UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2012

OR

[  ] TRANSITION REPORT PURSANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For The Transition Period From ____________To_____________.

Commission File number 0-11733

CITY HOLDING COMPANY

(Exact name of registrant as specified in its charter)

West Virginia	55-0619957
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
25 Gatewater Road
Charleston, West Virginia	25313
(Address of principal executive offices)	(Zip Code)

(304) 769-1100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [   ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [   ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [   ]	Accelerated filer [X]
Non-accelerated filer [   ]	Smaller reporting company [   ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [   ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

Common stock, $2.50 Par Value – 14,820,633 shares as of August 3, 2012.

1

FORWARD-LOOKING STATEMENTS

All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q, including statements in Management’s Discussion and Analysis of Financial Condition and Result of Operations are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such information involves risks and uncertainties that could result in the Company’s actual results differing from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include, but are not limited to:  (1) the Company may incur additional loan loss provision due to negative credit quality trends in the future that may lead to a deterioration of asset quality; (2) the Company may incur increased charge-offs in the future; (3)  the Company could have adverse legal actions of a material nature; (4) the Company may face competitive loss of customers; (5) the Company may be unable to manage its expense levels; (6) the Company may have difficulty retaining key employees; (7) changes in the interest rate environment may have results on the Company’s operations materially different from those anticipated by the Company’s market risk management functions; (8) changes in general economic conditions and increased competition could adversely affect the Company’s operating results; (9) changes in other regulations and government policies affecting bank holding companies and their subsidiaries, including changes in monetary policies, could negatively impact the Company’s operating results; (10) the Company may experience difficulties growing loan and deposit balances; (11) the current economic environment poses significant challenges for us and could adversely affect our  financial condition and results of operations; (12) continued deterioration in the financial condition of the U.S. banking system may impact the valuations of investments the Company has made in the securities of other financial institutions resulting in either actual losses or other than temporary impairments on such investments; and (13) the effects of the Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) recently adopted by the United States Congress. Forward-looking statements made herein reflect management’s expectations as of the date such statements are made. Such information is provided to assist stockholders and potential investors in understanding current and anticipated financial operations of the Company and is included pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances that arise after the date such statements are made.

2

Index

City Holding Company and Subsidiaries

PART I	Financial Information	Pages
Item 1.	Financial Statements (Unaudited).	4-31
	Consolidated Balance Sheets – June 30, 2012 and December 31, 2011.
	Consolidated Statements of Comprehensive Income – Three and Six months ended June 30, 2012 and 2011.
	Consolidated Statements of Changes in Shareholders’ Equity – Six months ended June 30, 2012 and 2011.
	Consolidated Statements of Cash Flows – Six months ended June 30, 2012 and 2011.
	Notes to Consolidated Financial Statements – June 30, 2012.
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	32-46
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	46
Item 4.	Controls and Procedures.	47
PART II	Other Information
Item 1.	Legal Proceedings.	49
Item 1A.	Risk Factors.	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	49
Item 3.	Defaults Upon Senior Securities.	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information.	49
Item 6.	Exhibits.	49
Signatures		50

3

PART I, ITEM 1 – FINANCIAL STATEMENTS

Consolidated Balance Sheets

City Holding Company and Subsidiaries

(in thousands)

