Edgar Filing: CITY HOLDING CO

form10-q.htm

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, 2011

[ ] 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]

[ ]

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]

[ ]

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

[ ]

[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 – 15,085,166 shares as of August 8, 2011.

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 may experience increases in the default rates on previously securitized loans that would result in impairment losses or lower the yield on such loans; (4) the Company may not continue to benefit from strong recovery efforts on previously securitized loans resulting in improved yields on these assets; (5) the Company could have adverse legal actions of a material nature; (6) the Company may face competitive loss of customers; (7) the Company may be unable to manage its expense levels; (8) the Company may have difficulty retaining key employees; (9) 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; (10) changes in general economic conditions and increased competition could adversely affect the Company’s operating results; (11) 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; (12) the Company may experience difficulties growing loan and deposit balances; (13) the current economic environment poses significant challenges for us and could adversely affect our financial condition and results of operations; (14) 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 (15) 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.

Index

City Holding Company and Subsidiaries

PART I	Financial Information	Pages

Item 1.	Financial Statements (Unaudited).	4-30
	Consolidated Balance Sheets – June 30, 2011 and December 31, 2010.
	Consolidated Statements of Income – Three months ended June 30, 2011 and 2010 and Six months ended June 30, 2011 and 2010.
	Consolidated Statements of Changes in Shareholders’ Equity – Six months ended June 30, 2011 and 2010.
	Consolidated Statements of Cash Flows – Six months ended June 30, 2011 and 2010.
	Notes to Consolidated Financial Statements – June 30, 2011.
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	31-47
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	48
Item 4.	Controls and Procedures.	48

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.	(Removed and Reserved)	49
Item 5.	Other Information.	49
Item 6.	Exhibits.	50

Signatures		51

Table of Contents

PART I, ITEM 1 – FINANCIAL STATEMENTS

Consolidated Balance Sheets

City Holding Company and Subsidiaries

(in thousands)

	June 30			December 31
	2011			2010
	(Unaudited)			(Note A)
Assets
Cash and due from banks	$	59,020		$	50,043
Interest-bearing deposits in depository institutions		6,825			5,336
Federal funds sold		35,000			11,000
Cash and Cash Equivalents		100,845			66,379

Investment securities available for sale, at fair value		440,889			429,720
Investment securities held-to-maturity, at amortized cost (approximate fair value at June 30, 2011 and December 31, 2010 - $24,440 and $23,100, respectively)		23,883			23,865
Total Investment Securities		464,772			453,585

Gross loans		1,897,344			1,865,000
Allowance for loan losses		(18,944	)		(18,224	)
Net Loans		1,878,400			1,846,776

Bank owned life insurance		77,705			76,231
Premises and equipment, net		64,403			64,530
Accrued interest receivable		7,704			7,264
Net deferred tax asset		29,937			29,235
Intangible assets		56,368			56,573
Other assets		33,686			36,722
Total Assets	$	2,713,820		$	2,637,295
Liabilities
Deposits:
Noninterest-bearing	$	353,495		$	337,927
Interest-bearing:
Demand deposits		510,985			486,737
Savings deposits		421,134			397,042
Time deposits		949,007			949,669
Total Deposits		2,234,621			2,171,375

Short-term borrowings		127,199			112,710
Long-term debt		16,495			16,495
Other liabilities		25,126			21,854
Total Liabilities		2,403,441			2,322,434

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, 2011 and December 31, 2010, less 3,414,116 and 2,994,501 shares in treasury, respectively		46,249			46,249
Capital surplus		102,938			103,057
Retained earnings		280,031			270,905
Cost of common stock in treasury		(117,001	)		(102,853	)
Accumulated other comprehensive income (loss):
Unrealized gain on securities available-for-sale		1,976			1,022
Unrealized gain on derivative instruments		-			295
Underfunded pension liability		(3,814	)		(3,814	)
Total Accumulated Other Comprehensive Loss		(1,838	)		(2,497	)
Total Shareholders’ Equity		310,379			314,861
Total Liabilities and Shareholders’ Equity	$	2,713,820		$	2,637,295

See notes to consolidated financial statements.

