 31, 2015
| Accretable Yield | Carrying Amount of Loans | Accretable Yield | Carrying Amount of Loans
Balance at the beginning of the period | $ | 6,640 |  | $ | 14,606 |  | $ | 10,334 |  | $ | 17,329 |
Accretion | (1,061 | ) | 1,061 |  | (2,665 | ) | 2,665 |
Reclassifications to/from accretable from/to non-accretable difference, net | (145 | ) | — |  | 1,103 |  | — |
Payments received, net | — |  | (4,376 | ) | — |  | (3,369 | )
Disposals | (425 | ) | (734 | ) | (2,132 | ) | (2,019 | )
Balance at the end of period | $ | 5,009 |  | $ | 10,557 |  | $ | 6,640 |  | $ | 14,606 |

Increases in expected cash flow subsequent to the acquisition are recognized first as a reduction of any previous impairment, then prospectively through adjustment of the yield on the loans or pools over its remaining life, while decreases in expected cash flows are recognized as impairment through a provision for loan loss and an increase in the allowance for purchased credit-impaired loans.
NOTE SIX –ALLOWANCE FOR LOAN LOSSES
Management systematically monitors the loan portfolio and the appropriateness of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. Management assesses the risk in each loan type based on historical 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 types of loan types is often based more upon specific credit reviews, with consideration given to the potential impairment of certain credits and historical loss rates, adjusted for economic conditions and other inherent risk factors.
The following summarizes the activity in the allowance for loan loss, by portfolio segment (in thousands). The allocation of a portion of the allowance in one portfolio segment does not preclude its availability to absorb losses in other portfolio segments. The following also presents the balance in the allowance for loan loss disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans, by portfolio segment (in thousands).

| Commercial and industrial | Commercial real estate | Residential real estate | Home equity | Consumer | DDA overdrafts | Total
December 31, 2016 |  |  |  |  |  |  |
Allowance for loan loss |  |  |  |  |  |  |
Beginning balance | $ | 3,271 |  | $ | 6,985 |  | $ | 6,778 |  | $ | 1,463 |  | $ | 97 |  | $ | 657 |  | $ | 19,251 |
Charge-offs | (148 | ) | (1,676 | ) | (1,734 | ) | (390 | ) | (126 | ) | (1,412 | ) | (5,486 | )
Recoveries | 14 |  | 487 |  | 187 |  | — |  | 118 |  | 764 |  | 1,570 |
Provision | 1,069 |  | 614 |  | 1,449 |  | 344 |  | (7 | ) | 763 |  | 4,232 |
Provision for acquired loans with deteriorated credit quality | — |  | 163 |  | — |  | — |  | — |  | — |  | 163 |
Ending balance | $ | 4,206 |  | $ | 6,573 |  | $ | 6,680 |  | $ | 1,417 |  | $ | 82 |  | $ | 772 |  | $ | 19,730 |
December 31, 2015 |  |  |  |  |  |  |
Allowance for loan loss |  |  |  |  |  |  |
Beginning balance | $ | 1,582 |  | $ | 8,845 |  | $ | 7,208 |  | $ | 1,495 |  | $ | 85 |  | $ | 859 |  | $ | 20,074 |
Charge-offs | (5,768 | ) | (580 | ) | (1,144 | ) | (312 | ) | (210 | ) | (1,414 | ) | (9,428 | )
Recoveries | 74 |  | 366 |  | 199 |  | — |  | 186 |  | 792 |  | 1,617 |

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Provision | 7,383 |  | (2,199 | ) | 515 |  | 280 |  | 36 |  | 420 |  | 6,435 |
Provision for acquired loans with deteriorated credit quality | — |  | 553 |  | — |  | — |  | — |  | — |  | 553 |
Ending balance | $ | 3,271 |  | $ | 6,985 |  | $ | 6,778 |  | $ | 1,463 |  | $ | 97 |  | $ | 657 |  | $ | 19,251 |
As of December 31, 2016 |  |  |  |  |  |  |
Allowance for loan loss |  |  |  |  |  |  |
Evaluated for impairment: |  |  |  |  |  |  |
Individually | $ | — |  | $ | 665 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 665 |
Collectively | 4,200 |  | 5,788 |  | 6,589 |  | 1,417 |  | 82 |  | 772 |  | 18,848 |
Acquired with deteriorated credit quality | 6 |  | 120 |  | 91 |  | — |  | — |  | — |  | 217 |
Total | $ | 4,206 |  | $ | 6,573 |  | $ | 6,680 |  | $ | 1,417 |  | $ | 82 |  | $ | 772 |  | $ | 19,730 |
Loans |  |  |  |  |  |  |
Evaluated for impairment: |  |  |  |  |  |  |
Individually | $ | 1,611 |  | $ | 5,970 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 7,581 |
Collectively | 183,741 |  | 1,216,050 |  | 1,448,830 |  | 141,965 |  | 32,545 |  | 5,071 |  | 3,028,202 |
Acquired with deteriorated credit quality | 315 |  | 7,496 |  | 2,632 |  | — |  | — |  | — |  | 10,443 |
Total | $ | 185,667 |  | $ | 1,229,516 |  | $ | 1,451,462 |  | $ | 141,965 |  | $ | 32,545 |  | $ | 5,071 |  | $ | 3,046,226 |
As of December 31, 2015 |  |  |  |  |  |  |
Allowance for loan loss |  |  |  |  |  |  |
Evaluated for impairment: |  |  |  |  |  |  |
Individually | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |
Collectively | 3,267 |  | 6,173 |  | 6,765 |  | 1,463 |  | 97 |  | 657 |  | 18,422 |
Acquired with deteriorated credit quality | 4 |  | 812 |  | 13 |  | — |  | — |  | — |  | 829 |
Total | $ | 3,271 |  | $ | 6,985 |  | $ | 6,778 |  | $ | 1,463 |  | $ | 97 |  | $ | 657 |  | $ | 19,251 |
Loans |  |  |  |  |  |  |
Evaluated for impairment: |  |  |  |  |  |  |
Individually | $ | 2,349 |  | $ | 6,133 |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | 8,482 |
Collectively | 162,662 |  | 1,109,327 |  | 1,381,064 |  | 147,036 |  | 35,997 |  | 3,361 |  | 2,839,447 |
Acquired with deteriorated credit quality | 329 |  | 12,121 |  | 2,069 |  | — |  | 86 |  | — |  | 14,605 |
Total | $ | 165,340 |  | $ | 1,127,581 |  | $ | 1,383,133 |  | $ | 147,036 |  | $ | 36,083 |  | $ | 3,361 |  | $ | 2,862,534 |

Credit Quality Indicators
All non-commercial loans are evaluated based on payment history. All commercial loans within the portfolio are subject to internal risk grading. The Company’s internal risk ratings for commercial loans are: Exceptional, Good, Acceptable, Pass/Watch, Special Mention, Substandard and Doubtful. Each internal risk rating is defined in the loan policy using the following criteria: balance sheet yields, ratios and leverage, cash flow spread and coverage, prior history, capability of management, market position/industry, potential impact of changing economic, legal, regulatory or environmental conditions, purpose structure, collateral support, and guarantor support. Risk grades are generally assigned by the primary lending officer and are periodically evaluated by the Company’s internal loan review process. Based on an individual loan’s risk grade, estimated loss percentages are applied to the outstanding balance of the loan to determine the amount of probable loss.
The Company categorizes loans into risk categories based on relevant information regarding the customer’s debt service ability, capacity, overall collateral position along with other economic trends, and historical payment performance. The risk grades for each credit are updated when the Company receives current financial information, the loan is reviewed by the Company’s internal loan review/credit administration departments, or the loan becomes delinquent or impaired. The risk grades
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are updated a minimum of annually for loans rated exceptional, good, acceptable, or pass/watch. Loans rated special mention, substandard or doubtful are reviewed at least quarterly. The Company uses the following definitions for its risk ratings:

Risk Rating | Description
Pass Ratings: |
(a) Exceptional | Loans classified as exceptional are secured with liquid collateral conforming to the internal loan policy. Loans rated within this category pose minimal risk of loss to the bank and the risk grade within this pool of loans is generally updated on an annual basis.
(b) Good | Loans classified as good have similar characteristics that include a strong balance sheet, satisfactory debt service coverage ratios, strong management and/or guarantors, and little exposure to economic cycles. Loans within this category are generally reviewed on an annual basis. Loans in this category generally have a low chance of loss to the bank.
(c) Acceptable | Loans classified as acceptable have acceptable liquidity levels, adequate debt service coverage ratios, experienced management, and have average exposure to economic cycles. Loans within this category generally have a low risk of loss to the bank.
(d) Pass/watch | Loans classified as pass/watch have erratic levels of leverage and/or liquidity, cash flow is volatile and the borrower is subject to moderate economic risk. A borrower in this category poses a low to moderate risk of loss to the bank.
Special mention | Loans classified as special mention have a potential weakness(es) that deserves management's close attention. The potential weakness could result in deterioration of the loan repayment or the bank's credit position at some future date. A loan rated in this category poses a moderate loss risk to the bank.
Substandard | Loans classified as substandard reflect a customer with a well defined weakness that jeopardizes the liquidation of the debt. Loans in this category have the possibility that the bank will sustain some loss if the deficiencies are not corrected and the bank's collateral value is weakened by the financial deterioration of the borrower.
Doubtful | Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristics that make collection of the full contract amount highly improbable. Loans rated in this category are most likely to cause the bank to have a loss due to a collateral shortfall or a negative capital position.

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The following table presents the Company's commercial loans by credit quality indicators, by class (in thousands):

| Commercial and industrial | Commercial real estate | Total
December 31, 2016 |  |  |
Pass | $ | 176,823 |  | $ | 1,178,288 |  | $ | 1,355,111 |
Special mention | 2,427 |  | 16,031 |  | 18,458 |
Substandard | 6,417 |  | 35,197 |  | 41,614 |
Doubtful | — |  | — |  | — |
Total | $ | 185,667 |  | $ | 1,229,516 |  | $ | 1,415,183 |
December 31, 2015 |  |  |  |  |  |
Pass | $ | 156,664 |  | $ | 1,070,506 |  | $ | 1,227,170 |
Special mention | 4,099 |  | 20,942 |  | 25,041 |
Substandard | 4,539 |  | 36,133 |  | 40,672 |
Doubtful | 38 |  | — |  | 38 |
Total | $ | 165,340 |  | $ | 1,127,581 |  | $ | 1,292,921 |

The following table presents the Company's non-commercial loans by payment performance, by class (in thousands):

| Performing | Non-Performing | Total
December 31, 2016 |  |  |
Residential real estate | $ | 1,451,389 |  | $ | 73 |  | $ | 1,451,462 |
Home equity | 141,934 |  | 31 |  | 141,965 |
Consumer | 32,545 |  | — |  | 32,545 |
DDA overdrafts | 5,071 |  | — |  | 5,071 |
Total | $ | 1,630,939 |  | $ | 104 |  | $ | 1,631,043 |
December 31, 2015 |  |  |
Residential real estate | $ | 1,379,797 |  | $ | 3,336 |  | $ | 1,383,133 |
Home equity | 147,013 |  | 23 |  | 147,036 |
Consumer | 36,049 |  | 34 |  | 36,083 |
DDA overdrafts | 3,361 |  | — |  | 3,361 |
Total | $ | 1,566,220 |  | $ | 3,393 |  | $ | 1,569,613 |