	June 30			December 31
	2012			2011
	(Unaudited)
Assets
Cash and due from banks	$	90,630		$	140,873
Interest-bearing deposits in depository institutions		8,410			5,526
Federal funds sold		35,000			-
Cash and Cash Equivalents		134,040			146,399
Investment securities available for sale, at fair value		376,891			360,783
Investment securities held-to-maturity, at amortized cost (approximate fair value at    June 30, 2012 and December 31, 2011 - $19,627 and $23,423, respectively)		19,319			23,458
Other securities		11,686			11,934
Total Investment Securities		407,896			396,175
Gross loans		2,065,589			1,973,103
Allowance for loan losses		(19,452	)		(19,409	)
Net Loans		2,046,137			1,953,694
Bank owned life insurance		80,407			78,961
Premises and equipment, net		72,516			64,612
Accrued interest receivable		7,090			7,093
Net deferred tax asset		34,716			32,219
Goodwill and other intangible assets		65,162			56,164
Other assets		45,502			41,792
Total Assets	$	2,893,466		$	2,777,109
Liabilities
Deposits:
Noninterest-bearing	$	421,664		$	369,025
Interest-bearing:
Demand deposits		543,623			526,824
Savings deposits		498,815			439,823
Time deposits		931,278			885,596
Total Deposits		2,395,380			2,221,268
Short-term borrowings:
Federal funds purchased		-			75,000
Customer repurchase agreements		123,074			114,050
Long-term debt		16,495			16,495
Other liabilities		37,895			39,162
Total Liabilities		2,572,844			2,465,975
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; 18,499,282 shares issued at June 30, 2012 and December 31, 2011, less 3,678,649 and 3,717,993 shares in treasury, respectively		46,249			46,249
Capital surplus		103,449			103,335
Retained earnings		298,155			291,050
Cost of common stock in treasury		(124,754	)		(125,593	)
Accumulated other comprehensive income (loss):
Unrealized gain on securities available-for-sale		2,255			825
Underfunded pension liability		(4,732	)		(4,732	)
Total Accumulated Other Comprehensive Loss		(2,477	)		(3,907	)
Total Shareholders’ Equity		320,622			311,134
Total Liabilities and Shareholders’ Equity	$	2,893,466		$	2,777,109

See notes to consolidated financial statements.

4

Consolidated Statements of Comprehensive Income (Unaudited)

City Holding Company and Subsidiaries

(in thousands, except earnings per share data)

	Three months Ended June 30						Six months Ended June 30
	2012			2011			2012			2011
Interest Income
Interest and fees on loans	$	23,143		$	23,352		$	46,210		$	47,090
Interest on investment securities:
Taxable		3,943			4,513			7,907			9,055
Tax-exempt		368			445			755			907
Interest on federal funds sold		12			13			23			26
Total Interest Income		27,466			28,323			54,895			57,078
Interest Expense
Interest on deposits		3,383			5,568			7,051			11,279
Interest on short-term borrowings		77			77			150			149
Interest on long-term debt		165			158			333			315
Total Interest Expense		3,625			5,803			7,534			11,743
Net Interest Income		23,841			22,520			47,361			45,335
Provision for loan losses		1,675			1,286			3,625			2,372
Net Interest Income After Provision for Loan Losses		22,166			21,234			43,736			42,963
Non-interest Income
Total investment securities impairment losses		(606	)		-			(606	)		-
Noncredit impairment losses recognized in other comprehensive income		302			-			302			-
Net investment securities impairment losses		(304	)		-			(304	)		-
Gain on sale of investment securities		832			3,128			801			3,128
Net investment securities gain		528			3,128			497			3,128
Service charges		9,649			9,855			18,739			18,909
Insurance commissions		1,347			1,504			3,343			3,125
Trust and investment management fee income		942			730			1,749			1,483
Bank owned  life insurance		766			745			1,489			1,503
Other income		558			575			1,091			1,051
Total Non-interest Income		13,790			16,537			26,908			29,199
Non-interest Expense
Salaries and employee benefits		10,668			10,183			20,913			20,095
Occupancy and equipment		1,978			1,921			3,913			4,027
Depreciation		1,109			1,140			2,195			2,276
FDIC insurance expense		394			932			779			1,884
Advertising		675			628			1,319			1,308
Bankcard expenses		694			633			1,314			1,134
Postage, delivery, and statement mailings		488			510			1,036			1,064
Office supplies		396			452			851			991
Legal and professional fees		421			3,511			738			3,980
Telecommunications		387			417			776			846
Repossessed asset losses (gains), net of expenses		650			(7	)		771			191
Merger related costs		4,042			-			4,177			-
Other expenses		2,861			2,592			5,496			4,974
Total Non-interest Expense		24,763			22,912			44,278			42,770
Income Before Income Taxes		11,193			14,859			26,366			29,392
Income tax expense		3,780			5,029			8,924			9,947
Net Income Available to Common Shareholders	$	7,413		$	9,830		$	17,442		$	19,445
Total comprehensive income	$	6,673		$	9,897		$	18,872		$	20,104
Average common shares outstanding		14,680			15,120			14,676			15,244
Effect of dilutive securities:
Employee stock options		79			73			84			78
Shares for diluted earnings per share		14,759			15,193			14,760			15,322
Basic earnings per common share	$	0.50		$	0.65		$	1.18		$	1.27
Diluted earnings per common share	$	0.50		$	0.64		$	1.17		$	1.26
Dividends declared per common share	$	0.35		$	0.34		$	0.70		$	0.68

See notes to consolidated financial statements.