Table of Contents

Consolidated Statements of Income (Unaudited)

City Holding Company and Subsidiaries

(in thousands, except earnings per share data)

	Three Months Ended June 30						Six Months Ended June 30
	2011			2010			2011		2010

Interest Income
Interest and fees on loans	$	23,352		$	25,991		$	47,090	$	50,845
Interest on investment securities:
Taxable		4,513			5,317			9,055		10,928
Tax-exempt		445			461			907		931
Interest on federal funds sold		13			1			26		1
Total Interest Income		28,323			31,770			57,078		62,705

Interest Expense
Interest on deposits		5,568			6,831			11,279		14,015
Interest on short-term borrowings		77			98			149		198
Interest on long-term debt		158			163			315		323
Total Interest Expense		5,803			7,092			11,743		14,536
Net Interest Income		22,520			24,678			45,335		48,169
Provision for loan losses		1,286			1,823			2,372		2,903
Net Interest Income After Provision for Loan Losses		21,234			22,855			42,963		45,266

Non-interest Income
Total investment securities impairment losses		-			(1,237	)		-		(4,440	)
Noncredit impairment losses recognized in other comprehensive
income		-			944			-		2,496
Net investment securities impairment losses		-			(293	)		-		(1,944	)
Gains on sale of investment securities		3,128			62			3,128		62
Net investment securities gains (losses)		3,128			(231	)		3,128		(1,882	)

Service charges		9,855			10,448			18,909		20,676
Insurance commissions		1,504			1,244			3,125		2,641
Trust and investment management fee income		730			567			1,483		1,429
Bank owned life insurance		745			813			1,503		1,541
Other income		575			437			1,051		985
Total Non-interest Income		16,537			13,278			29,199		25,390

Non-interest Expense
Salaries and employee benefits		10,183			9,745			20,095		19,494
Occupancy and equipment		1,921			1,874			4,027		3,919
Depreciation		1,140			1,174			2,276		2,392
FDIC insurance expense		932			918			1,884		1,813
Advertising		628			1,241			1,308		2,154
Bankcard expenses		633			448			1,134		924
Postage, delivery, and statement mailings		510			615			1,064		1,224
Office supplies		452			484			991		977
Legal and professional fees		3,511			398			3,980		761
Telecommunications		417			440			846		891
Repossessed asset (gains) losses, net of expenses		(7	)		78			191		1,024
Other expenses		2,592			2,550			4,974		4,943
Total Non-interest Expense		22,912			19,965			42,770		40,516
Income Before Income Taxes		14,859			16,168			29,392		30,140
Income tax expense		5,029			5,453			9,947		10,112
Net Income Available to Common Shareholders	$	9,830		$	10,715		$	19,445	$	20,028

Basic earnings per common share	$	0.65		$	0.68		$	1.27	$	1.27
Diluted earnings per common share	$	0.64		$	0.68		$	1.26	$	1.26
Dividends declared per common share	$	0.34		$	0.34		$	0.68	$	0.68
Average common shares outstanding:
Basic		15,120			15,656			15,244		15,722
Diluted		15,193			15,721			15,322		15,785

See notes to consolidated financial statements.

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Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

City Holding Company and Subsidiaries

Six Months Ended June 30, 2011 and 2010

(in thousands)

	Common Stock		Capital Surplus			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity

Balances at December 31, 2009	$	46,249	$	102,917		$	253,167		$	(90,877	)	$	(2,554	)	$	308,902
Comprehensive income:
Net income							20,028									20,028
Other comprehensive gain, net of deferred
income taxes of $2,185:
Unrealized gain (loss) on available-for-
sale securities of $8,510, net of
taxes													5,242			5,242
Net unrealized loss on interest rate
floors of $2,821, net of taxes													(1,738	)		(1,738	)
Total comprehensive income																23,532
Cash dividends declared ($0.68 per share)							(10,685	)								(10,685	)
Issuance of stock awards, net				(192	)					682						490
Exercise of 1,700 stock options				(12	)					58						46
Purchase of 297,015 treasury shares										(9,710	)					(9,710	)
Balances at June 30, 2010	$	46,249	$	102,713		$	262,510		$	(99,847	)	$	950		$	312,575

	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
Comprehensive income:
Net income							19,445									19,445
Other comprehensive gain, net of deferred
income taxes of $407:
Unrealized gain on available-for-sale
securities of $4,671, net of taxes													954			954
Net unrealized loss on interest rate
floors of $477, net of taxes													(295	)		(295	)
Total comprehensive income																20,104
Cash dividends declared ($0.68 per share)							(10,319	)								(10,319	)
Issuance of stock awards, 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

See notes to consolidated financial statements.