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Aging Analysis of Accruing and Non-Accruing Loans
The following presents an aging analysis of the Company’s accruing and non-accruing loans, by class (in thousands). The purchased credit-impaired loan column represents the purchased credit-impaired loans that the Company acquired that are contractually past due, but are still performing in accordance with the Company's initial expectations.

| December 31, 2016
| Accruing |  |
| Current | 30-59 days | 60-89 days | Over 90 days | Purchased-Credit Impaired | Non-accrual | Total
Residential real estate | $ | 1,441,086 |  | $ | 5,364 |  | $ | 637 |  | $ | 73 |  | $ | — |  | $ | 4,302 |  | $ | 1,451,462 |
Home equity | 141,192 |  | 423 |  | 219 |  | 31 |  | — |  | 100 |  | 141,965 |
Commercial and industrial | 183,615 |  | 94 |  | — |  | — |  | — |  | 1,958 |  | 185,667 |
Commercial real estate | 1,221,344 |  | 553 |  | — |  | 278 |  | — |  | 7,341 |  | 1,229,516 |
Consumer | 32,506 |  | 38 |  | 1 |  | — |  | — |  | — |  | 32,545 |
DDA overdrafts | 4,472 |  | 595 |  | 4 |  | — |  | — |  | — |  | 5,071 |
Total | $ | 3,024,215 |  | $ | 7,067 |  | $ | 861 |  | $ | 382 |  | $ | — |  | $ | 13,701 |  | $ | 3,046,226 |
| December 31, 2015
| Accruing |  |
| Current | 30-59 days | 60-89 days | Over 90 days | Purchased-Credit Impaired | Non-accrual | Total
Residential real estate | $ | 1,373,604 |  | $ | 5,261 |  | $ | 932 |  | $ | 418 |  | $ | — |  | $ | 2,918 |  | $ | 1,383,133 |
Home equity | 146,493 |  | 318 |  | 65 |  | 24 |  | — |  | 136 |  | 147,036 |
Commercial and industrial | 162,435 |  | 141 |  | — |  | 19 |  | — |  | 2,745 |  | 165,340 |
Commercial real estate | 1,114,953 |  | 762 |  | 211 |  | — |  | 506 |  | 11,149 |  | 1,127,581 |
Consumer | 35,886 |  | 154 |  | 9 |  | 34 |  | — |  | — |  | 36,083 |
DDA overdrafts | 3,048 |  | 310 |  | 3 |  | — |  | — |  | — |  | 3,361 |
Total | $ | 2,836,419 |  | $ | 6,946 |  | $ | 1,220 |  | $ | 495 |  | $ | 506 |  | $ | 16,948 |  | $ | 2,862,534 |

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The following presents the Company’s impaired loans, by class (in thousands):

| December 31, 2016 | December 31, 2015
|  | Unpaid |  |  | Unpaid |
| Recorded | Principal | Related | Recorded | Principal | Related
| Investment | Balance | Allowance | Investment | Balance | Allowance
With no related allowance recorded: |  |  |  |  |  |
Commercial and industrial | $ | 1,611 |  | $ | 3,775 |  | $ | — |  | $ | 2,349 |  | $ | 7,547 |  | $ | — |
Commercial real estate | 3,138 |  | 4,963 |  | — |  | 6,133 |  | 9,502 |  | — |
Total | $ | 4,749 |  | $ | 8,738 |  | $ | — |  | $ | 8,482 |  | $ | 17,049 |  | $ | — |
With an allowance recorded |  |  |  |  |  |
Commercial and industrial | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |  | $ | — |
Commercial real estate | 2,832 |  | 2,832 |  | 665 |  | — |  | — |  | — |
Total | $ | 2,832 |  | $ | 2,832 |  | $ | 665 |  | $ | — |  | $ | — |  | $ | — |

The following table presents information related to the average recorded investment and interest income recognized on the Company’s impaired loans, by class (in thousands):

| For the year ended
| December 31, 2016 | December 31, 2015
| Average | Interest | Average | Interest
| Recorded | Income | Recorded | Income
| Investment | Recognized | Investment | Recognized
With no related allowance recorded: |  |  |  |
Commercial and industrial | 2,099 |  | — |  | 2,913 |  | — |
Commercial real estate | 4,039 |  | 14 |  | 5,606 |  | 4 |
Total | $ | 6,138 |  | $ | 14 |  | $ | 8,519 |  | $ | 4 |
With an allowance recorded |  |  |  |
Commercial and industrial | — |  | — |  | — |  | — |
Commercial real estate | 1,419 |  | 24 |  | 1,012 |  | — |
Total | $ | 1,419 |  | $ | 24 |  | $ | 1,012 |  | $ | — |

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 the years ended December 31, 2016, 2015 and 2014, respectively. There were no commitments to provide additional funds on non-accrual, impaired or other potential problem loans at December 31, 2016.
Loan Modifications
The Company’s policy on loan modifications typically does not allow for modifications that would be considered a concession from the Company. However, when there is a modification, the Company evaluates each modification to determine if the modification constitutes a troubled debt restructuring (“TDR”) in accordance with ASU 2011-2, whereby a modification of a loan would be considered a TDR when both of the following conditions are met: (1) a borrower is experiencing financial difficulty and (2) the modification constitutes a concession. When determining whether the borrower is experiencing financial difficulties, the Company reviews whether the debtor is currently in payment default on any of its debt or whether it is probable that the debtor would be in payment default in the foreseeable future without the modification. Other indicators of financial difficulty include whether the debtor has declared or is in the process of declaring bankruptcy, the debtor’s ability to continue as a going concern, or the debtor’s projected cash flow to service its debt (including principal and interest) in accordance with the contractual terms for the foreseeable future, without a modification.
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.
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The following tables set forth the Company’s TDRs (in thousands):

| December 31, 2016 | December 31, 2015
| Non- |  |  | Non- |
Accruing | Accruing | Total | Accruing | Accruing | Total
Commercial and industrial | $ | 42 |  | $ | — |  | $ | 42 |  | $ | 58 |  | $ | — |  | $ | 58 |
Commercial real estate | 5,525 |  | — |  | 5,525 |  | 1,746 |  | — |  | 1,746 |
Residential real estate | 20,424 |  | 391 |  | 20,815 |  | 17,796 |  | 191 |  | 17,987 |
Home equity | 3,105 |  | 30 |  | 3,135 |  | 2,659 |  | 34 |  | 2,693 |
Consumer | — |  | — |  | — |  | — |  | — |  | — |
| $ | 29,096 |  | $ | 421 |  | $ | 29,517 |  | $ | 22,259 |  | $ | 225 |  | $ | 22,484 |

| New TDRs | New TDRs
| For the year ended | For the year ended
| December 31, 2016 | December 31, 2015
| Pre | Post |  | Pre | Post
| Modification | Modification |  | Modification | Modification
| Outstanding | Outstanding |  | Outstanding | Outstanding
Number of | Recorded | Recorded | Number of | Recorded | Recorded
Contracts | Investment | Investment | Contracts | Investment | Investment
Commercial and industrial | — |  | $ | — |  | $ | — |  | — |  | $ | — |  | $ | — |
Commercial real estate | 2 |  | 5,021 |  | 4,366 |  | — |  | — |  | — |
Residential real estate | 37 |  | 3,812 |  | 3,812 |  | 38 |  | 2,969 |  | 2,969 |
Home equity | 9 |  | 221 |  | 221 |  | 13 |  | 361 |  | 361 |
Consumer | — |  | — |  | — |  | — |  | — |  | — |
| 48 |  | $ | 9,054 |  | $ | 8,399 |  | 51 |  | $ | 3,330 |  | $ | 3,330 |

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NOTE SEVEN – PREMISES AND EQUIPMENT
A summary of premises and equipment and related accumulated depreciation is summarized as follows (in thousands):

| Estimated Useful Life | 2016 | 2015
Land |  | $ | 31,546 |  | $ | 31,496 |
Buildings and improvements | 10 to 30 yrs. | 88,698 |  | 87,875 |
Equipment | 3 to 7 yrs. | 40,157 |  | 39,159 |
|  | 160,401 |  | 158,530 |
Less: accumulated depreciation |  | (85,236 | ) | (81,259 | )
|  | $ | 75,165 |  | $ | 77,271 |

NOTE EIGHT – GOODWILL AND OTHER INTANGIBLE ASSETS
The Company completed its annual assessment of the carrying value of goodwill during 2016 and concluded that its carrying value was not impaired. The following table presents a roll forward of the Company's goodwill activity (in thousands):

| 2016 | 2015
Beginning balance | $ | 76,256 |  | $ | 71,401 |
Goodwill reduction in conjunction with sale of CityInsurance | — |  | (3,020 | )
Goodwill acquired in conjunction with the acquisition of AFB | — |  | 7,875 |
Adjustments to goodwill acquired in conjunction with the acquisition of AFB | (60 | ) | — |
Ending balance | $ | 76,196 |  | $ | 76,256 |

The Company believes that the customer relationships with the deposits acquired have an intangible value. In connection with acquisitions, the Company recorded a core deposit intangible, which represented the value that the acquiree had with their deposit customers. The fair value was estimated based on a discounted cash flow methodology that considered the type of deposit, estimated deposit retention, the cost of the deposit base and an alternate cost of funds. The following tables present the details of the Company's core deposit intangibles (in thousands):

| 2016 | 2015
Gross carrying amount | $ | 9,802 |  | $ | 9,802 |
Accumulated amortization | (6,863 | ) | (6,266 | )
| $ | 2,939 |  | $ | 3,536 |
Beginning balance | $ | 3,536 |  | $ | 2,797 |
Core deposit intangible acquired in conjunction with the acquisition of AFB | — |  | 1,415 |
Amortization expense | (597 | ) | (676 | )
Ending balance | $ | 2,939 |  | $ | 3,536 |

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The core deposit intangible amortization expense for the year ended December 31, 2016 was $0.9 million. The core deposit intangibles are being amortized over ten years. The estimated amortization expense for core deposit intangible assets for each of the next five years is as follows (in thousands):

2017 | $ | 545 |
2018 | 496 |
2019 | 454 |
2020 | 416 |
2021 | 382 |
Thereafter | 646 |
| $ | 2,939 |

NOTE NINE – SCHEDULED MATURITIES OF TIME DEPOSITS
Scheduled maturities of the Company's time deposits outstanding at December 31, 2016 are summarized as follows (in thousands):

2017 | $ | 484,946 |
2018 | 265,660 |
2019 | 185,882 |
2020 | 85,766 |
2021 | 18,722 |
Over five years | 443 |
| $ | 1,041,419 |

Scheduled maturities of Company's time deposits that meet or exceed the FDIC insurance limit of $250,000 are summarized as follows (in thousands):

| 2016 | 2015
Within one year | $ | 50,261 |  | $ | 35,160 |
Over one through two years | 24,140 |  | 16,491 |
Over two through three years | 16,437 |  | 19,032 |
Over three through four years | 13,370 |  | 10,907 |
Over four through five years | 588 |  | 4,709 |
Over five years | — |  | — |
| $ | 104,796 |  | $ | 86,299 |