5

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

City Holding Company and Subsidiaries

six months Ended June 30, 2012 and 2011

(in thousands)

	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balances at December 31, 2010	$	46,249	$	103,057		$	270,905		$	(102,853	)	$	(2,497	)	$	314,861
Net income							19,445									19,445
Other comprehensive income													659			659
Cash dividends declared ($0.68 per share)							(10,319	)								(10,319	)
Stock-based compensation expense, net				(119	)					784						665
Exercise of 5,476 stock options				-						153						153
Purchase of 447,524 treasury shares										(15,085	)					(15,085	)
Balances at June 30, 2011	$	46,249	$	102,938		$	280,031		$	(117,001	)	$	(1,838	)	$	310,379

	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balances at December 31, 2011	$	46,249	$	103,335		$	291,050		$	(125,593	)	$	(3,907	)	$	311,134
Net income							17,442									17,442
Other comprehensive income													1,430			1,430
Acquisition of Virginia Savings Bancorp				276						7,447						7,723
Cash dividends declared ($0.70 per share)							(10,337	)								(10,337	)
Stock-based compensation expense, net				(49	)					706						657
Exercise of 16,899 stock options				(113	)					601						488
Purchase of 237,535 treasury shares										(7,915	)					(7,915	)
Balances at June 30, 2012	$	46,249	$	103,449		$	298,155		$	(124,754	)	$	(2,477	)	$	320,622

See notes to consolidated financial statements.

6

Consolidated Statements of Cash Flows (Unaudited)

City Holding Company and Subsidiaries

(in thousands)

	Six months Ended June 30
	2012			2011
Operating Activities
Net income	$	17,442		$	19,445
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion		1,412			810
Provision for loan losses		3,625			2,372
Depreciation of premises and equipment		2,195			2,276
Deferred income tax expense (benefit)		263			(1,271	)
Accretion of gain from sale of interest rate floors		-			(295	)
Net periodic employee benefit cost		262			192
Net realized investment securities (gains)		(497	)		(3,128	)
Stock-compensation expense		657			665
Increase in value of bank-owned life insurance		(1,462	)		(1,503	)
Proceeds from bank-owned life insurance		-			14
Change in accrued interest receivable		454			(440	)
Change in other assets		545			3,051
Change in other liabilities		(1,647	)		3,222
Net Cash Provided by Operating Activities		23,249			25,410
Investing Activities
Proceeds from sale of money market and mutual fund securities available-for-sale		-			471,831
Purchases of money market and mutual fund securities available-for-sale		-			(525,502	)
Proceeds from sales of securities available-for-sale		15,642			56,101
Proceeds from maturities and calls of securities available-for-sale		51,167			64,844
Proceeds from maturities and calls of securities held-to-maturity		4,158			-
Purchases of securities available-for-sale		(66,560	)		(74,287	)
Net (increase) in loans		(23,152	)		(34,123	)
Purchases of premises and equipment		(4,944	)		(2,149	)
Acquisition of Virginia Savings Bancorp, net of cash acquired of $25,060		20,389			-
Net Cash Used in Investing Activities		(3,300	)		(43,285	)
Financing Activities
Net increase in noninterest-bearing deposits		40,841			15,568
Net increase in interest-bearing deposits		10,580			47,678
Net (decrease) increase in short-term borrowings		(65,976	)		14,489
Purchases of treasury stock		(7,915	)		(15,085	)
Proceeds from exercise of stock options		488			153
Dividends paid		(10,326	)		(10,462	)
Net Cash (Used in) Provided by Financing Activities		(32,308	)		52,341
(Decrease) increase in Cash and Cash Equivalents		(12,359	)		34,466
Cash and cash equivalents at beginning of period		146,399			66,379
Cash and Cash Equivalents at End of Period	$	134,040		$	100,845

See notes to consolidated financial statements.