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Consolidated Statements of Cash Flows (Unaudited)

City Holding Company and Subsidiaries

(in thousands)

	Six Months Ended June 30
	2011			2010

Operating Activities
Net income	$	19,445		$	20,028
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization and accretion		810			369
Provision for loan losses		2,372			2,903
Depreciation of premises and equipment		2,276			2,392
Deferred income tax benefit		(1,271	)		(30	)
Accretion of gain from sale of interest rate floors		(295	)		(1,738	)
Net periodic employee benefit		192			116
Realized investment securities (gains)		(3,128	)		(62	)
Net investment securities impairment losses		-			1,944
Increase in value of bank-owned life insurance		(1,503	)		(1,541	)
Proceeds from bank-owned life insurance		14			71
Increase in accrued interest receivable		(440	)		(301	)
Decrease (increase) in other assets		3,051			(3,049	)
Increase in other liabilities		3,887			6,502
Net Cash Provided by Operating Activities		25,410			27,604

Investing Activities
Proceeds from maturities and calls of securities held-to-maturity		-			3,217
Proceeds from sale of money market and mutual fund securities available-for-sale		471,831			424,550
Purchases of money market and mutual fund securities available-for-sale		(525,502	)		(426,045	)
Proceeds from sales of securities available-for-sale		56,101			145
Proceeds from maturities and calls of securities available-for-sale		64,844			55,388
Purchases of securities available-for-sale		(74,287	)		(43,407	)
Net increase in loans		(34,123	)		(42,779	)
Purchases of premises and equipment		(2,149	)		(2,714	)
Net Cash Used in Investing Activities		(43,285	)		(31,645	)

Financing Activities
Net increase in noninterest-bearing deposits		15,568			2,846
Net increase in interest-bearing deposits		47,678			9,144
Net increase (decrease) in short-term borrowings		14,489			(5,090	)
Repayment of long-term debt		-			(44	)
Purchases of treasury stock		(15,085	)		(9,710	)
Proceeds from exercise of stock options		153			46
Dividends paid		(10,462	)		(10,779	)
Net Cash Provided by (Used in) Financing Activities		52,341			(13,587	)
Increase (decrease) in Cash and Cash Equivalents		34,466			(17,628	)
Cash and cash equivalents at beginning of period		66,379			62,635
Cash and Cash Equivalents at End of Period	$	100,845		$	45,007

See notes to consolidated financial statements.

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Notes to Consolidated Financial Statements (Unaudited)

June 30, 2011

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, 2011 are not necessarily indicative of the results of operations that can be expected for the year ending December 31, 2011. 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, 2010 has been derived from audited financial statements included in the Company’s 2010 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 2010 Annual Report of the Company.

Note B –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, 2011									December 31, 2010
(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:
Obligations of states and political subdivisions	$	58,216	$	1,066	$	(151	)	$	59,131	$	65,634	$	759	$	(467	)	$	65,926
Mortgage-backed securities:
US government agencies		231,884		7,539		(481	)		238,942		259,046		8,264		(493	)		266,817
Private label		6,391		81		-			6,472		8,031		87		-			8,118
Trust preferred securities		51,293		952		(3,969	)		48,276		58,517		1,031		(4,938	)		54,610
Corporate securities		16,220		126		(689	)		15,657		16,214		63		(884	)		15,393
Total Debt Securities		364,004		9,764		(5,290	)		368,478		407,442		10,204		(6,782	)		410,864
Marketable equity securities		5,219		397		(488	)		5,128		5,207		8		(522	)		4,693
Non-marketable equity securities		11,985		-		-			11,985		12,553		-		-			12,553
Investment funds		55,289		9		-			55,298		1,617		-		(7	)		1,610
Total Securities Available-for-Sale	$	436,497	$	10,170	$	(5,778	)	$	440,889	$	426,819	$	10,212	$	(7,311	)	$	429,720

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	June 30, 2011									December 31, 2010
(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
Obligations of states and political subdivisions	$	438	$	4	$	-		$	442	$	438	$	5	$	-		$	443
Trust preferred securities		23,445		643		(90	)		23,998		23,427		-		(770	)		22,657
Total Securities Held-to-Maturity	$	23,883	$	647	$	(90	)	$	24,440	$	23,865	$	5	$	(770	)	$	23,100

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, 2011 and December 31, 2010. 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, 2011 and December 31, 2010.

	June 30, 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	$	3,165	$	123	$	1,073	$	27	$	4,238	$	150
Mortgage-backed securities:
US Government agencies		4,383		481		-		-		4,383		481
Trust preferred securities		840		357		5,159		3,613		5,999		3,970
Corporate securities		-		-		3,681		689		3,681		689
Marketable equity securities		1,215		298		1,371		190		2,586		488
Total	$	9,603	$	1,259	$	11,284	$	4,519	$	20,887	$	5,778

Securities held-to-maturity:
Trust preferred securities	$	-	$	-	$	7,481	$	90	$	7,481	$	90

	December 31, 2010
	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	$	16,242	$	253	$	2,141	$	214	$	18,383	$	467
Mortgage-backed securities:
US Government agencies		20,160		493		-		-		20,160		493
Trust preferred securities		6,910		686		6,831		4,252		13,741		4,938
Corporate securities		2,010		26		3,511		858		5,521		884
Marketable equity securities		1,038		221		1,260		301		2,298		522
Investment funds		1,493		7		-		-		1,493		7
Total	$	47,853	$	1,686	$	13,743	$	5,625	$	61,596	$	7,311

Securities held-to-maturity:
Trust preferred securities	$	6,623	$	198	$	7,889	$	572	$	14,512	$	770

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.