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NOTE TEN – SHORT-TERM DEBT
A summary of the Company's short-term borrowings are as follows (dollars in thousands):

| 2016 | 2015 | 2014
Balance at end of year: |  |  |
Securities sold under agreements to repurchase | $ | 184,205 |  | $ | 141,869 |  | $ | 134,931 |
Federal Home Loan Bank advances | 64,100 |  | 13,000 |  | — |
Avg. outstanding during the year: |  |  |
Securities sold under agreements to repurchase | $ | 157,215 |  | $ | 143,847 |  | $ | 133,769 |
Federal Funds purchased | — |  | 193 |  | — |
Federal Home Loan Bank advances | 18,850 |  | 1,159 |  | — |
Max. outstanding at any month end: |  |  |
Securities sold under agreements to repurchase | $ | 184,205 |  | $ | 166,507 |  | $ | 151,637 |
Federal Home Loan Bank advances | 88,600 |  | 13,000 |  | — |
Weighted-average interest rate: |  |  |
During the year: |  |  |
Securities sold under agreements to repurchase | 0.22 | % | 0.22 | % | 0.26 | %
Federal Funds purchased | — |  | 0.64 | % | — |
Federal Home Loan Bank advances | 0.66 | % | 0.53 | % | — |
End of the year: |  |  |
Securities sold under agreements to repurchase | 0.19 | % | 0.20 | % | 0.26 | %
Federal Home Loan Bank advances | 0.77 | % | 0.51 | % | — |

Through City National, the Company has purchased 61,641 shares of Federal Home Loan Bank (“FHLB”) stock at par value as of December 31, 2016. Such purchases are required based on City National’s maximum borrowing capacity with the FHLB. Additionally, FHLB stock entitles the Company to dividends declared by the FHLB and provides an additional source of short-term and long-term funding, in the form of collateralized advances. Financing obtained from the FHLB is based, in part, on the amount of qualifying collateral available, specifically 1-4 family residential mortgages, other residential mortgages, and commercial real estate and other non-residential mortgage loans. Collateral pledged to the FHLB included approximately $1.9 billion at December 31, 2016 and $1.7 billion at December 31, 2015 in investment securities and one-to-four-family residential property loans. In addition to the short-term financing discussed above and long-term financing (see Note Eleven) City National had an additional $1.6 billion available from unused portions of lines of credit with the FHLB and other financial institutions at both December 31, 2016 and 2015.
NOTE ELEVEN – LONG-TERM DEBT
The components of the Company's long-term debt are summarized below (dollars in thousands):

| 2016 | 2015
Junior subordinated debentures owed to City Holding Capital Trust III, due 2038, interest at a rate of 4.35% and 4.01%, respectively | $ | 16,495 |  | $ | 16,495 |

The Company formed a statutory business trust, City Holding Capital Trust III (“Capital Trust III”), under the laws of Delaware. Capital Trust III was created for the exclusive purpose of (i) issuing trust-preferred capital securities (“Capital Securities”), which represent preferred undivided beneficial interests in the assets of the trust, (ii) using the proceeds from the sale of the Capital Securities to acquire junior subordinated debentures (“Debentures”) issued by the Company, and (iii) engaging
57

in only those activities necessary or incidental thereto. The trust is considered a variable interest entity for which the Company is not the primary beneficiary. Accordingly, the accounts of the trusts are not included in the Company’s consolidated financial statements.
Distributions on the Debentures are cumulative and will be payable quarterly at an interest rate of 3.50% over the three month LIBOR rate, reset quarterly. Interest payments are due in March, June, September and December. The Debentures are redeemable prior to maturity at the option of the Company (i) in whole or at any time or in part from time-to-time, or (ii) in whole, but not in part, at any time within 90 days following the occurrence and during the continuation of certain pre-defined events.
Payments of distributions on the Capital Securities and payments on redemption of the Capital Securities are guaranteed by the Company. The Company also entered into an agreement as to expenses and liabilities with the trust pursuant to which it agreed, on a subordinated basis, to pay any cost, expenses or liabilities of the trust other than those arising under the trust preferred securities. The obligations of the Company under the junior subordinated debentures, the related indentures, the trust agreement establishing the trust and the guarantees and the agreements as to expenses and liabilities, in the aggregate, constitute a full and unconditional guarantee by the Company of the trust’s obligations under the trust preferred securities. The Capital Securities issued by the statutory business trusts qualify as Tier 1 capital for the Company under current Federal Reserve Board guidelines.
NOTE TWELVE – DERIVATIVE INSTRUMENTS
As of December 31, 2016 and 2015, the Company has derivative financial instruments not included in hedge relationships. These derivatives consist of interest rate swaps used for interest rate management purposes and derivatives executed with commercial banking customers to facilitate their interest rate management strategies. For the majority of these instruments the Company acts as an intermediary for its customers. Changes in the fair value of the underlying derivative contracts for the most part offset each other and do not significantly impact the Company's results of operations.
The Company also has an interest rate swap that serves as a fair value hedge for changes in long term fixed interest rates related to commercial real estate loans. Hedge ineffectiveness is assessed quarterly and any ineffectiveness is recorded as non-interest expense. For the year ended December 31, 2016, the hedge ineffectiveness was less than $0.1 million.
The following table summarizes the notional and fair value of these derivative instruments (in thousands):

| December 31, 2016 |  | December 31, 2015
| Notional Amount |  | Fair Value |  | Notional Amount |  | Fair Value
Non-hedging interest rate derivatives: |  |  |  |  |  |  |
Customer counterparties: |  |  |  |  |  |  |
Loan interest rate swap - assets | $ | 234,806 |  |  | $ | 7,352 |  |  | $ | 372,995 |  |  | $ | 10,811 |
Loan interest rate swap - liabilities | 207,201 |  |  | 8,111 |  |  | — |  |  | — |
Non-hedging interest rate derivatives: |  |  |  |  |  |  |
Financial institution counterparties: |  |  |  |  |  |  |
Loan interest rate swap - assets | 207,201 |  |  | 8,111 |  |  | — |  |  | — |
Loan interest rate swap - liabilities | 241,995 |  |  | 7,360 |  |  | 380,995 |  |  | 10,872 |
Derivatives designated as hedges of fair value: |  |  |  |  |  |  |
Financial institution counterparties: |  |  |  |  |  |  |
Loan interest rate swap - liabilities | 4,626 |  |  | 12 |  |  | 5,475 |  |  | 61 |

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The following table summarizes the change in fair value of these derivative instruments (in thousands):

| Year Ended December 31,
| 2016 | 2015 | 2014
Change in Fair Value Non-Hedging Interest Rate Derivatives: |  |  |
Other income - derivative assets | $ | 3,904 |  | $ | 1,030 |  | $ | 6,811 |
Other income - derivative liabilities | (3,904 | ) | (1,030 | ) | (6,811 | )
Other expense - derivative liabilities | (52 | ) | (61 | ) | — |
Change in Fair Value Hedging Interest Rate Derivatives: |  |  |
Hedged item - derivative asset | $ | (36 | ) | 25 |  | — |
Other income (expense) - derivative liability with financial institution counterparties | 13 |  | (12 | ) | — |

Certain financial instruments, including derivatives, may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements. The Company's derivative transactions with financial institution counterparties are generally executed under International Swaps and Derivative Association ("ISDA") master agreements which include "right of setoff" provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Nonetheless, the Company does not generally offset financial instruments for financial reporting purposes. Information about financial instruments that are eligible for offset in the consolidated balance sheet as of December 31, 2016 is presented in the following tables (in thousands):

|  |  |  | Gross Amounts |  |
|  |  |  | Not Offset in the Statement |  |
|  |  |  | of Financial Position |  |
|  |  |  |  |  | Total |
|  |  |  |  |  | of Gross |
|  |  |  |  |  | Amounts |
|  |  |  |  |  | Not Offset in |
|  |  |  |  |  | the Statement |
|  |  |  |  |  | of Financial |
|  |  |  |  |  | Position |
|  |  |  | Netting |  | Including |
|  | Gross | Net Amounts | Adjustment |  | Applicable |
|  | Amounts | of Assets | per |  | Netting |
| Gross | Offset in the | presented in | Applicable |  | Agreement |
| Amounts of | Statement of | the Statement | Master | Fair Value | and Fair |
| Recognized | Financial | of Financial | Netting | of Financial | Value of |
Description | Assets | Position | Position | Arrangements | Collateral | Collateral | Net Amount
| (a) | (b) | (c)=(a)-(b) |  |  | (d) | (c)-(d)
Non-hedging derivative assets: |  |  |  |  |  |
Interest rate swap agreements - customer counterparties | $ | 7,352 |  | $ | — |  | $ | 7,352 |  | $ | — |  | $ | 7,352 |  | $ | 7,352 |  | $ | — |
Interest rate swap agreements - financial institution counterparties | 8,111 |  | — |  | 8,111 |  | — |  | — |  | — |  | 8,111 |

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|  |  |  | Gross Amounts |  |
|  |  |  | Not Offset in the Statement |  |
|  |  |  | of Financial Position |  |
|  |  |  |  |  | Total |
|  |  |  |  |  | of Gross |
|  |  |  |  |  | Amounts |
|  |  |  |  |  | Not Offset in |
|  |  |  |  |  | the Statement |
|  |  |  |  |  | of Financial |
|  |  |  |  |  | Position |
|  |  |  | Netting |  | Including |
|  | Gross | Net Amounts | Adjustment |  | Applicable |
|  | Amounts | of Liabilities | per |  | Netting |
| Gross | Offset in the | presented in | Applicable |  | Agreement |
| Amounts of | Statement of | the Statement | Master | Fair Value | and Fair |
| Recognized | Financial | of Financial | Netting | of Financial | Value of |
Description | Liabilities | Position | Position | Arrangements | Collateral | Collateral | Net Amount
| (a) | (b) | (c)=(a)-(b) |  |  | (d) | (c)-(d)*
Non-hedging derivative liabilities: |  |  |  |  |  |
Interest rate swap agreements - customer counterparties | $ | 7,360 |  | $ | — |  | $ | 7,360 |  | $ | — |  | $ | 29,812 |  | $ | 29,812 |  | $ | — |
Interest rate swap agreements -financial institution counterparties | $ | 8,111 |  | $ | — |  | $ | 8,111 |  | $ | — |  | $ | 8,111 |  | $ | 8,111 |  | $ | — |
Hedging derivative liabilities: |  |  |  |  |  |
Interest rate swap agreements | $ | 12 |  | $ | — |  | $ | 12 |  | $ | — |  | $ | 23 |  | $ | 23 |  | $ | — |
* For instances where the fair value of financial collateral meets or exceeds the amounts presented in the Statement of Financial Position, a value of zero is displayed to represent full collateralization.