7

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2012

Note A – Basis of Presentation

The accompanying consolidated financial statements, which are unaudited, include all of the accounts of City Holding Company (“the Parent Company”) and its wholly-owned subsidiaries (collectively, “the Company”). All material intercompany transactions have been eliminated. The consolidated financial statements include all adjustments that, in the opinion of management, are necessary for a fair presentation of the results of operations and financial condition for each of the periods presented. Such adjustments are of a normal recurring nature. The results of operations for the six months ended June 30, 2012 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2012. The Company’s accounting and reporting policies conform with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Such policies require management to make estimates and develop assumptions that affect the amounts reported in the consolidated financial statements and related footnotes. Actual results could differ from management’s estimates.

The consolidated balance sheet as of December 31, 2011 has been derived from audited financial statements included in the Company’s 2011 Annual Report to Shareholders.  Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been omitted.  These financial statements should be read in conjunction with the financial statements and notes thereto included in the 2011 Annual Report of the Company.

Certain amounts in the financial statements have been reclassified.  Such reclassifications had no impact on shareholders’ equity or net income for any period.

Note B – Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs.”  This ASU amends Topic 820, “Fair Value Measurements and Disclosures,” to converge the fair value measurement guidance contained in U.S. generally accepted accounting principles and International Financial Reporting Standards (“IFRS”).  The provisions of ASU No. 2011-04 clarify existing fair value measurements, amend certain principles set forth in Topic 820 and requires additional fair value disclosures.  ASU No. 2011-04 become effective for the Company’s reporting period that began on January 1, 2012.  The adoption of ASU No. 2011-04 did not have a material impact on the Company’s financial statements.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.”  ASU 2011-05 amends Topic 220, “Comprehensive Income,” to require that all non-owner changes in shareholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate, but consecutive statements, thus eliminating the option to present components of comprehensive income within the statement of changes in shareholders’ equity.  ASU No. 2011-05 is effective for the Company’s reporting period that began on January 1, 2012; however, certain provisions related to the presentation of reclassification adjustments have been deferred by ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassification Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” as further discussed below.  The adoption of ASU No. 2011-05 did not have a material impact on the Company’s financial statements.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.”  Under this ASU, an entity has the option to first assess the qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount.  If an entity determines, as a result of this qualitative assessment, that it is not more than likely that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.  ASU No. 2011-08 is effective for the Company’s reporting period that began on January 1, 2012.  The adoption of ASU No. 2011-08 did not have a material impact on the Company’s financial statements.

8

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.”  This ASU defers the changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments.  ASU No. 2011-12 allows entities to continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to ASU No. 2011-05.  All other requirements in ASU No. 2011-05 are not affected.  ASU No. 2011-12 is effective for the Company’s reporting period that began on January 1, 2012.  The adoption of ASU No. 2011-12 did not have a material impact on the Company’s financial statements.

Note C – Acquisitions

On May 31, 2012, the Company acquired 100% of the outstanding common and preferred stock of Virginia Savings Bancorp, Inc. and its wholly owned subsidiary, Virginia Savings Bank (collectively, “VSB”).  As a result of this acquisition, the Company acquired five branches which expanded its footprint into Virginia.  At the time of closing, VSB had assets of $132 million, loans of $82 million, deposits of $120 million and shareholders’ equity of $11 million.

The total transaction was valued at $12.4 million, consisting of cash of $4.7 million and approximately 240,000 shares of common stock valued at $7.7 million.  The common stock was valued based on the closing price of $32.18 for the Company’s common shares on May 31, 2012.  The preliminary purchase price has been allocated as follows:

	May 31, 2012
Consideration:
Cash	$	4,672
Common stock		7,723
	$	12,395
Identifiable assets:
Cash and cash equivalents	$	25,060
Investment securities		14,082
Loans		73,448
Premises and equipment		5,158
Other assets		8,860
Total identifiable assets		126,608
Identifiable liabilities:
Deposits		122,721
Other liabilities		698
Total identifiable liabilities		123,419
Net identifiable assets		3,189
Goodwill		8,014
Core deposit intangible		1,192
	$	12,395

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 net 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 standards:

(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 would be 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.  The accretabe difference represents the difference between the expected cash flows and the net present value of expected cash flows.  This difference is accreted into earnings using the level-yield method over the expected cash flow periods of the loans.  In determining the net present value of expected cash flows, management used various discount rates based upon the risk characteristics for each loan type.