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During the first six months of 2011, the Company did not record any credit-related net investment impairment losses. During 2010, the Company recorded $6.1 million of credit-related net investment impairment losses. The charges deemed to be other-than-temporary were related to pooled bank trust preferred securities ($1.8 million credit-related net impairment losses for the full year) with a remaining book value of $7.8 million at December 31, 2010, single issuer bank trust preferred securities ($0.7 million credit-related net impairment losses for the full year) with a remaining book value of $1.2 million at December 31, 2010, and community bank and bank holding company equity positions ($3.6 million credit-related net impairment losses for the full year) with a remaining book value of $3.6 million at December 31, 2010. The credit-related net impairment charges related to the pooled bank trust preferred securities (Cascade Capital Trust I issued by Cascade Financial Corporation of Everett, Washington) 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 $1.8 million and $0.7 million on the pooled bank trust preferred securities and single issuer bank trust preferred securities, respectively, were appropriate for the year ending December 31, 2010. The $3.6 million of credit-related net impairment charges recognized on the community bank and bank holding equity positions was due to trends of poor financial performance over the last several quarters and 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 did not expect the market value of these securities to recover in the near future. These losses were partially offset by realized investment gains of $1.4 million as the Company sold certain single issuer trust preferred securities with a remaining book value of $75.3 million during the year ended December 31, 2010.

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, 2011, 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, 2011, 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.

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At June 30, 2011, the book value of the Company’s five pooled trust preferred securities totaled $7.8 million with an estimated fair value of $4.6 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 FASB Topic ASC 320, Investments-Debt and Equity Securities, (“ASC 320”) 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. There is a risk that continued collateral deterioration could cause the Company to recognize additional OTTI charges in earnings in the future.

When evaluating debt securities for OTTI, the Company determines a credit related portion and a noncredit related portion, if any. 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.

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. As in the past, 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 31% of the banks currently deferring or in default will cure such positions between June 2011 and July 2015. 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.

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Based upon the analysis performed by management as of June 30, 2011, no credit-related OTTI charges were recognized during either the three or six months ended June 30, 2011. During the three and six months ended June 30, 2010, the Company recognized $0.3 million and $2.0 million, respectively, of credit-related OTTI charges.

The following table presents a progression of the credit loss component of OTTI on debt securities recognized in earnings. 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 debt security was credit impaired (initial credit impairment) or if there is additional credit impairment on a debt security that was credit impaired in previous periods.

	For the six months ended
(In thousands)	June 30, 2011		June 30, 2010

Balance at January 1	$	20,476	$	18,694
Additions:
Initial credit impairment		-		-
Additional credit impairment		-		1,682
Balance June 30	$	20,476	$	20,376

The amortized cost and estimated fair value of debt securities at June 30, 2011, by contractual maturity, are shown in the following table. 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.

(In thousands)	Cost		Estimated Fair Value
Securities Available-for-Sale
Due in one year or less	$	9,024	$	9,086
Due after one year through five years		53,591		53,614
Due after five years through ten years		64,604		60,297
Due after ten years		236,785		245,481
	$	364,004	$	368,478

Securities Held-to-Maturity
Due in one year or less	$	130	$	130
Due after one year through five years		308		312
Due after five years through ten years		-		-
Due after ten years		23,445		23,998
	$	23,883	$	24,440

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

	Three Months Ended June 30				Six Months Ended June 30
	2011		2010		2011		2010
Gross realized gains	$	3,128	$	62	$	3,128	$	62
Gross realized losses		-		-		-		-
Gain (loss) on sale of investment securities	$	3,128	$	62	$	3,128	$	62

The specific identification method is used to determine the cost basis of securities sold.

The carrying value of securities pledged to secure public deposits and for other purposes as required or permitted by law approximated $168.8 million and $204.6 million at June 30, 2011 and December 31, 2010, respectively.