NOTE THIRTEEN – INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):
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| 2016 | 2015
Previously securitized loans | $ | 3,950 |  | $ | 4,337 |
Allowance for loan losses | 7,303 |  | 7,412 |
Deferred compensation payable | 4,099 |  | 4,058 |
Underfunded pension liability | 2,739 |  | 2,792 |
Accrued expenses | 1,721 |  | 1,789 |
Impaired assets | 834 |  | 797 |
Impaired securities losses | 3,791 |  | 6,719 |
Unrealized securities losses | 1,338 |  | — |
Intangible assets | 1,312 |  | 2,194 |
Other | 4,716 |  | 3,964 |
Total Deferred Tax Assets | 31,803 |  | 34,062 |
Unrealized securities gains | — |  | 585 |
Other | 3,760 |  | 3,503 |
Total Deferred Tax Liabilities | 3,760 |  | 4,088 |
Net Deferred Tax Assets | $ | 28,043 |  | $ | 29,974 |

No valuation allowance for deferred tax assets was recorded at December 31, 2016 and 2015 as the Company believes it is more likely than not that all of the deferred tax assets will be realized because they were supported by recoverable taxes paid in prior years.
Significant components of the provision for income taxes are as follows (in thousands):

| 2016 | 2015 | 2014
Current: |  |  |
Federal | $ | 20,100 |  | $ | 20,830 |  | $ | 20,629 |
State | 1,166 |  | 957 |  | (943 | )
Total current tax expense | 21,266 |  | 21,787 |  | 19,686 |
Total deferred tax expense | 3,817 |  | 6,627 |  | 4,585 |
Income tax expense | $ | 25,083 |  | $ | 28,414 |  | $ | 24,271 |

A reconciliation of the significant differences between the federal statutory income tax rate and the Company’s effective income tax rate is as follows (in thousands):

| 2016 | 2015 | 2014
Computed federal taxes at statutory rate | $ | 27,025 |  | $ | 28,879 |  | $ | 27,031 |
State income taxes, net of federal tax benefit | 888 |  | 887 |  | (482 | )
Tax effects of: |  |  |
Tax-exempt interest income | (708 | ) | (498 | ) | (500 | )
Bank-owned life insurance | (1,164 | ) | (1,181 | ) | (1,074 | )
Other items, net | (958 | ) | 327 |  | (704 | )
Income tax expense | $ | 25,083 |  | $ | 28,414 |  | $ | 24,271 |

The entire amount of the Company’s unrecognized tax benefits if recognized, would favorably affect the Company’s effective tax rate. The Company anticipates that it will release $0.5 million over the next 12 months. A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in thousands):
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| 2016 | 2015
Beginning balance | $ | 2,164 |  | $ | 2,398 |
Additions for current year tax positions | 339 |  | 299 |
Additions for prior year tax positions | — |  | 377 |
Decreases related to lapse of applicable statute of limitation | (852 | ) | (910 | )
Ending balance | $ | 1,651 |  | $ | 2,164 |

Interest and penalties on income tax uncertainties are included in income tax expense. During 2016, 2015 and 2014, the provision related to interest and penalties was $0.1 million in each period. The balance of accrued interest and penalties at December 31, 2016 and 2015 was $0.3 million and $0.4 million, respectively.
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, 2013 through 2015.
NOTE FOURTEEN – EMPLOYEE BENEFIT PLANS
Pursuant to the terms of the City Holding Company 2003 Incentive Plan and the City Holding Company 2013 Incentive Plan (the "2003 Plan" and "2013 Plan", respectively), the Compensation Committee of the Board of Directors, or its delegate, may, from time-to-time, grant stock options, stock appreciation rights (“SARs”), or stock awards to employees, directors and individuals who provide service to the Company (collectively, "Plan Participants"). The 2003 Plan expired in April of 2013 and the 2013 Plan was approved by the shareholders in April 2013. A maximum of 750,000 shares of the Company’s common stock may be issued under the 2013 plan upon the exercise of stock options, SARs and stock awards, subject to certain limitations. These limitations may be adjusted in the event of a change in the number of outstanding shares of common stock by reason of a stock dividend, stock split or other similar event. Specific terms of options and SARs awarded, including vesting periods, exercise prices (stock price at date of grant) and expiration dates are determined at the date of grant and are evidenced by agreements between the Company and the awardee. The exercise price of the option grants equals the market price of the Company’s stock on the date of grant. All incentive stock options and SARs will be exercisable up to 10 years from the date granted and all options and SARs are exercisable for the period specified in the individual agreement. As of December 31, 2016, 607,835 shares were still available to be issued under the 2013 Plan.
Each award from the 2003 Plan and 2013 Plan is evidenced by an award agreement that specifies the option price, the duration of the option, the number of shares to which the option pertains, and such other provisions as the Compensation Committee, or its delegate, determines. The option price for each grant is equal to the fair market value of a share of the Company’s common stock on the date of the grant. Options granted expire at such time as the Compensation Committee, or its delegate, determines at the date of the grant and in no event does the exercise period exceed a maximum of ten years. Upon a change-in-control of the Company, as defined in the 2003 Plan and 2013 Plan, all outstanding options and awards shall immediately vest.
Certain stock options and restricted stock awards have performance-based vesting requirements. These shares will vest in three separate annual installments of approximately 33.33% per installment on the third, fourth and fifth anniversaries of the grant date, subject further to performance-based vesting requirements. The performance-based vesting requirements are as follows:

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

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

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

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

| 2016 | 2015 | 2014
| Options | Weighted-Average Exercise Price | Options | Weighted-Average Exercise Price | Options | Weighted-Average Exercise Price
Outstanding at January 1 | 95,015 |  | $ | 38.38 |  | 167,554 |  | $ | 36.74 |  | 173,601 |  | $ | 35.26 |
Granted | 24,348 |  | 43.73 |  | 12,961 |  | 46.41 |  | 13,953 |  | 44.43 |
Exercised | (32,750 | ) | 35.28 |  | (81,500 | ) | 36.63 |  | (20,000 | ) | 29.19 |
Forfeited | — |  | — |  | (4,000 | ) | 31.66 |  | — |  | — |
Outstanding at December 31 | 86,613 |  | $ | 41.08 |  | 95,015 |  | $ | 38.38 |  | 167,554 |  | $ | 36.74 |
Exercisable at end of year | 3,000 |  | $ | 29.45 |  | 19,750 |  | $ | 34.54 |  | 89,750 |  | $ | 36.73 |
Nonvested at beginning of year | 75,265 |  | 39.38 |  | 77,804 |  | 36.76 |  | 96,769 |  | 33.10 |
Granted during the year | 24,348 |  | 43.73 |  | 12,961 |  | 46.41 |  | 13,953 |  | 44.43 |
Vested during the year | (16,000 | ) | 35.09 |  | (15,500 | ) | 32.09 |  | (32,918 | ) | 29.25 |
Forfeited during the year | — |  | — |  | — |  | — |  | — |  | — |
Nonvested at end of year | 83,613 |  | $ | 41.47 |  | 75,265 |  | $ | 39.38 |  | 77,804 |  | $ | 36.76 |

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

| For the year ended December 31,
| 2016 | 2015 | 2014
Proceeds from stock option exercises | $ | 1.2 |  | $ | 3.0 |  | $ | 0.6 |
Intrinsic value of stock options exercised | 0.6 |  | 0.9 |  | 0.3 |
Stock-based compensation expense associated with stock options | $ | 0.2 |  | $ | 0.2 |  | $ | 0.2 |
Income tax benefit recognized related to stock-based compensation | 0.1 |  | 0.1 |  | 0.1 |
At period-end: | 2016 |  |
Unrecognized stock-based compensation expense | $ | 0.4 |  |  |
Weighted average period in which the above amount is expected to be recognized | 2.4 |  | years |

Shares issued in connection with stock option exercises are issued from available treasury shares. If no treasury shares are available, new shares would be issued from available authorized shares. During 2016, 2015 and 2014, all shares issued in connection with stock option exercises and restricted stock awards were issued from available treasury stock. For the stock options that have performance-based criteria, management has evaluated those criteria and has determined that, as of December 31, 2016, the criteria were probable of being met.
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Additional information regarding the Company's stock options outstanding and exercisable at December 31, 2016, is provided in the following table:

Ranges of Exercise Prices | No. of Options Outstanding | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Life (Months) | Aggregate Intrinsic Value (in thousands) | No. of Options Currently Exercisable | Weighted-Average Exercise Price of Options Currently Exercisable | Weighted-Average Remaining Contractual Life (Months) | Aggregate Intrinsic Value of Options Currently Exercisable (in thousands)
$ 25.00 - 29.99 | 1,250 |  | $ | 28.15 |  | 2.2 | $ | 49 |  | 1,250 |  | $ | 28.15 |  | 2.2 |  | $ | 49 |
30.00 - 34.99 | 1,750 |  | 30.38 |  | 1.9 | 65 |  | 1,750 |  | 30.38 |  | 1.9 |  | 65 |
35.00 - 39.99 | 32,351 |  | 36.51 |  | 5.7 | 1,006 |  | — |  | — |  | — |  | — |
40.00 - 44.99 | 38,301 |  | 43.99 |  | 8.5 | 904 |  | — |  | — |  | — |  | — |
45.00 - 50.00 | 12,961 |  | 46.61 |  | 8.2 | 272 |  | — |  | — |  | — |  | — |
| 86,613 |  |  |  | $ | 2,296 |  | 3,000 |  |  |  | $ | 114 |

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

| 2016 | 2015 | 2014
Risk-free interest rate | 1.43 | % | 1.95 | % | 2.42 | %
Expected dividend yield | 3.86 | % | 3.50 | % | 3.60 | %
Volatility factor | 30.76 | % | 45.40 | % | 48.75 | %
Expected life of option | 7.0 years |  | 7.0 years |  | 8.0 years |

Restricted Shares
The Company measures compensation expense with respect to restricted shares in an amount equal to the fair value of the common stock covered by each award on the date of grant. The restricted shares awarded become fully vested after various periods of continued employment from the respective dates of grant. The Company is entitled to an income tax deduction in an amount equal to the taxable income reported by the holders of the restricted shares when the restrictions are released and the shares are issued. Compensation is charged to expense over the respective vesting periods.
Restricted shares are generally forfeited if officers and employees terminate prior to the lapsing of restrictions. The Company records forfeitures of restricted stock as treasury share repurchases and any compensation cost previously recognized is reversed in the period of forfeiture. Recipients of restricted shares do not pay any cash consideration to the Company for the shares, have the right to vote all shares subject to such grant and receive all dividends with respect to such shares, whether or not the shares have vested. For the restricted shares that have performance-based criteria, management has evaluated those criteria and has determined that, as of December 31, 2016, the criteria were probable of being met.
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A summary of the Company’s restricted shares activity and related information is presented below:

| 2016 | 2015 | 2014
| Restricted Awards | Average Market Price at Grant | Restricted Awards | Average Market Price at Grant | Restricted Awards | Average Market Price at Grant
Outstanding at January 1 | 172,921 |  |  | 163,431 |  |  | 142,469 |  |
Granted | 30,601 |  | $ | 46.39 |  | 26,840 |  | $ | 46.45 |  | 27,162 |  | $ | 39.72 |
Forfeited/Vested | (22,900 | ) |  | (17,350 | ) |  | (6,200 | ) |
Outstanding at December 31 | 180,622 |  |  | 172,921 |  |  | 163,431 |  |

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

| For the year ended December 31,
| 2016 | 2015 | 2014
Stock-based compensation expense associated with restricted shares | $ | 1.4 |  | $ | 1.2 |  | $ | 1.0 |
At period-end: | 2016 |  |
Unrecognized stock-based compensation expense | $ | 2.9 |  |  |
Weighted average period in which the above amount is expected to be recognized | 3.1 |  |  |