9

The following table presents the loans acquired in conjunction with the VSB acquisition:

	May 31, 2012
Contractually required principal and interest	$	11,049
Contractual cash flows not expected to be collected (non-accretable difference)		(3,734	)
Expected cash flows		7,315
Interest component of expected cash flows (accretable difference)		(675	)
Estimated fair value of purchased credit impaired loans acquired	$	6,640
Estimated fair value of performing loans acquired		66,808
Estimated fair value of loans acquired	$	73,448

  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 $2.3 million, which is being amortized over ten years.

The Company believes that the customer relationships with the deposits acquired have an intangible value.  In connection with the acquisition, the Company recorded a core deposit intangible asset of $1.2 million, which represents the value of the relationship that VSB 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 ten years, with an annual charge of less than $0.2 million per year.  The following table presents a rollforward of the Company’s intangible assets from the beginning of the year:

	Intangible Assets
Balance, January 1, 2012	$	1,274
Core deposit intangible acquired in conjunction with the acquisition of VSB		1,192
Amortization expense		(208	)
Balance, June 30, 2012	$	2,258

Under GAAP, management has up to twelve months following the date of the acquisition to finalize the fair values of acquired assets and liabilities.  The measurement period ends as soon as the Company receives information it was seeking about facts and circumstances that existed as of the acquisition date or learns more information is not obtainable.  Any subsequent adjustments to the fair value of the acquired assets and liabilities, intangible assets or other purchase accounting adjustments will result in adjustments to the goodwill recorded.  The measurement period is limited to one year from the acquisition date.  The goodwill recorded in conjunction with the VSB acquisition is not expected to be deductible for tax purposes.  The following table presents a rollforward of goodwill from the beginning of the year:

	Goodwill
Balance, January 1, 2012	$	54,890
Goodwill acquired in conjunction with the acquisition of VSB		8,014
Balance, June 30, 2012	$	62,904

On August 2, 2012, the Company entered into a definitive agreement to acquire Community Financial Corporation and its wholly-owned subsidiary, Community Bank (“Community”).  Community is a $500 million bank and operates nine branches along the I-81 corridor in western Virginia and two branches in Virginia Beach, Virginia.  The Company anticipates the transaction will be completed in the first quarter of 2013, depending on regulatory approvals, the approval of Community shareholders and the completion of other customary closing conditions.  The total transaction value is expected to be approximately $25.3 million.

10

Note D –Investments

The aggregate carrying and approximate market values of securities follow.  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.

	June 30, 2012								December 31, 2011
(In thousands)	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	$	5,332	$	118	$	-	$	5,450	$	5,868	$	173	$	-	$	6,041
Obligations of states and
political subdivisions		52,197		1,755		19		53,933		55,262		1,561		21		56,802
Mortgage-backed
securities:
U.S. government
agencies		239,859		7,119		24		246,954		220,815		6,966		168		227,613
Private label		4,080		44		28		4,096		5,117		45		6		5,156
Trust preferred
securities		50,668		448		3,988		47,128		48,951		941		4,735		45,157
Corporate securities		14,203		162		830		13,535		16,226		160		1,988		14,398
Total Debt Securities		366,339		9,646		4,889		371,096		352,239		9,846		6,918		355,167
Marketable equity
securities		4,105		231		321		4,015		4,318		-		465		3,853
Investment funds		1,724		56		-		1,780		1,724		39		-		1,763
Total Securities
Available-for-Sale	$	372,168	$	9,933	$	5,210	$	376,891	$	358,281	$	9,885	$	7,383	$	360,783

	June 30, 2012								December 31, 2011
(In thousands)	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
Trust preferred securities	$	19,319	$	504	$	196	$	19,627	$	23,458	$	675	$	710	$	23,423
Total Securities
Held-to-Maturity	$	19,319	$	504	$	196	$	19,627	$	23,458	$	675	$	710	$	23,423
Other investment securities:
Non-marketable equity
Securities	$	11,686	$	-	$	-	$	11,686	$	11,934	$	-	$	-	$	11,934
Total Other Investment
Securities	$	11,686	$	-	$	-	$	11,686	$	11,934	$	-	$	-	$	11,934

Securities with limited marketability, such as stock in the Federal Reserve Bank or the Federal Home Loan Bank, are carried at cost and are reported as non-marketable equity securities in the table above.

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 June 30, 2012 and December 31, 2011.  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 at June 30, 2012 and December 31, 2011.