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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, 2011:

(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	(5)	Pooled	Mezz	$	1,179	$	508	$	221	$	(287	)	Ca		16		32.7	%		18.8	%(2)		6.6	%
	P2	(6)	Pooled	Mezz		3,778		1,197		840		(357	)	Ca		22		26.9	%		21.8	%(2)		14.7	%
	P3	(7)	Pooled	Mezz		2,962		1,545		376		(1,169	)	Caa3		27		24.4	%		22.7	%(2)		0.0	%
	P4	(8)	Pooled	Mezz		4,060		1,205		272		(933	)	Ca		14		25.3	%		0.0	% (3)		3.1	%
	P5	(9)	Pooled	Mezz		5,392		826		190		(636	)	Ca		23		35.6	%		22.8	%(2)		23.2	%

			Held to Maturity:
	P6	(10)	Pooled	Mezz		2,281		986		441		(545	)	Ca		16		32.7	%		21.8	%(2)		3.8	%
	P7	(6)	Pooled	Mezz		5,017		1,581		1,120		(461	)	Ca		22		26.9	%		21.8	%(2)		14.7	%

			Single issuer trust preferred securities
			Available for sale:
	S1		Single			1,149		1,040		1,040		-		Ba2		1		-			-
	S2	(11)	Single			1,700		944		1,425		481		NR		1		-			-
	S3		Single			5,119		5,083		5,113		30		BB+		1		-			-
	S4		Single			535		511		511		-		BB+		1		-			-
	S5	(12)	Single			261		235		92		(143	)	NR		1		-			-
	S6		Single			3,000		3,000		3,030		30		B2		1		-			-
	S7		Single			1,046		1,027		1,052		25		NR		1		-			-
	S8		Single			1,000		1,000		1,017		17		Caa1		1		-			-

			Held to Maturity:
	S9		Single			4,000		4,000		4,000		-		NR		1		-			-
	S10		Single			3,360		3,115		2,970		(145	)	NR		1		-			-
	S11		Single			3,564		3,537		3,647		110		NR		1		-			-
	S12		Single			4,321		4,139		4,070		(69	)	Ba1		1		-			-

		(1)	The differences noted consist of unrealized losses recorded at June 30, 2011 and noncredit other-than-temporary impairment losses recorded subsequent to April 1, 2009 that have not been reclassified as credit losses.
		(2)	Performing collateral is defined as total collateral minus all collateral that has been called, is currently deferring, or currently in default. This model for this security assumes that all collateral that is currently deferring will default with a zero recovery rate. The underlying issuers can cure, thus this bond could recover at a higher percentage upon default than zero.
		(3)	Performing collateral is defined as total collateral minus all collateral that has been called, is currently deferring, or currently in default. The model for this security assumes that 31% of all collateral that is currently deferring will cure between June 2011 and July 2015. If additional underlying issuers cure, this bond could recover at a higher percentage.
		(4)	Excess subordination is defined as the additional defaults/deferrals necessary in the next reporting period to deplete the entire credit enhancement (excess interest and over-collateralization) beneath our tranche within each pool to the point that would cause a "break in yield." This amount assumes that all currently performing collateral continues to perform. A break in yield means that our security would not be expected to receive all the contractual cash flows (principal and interest) by maturity. The "percent of current performing collateral" is the ratio of the "excess subordination amount" to current performing collateral—a higher percent means there is more excess subordination to absorb additional defaults/deferrals, and the better our security is protected from loss.
		(5)	Other-than-temporary impairment losses of $370,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the six month period ended June 30, 2011.
		(6)	No other-than-temporary impairment losses were incurred during the six month period ended June 30, 2011 and the year ended December 31, 2010.
		(7)	Other-than-temporary impairment losses of $72,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the six month period ended June 30, 2011.
		(8)	Other-than-temporary impairment losses of $619,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the six month period ended June 30, 2011.
		(9)	Other-than-temporary impairment losses of $1,750,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the six month period ended June 30, 2011.
		(10)	Other-than-temporary impairment losses of $706,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the six month period ended June 30, 2011.
		(11)	Other-than-temporary impairment losses of $ 638,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the six month period ended June 30, 2011.
		(12)	Other-than-temporary impairment losses of $15,000 were recognized during the year ended December 31, 2010. No other-than-temporary impairment losses were incurred during the six month period ended June 30, 2011.

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Note C –Loans

The following summarizes the Company’s loans, by portfolio segment:

( In thousands)	June 30, 2011			December 31, 2010

Residential real estate	$	622,118		$	610,369
Home equity		420,752			416,172
Commercial and industrial		121,149			134,612
Commercial real estate		693,959			661,758
Consumer		36,626			38,424
DDA overdrafts		2,415			2,876
Previously securitized loans		325			789
Gross loans		1,897,344			1,865,000
Allowance for loan losses		(18,944	)