401(k) Plan
The Company provides retirement benefits to its employees through the City Holding Company 401(k) Plan and Trust (“the 401(k) Plan”), which is intended to be compliant with Employee Retirement Income Security Act (ERISA) section 404(c). The Company’s total expense associated with the retirement benefit plan approximated $0.8 million in 2016, $0.7 million in 2015, and $0.8 million in 2014. The total number of shares of the Company’s common stock held by the 401(k) Plan as of December 31, 2016 and 2015 is 238,647 and 291,736, respectively.
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Defined Benefit Plans
The Company maintains two defined benefit pension plans (“the Defined Benefit Plans”), which were inherited from the Company's acquisition of the plan sponsors (Horizon Bancorp, Inc. and Community Financial Corporation). The Horizon Defined Benefit Plan was frozen in 1999 and maintains a December 31st year-end for purposes of computing its benefit obligations. The Community Defined Benefit Plan was frozen in 2012 and maintains a December 31st year-end for purposes of computing its benefit obligations.
Primarily as a result of the interest rate environment over the past several years and a revised mortality table issued in 2014, the benefit obligation exceeded the estimated fair value of plan assets as of December 31, 2016 and December 31, 2015. The following table summarizes activity within the Company's Defined Benefit Plans (dollars in thousands):

| Pension Benefits
| 2016 | 2015
Change in fair value of plan assets: |  |
Fair value at beginning of measurement period | $ | 17,435 |  | $ | 14,667 |
Actual gain (loss) on plan assets | 669 |  | (231 | )
Contributions | — |  | 4,399 |
Benefits paid | (987 | ) | (1,400 | )
Fair value at end of measurement period | 17,117 |  | 17,435 |
Change in benefit obligation: |  |
Benefit obligation at beginning of measurement period | (19,700 | ) | (21,390 | )
Interest cost | (820 | ) | (813 | )
Actuarial (loss) gain | (263 | ) | 334 |
Assumption changes | 54 |  | 769 |
Benefits paid | 987 |  | 1,400 |
Benefit obligation at end of measurement period | (19,742 | ) | (19,700 | )
Funded status | $ | (2,625 | ) | $ | (2,265 | )
Weighted-average assumptions for benefit obligation: |  |
Discount rate | 4.01 | % | 4.26 | %
Expected long-term rate of return | 5.83 | % | 5.75 | %
Weighted-average assumptions for net periodic pension cost: |  |
Discount rate | 4.26 | % | 3.93 | %
Expected long-term rate of return | 5.75 | % | 6.92 | %

During the year ended December 31, 2015, the Company made contributions totaling $4.4 million to the Horizon Defined Benefit Plan. Based on the funding status of the Horizon Defined Benefit Plan, no contributions were required during the year ended December 31, 2016 and no contributions are anticipated being required for the year ending December 31, 2017. Based on the funding status of the Community Defined Benefit plan, no contributions were required during the year ended December 31, 2016 and no contributions are anticipated being required for the year ending December 31, 2017.
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The following table presents the components of the net periodic pension cost of the Company's Defined Benefit Plans (in thousands):

| 2016 | 2015 | 2014
Components of net periodic benefit: |  |  |
Interest cost | $ | 820 |  | $ | 813 |  | $ | 836 |
Expected return on plan assets | (1,154 | ) | (937 | ) | (1,032 | )
Net amortization and deferral | 849 |  | 960 |  | 696 |
Net Periodic Pension Cost | $ | 515 |  | $ | 836 |  | $ | 500 |

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

| 2016 | 2015 | 2014
Net actuarial gain (loss) | $ | 157 |  | $ | 935 |  | $ | (3,915 | )
Deferred tax (expense) benefit | (58 | ) | (345 | ) | 1,445 |
Other comprehensive income (loss), net of tax | $ | 99 |  | $ | 590 |  | $ | (2,470 | )

Amounts recognized as a component of accumulated other comprehensive loss as of December 31, 2016 and 2015 were as follows (in thousands):

| 2016 | 2015
Net actuarial loss | $ | 7,399 |  | $ | 7,551 |
Deferred tax benefit | (2,739 | ) | (2,792 | )
Amounts included in accumulated other comprehensive loss, net of tax | $ | 4,660 |  | $ | 4,759 |

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

Plan Year Ending December 31, | Expected Benefits to be Paid
2017 | $ | 1,134 |
2018 | 1,243 |
2019 | 1,094 |
2020 | 1,079 |
2021 | 1,114 |
2022 through 2026 | 5,697 |

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

| Total | Level 1 | Level 2 | Level 3
2016 |  |  |  |
Cash and cash equivalents | $ | 2,101 |  | $ | 2,101 |  | $ | — |  | $ | — |
Mutual funds/Investment funds | 6,063 |  | 5,797 |  | 266 |  | — |
Common stocks | 4,284 |  | 3,103 |  | 1,181 |  | — |
Mortgage-backed securities | 514 |  | — |  | 514 |  | — |
U.S. Treasuries | 971 |  | — |  | 971 |  | — |
Corporate bonds | 1,597 |  | — |  | 1,597 |  | — |
Alternative investments** | 1,587 |  | 972 |  | — |  | — |
Total | $ | 17,117 |  | $ | 11,973 |  | $ | 4,529 |  | $ | — |
** Includes an investment of $615 that has not been categorized in the fair value hierarchy, as permitted by ASU No. 2015-07.
2015 |  |  |  |
Cash and cash equivalents | $ | 1,441 |  | $ | 1,441 |  | $ | — |  | $ | — |
Mutual funds/Investment funds | 5,617 |  | 5,473 |  | 144 |  | — |
Common stocks | 5,082 |  | 3,880 |  | 1,202 |  | — |
Mortgage-backed securities | 288 |  | — |  | 288 |  | — |
U.S. Treasuries | 1,313 |  | — |  | 1,313 |  | — |
Corporate bonds | 1,043 |  | — |  | 1,043 |  | — |
Alternative investments | 2,651 |  | 607 |  | 1,371 |  | 673 |
Total | $ | 17,435 |  | $ | 11,401 |  | $ | 5,361 |  | $ | 673 |

Horizon Defined Benefit Plan (Investment Strategy)
The Horizon Defined Benefit Plan is administered by the West Virginia Bankers Association (“WVBA”) and all investment policies and strategies are established by the WVBA Pension Committee. The policy established by the Pension Committee is to invest assets per target allocations, as detailed in the table below. The assets are reallocated periodically to meet these target allocations. The investment policy is reviewed periodically, under the advisement of a certified investment advisor, to determine if the policy should be revised.
The overall investment return goal is to achieve a return greater than a blended mix of the S&P 500 and the Barclay's Capital Aggregate Bond Index, which is tailored to the same asset mix of the retirement plan assets, by 0.5% annualized after fees over a rolling five years moving average basis. Allowable assets include cash equivalents, fixed income securities, equity securities, alternative investments, mutual funds, exchange-traded funds, managed separate accounts, investment partnerships and commingled funds. Prohibited investments include, but are not limited to, private placements, limited partnerships, venture capital investments, direct investment in private real estate properties and residual remics. Unless explicitly authorized by the Pension Committee, the use of leverage or speculative use of derivatives is prohibited unless as part of an alternative asset program or as means for real asset managers to hedge investment risk or replicate investment positions at a lower cost than would otherwise be created in a cash market. Managers using derivatives must have systems in place to rigorously analyze and monitor duration, liquidity and counter-party credit risk in order to minimize the risk associated with the use of derivatives. Prohibited transactions include, but are not limited to, short selling and margin transactions.
In order to achieve a prudent level of portfolio diversification, the securities of any one company are not to exceed more than 15% of the cost and/or market value of the total retirement plan assets, and no more than 25% of the total retirement plan assets are to be invested in any one industry (other than securities of the U.S. government or agencies thereof). Exchange traded index funds are allowable investments and are not subject to these restrictions.
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The expected long-term rate of return for the plan’s assets is based on the expected return of each of the categories, weighted based on the median of the target allocation for each class, noted in the table below. The target, allowable, and current allocation percentages of plan assets are as follows:

| Target Allocation 2016 | Allowable- Allocation Range | Percentage of Plan Assets At December 31
| 2016 | 2015
Equity securities | 62.5 | % | 35-88% | 48 | % | 51 | %
Fixed income securities | 15.0 | % | 10-40% | 25 | % | 20 | %
Cash and cash equivalents | 2.5 | % | 2-20% | 15 | % | 10 | %
Alternative investments | 20.0 | % | 0-25% | 12 | % | 19 | %
Total | 100.0 | % |  | 100 | % | 100 | %

Community Defined Benefit Plan (Investment Strategy)
The Community Defined Benefit Plan is administered by the Virginia Bankers Association ("VBA") and all investment polices are established by the Board of Directors of the VBA Benefits Corporation. The investment goal is to provide asset allocation models with varying degrees of investment return and risk consistent with each bank's funding objectives and participant demographics. The Board of Directors shall at least annually review the overall investment program, and each investment alternative, to ensure the current investment mix will achieve the goals of the Plan and participating banks.
The performance goal for the investments of the Plan is to exceed the investment benchmarks over the most recent three and five year periods, while taking less risk than the market. Approved asset classes include equity securities, fixed income securities and cash equivalents.
The Plan's investment portfolio contains a mix of large-cap, mid-cap, small-cap and international equities and intermediate and short-term bonds. Allocations to the equity and fixed income asset classes may vary within a range of + or - 5% of the noted target, as detailed in the table below. The minimum and maximum allocations for each sub-asset class within the equity and fixed classes are equity to 50% and 150%, respectively, of its long-term strategy target allocation.
The expected long-term rate of return for the plan’s assets is based on the expected return of each of the categories, weighted based on the median of the target allocation for each class, noted in the table below. During 2016, the Plan's investment portfolio allocation was changed from 25% equity securities/75% fixed income securities to 40% equity securities/60% fixed income securities. The target, allowable, and current allocation percentages of plan assets are as follows:

| Target Allocation 2016 | Allowable- Allocation Range | Percentage of Plan Assets At December 31
| 2016 | 2015
Equity securities | 40 | % | 29%-51% | 41 | % | 25 | %
Fixed income securities | 60 | % | 42%-81% | 59 | % | 75 | %
| 100 | % |  | 100 | % | 100 | %