11

	June 30, 2012
	Less Than Twelve Months				Twelve Months or Greater				Total
(In thousands)	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	$	2,522	$	17	$	266	$	2	$	2,788	$	19
Mortgage-backed securities:
U.S. government agencies		31		-		3,607		24		3,638		24
Private label		2,606		28		-		-		2,606		28
Trust preferred securities		7,670		115		5,430		3,873		13,100		3,988
Corporate securities		-		-		5,867		830		5,867		830
Marketable equity securities		1,374		321		-		-		1,374		321
Total	$	14,203	$	481	$	15,170	$	4,729	$	29,373	$	5,210
Securities held-to-maturity:
Trust preferred securities	$	991	$	4	$	3,199	$	192	$	4,190	$	196

	December 31, 2011
	Less Than Twelve Months				Twelve Months or Greater				Total
(In thousands)	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	$	992	$	11	$	394	$	10	$	1,386	$	21
Mortgage-backed securities:
US Government agencies		-		-		4,333		168		4,333		168
Private label		3,236		6		-		-		3,236		6
Trust preferred securities		6,724		520		5,402		4,215		12,126		4,735
Corporate securities		1,791		241		4,941		1,747		6,732		1,988
Marketable equity securities		3,810		465		-		-		3,810		465
Total	$	16,553	$	1,243	$	15,070	$	6,140	$	31,623	$	7,383
Securities held-to-maturity:
Trust preferred securities	$	4,823	$	212	$	8,219	$	498	$	13,042	$	710

Marketable equity securities consist of investments made by the Company in equity positions of various community banks.  Included within this portfolio are meaningful (2-5%) ownership positions in the following community bank holding companies: Community Financial Corporation; Eagle Financial Services, Inc.; First National Corporation; and First United Corporation.

During the first six months of 2012, the Company recorded $0.3 million in credit-related net investment impairment losses.  The charges deemed to be other-than-temporary were related to pooled bank trust preferred securities with a remaining book value of $3.3 million at June 30, 2012.  During 2011, the Company recorded $1.3 million in credit-related net investment impairment losses.  The charges deemed to be other-than-temporary were related to pooled bank trust preferred securities ($0.4 million credit-related net impairment losses for the full year) with a remaining book value of $3.4 million at December 31, 2011, and community bank and bank holding company equity positions ($0.9 million credit-related net impairment losses for the full year) with a remaining book value of $3.9 million at December 31, 2011.  The credit-related net impairment charges related to the pooled bank trust preferred securities were based on the Company’s quarterly reviews of its investment securities for indications of losses considered to be other than temporary.  Based on management’s assessment of the securities the Company owns, the seniority position of the securities within the pools, the level of defaults and deferred payments within the pools, management concluded that credit-related impairment charges of $0.4 million on the pooled bank trust preferred securities were appropriate for the year ending December 31, 2011.  During the year ended December 31, 2011, the Company recognized $0.9 million of credit-related net impairment charges on the Company’s equity positions due to the length of time and extent to which the market value of these securities have been below the Company’s cost basis.  As a result of these factors, the Company does not expect the market value of these securities to recover in the near future.

12

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, the trading activity for these stocks is minimal, with trading volumes of less than 0.1% of each respective company being traded on a daily basis.  Another factor influencing the market value of these equity securities is a depressed stock market, particularly in the smaller community bank financial sector.  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 will receive full value for the securities.  Furthermore, as of June 30, 2012, 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 widening 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 June 30, 2012, management believes the unrealized losses detailed in the table above are temporary and no 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 recognized in net income in the period of the other-than-temporary impairment is identified, while any noncredit loss will be recognized in other comprehensive income.

At June 30, 2012, the book value of the Company’s five pooled trust preferred securities totaled $7.1 million with an estimated fair value of $3.3 million.  All of these securities are mezzanine tranches.  Pooled trust preferred securities represent beneficial interests in securitized financial assets that the Company analyzes within the scope of ASC 320, “Investments-Debt and Equity Securities” and are evaluated quarterly for other-than-temporary-impairment (“OTTI”).  Management performs an analysis of OTTI utilizing its internal methodology as described below to estimate expected cash flows to be received in the future.  The Company reviews each of its pooled trust preferred securities to determine if an OTTI charge would be recognized in current earnings in accordance with ASC 320, “Investments-Debt and Equity Securities”.  There is a risk that continued collateral deterioration could cause the Company to recognize additional OTTI charges in earnings in the future.