Pentegra Defined Benefit Plan
In addition, the Company and its subsidiary participate in the Pentegra Defined Benefit Plan for Financial Institutions ("The Pentegra DB Plan"), a tax-qualified defined benefit pension plan. The Pentegra DB Plan's Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multiple-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan. The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers. The funded status as of July 1, 2016 (the latest available valuation report) was 101.26%. It is the policy of the Company to fund the normal cost of the Pentegra DB Plan on an annual basis. Other than for
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normal plan expenses, no contributions were required for the years ended December 31, 2016, 2015 and 2014. The benefits of the Pentegra DB Plan were frozen prior to the acquisition of Classic Bancshares in 2005, and it is the intention of the Company to fund benefit amounts when assets of the plan are sufficient.
Employment Contracts
The Company has entered into employment contracts with certain of its current executive officers. The employment contracts provide for, among other things, the payment of termination compensation in the event an executive officer either voluntarily or involuntarily terminates his employment with the Company for other than “Just Cause.” The cost of these benefits was previously accrued for each executive and is included in Other Liabilities within the Consolidated Balance Sheets. The liability was $2.0 million at both December 31, 2016 and 2015 and is fully vested, and therefore no charge to operations was incurred for the years ended December 31, 2016 and December 31, 2015.
Other Post-Retirement Benefit Plans
Certain entities previously acquired by the Company had entered into individual deferred compensation and supplemental retirement agreements with certain current and former directors and officers. The Company has assumed the liabilities associated with these agreements, the cost of which is being accrued over the period of active service from the date of the respective agreement. The cost of such agreements approximated $0.3 million during 2016 and $0.2 million during 2015, and 2014, respectively. The liability for such agreements approximated $6.2 million and $6.5 million at December 31, 2016 and December 31, 2015, respectively and is included within Other Liabilities in the accompanying Consolidated Balance Sheets.
To assist in funding the above liabilities, the acquired entities had insured the lives of certain current and former directors and officers. The Company is the current owner and beneficiary of insurance policies with a cash surrender value approximating $8.2 million and $8.0 million at December 31, 2016 and 2015, respectively, which is included in Other Assets in the accompanying Consolidated Balance Sheets.
NOTE FIFTEEN – RELATED PARTY TRANSACTIONS
City National has granted loans to certain non-executive officers and directors of the Company and its subsidiaries, and to their associates totaling $13.5 million at December 31, 2016 and $14.2 million at December 31, 2015. The loans were made in the ordinary course of business and on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable transactions with third-party lending arrangements. These relationships had unfunded commitments of $23.0 million and $17.8 million at December 31, 2016 and December 31, 2015. During 2016, total principal additions were $0.6 million and total principal reductions were $1.3 million.
NOTE SIXTEEN – COMMITMENTS AND CONTINGENCIES
The Company is a party to certain financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The Company has entered into agreements with its customers to extend credit or provide conditional commitment to provide payment on drafts presented in accordance with the terms of the underlying credit documents. The Company also provides overdraft protection to certain demand deposit customers that represent an unfunded commitment. Overdraft protection commitments, which are included with other commitments below, are uncollateralized and are paid at the Company’s discretion. Conditional commitments generally include standby and commercial letters of credit. Standby letters of credit represent an obligation of the Company to a designated third party contingent upon the failure of a customer of the Company to perform under the terms of the underlying contract between the customer and the third party. Commercial letters of credit are issued specifically to facilitate trade or commerce. Under the terms of a commercial letter of credit, drafts will be drawn when the underlying transaction is consummated, as intended, between the customer and a third party. The funded portion of these financial instruments is reflected in the Company’s balance sheet, while the unfunded portion of these commitments is not reflected in the balance sheet.
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The table below presents a summary of the contractual obligations of the Company resulting from significant commitments (in thousands):

| December 31, 2016 | December 31, 2015
Commitments to extend credit: |  |
Home equity lines | $ | 185,553 |  | $ | 183,017 |
Commercial real estate | 98,883 |  | 84,672 |
Other commitments | 203,103 |  | 177,491 |
Standby letters of credit | 5,014 |  | 5,086 |
Commercial letters of credit | 1,859 |  | 2,312 |

Loan commitments and standby and commercial letters of credit have credit risks essentially the same as that involved in extending loans to customers and are subject to the Company’s standard credit policies. Collateral is obtained based on management’s credit assessment of the customer. Management does not anticipate any material losses as a result of these commitments.
In addition, 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.
NOTE SEVENTEEN – PREFERRED STOCK
The Company’s Board of Directors has the authority to issue preferred stock, and to the designation, preferences, rights, dividends and all other attributes of such preferred stock, without any vote or action by the shareholders. As of December 31, 2016, no such shares were outstanding, nor were any expected to be issued.
NOTE EIGHTEEN – REGULATORY REQUIREMENTS AND CAPITAL RATIOS
The principal source of income and cash for City Holding (the “Parent Company”) is dividends from 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. Approval is also required if dividends declared would cause City National’s regulatory capital to fall below specified minimum levels. At December 31, 2016, City National could pay dividends up to $57.5 million without prior regulatory permission.
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 common stock repurchases for treasury. As of December 31, 2016, the Parent Company reported a cash balance of approximately $26.5 million. Management believes that the Parent Company’s available cash balance, together with cash dividends from City National, is adequate to satisfy its funding and cash needs in 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.
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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 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.
The aforementioned 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 Company’s regulatory capital ratios for both City Holding and City National are illustrated in the following tables (in thousands):

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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 408,406 |  |  | 14.7 | % |  | 240,397 |  |  | 8.625 | % |  | 292,658 |  |  | 10.5 | % |  | 278,722 |  |  | 10.0 | %
City National Bank | 338,675 |  |  | 12.2 | % |  | 238,741 |  |  | 8.625 | % |  | 290,641 |  |  | 10.5 | % |  | 276,801 |  |  | 10.0 | %
Tier 1 Leverage Ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 387,677 |  |  | 10.1 | % |  | 153,864 |  |  | 4.000 | % |  | 153,864 |  |  | 4.0 | % |  | 192,330 |  |  | 5.0 | %
City National Bank | 318,872 |  |  | 8.3 | % |  | 153,088 |  |  | 4.000 | % |  | 153,088 |  |  | 4.0 | % |  | 191,359 |  |  | 5.0 | %
(*) Represents the minimum required capital levels as of January 1, 2019 when Basel III Capital Rules have been fully phased in.

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December 31, 2015: | 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 | $ | 345,620 |  |  | 13.7 | % |  | $ | 113,919 |  |  | 4.5 | % |  | $ | 177,207 |  |  | 7.0 | % |  | $ | 164,549 |  |  | 6.5 | %
City National Bank | 264,812 |  |  | 10.5 | % |  | 113,209 |  |  | 4.5 | % |  | 176,103 |  |  | 7.0 | % |  | 163,524 |  |  | 6.5 | %
Tier 1 Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 361,620 |  |  | 14.3 | % |  | 151,891 |  |  | 6.0 | % |  | 215,180 |  |  | 8.5 | % |  | 202,522 |  |  | 8.0 | %
City National Bank | 288,752 |  |  | 11.5 | % |  | 150,945 |  |  | 6.0 | % |  | 213,839 |  |  | 8.5 | % |  | 201,260 |  |  | 8.0 | %
Total Capital |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 382,180 |  |  | 15.1 | % |  | 202,522 |  |  | 8.0 | % |  | 265,810 |  |  | 10.5 | % |  | 253,152 |  |  | 10.0 | %
City National Bank | 308,804 |  |  | 12.3 | % |  | 201,260 |  |  | 8.0 | % |  | 264,154 |  |  | 10.5 | % |  | 251,575 |  |  | 10.0 | %
Tier 1 Leverage Ratio |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
City Holding Company | 361,620 |  |  | 10.2 | % |  | 142,521 |  |  | 4.0 | % |  | 142,521 |  |  | 4.0 | % |  | 178,151 |  |  | 5.0 | %
City National Bank | 288,752 |  |  | 8.1 | % |  | 141,874 |  |  | 4.0 | % |  | 141,874 |  |  | 4.0 | % |  | 177,343 |  |  | 5.0 | %
(*) Represents the minimum required capital levels as of January 1, 2019 when Basel III Capital Rules have been fully phased in.

As of December 31, 2016, 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 Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“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, 2016, management believes that City Holding and City National meet all capital adequacy requirements.
NOTE NINETEEN –FAIR VALUE MEASUREMENTS
Fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Company bases fair value of assets and liabilities on quoted market prices, prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data. If such information is not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the
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balance sheet date may differ significantly from the amount presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Financial Assets and Liabilities
The Company used the following methods and significant assumptions to estimate fair value for financial assets and liabilities measured on a recurring basis.
Securities Available for Sale. Securities available for sale are reported at fair value utilizing Level 1, Level 2, and Level 3 inputs. The fair value of securities available for sale is determined by utilizing a market approach by obtaining quoted prices on nationally recognized securities exchanges (other than forced or distressed transactions) that occur in sufficient volume or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities. If such measurements are unavailable, the security is classified as Level 3. Significant judgment is required to make this determination.
The Company utilizes a third party pricing service provider to value its Level 1 and Level 2 investment securities. Annually, the Company obtains an independent auditor’s report from its third party pricing service provider regarding its controls over investment securities. Although no control deficiencies were noted, the report did contain caveats and disclaimers regarding the pricing information, such as the Company should review fair values for reasonableness. On a quarterly basis, the Company selects a sample of its debt securities and reprices those securities with a third party that is independent of the primary pricing service provider to verify the reasonableness of the fair values. In addition, the Company selects a sample of securities and reviews the underlying support from the primary pricing service provider.
The Company has determined that its pooled trust preferred securities are priced using Level 3 inputs in accordance with ASC Topic 820 and guidance issued by the SEC. The Company has determined that there are few observable transactions and market quotations available for pooled trust preferred securities and they are not reliable for purposes of determining fair value of trust preferred securities held at December 31, 2016. Due to these circumstances, the Company has elected to utilize an income valuation approach produced by a third party pricing source. This third party model utilizes deferral and default probabilities for the underlying issuers, estimated prepayment rates and assumes no future recoveries of any defaults or deferrals. The Company then compares the values provided by the third party model with other external sources. At such time as there are observable transactions or quoted prices that are associated with an orderly and active market for pooled trust preferred securities, the Company will incorporate such market values in its estimate of fair values for these securities.
Derivatives. Derivatives are reported at fair value utilizing Level 2 inputs. The Company utilizes a market approach by obtaining dealer quotations to value its customer interest rate swaps. These quotes utilize the overnight indexed swap ("OIS") curve as a basis for discounting cash flows. The OIS curve is based on the Federal Funds rate. The Company’s derivatives are included within its Other Assets and Other Liabilities in the accompanying consolidated balance sheets. Derivative assets are typically secured through securities with financial counterparties or cross collateralization with a borrowing customer. Derivative liabilities are typically secured through the Company pledging securities to financial counterparties or, in the case of a borrowing customer, by the right of setoff. The Company considers such factors such as the likelihood of default by itself and its counterparties, right of setoff, and remaining maturities in determining the appropriate fair value adjustments. All derivative counterparties approved by the Company's Asset and Liability Committee ("ALCO") are regularly reviewed, and appropriate business action is taken to adjust the exposure to certain counterparties, if necessary. Counterparty exposure is evaluated by netting positions that are subject to master netting agreements, as well as considering the amount of marketable collateral securing the position. This approach used to estimate impacted exposures to counterparties is also used by the Company to estimate its own credit risk in derivative liability positions. To date, no material losses have been incurred due to a counterparty's inability to pay any undercollateralized position. There was no significant change in the value of derivative assets and liabilities attributed to credit risk during the year ended December 31, 2016.
The Company may be required, from time to time, to measure certain financial assets and financial liabilities at fair value on a nonrecurring basis. Financial assets measured at fair value on a nonrecurring basis include impaired loans reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 2 inputs based on observable market data for real estate collateral or Level 3 inputs for non-real estate collateral. The following table presents the Company's assets and liabilities measured at fair value (in thousands):
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| Total | Level 1 | Level 2 | Level 3 | Total Gains (Losses)
December 31, 2016 |  |  |  |  |
Recurring fair value measurements |  |  |  |  |
Financial Assets |  |  |  |  |
U.S. Government agencies | $ | 3 |  | $ | — |  | $ | 3 |  | $ | — |  |
Obligations of states and political subdivisions | 82,368 |  | — |  | 82,368 |  | — |  |
Mortgage-backed securities: |  |  |  |  |  |
U.S. Government agencies | 330,814 |  | — |  | 330,814 |  | — |  |
Private label | 942 |  | — |  | 942 |  | — |  |
Trust preferred securities | 6,662 |  | — |  | 4,127 |  | 2,535 |  |
Corporate securities | 23,574 |  | — |  | 23,574 |  | — |  |
Marketable equity securities | 4,231 |  | 4,231 |  | — |  | — |  |
Investment funds | 1,489 |  | 1,489 |  | — |  | — |  |
Derivative assets | 15,463 |  | — |  | 15,463 |  | — |  |
Financial Liabilities |  |  |  |  |
Derivative liabilities | 15,483 |  | — |  | 15,483 |  | — |  |
Nonrecurring fair value measurements |  |  |  |  |
Financial Assets |  |  |  |  |
Impaired loans | $ | 6,916 |  | $ | — |  | $ | — |  | $ | 6,916 |  | $ | (665 | )
Non-Financial Assets |  |  |  |  |
Other real estate owned | 4,588 |  | — |  | — |  | 4,588 |  | (665 | )
Other assets | 625 |  | — |  | — |  | 625 |  | (444 | )

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| Total | Level 1 | Level 2 | Level 3 | Total Gains (Losses)
December 31, 2015 |  |  |  |  |
Recurring fair value measurements |  |  |  |  |
Financial Assets |  |  |  |  |
U.S. Government agencies | $ | 5 |  | $ | — |  | $ | 5 |  | $ | — |  |
Obligations of states and political subdivisions | 50,697 |  | — |  | 50,697 |  | — |  |
Mortgage-backed securities: |  |  |  |  |
U.S. Government agencies | 288,197 |  | — |  | 288,197 |  | — |  |
Private label | 1,231 |  | — |  | 1,231 |  | — |  |
Trust preferred securities | 5,858 |  | — |  | 3,762 |  | 2,096 |  |
Corporate securities | 18,693 |  | — |  | 18,693 |  | — |  |
Marketable equity securities | 3,273 |  | 3,273 |  | — |  | — |  |
Investment funds | 1,512 |  | 1,512 |  | — |  | — |  |
Derivative assets | 10,811 |  | — |  | 10,811 |  | — |  |
Financial Liabilities |  |  |  |  |
Derivative liabilities | 10,933 |  | — |  | 10,933 |  | — |  |
Nonrecurring fair value measurements |  |  |  |  |
Financial Assets |  |  |  |  |
Impaired loans | $ | 8,482 |  | $ | — |  | $ | — |  | $ | 8,482 |  | $ | — |
Non-Financial Assets |  |  |  |  |
Other real estate owned | 6,518 |  | — |  | — |  | 6,518 |  | (937 | )
Other assets | — |  | — |  | — |  | — |  | (1,449 | )

The table below presents a reconcilement of the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

| December 31,
| 2016 | 2015
Beginning balance | $ | 2,096 |  | $ | 1,871 |
Impairment losses on investment securities | (465 | ) | — |
Gains on sale of investment securities | 3,978 |  | — |
Included in other comprehensive income | (3,074 | ) | 225 |
Dispositions | — |  | — |
Transfers into Level 3 | — |  | — |
Ending Balance | $ | 2,535 |  | $ | 2,096 |

The Company utilizes a third party model to compute the present value of expected cash flows which considers the structure and term of each of the five respective pooled trust preferred securities and the financial condition of the underlying issuers. Specifically, the third party model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. For issuing banks that have defaulted, management generally assumes no recovery. For issuing banks that have deferred its interest payments, management excludes the collateral balance associated with these banks and assumes no recoveries of such collateral balance in the future. The exclusion of such issuing banks in a current deferral position is based on such bank experiencing a
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certain level of financial difficulty that raises doubt about its ability to satisfy its contractual debt obligation, and accordingly, the Company excludes the associated collateral balance from its estimate of expected cash flows. Other assumptions used in the estimate of expected cash flows include expected future default rates and prepayments. Specifically, the model assumes annual prepayments of 1.0% with 100% at maturity and assumes 150 basis points of additional annual defaults from banks that are currently not in default or deferral. In addition, the model assumes no recoveries except for one trust preferred security which assumes that one of the banks currently deferring or in default will cure such positions.
The table below presents a reconcilement of the Company's financial assets and liabilities measured at fair value on a nonrecurring basis using significant unobservable inputs (Level 3), which solely relates to impaired loans that were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral (in thousands). The fair value of impaired loans is estimated using one of several methods, including collateral value, liquidation value and discounted cash flows. The significant unobservable inputs used in the fair value measurement of collateral for collateral-dependent impaired loans primarily relate to discounts applied to the customers’ reported amount of collateral. The amount of collateral discount depends upon the marketability of the underlying collateral. During December 31, 2016 and 2015, collateral discounts ranged from 20% to 30%. During December 31, 2016 and 2015, the Company had no Level 2 financial assets and liabilities that were measured on a nonrecurring basis.

| Year ended December 31,
2016 | 2015
Beginning balance | $ | 8,482 |  | $ | 6,517 |
Loans classified as impaired during the period | 2,832 |  | 2,349 |
Specific valuation allowance allocations | (665 | ) | — |
| 2,167 |  | 2,349 |
(Additional) reduction in specific valuation allowance allocations | — |  | 252 |
Paydowns, payoffs, other activity | (3,733 | ) | (636 | )
Ending balance | $ | 6,916 |  | $ | 8,482 |

Non-Financial Assets and Liabilities
The Company has no non-financial assets or liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include other real estate owned (“OREO”), which is measured at the lower of cost or fair value, and goodwill and other intangible assets, which are measured at fair value and evaluated at least annually for impairment. The table below presents OREO that was remeasured and reported at fair value based on significant unobservable inputs (Level 3) (in thousands):

| 2016 | 2015
Beginning Balance | $ | 6,518 |  | $ | 8,179 |
OREO remeasured at initial recognition: |  |
Carrying value of foreclosed assets prior to remeasurement | 3,151 |  | 3,732 |
Charge-offs recognized in the allowance for loan losses | — |  | — |
Fair value | 3,151 |  | 3,732 |
OREO remeasured subsequent to initial recognition: |  |
Carrying value of foreclosed assets prior to remeasurement | 1,228 |  | 3,937 |
Fair value | 563 |  | 3,000 |
Write-downs included in other non-interest expense | (665 | ) | (937 | )
Disposals | (4,416 | ) | (4,456 | )
Ending Balance | $ | 4,588 |  | $ | 6,518 |

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During the year ended December 31, 2016, the Company recognized a $0.4 million impairment on a facility that formerly housed certain bank operations. During the year ended December 31, 2015, the Company recognized a $1.4 million loss relating to a partnership investment. Based on the Company's annual assessment for impairment in the recorded value of goodwill and indefinite lived intangible assets, no impairment was recorded during the years ended December 31, 2016 and 2015.
ASC Topic 825 “Financial Instruments,” as amended, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rate and estimate of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. ASC Topic 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used in estimating fair value for financial instruments:
Cash and cash equivalents: Due to their short-term nature, the carrying amounts reported in the Consolidated Balance Sheets approximate fair value.
Securities: The fair value of securities are generally based on quoted market prices or matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities.
Other securities: It is not practicable to determine the fair value of the Company's other securities, which consist of FRB and FHLB stock, due to restrictions placed on its transferability.
Net loans: The fair value of the loan portfolio is estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers for the same remaining maturities. Loans were first segregated by type such as commercial, real estate and consumer, and were then further segmented into fixed, adjustable and variable rate categories. Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.
Accrued interest receivable: The carrying amount of accrued interest receivable approximates fair value.
Deposits: The fair values of demand deposits (e.g., interest and noninterest-bearing checking, regular savings, and other money market demand accounts) are, by definition, equal to their carrying values. The fair values of time deposits were estimated using discounted cash flow analyses. The discount rates used were based on rates currently offered for deposits with similar remaining maturities. The fair values of the time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.
Short-term debt: Securities sold under agreements to repurchase and Federal Home Loan Bank advances represent borrowings with original maturities of less than 90 days. The carrying amount of borrowings under purchase agreements approximate their fair value.
Long-term debt: The fair value of long-term borrowings is estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements and market conditions of similar debt instruments.
Commitments and letters of credit: The fair values of commitments are estimated based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties’ credit standing. The fair value of letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. The amounts of fees currently charged on commitments and letters of credit are deemed insignificant, and therefore, the estimated fair values and carrying values have not been reflected in the following table.
The following table represents the estimates of fair value of financial instruments (in thousands). This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as noninterest-bearing demand, interest-bearing
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demand and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

| Carrying Amount | Fair Value | Level 1 | Level 2 | Level 3
December 31, 2016 |  |  |  |  |
Assets: |  |  |  |  |
Cash and cash equivalents | $ | 88,139 |  | $ | 88,139 |  | $ | 88,139 |  | $ | — |  | $ | — |
Securities available-for-sale | 450,083 |  | 450,083 |  | 5,720 |  | 441,828 |  | 2,535 |
Securities held-to-maturity | 75,169 |  | 76,445 |  | — |  | 76,445 |  | — |
Other securities | 14,352 |  | 14,352 |  | — |  | 14,352 |  | — |
Net loans | 3,026,496 |  | 3,014,425 |  | — |  | — |  | 3,014,425 |
Accrued interest receivable | 8,408 |  | 8,408 |  | 8,408 |  | — |  | — |
Derivative assets | 15,463 |  | 15,463 |  | — |  | 15,463 |  | — |
Liabilities: |  |  |  |  |
Deposits | 3,231,653 |  | 3,232,970 |  | 2,190,234 |  | 1,042,736 |  | — |
Short-term debt | 248,305 |  | 248,305 |  | — |  | 248,305 |  | — |
Long-term debt | 16,495 |  | 16,455 |  | — |  | 16,455 |  | — |
Derivative liabilities | 15,483 |  | 15,483 |  | — |  | 15,483 |  | — |
December 31, 2015 |  |  |  |  |
Assets: |  |  |  |  |
Cash and cash equivalents | $ | 70,113 |  | $ | 70,113 |  | $ | 70,113 |  | $ | — |  | $ | — |
Securities available-for-sale | 369,466 |  | 369,466 |  | 4,785 |  | 362,585 |  | 2,096 |
Securities held-to-maturity | 88,937 |  | 90,810 |  | — |  | 90,810 |  | — |
Other securities | 12,915 |  | 12,915 |  | — |  | 12,915 |  | — |
Net loans | 2,843,283 |  | 2,843,973 |  | — |  | — |  | 2,843,973 |
Accrued interest receivable | 7,432 |  | 7,432 |  | 7,432 |  | — |  | — |
Derivative assets | 10,811 |  | 10,811 |  | — |  | 10,811 |  | — |
Liabilities: |  |  |  |  |
Deposits | 3,083,975 |  | 3,085,908 |  | 2,066,419 |  | 1,019,489 |  | — |
Short-term debt | 154,869 |  | 154,872 |  | — |  | 154,872 |  | — |
Long-term debt | 16,495 |  | 16,457 |  | — |  | 16,457 |  | — |
Derivative liabilities | 10,933 |  | 10,933 |  | — |  | 10,933 |  | — |

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NOTE TWENTY –CITY HOLDING COMPANY (PARENT COMPANY ONLY) FINANCIAL INFORMATION
Condensed Balance Sheets
The following table presents the condensed balance sheets of City Holding Company, parent company only (in thousands):

| December 31
| 2016 | 2015
Assets |  |
Cash | $ | 26,520 |  | $ | 46,672 |
Securities available-for-sale | 4,231 |  | 3,273 |
Investment in subsidiaries | 430,769 |  | 388,201 |
Deferred tax assets, net | 1,459 |  | 1,569 |
Fixed assets | 7 |  | 8 |
Other assets | 2,584 |  | 3,290 |
Total Assets | $ | 465,570 |  | $ | 443,013 |
Liabilities |  |
Junior subordinated debentures | $ | 16,495 |  | $ | 16,495 |
Dividends payable | 6,459 |  | 6,376 |
Accrued interest payable | 36 |  | 30 |
Other liabilities | 142 |  | 840 |
Total Liabilities | 23,132 |  | 23,741 |
Total Shareholders’ Equity | 442,438 |  | 419,272 |
Total Liabilities and Shareholders’ Equity | $ | 465,570 |  | $ | 443,013 |

Junior subordinated debentures represent the Parent Company’s amounts owed to City Holding Capital Trust III.
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. During the year ended December 31, 2016, the Company sold 107,662 common shares at a weighted average price of $66.21, net of broker fees.
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Condensed Statements of Comprehensive Income
The following table presents the condensed statements of comprehensive income of City Holding Company, parent company only (in thousands):

| Year Ended December 31
| 2016 | 2015 | 2014
Income |  |  |
Dividends from subsidiaries | $ | 8,600 |  | $ | 48,950 |  | $ | 46,050 |
Investment securities gains | — |  | — |  | 1,130 |
Other income | 320 |  | 22 |  | 65 |
| 8,920 |  | 48,972 |  | 47,245 |
Expenses |  |  |
Interest expense | 683 |  | 618 |  | 605 |
Other expenses | 1,957 |  | 1,170 |  | 849 |
| 2,640 |  | 1,788 |  | 1,454 |
Income Before Income Tax Benefit and Equity in Undistributed Net Income of Subsidiaries | 6,280 |  | 47,184 |  | 45,791 |
Income tax benefit | (1,096 | ) | (795 | ) | (231 | )
Income Before Equity in Undistributed Net Income of Subsidiaries | 7,376 |  | 47,979 |  | 46,022 |
Equity in undistributed net income of subsidiaries | 44,752 |  | 6,118 |  | 6,940 |
Net Income | $ | 52,128 |  | $ | 54,097 |  | $ | 52,962 |
Total Comprehensive Income | $ | 48,948 |  | $ | 54,424 |  | $ | 53,793 |

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Condensed Statements of Cash Flows
The following table presents the condensed statements of cash flows of City Holding Company, parent company only (in thousands):

| Year Ended December 31
| 2016 | 2015 | 2014
Operating Activities |  |  |
Net income | $ | 52,128 |  | $ | 54,097 |  | $ | 52,962 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |
Realized investment securities gains | — |  | — |  | (1,130 | )
Amortization and accretion | (5 | ) | — |  | — |
Stock based compensation | 2,018 |  | 3 |  | 199 |
Depreciation | 1 |  | 1 |  | 1 |
Asset write down | 444 |  | — |  | — |
Change in other assets | 262 |  | 13,338 |  | (16,110 | )
Change in other liabilities | (2,531 | ) | 314 |  | 2,146 |
Equity in undistributed net income | (44,752 | ) | (6,118 | ) | (6,940 | )
Net Cash Provided by Operating Activities | 7,565 |  | 61,635 |  | 31,128 |
Investing Activities |  |  |
Proceeds from sales of available for sale securities | — |  | — |  | 2,334 |
Return of capital | — |  | — |  | 2,500 |
Net Cash Provided by Investing Activities | — |  | — |  | 4,834 |
Financing Activities |  |  |
Dividends paid | (25,718 | ) | (25,304 | ) | (24,487 | )
Issuance of common stock | 6,864 |  | — |  | — |
Purchases of treasury stock | (10,018 | ) | (7,055 | ) | (27,957 | )
Exercise of stock options | 1,155 |  | 2,979 |  | 580 |
Exercise of warrants | — |  | 1,896 |  | — |
Net Cash Used in Financing Activities | (27,717 | ) | (27,484 | ) | (51,864 | )
(Decrease) increase in Cash and Cash Equivalents | (20,152 | ) | 34,151 |  | (15,902 | )
Cash and cash equivalents at beginning of year | 46,672 |  | 12,521 |  | 28,423 |
Cash and Cash Equivalents at End of Year | $ | 26,520 |  | $ | 46,672 |  | $ | 12,521 |

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NOTE TWENTY-ONE – SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
A summary of selected quarterly financial information is presented below (in thousands, except for per share data):

| First Quarter | Second Quarter | Third Quarter | Fourth Quarter
2016 |  |  |  |
Interest income | $ | 32,289 |  | $ | 32,932 |  | $ | 33,046 |  | $ | 33,884 |
Taxable equivalent adjustment | 192 |  | 195 |  | 224 |  | 258 |
Interest income (FTE) | 32,481 |  | 33,127 |  | 33,270 |  | 34,142 |
Interest expense | 3,169 |  | 3,264 |  | 3,268 |  | 3,504 |
Net interest income | 29,312 |  | 29,863 |  | 30,002 |  | 30,638 |
Provision for loan losses | 539 |  | 1,122 |  | 1,432 |  | 1,301 |
Investment securities gains | — |  | 845 |  | 2,668 |  | — |
Non-interest income | 13,127 |  | 13,736 |  | 14,079 |  | 14,371 |
Non-interest expense | 24,140 |  | 24,283 |  | 25,284 |  | 22,456 |
Income before income tax expense | 17,760 |  | 19,039 |  | 20,033 |  | 21,252 |
Income tax expense | 5,866 |  | 6,303 |  | 6,577 |  | 6,338 |
Taxable equivalent adjustment | (192 | ) | (195 | ) | (224 | ) | (258 | )
Net income available to common shareholders | $ | 11,702 |  | $ | 12,541 |  | $ | 13,232 |  | $ | 14,656 |
Net earnings allocated to common shareholders | $ | 11,571 |  | $ | 12,391 |  | $ | 13,075 |  | $ | 14,479 |
Basic earnings per common share | $ | 0.78 |  | $ | 0.83 |  | $ | 0.88 |  | $ | 0.97 |
Diluted earnings per common share | 0.78 |  | 0.83 |  | 0.88 |  | 0.97 |
Average common shares outstanding: |  |  |  |
Basic | 14,916 |  | 14,889 |  | 14,899 |  | 14,894 |
Diluted | 14,927 |  | 14,902 |  | 14,909 |  | 14,914 |
2015 |  |  |  |
Interest income | $ | 32,364 |  | $ | 31,720 |  | $ | 30,768 |  | $ | 32,222 |
Taxable equivalent adjustment | 142 |  | 144 |  | 147 |  | 179 |
Interest income (FTE) | 32,506 |  | 31,864 |  | 30,915 |  | 32,401 |
Interest expense | 2,973 |  | 2,937 |  | 2,910 |  | 3,010 |
Net interest income | 29,533 |  | 28,927 |  | 28,005 |  | 29,391 |
Provision for loan losses | 888 |  | 2,836 |  | 451 |  | 2,813 |
Investment securities gains | 14 |  | 2,116 |  | — |  | — |
Non-interest income | 24,007 |  | 13,289 |  | 13,706 |  | 14,074 |
Non-interest expense | 23,165 |  | 23,244 |  | 25,377 |  | 21,165 |
Income before income tax expense | 29,501 |  | 18,252 |  | 15,883 |  | 19,487 |
Income tax expense | 11,367 |  | 6,125 |  | 5,129 |  | 5,793 |
Taxable equivalent adjustment | (142 | ) | (144 | ) | (147 | ) | (179 | )
Net income available to common shareholders | $ | 17,992 |  | $ | 11,983 |  | $ | 10,607 |  | $ | 13,515 |
Net earnings allocated to common shareholders | $ | 17,783 |  | $ | 11,849 |  | $ | 10,487 |  | $ | 13,362 |
Basic earnings per common share | $ | 1.18 |  | $ | 0.78 |  | $ | 0.69 |  | $ | 0.88 |

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Diluted earnings per common share | 1.17 |  | 0.78 |  | 0.69 |  | 0.88 |
Average common shares outstanding: |  |  |  |
Basic | 15,067 |  | 15,104 |  | 15,178 |  | 15,158 |
Diluted | 15,149 |  | 15,127 |  | 15,198 |  | 15,175 |

NOTE TWENTY-TWO – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):

| For the Year Ended December 31,
| 2016 | 2015 | 2014
Net income available to common shareholders | $ | 52,128 |  | $ | 54,097 |  | $ | 52,962 |
Less: earnings allocated to participating securities | $ | (623 | ) | $ | (613 | ) | $ | (562 | )
Net earnings allocated to common shareholders | $ | 51,505 |  | $ | 53,484 |  | $ | 52,400 |
Distributed earnings allocated to common shares outstanding | $ | 25,710 |  | $ | 25,212 |  | $ | 23,984 |
Undistributed earnings allocated to common shares outstanding | 25,795 |  | 28,272 |  | 28,416 |
Net earnings allocated to common shareholders | $ | 51,505 |  | $ | 53,484 |  | $ | 52,400 |
Average shares outstanding, basic | 14,900 |  | 15,123 |  | 15,403 |
Effect of dilutive securities | 13 |  | 48 |  | 85 |
Average shares outstanding, diluted | 14,913 |  | 15,171 |  | 15,488 |
Basic earnings per share | $ | 3.46 |  | $ | 3.54 |  | $ | 3.40 |
Diluted earnings per share | $ | 3.45 |  | $ | 3.53 |  | $ | 3.38 |

Options to purchase approximately 2,000 shares and 13,000 shares of common stock were outstanding during the years ended December 31, 2016 and December 31, 2015, but were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares and therefore, the effect would have been anti-dilutive. During the year ended December 31, 2014, there were no anti-dilutive options outstanding.
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NOTE TWENTY-THREE – ACCUMULATED OTHER COMPREHENSIVE LOSS
The activity in accumulated other comprehensive loss is presented in the tables below (in thousands). All amounts are shown net of tax, which is calculated using a combined Federal and state income tax rate approximating 37%.

| Accumulated Other Comprehensive Loss
|  | Unrealized |
|  | Gains (Losses) on |
| Defined Benefit | Securities |
| Pension Plans | Available-for-Sale | Total
Balance at December 31, 2014 | $ | (5,349 | ) | $ | 1,190 |  | $ | (4,159 | )
Other comprehensive income before reclassifications | 590 |  | 1,081 |  | 1,671 |
Amounts reclassified from other comprehensive loss | — |  | (1,344 | ) | (1,344 | )
| 590 |  | (263 | ) | 327 |
Balance at December 31, 2015 | $ | (4,759 | ) | $ | 927 |  | $ | (3,832 | )
Other comprehensive income (loss) before reclassifications | 99 |  | (1,063 | ) | (964 | )
Amounts reclassified from other comprehensive loss | — |  | (2,216 | ) | (2,216 | )
| 99 |  | (3,279 | ) | (3,180 | )
Balance at December 31, 2016 | $ | (4,660 | ) | $ | (2,352 | ) | $ | (7,012 | )

| Amount reclassified from Other Comprehensive Loss | Affected line item
| December 31, | in the Statements
| 2016 | 2015 | 2014 | of Income
Securities available-for-sale: |  |  |  |
Net securities gains reclassified into earnings | $ | (3,513 | ) | $ | (2,130 | ) | $ | (1,156 | ) | Gains on sale of investment securities
Related income tax expense | 1,297 |  | 786 |  | 427 |  | Income tax expense
Net effect on accumulated other comprehensive (loss) | $ | (2,216 | ) | $ | (1,344 | ) | $ | (729 | ) |

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