When evaluating pooled trust preferred securities for OTTI, the Company determines a credit related portion and a noncredit related portion.  The credit related portion is recognized in earnings and represents the difference between the present value of expected future cash flows and the amortized cost basis of the security.  The noncredit related portion is recognized in other comprehensive income, and represents the difference between the book value and the fair value of the security less the amount of the credit related impairment.  The determination of whether it is probable that an adverse change in estimated cash flows has occurred is evaluated by comparing estimated cash flows to those previously projected as further described below.  The Company considers this process to be its primary evidence when determining whether credit related OTTI exists.  The results of these analyses are significantly affected by other variables such as the estimate of future cash flows, credit worthiness of the underlying issuers and determination of the likelihood of defaults of the underlying collateral.

13

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 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 by June 2013.  Management compares the present value of expected cash flows to those previously projected to determine if an adverse change in cash flows has occurred. If an adverse change in cash flows has occurred, management determines the credit loss to be recognized in the current period and the portion related to noncredit factors to be recognized in other comprehensive income.

The following table presents a progression of the credit loss component of OTTI on debt and equity securities recognized in earnings during the six months ended June 30, 2012 and for the year ended December 31, 2011.  The credit loss component represents the difference between the present value of expected future cash flows and the amortized cost basis of the security.  The credit component of OTTI recognized in earnings during a period is presented in two parts based upon whether the credit impairment in the current period is the first time the security was credit impaired (initial credit impairment) or if there is additional credit impairment on a security that was credit impaired in previous periods.

(In thousands)	Debt Securities			Equity Securities			Total
Balance at January 1, 2011	$	20,893		$	5,130		$	26,023
Additions:
Initial credit impairment		-			-			-
Additional credit impairment		355			918			1,273
Deductions:
Called		(638	)		-			(638	)
Balance December 31, 2011		20,610			6,048			26,658
Additions:
Initial credit impairment		-			-			-
Additional credit impairment		304			-			304
Deductions:
Sold		-			(786	)		(786	)
Balance June 30, 2012	$	20,914		$	5,262		$	26,176

14

The following table presents additional information about the Company’s trust preferred securities with a credit rating of below investment grade as of June 30, 2012:

(Dollars in thousands)

Deal Name			Type	Class	Original Cost		Amortized Cost		Fair Value		Difference (1)			Lowest Credit Rating	# of issuers currently performing		Actual deferrals/defaults (as a % of original dollar)			Expected deferrals/defaults (as a % of remaining of performing collateral)				Excess Subordination as a Percentage of Current Performing Collateral (4)
			Pooled trust preferred securities:
			Other-than-temporarily impaired
			Available for Sale:
	P1		Pooled	Mezz	$	1,158	$	490	$	222	$	(268	)	Ca		14		26.1	%		17.6	%	(2)		20.0	%
	P2		Pooled	Mezz		3,944		1,197		776		(421	)	Ca		13		25.9	%		22.5	%	(2)		9.1	%
	P3	(5)	Pooled	Mezz		2,962		1,419		373		(1,046	)	Caa3		24		24.5	%		21.8	%	(2)		0.0	%
	P4	(6)	Pooled	Mezz		4,060		672		209		(463	)	Ca		11		24.2	%		0.0	%	(3)		0.0	%
	P5		Pooled	Mezz		5,806		826		335		(491	)	Ca		14		27.5	%		21.7	%	(2)		16.4	%
			Held to Maturity:
	P6		Pooled	Mezz		2,241		315		445		130		Ca		14		26.1	%		17.6	%	(2)		20.0	%
	P7		Pooled	Mezz		5,237		1,061		1,035		(26	)	Ca		13		25.9	%		22.5	%	(2)		9.1	%
			Single issuer trust preferred securities
			Available for sale:
	S1		Single			2,048		2,028		2,049		21		BB+		1		-			-
	S2		Single			535		509		511		2		BB+		1		-			-
	S3		Single			261		235		128		(107	)	NR		1		-			-
	S4		Single			3,000		3,000		3,060		60		B2		1		-			-
	S5		Single			1,000		1,000		1,038		38		B2		1		-			-
			Held to Maturity: