UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2013

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

Commission File Number: 0-20293

UNION FIRST MARKET BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

VIRGINIA	54-1598552
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1051 East Cary Street

Suite 1200

Richmond, Virginia 23219

(Address of principal executive offices) (Zip Code)

(804) 633-5031

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has 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 the definitions 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

The number of shares of common stock outstanding as of August 1, 2013 was 24,885,653.

UNION FIRST MARKET BANKSHARES CORPORATION

FORM 10-Q

INDEX

ITEM		PAGE

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of June 30, 2013, December 31, 2012, and June 30, 2012	1

	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012	2

	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012	3

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2013 and 2012	4

	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012	5

	Notes to Condensed Consolidated Financial Statements	6

	Report of Independent Registered Public Accounting Firm	39

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	68

Item 4	Controls and Procedures	69

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	70

Item 1A.	Risk Factors	70

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73

Item 6	Exhibits	74

	Signatures	75

PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	June 30,			December 31,		June 30,
	2013			2012		2012
	(Unaudited)			(Audited)		(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	59,867		$	71,426	$	57,245
Interest-bearing deposits in other banks		11,526			11,320		14,975
Money market investments		1			1		1
Federal funds sold		153			155		163
Total cash and cash equivalents		71,547			82,902		72,384

Securities available for sale, at fair value		582,312			585,382		627,543
Restricted stock, at cost		17,956			20,687		19,291

Loans held for sale		109,395			167,698		100,066

Loans, net of unearned income		3,000,855			2,966,847		2,887,790
Less allowance for loan losses		34,333			34,916		40,985
Net loans		2,966,522			2,931,931		2,846,805

Bank premises and equipment, net		82,857			85,409		91,122
Other real estate owned, net of valuation allowance		35,153			32,834		35,802
Core deposit intangibles, net		13,821			15,778		18,178
Goodwill		59,400			59,400		59,400
Other assets		117,594			113,844		111,697
Total assets	$	4,056,557		$	4,095,865	$	3,982,288

LIABILITIES
Noninterest-bearing demand deposits		668,303			645,901		591,757
Interest-bearing deposits:
NOW accounts		456,459			454,150		425,188
Money market accounts		953,978			957,130		905,739
Savings accounts		225,821			207,846		198,728
Time deposits of $100,000 and over		468,263			508,630		534,682
Other time deposits		493,139			524,110		562,892
Total interest-bearing deposits		2,597,660			2,651,866		2,627,229
Total deposits		3,265,963			3,297,767		3,218,986

Securities sold under agreements to repurchase		101,418			54,270		75,394
Other short-term borrowings		28,000			78,000		-
Trust preferred capital notes		60,310			60,310		60,310
Long-term borrowings		137,919			136,815		155,625
Other liabilities		34,518			32,840		38,537
Total liabilities		3,628,128			3,660,002		3,548,852

Commitments and contingencies

STOCKHOLDERS' EQUITY
Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 24,880,403 shares, 25,270,970 shares, and 25,952,035 shares, respectively.		32,901			33,510		34,415
Surplus		168,600			176,635		185,733
Retained earnings		227,563			215,634		202,278
Accumulated other comprehensive (loss) income		(635	)		10,084		11,010
Total stockholders' equity		428,429			435,863		433,436

Total liabilities and stockholders' equity	$	4,056,557		$	4,095,865	$	3,982,288

See accompanying notes to condensed consolidated financial statements.

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UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2013			2012		2013			2012
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Interest and dividend income:
Interest and fees on loans	$	38,687		$	40,299	$	77,912		$	80,907
Interest on Federal funds sold		-			-		1			-
Interest on deposits in other banks		6			32		11			54
Interest and dividends on securities:
Taxable		1,939			3,184		4,008			6,640
Nontaxable		2,054			1,787		4,041			3,577
Total interest and dividend income		42,686			45,302		85,973			91,178

Interest expense:
Interest on deposits		3,701			5,023		7,663			10,358
Interest on federal funds purchased		21			1		36			1
Interest on short-term borrowings		54			47		108			91
Interest on long-term borrowings		1,507			2,144		3,009			4,294
Total interest expense		5,283			7,215		10,816			14,744

Net interest income		37,403			38,087		75,157			76,434
Provision for loan losses		1,000			3,000		3,050			6,500
Net interest income after provision for loan losses		36,403			35,087		72,107			69,934

Noninterest income:
Service charges on deposit accounts		2,346			2,291		4,618			4,421
Other service charges, commissions and fees		3,222			2,774		6,029			5,346
Gains on securities transactions, net		53			10		42			5
Gains on sales of mortgage loans, net of commissions		4,668			3,832		8,520			6,597
Gains (losses) on sales of bank premises		(34	)		373		(330	)		343
Other operating income		1,044			973		2,254			2,017
Total noninterest income		11,299			10,253		21,133			18,729

Noninterest expenses:
Salaries and benefits		17,912			16,935		35,878			33,911
Occupancy expenses		2,764			3,092		5,619			5,739
Furniture and equipment expenses		1,741			1,868		3,585			3,631
Other operating expenses		11,866			11,712		22,701			22,593
Total noninterest expenses		34,283			33,607		67,783			65,874

Income before income taxes		13,419			11,733		25,457			22,789
Income tax expense		3,956			3,313		7,011			6,446
Net income	$	9,463		$	8,420	$	18,446		$	16,343
Earnings per common share, basic	$	0.38		$	0.32	$	0.74		$	0.63
Earnings per common share, diluted	$	0.38		$	0.32	$	0.74		$	0.63

See accompanying notes to condensed consolidated financial statements.

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UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

(Unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2013			2012			2013			2012
Net income	$	9,463		$	8,420		$	18,446		$	16,343
Other comprehensive income (loss):
Change in fair value of interest rate swap (cash flow hedge)		849			(487	)		1,135			(290	)
Unrealized holding (losses) gains arising during period (net of tax, $5,233 and $6,368 and $535 and $890 for three and six months ended June 30, 2013 and 2012)		(9,720	)		992			(11,827	)		1,653
Reclassification adjustment for losses included in net income (net of tax, $19 and $15 and $4 and $2 for three and six months ended June 30, 2013 and 2012)		(34	)		(6	)		(27	)		(3	)
Other comprehensive income (loss)		(8,905	)		499			(10,719	)		1,360
Comprehensive income	$	558		$	8,919		$	7,727		$	17,703

See accompanying notes to consolidated financial statements.

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UNION FIRST MARKET BANKSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(Dollars in thousands, except share amounts)

(Unaudited)

	Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total

Balance - December 31, 2011	$	34,672		$	187,493		$	189,824		$	9,650		$	421,639
Net income - 2012								16,343						16,343
Other comprehensive income (net of tax, $888 )											1,360			1,360
Dividends on Common Stock ( $.15 per share)								(3,632	)					(3,632	)
Stock purchased under stock repurchase plan ( 220,265 shares)		(293	)		(2,570	)								(2,863	)
Issuance of common stock under Dividend Reinvestment Plan ( 19,028 shares)		25			232			(257	)					-
Vesting of restricted stock under Stock Incentive Plan ( 9,647 shares)		13			(13	)								-
Net settle for taxes on Restricted Stock Awards ( 1,818 shares)		(2	)		(24	)								(26	)
Stock-based compensation expense					615									615
Balance - June 30, 2012	$	34,415		$	185,733		$	202,278		$	11,010		$	433,436

Balance - December 31, 2012	$	33,510		$	176,635		$	215,634		$	10,084		$	435,863
Net income - 2013								18,446						18,446
Other comprehensive loss (net of tax, $6,383)											(10,719	)		(10,719	)
Dividends on Common Stock ( $.26 per share)								(6,063	)					(6,063	)
Stock purchased under stock repurchase plan ( 500,000 shares)		(664	)		(8,835	)								(9,499	)
Issuance of common stock under Dividend Reinvestment Plan ( 25,177 shares)		33			421			(454	)					-
Issuance of common stock under Stock Incentive Plan ( 13,365 shares)		17			79									96
Vesting of restricted stock under Stock Incentive Plan ( 6,177 shares)		8			(8	)								-
Net settle for taxes on Restricted Stock Awards ( 2,563 shares)		(3	)		(17	)								(20	)
Stock-based compensation expense					325									325
Balance - June 30, 2013	$	32,901		$	168,600		$	227,563		$	(635	)	$	428,429

See accompanying notes to condensed consolidated financial statements.

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UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

(Dollars in thousands)

(Unaudited)

	2013			2012
Operating activities:
Net income	$	18,446		$	16,343
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation of bank premises and equipment		3,046			3,412
Amortization, net		2,598			7,370
Provision for loan losses		3,050			6,500
Gains on the sale of investment securities		(42	)		(5	)
Decrease (increase) in loans held for sale, net		58,303			(25,243	)
(Gains) losses on sales of other real estate owned, net		(142	)		206
Losses (gains) on bank premises, net		330			(343	)
Stock-based compensation expenses		325			615
Decrease (increase) in other assets		2,151			(231	)
Increase in other liabilities		2,813			6,590
Net cash and cash equivalents provided by operating activities		90,878			15,214
Investing activities:
Purchases of securities available for sale		(106,188	)		(95,191	)
Proceeds from sales of securities available for sale		15,585			3,583
Proceeds from maturities, calls and paydowns of securities available for sale		78,050			83,656
Net increase in loans		(42,027	)		(84,671	)
Net increase in bank premises and equipment		(1,812	)		(3,603	)
Proceeds from sales of other real estate owned		3,391			7,077
Improvements to other real estate owned		(194	)		(343	)
Net cash and cash equivalents used in investing activities		(53,195	)		(89,492	)
Financing activities:
Net increase in noninterest-bearing deposits		22,402			57,222
Net increase in NOW accounts		2,309			12,583
Net (decrease) increase in money market accounts		(3,152	)		846
Net increase in savings accounts		17,975			19,571
Net (decrease) increase in time deposits of $100,000 and over		(40,367	)		(16,873	)
Net decrease in other time deposits		(30,971	)		(29,468	)
Net (decrease) increase in short-term borrowings		(2,852	)		12,399
Net increase in long-term borrowings ⁽¹⁾		1,104			244
Cash dividends paid - common stock		(6,063	)		(3,632	)
Repurchase of common stock		(9,499	)		(2,863	)
Issuance of common stock		96			-
Taxes paid related to net share settlement of equity awards		(20	)		(26	)
Net cash and cash equivalents (used in) provided by financing activities		(49,038	)		50,003
(Decrease) increase in cash and cash equivalents		(11,355	)		(24,275	)
Cash and cash equivalents at beginning of the period		82,902			96,659
Cash and cash equivalents at end of the period	$	71,547		$	72,384

Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	11,166		$	15,699
Income taxes		4,600			7,500

Supplemental schedule of noncash investing and financing activities
Unrealized (loss) gain on securities available for sale	$	(18,237	)	$	2,538
Changes in fair value of interest rate swap loss		1,135			(290	)
Transfers from loans to other real estate owned		4,386			10,479
Transfers from bank premises to other real estate owned		988			-

(1) See Note 5 "Borrowings" related to 2013 activity.

See accompanying notes to consolidated financial statements.

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UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2013

ACCOUNTING POLICIES

The condensed consolidated financial statements include the accounts of Union First Market Bankshares Corporation and its subsidiaries (collectively, the “Company”). Significant inter-company accounts and transactions have been eliminated in consolidation.

The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited condensed consolidated financial statements do not include all the information and footnotes required by GAAP for complete financial statements. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of the interim periods presented have been made. The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2012 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of ASU 2011-11 did not have a material impact on the Company’s consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.” The amendments in this ASU apply to all entities that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments in this ASU provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. The amendments also enhance the consistency of impairment testing guidance among long-lived asset categories by permitting an entity to assess qualitative factors to determine whether it is necessary to calculate the asset’s fair value when testing an indefinite-lived intangible asset for impairment. The amendments became effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption was permitted. The adoption of ASU 2012-02 did not have a material impact on the Company’s consolidated financial statements.

In January 2013, the FASB issued ASU 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” The amendments in this ASU clarify the scope for derivatives accounted for in accordance with Topic 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset or subject to netting arrangements. An entity is required to apply the amendments for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. The adoption of ASU 2013-01 did not have a material impact on the Company’s consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” The amendments in this ASU require an entity to present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income. In addition, the amendments require a cross-reference to other disclosures currently required for other reclassification items to be reclassified directly to net income in their entirety in the same reporting period. Public companies were required to apply these amendments for fiscal years, and interim periods within those years, beginning on or after December 15, 2012. The Company has included the required disclosures from ASU 2013-02 in the Company’s consolidated financial statements.

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SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities as of June 30, 2013 and December 31, 2012 are summarized as follows (dollars in thousands):

	Amortized		Gross Unrealized					Estimated
	Cost		Gains		(Losses)			Fair Value
June 30, 2013
U.S. government and agency securities	$	1,995	$	803	$	-		$	2,798
Obligations of states and political subdivisions		235,497		7,280		(6,061	)		236,716
Corporate and other bonds		5,671		96		(141	)		5,626
Mortgage-backed securities		331,512		4,911		(2,653	)		333,770
Other securities		3,413		15		(26	)		3,402
Total securities	$	578,088	$	13,105	$	(8,881	)	$	582,312

December 31, 2012
U.S. government and agency securities	$	2,581	$	268	$	-		$	2,849
Obligations of states and political subdivisions		214,980		15,123		(325	)		229,778
Corporate and other bonds		7,353		173		(314	)		7,212
Mortgage-backed securities		335,327		7,383		(536	)		342,174
Other securities		3,277		92		-			3,369
Total securities	$	563,518	$	23,039	$	(1,175	)	$	585,382

Due to restrictions placed upon the Company’s common stock investment in the Federal Reserve Bank of Richmond and Federal Home Loan Bank of Atlanta (“FHLB”), these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications. The FHLB requires the Union First Market Bank (the “Bank”) to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Bank’s total assets. The Federal Reserve Bank of Richmond requires the Company to maintain stock with a par value equal to 6% of its outstanding capital. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $6.8 million for both June 30, 2013 and December 31, 2012 and FHLB stock in the amount of $11.2 million and $13.9 million as of June 30, 2013 and December 31, 2012, respectively.

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The following table shows the gross unrealized losses and fair value (in thousands) of the Company’s investments with unrealized losses that are not deemed to be other-than-temporarily impaired. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position and are as follows:

	Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2013
Obligations of states and political subdivisions	$	70,559	$	(5,988	)	$	618	$	(73	)	$	71,177	$	(6,061	)
Mortgage-backed securities		147,741		(2,608	)		5,255		(45	)		152,996		(2,653	)
Corporate bonds and other securities		2,888		(26	)		1,730		(141	)		4,618		(167	)
Totals	$	221,188	$	(8,622	)	$	7,603	$	(259	)	$	228,791	$	(8,881	)

December 31, 2012
Obligations of states and political subdivisions	$	22,397	$	(283	)	$	649	$	(42	)	$	23,046	$	(325	)
Mortgage-backed securities		86,183		(536	)		-		-			86,183		(536	)
Corporate bonds and other securities		-		-			1,555		(314	)		1,555		(314	)
Totals	$	108,580	$	(819	)	$	2,204	$	(356	)	$	110,784	$	(1,175	)

As of June 30, 2013, there were $7.6 million, or 5 issues, of individual securities that had been in a continuous loss position for more than 12 months. Additionally, these securities had an unrealized loss of $259,000 and consisted of municipal obligations, mortgage-backed securities, and corporate bonds.

The following table presents the amortized cost and estimated fair value of securities as of June 30, 2013 and December 31, 2012, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	June 30, 2013				December 31, 2012
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	9,082	$	9,178	$	5,623	$	5,741
Due after one year through five years		15,322		15,926		16,413		17,016
Due after five years through ten years		73,607		76,923		69,164		73,501
Due after ten years		480,077		480,285		472,318		489,124
Total securities available for sale	$	578,088	$	582,312	$	563,518	$	585,382

Securities with an amortized cost of $192.0 million and $183.7 million as of June 30, 2013 and December 31, 2012, respectively, were pledged to secure public deposits, repurchase agreements, and for other purposes.

During each quarter the Company conducts an assessment of the securities portfolio for other-than-temporary impairment (“OTTI”) consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is other-than-temporary if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the quarter ended June 30, 2013, and in accordance with the guidance, no OTTI was recognized.

- 8 -

Based on the assessment for the quarter ended September 30, 2011 and in accordance with the guidance, the Company determined that a single issuer Trust Preferred security incurred credit-related OTTI of $400,000, which was recognized in earnings for the quarter ended September 30, 2011. There is a possibility that the Company will sell the security before recovering all unamortized costs. The significant inputs the Company considered in determining the amount of the credit loss are as follows:

The assessment of security credit rating agencies and research performed by third parties;

The continued interest payment deferral by the issuer;

The lack of improving asset quality of the issuer and worsening economic conditions; and

The security is thinly traded and trading at its historical low, below par.

OTTI recognized for the periods presented is summarized as follow (dollars in thousands):

	OTTI Losses
Cumulative credit losses on investment securities, through December 31, 2012	$	400
Cumulative credit losses on investment securities		-
Additions for credit losses not previously recognized		-
Cumulative credit losses on investment securities, through June 30, 2013	$	400

LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of unearned income, and consist of the following at June 30, 2013 and December 31, 2012 (dollars in thousands):

	June 30,		December 31,
	2013		2012
Commercial:
Commercial Construction	$	206,994	$	202,344
Commercial Real Estate - Owner Occupied		516,303		513,671
Commercial Real Estate - Non-Owner Occupied		732,596		682,760
Raw Land and Lots		182,629		205,726
Single Family Investment Real Estate		238,075		233,395
Commercial and Industrial		200,314		217,661
Other Commercial		54,603		47,551
Consumer:
Mortgage		225,848		220,567
Consumer Construction		41,160		33,969
Indirect Auto		168,885		157,518
Indirect Marine		39,010		36,586
HELOCs		280,448		288,092
Credit Card		21,878		21,968
Other Consumer		92,112		105,039
Total	$	3,000,855	$	2,966,847

- 9 -

The following table shows the aging of the Company’s loan portfolio, by class, at June 30, 2013 (dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and still Accruing		Purchased Impaired (net of credit mark)		Nonaccrual		Current		Total Loans
Commercial:
Commercial Construction	$	709	$	-	$	-	$	-	$	5,103	$	201,182	$	206,994
Commercial Real Estate - Owner Occupied		1,202		244		719		211		2,102		511,825		516,303
Commercial Real Estate - Non-Owner Occupied		3,735		184		-		-		614		728,063		732,596
Raw Land and Lots		285		-		43		2,529		4,573		175,199		182,629
Single Family Investment Real Estate		1,220		489		212		299		2,859		232,996		238,075
Commercial and Industrial		225		176		379		-		7,291		192,243		200,314
Other Commercial		16		-		-		-		471		54,116		54,603
Consumer:
Mortgage		5,182		2,593		2,091		-		1,485		214,497		225,848
Consumer Construction		208		-		-		-		228		40,724		41,160
Indirect Auto		1,482		302		327		14		-		166,760		168,885
Indirect Marine		586		-		114		-		158		38,152		39,010
HELOCs		1,560		333		1,062		818		1,665		275,010		280,448
Credit Card		134		207		183		-		-		21,354		21,878
Other Consumer		2,063		294		1,161		102		473		88,019		92,112
Total	$	18,607	$	4,822	$	6,291	$	3,973	$	27,022	$	2,940,140	$	3,000,855

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2012 (dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and still Accruing		Purchased Impaired (net of credit mark)		Nonaccrual		Current		Total Loans
Commercial:
Commercial Construction	$	-	$	-	$	-	$	-	$	5,781	$	196,563	$	202,344
Commercial Real Estate - Owner Occupied		2,105		153		1,711		247		2,206		507,249		513,671
Commercial Real Estate - Non-Owner Occupied		866		63		207		-		812		680,812		682,760
Raw Land and Lots		277		-		75		2,942		8,760		193,672		205,726
Single Family Investment Real Estate		1,819		261		756		326		3,420		226,813		233,395
Commercial and Industrial		506		270		441		79		2,036		214,329		217,661
Other Commercial		70		182		1		-		193		47,105		47,551
Consumer:
Mortgage		5,610		2,244		3,017		-		747		208,949		220,567
Consumer Construction		157		-		-		-		235		33,577		33,969
Indirect Auto		2,504		276		329		21		-		154,388		157,518
Indirect Marine		67		-		114		-		158		36,247		36,586
HELOCs		3,063		640		1,239		845		1,325		280,980		288,092
Credit Card		269		101		397		-		-		21,201		21,968
Other Consumer		1,525		487		556		105		533		101,833		105,039
Total	$	18,838	$	4,677	$	8,843	$	4,565	$	26,206	$	2,903,718	$	2,966,847

Nonaccrual loans totaled $27.0 million, $26.2 million, and $39.2 million at June 30, 2013, December 31, 2012, and June 30, 2012, respectively. There were no nonaccrual loans excluded from impaired loan disclosure in 2013 or 2012. Loans past due 90 days or more and accruing interest totaled $6.3 million, $8.8 million, and $10.8 million at June 30, 2013, December 31,2012, and June 30, 2012, respectively.

- 10 -

The following table shows purchased impaired commercial and consumer loan portfolios, by class and their delinquency status at June 30, 2013 (dollars in thousands):

	30-89 Days Past Due		Greater than 90 Days		Current		Total
Commercial:
Commercial Real Estate - Owner Occupied	$	-	$	166	$	45	$	211
Raw Land and Lots		-		-		2,529		2,529
Single Family Investment Real Estate		-		11		288		299
Consumer:
Indirect Auto		3		2		9		14
HELOCs		-		32		786		818
Other Consumer		42		-		60		102
Total	$	45	$	211	$	3,717	$	3,973

The following table shows purchased impaired commercial and consumer loan portfolios, by class and their delinquency status at December 31, 2012 (dollars in thousands):

	30-89 Days Past Due		Greater than 90 Days		Current		Total
Commercial:
Commercial Real Estate - Owner Occupied	$	-	$	193	$	54	$	247
Raw Land and Lots		-		81		2,861		2,942
Single Family Investment Real Estate		-		14		312		326
Commercial and Industrial		-		79		-		79
Consumer:
Indirect Auto		3		2		16		21
HELOCs		-		51		794		845
Other Consumer		-		-		105		105
Total	$	3	$	420	$	4,142	$	4,565

- 11 -

The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. At June 30, 2013, the Company had $133.8 million in loans considered to be impaired of which $11.4 million were collectively evaluated for impairment and $122.4 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at June 30, 2013 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Average Investment		Interest Income Recognized
Loans without a specific allowance
Commercial:
Commercial Construction	$	16,900	$	16,902	$	-	$	16,111	$	396
Commercial Real Estate - Owner Occupied		10,951		11,051		-		11,198		300
Commercial Real Estate - Non-Owner Occupied		14,111		14,195		-		14,308		350
Raw Land and Lots		36,273		36,528		-		36,556		627
Single Family Investment Real Estate		6,854		7,232		-		7,900		111
Commercial and Industrial		3,194		3,326		-		3,604		64
Other Commercial		616		616		-		616		15
Consumer:
Mortgage		1,382		1,382		-		1,383		27
HELOCs		2,018		2,137		-		2,392		-
Other Consumer		12		13		-		13		-
Total impaired loans without a specific allowance	$	92,311	$	93,382	$	-	$	94,081	$	1,890

Loans with a specific allowance
Commercial:
Commercial Construction	$	11,790	$	12,274	$	795	$	18,517	$	19
Commercial Real Estate - Owner Occupied		2,675		2,829		466		2,912		16
Commercial Real Estate - Non-Owner Occupied		430		476		88		538		-
Raw Land and Lots		2,199		2,221		347		2,282		23
Single Family Investment Real Estate		2,414		2,796		40		2,888		-
Commercial and Industrial		6,698		6,807		3,323		6,919		117
Other Commercial		418		418		1		418		3
Consumer:
Mortgage		1,283		1,291		72		1,293		-
Consumer Construction		228		262		38		268		-
Indirect Marine		158		283		28		283		-
HELOCs		1,333		1,401		717		1,655		12
Other Consumer		461		496		194		496		-
Total impaired loans with a specific allowance	$	30,087	$	31,554	$	6,109	$	38,469	$	190
Total loans individually evaluated for impairment	$	122,398	$	124,936	$	6,109	$	132,550	$	2,080

- 12 -

At December 31, 2012, the Company had $155.4 million in loans considered to be impaired of which $13.0 million were collectively evaluated for impairment and $142.4 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at December 31, 2012 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Average Investment		Interest Income Recognized
Loans without a specific allowance
Commercial:
Commercial Construction	$	28,212	$	28,695	$	-	$	28,925	$	1,237
Commercial Real Estate - Owner Occupied		13,356		13,449		-		14,362		773
Commercial Real Estate - Non-Owner Occupied		13,997		14,076		-		15,153		768
Raw Land and Lots		40,421		40,485		-		43,162		1,537
Single Family Investment Real Estate		5,348		6,046		-		6,887		242
Commercial and Industrial		1,582		1,610		-		1,926		105
Consumer:
Mortgage		857		857		-		892		43
Indirect Auto		4		4		-		8		-
Indirect Marine		158		283		-		283		3
HELOCs		1,330		1,429		-		1,481		5
Other Consumer		125		127		-		129		-
Total impaired loans without a specific allowance	$	105,390	$	107,061	$	-	$	113,208	$	4,713

Loans with a specific allowance
Commercial:
Commercial Construction	$	3,786	$	3,834	$	596	$	4,614	$	157
Commercial Real Estate - Owner Occupied		2,699		2,838		698		2,878		30
Commercial Real Estate - Non-Owner Occupied		13,791		13,828		691		13,896		761
Raw Land and Lots		9,711		9,919		2,411		10,656		145
Single Family Investment Real Estate		1,740		1,826		499		1,953		47
Commercial and Industrial		2,413		2,573		603		2,584		31
Other Commercial		134		134		28		134		-
Consumer:
Mortgage		545		549		154		550		-
Consumer Construction		235		262		106		230		-
HELOCs		1,563		1,630		942		1,840		25
Other Consumer		408		438		193		438		2
Total impaired loans with a specific allowance	$	37,025	$	37,831	$	6,921	$	39,773	$	1,198
Total loans individually evaluated for impairment	$	142,415	$	144,892	$	6,921	$	152,981	$	5,911

The Company considers troubled debt restructurings (“TDRs”) to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Included in the impaired loan disclosures above are $53.0 million and $63.5 million of loans considered to be troubled debt restructurings as of June 30, 2013 and December 31, 2012, respectively. All loans that are considered to be TDRs are specifically evaluated for impairment in accordance with the Company’s allowance for loan loss methodology.

- 13 -

The following table provides a summary, by class, of modified loans that continue to accrue interest under the terms of the restructuring agreement, which are considered to be performing, and modified loans that have been placed in nonaccrual status, which are considered to be nonperforming, as of June 30, 2013 and December 31, 2012 (dollars in thousands):

	June 30, 2013						December 31, 2012
	No. of Loans		Recorded Investment		Outstanding Commitment		No. of Loans		Recorded Investment		Outstanding Commitment
Performing
Commercial:
Commercial Construction		1	$	653	$	-		5	$	4,549	$	73
Commercial Real Estate - Owner Occupied		8		5,671		-		11		6,009		-
Commercial Real Estate - Non-Owner Occupied		8		4,850		130		10		13,103		-
Raw Land and Lots		14		20,868		-		13		22,886		-
Single Family Investment Real Estate		10		2,602		-		6		928		-
Commercial and Industrial		7		1,918		-		5		1,041		-
Other Commercial		-		-		-		1		236		-
Consumer:
Mortgage		15		3,005		-		12		2,256		-
Other Consumer		3		259		-		4		460		-
Total performing		66	$	39,826	$	130		67	$	51,468	$	73

Nonperforming
Commercial:
Commercial Construction		5	$	4,175	$	-		4		4,260		-
Commercial Real Estate - Owner Occupied		5		1,366		-		3		1,079		-
Commercial Real Estate - Non-Owner Occupied		2		430		-		2		514		-
Raw Land and Lots		3		4,041		-		2		4,032		-
Single Family Investment Real Estate		4		873		-		2		427		-
Commercial and Industrial		10		1,297		-		7		1,251		-
Consumer:
Mortgage		2		805		-		1		202		-
Indirect Marine		1		158		-		1		158		-
Other Consumer		1		65		-		1		68		-
Total nonperforming		33	$	13,210	$	-		23	$	11,991	$	-

Total performing and nonperforming		99	$	53,036	$	130		90	$	63,459	$	73

The Company considers a default of a restructured loan to occur when subsequent to the restructure, the borrower is 90 days past due or results in foreclosure and repossession of the applicable collateral. During the three and six months ended June 30, 2013, the Company identified one loan, totaling approximately $43,000, that went into default that had been restructured in the twelve-month period prior to the time of default. This loan was a raw land and lot loan which was modified to an interest only loan with a market rate of interest. During the three months ended June 30, 2012, the Company identified two restructured loans, totaling approximately $928,000, that went into default in that quarter that had been restructured during the previous twelve months. During the six months ended June 30, 2012, the Company identified three restructured loans, totaling approximately $1.4 million, that went into default that had been restructured in the twelve-month period prior to the time of default. All three loans had a term extension at a market rate.

- 14 -

The following table shows, by class and modification type, TDRs that occurred during the three and six month periods ended June 30, 2013 (dollars in thousands):

	Three months ended				Six months ended
	June 30, 2013				June 30, 2013
	No. of Loans		Recorded investment at period end		No. of Loans		Recorded investment at period end
Modified to interest only, at a market rate
Commercial:
Raw Land and Lots		1	$	43		1	$	43
Single Family Investment Real Estate		-		-		1		210
Consumer:
Mortgage		-		-		1		603
Total interest only at market rate of interest		1	$	43		3	$	856

Term modification, at a market rate
Commercial:
Commercial Construction		2	$	704		2	$	704
Commercial Real Estate - Owner Occupied		1		933		1	$	933
Commercial Real Estate - Non-Owner Occupied		1		753		1		753
Raw Land and Lots		3		386		3		386
Single Family Investment Real Estate		5		1,326		6		1,953
Commercial and Industrial		4		1,125		5		1,180
Consumer:
Mortgage		1		525		2		690
Total loan term extended at a market rate		17	$	5,752		20	$	6,599

Term modification, below market rate
Commercial:
Commercial Real Estate - Owner Occupied		-	$	-		1	$	206
Commercial and Industrial		-		-		1		9
Consumer:
Mortgage		1		155		1		155
Total loan term extended at a below market rate		1	$	155		3	$	370
Total		19	$	5,950		26	$	7,825

- 15 -

The following table shows, by class and modification type, TDRs that occurred during the three month and six month periods ended June 30, 2012 (dollars in thousands):

	Three months ended				Six months ended
	June 30, 2012				June 30, 2012
	No. of Loans		Recorded investment at period end		No. of Loans		Recorded investment at period end
Modified to interest only, at a market rate
Commercial:
Raw Land and Lots		-	$	-		3	$	327
Single Family Investment Real Estate		-		-		2		179
Consumer:
Indirect Marine		1		283		1		283
Total interest only at market rate of interest		1	$	283		6	$	789

Term modification, at a market rate
Commercial:
Commercial Real Estate - Owner Occupied		1	$	132		3	$	1,822
Raw Land and Lots		-		-		1		604
Commercial and Industrial		5		329		6		430
Consumer:
Mortgage		1		202		2		474
Other Consumer		2		85		3		287
Total loan term extended at a market rate		9	$	748		15	$	3,617

Term modification, below market rate
Commercial:
Commercial Real Estate - Owner Occupied		3	$	649		4	$	658
Total loan term extended at a below market rate		3	$	649		4	$	658

Interest rate modification, below market rate
Commercial:
Commercial Real Estate - Non-Owner Occupied		2	$	2,390		2	$	2,390
Total interest only at below market rate of interest		2	$	2,390		2	$	2,390
Total		15	$	4,070		27	$	7,454

- 16 -

The following table shows the allowance for loan loss (“ALL”) activity, by portfolio segment, balances for allowance for credit losses, and loans based on impairment methodology for the six months ended June 30, 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):

	Commercial			Consumer			Unallocated			Total
Allowance for loan losses:
Balance, beginning of the year	$	24,821		$	10,107		$	(12	)	$	34,916
Recoveries credited to allowance		944			611			-			1,555
Loans charged off		(2,970	)		(2,218	)		-			(5,188	)
Provision charged to operations		1,713			1,303			34			3,050
Balance, end of period	$	24,508		$	9,803		$	22		$	34,333

Ending Balance, ALL:
Loans individually evaluated for impairment	$	5,053		$	1,049		$	-		$	6,102
Loans collectively evaluated for impairment		19,448			8,754			22			28,224
Loans acquired with deteriorated credit quality		7			-			-			7
Total	$	24,508		$	9,803		$	22		$	34,333

Ending Balance, Loans:
Loans individually evaluated for impairment	$	112,484		$	5,941		$	-		$	118,425
Loans collectively evaluated for impairment		2,015,991			862,466			-			2,878,457
Loans acquired with deteriorated credit quality		3,039			934			-			3,973
Total	$	2,131,514		$	869,341		$	-		$	3,000,855

The following table shows the allowance for loan loss activity, portfolio segment types, balances for allowance for loan losses, and loans based on impairment methodology for the year ended December 31, 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):

	Commercial			Consumer			Unallocated			Total
Allowance for loan losses:
Balance, beginning of the year	$	27,891		$	11,498		$	81		$	39,470
Recoveries credited to allowance		589			1,122			-			1,711
Loans charged off		(12,852	)		(5,613	)		-			(18,465	)
Provision charged to operations		9,193			3,100			(93	)		12,200
Balance, end of period	$	24,821		$	10,107		$	(12	)	$	34,916

Ending Balance, ALL:
Loans individually evaluated for impairment	$	5,404		$	1,395		$	-		$	6,799
Loans collectively evaluated for impairment		19,295			8,712			(12	)		27,995
Loans acquired with deteriorated credit quality		122			-			-			122
Total	$	24,821		$	10,107		$	(12	)	$	34,916

Ending Balance, Loans:
Loans individually evaluated for impairment	$	133,596		$	4,254		$	-		$	137,850
Loans collectively evaluated for impairment		1,965,918			858,514			-			2,824,432
Loans acquired with deteriorated credit quality		3,594			971			-			4,565
Total	$	2,103,108		$	863,739		$	-		$	2,966,847

- 17 -

The following table shows the allowance for loan loss activity, portfolio segment types, balances for allowance for loan losses, and loans based on impairment methodology for the six months ended June 30, 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):

	Commercial			Consumer			Unallocated		Total
Allowance for loan losses:
Balance, beginning of the year	$	27,891		$	11,498		$	81	$	39,470
Recoveries credited to allowance		127			564			-		691
Loans charged off		(2,950	)		(2,726	)		-		(5,676	)
Provision charged to operations		5,485			988			27		6,500
Balance, end of period	$	30,553		$	10,324		$	108	$	40,985

Ending Balance, ALL:
Loans individually evaluated for impairment	$	10,429		$	850		$	-	$	11,279
Loans collectively evaluated for impairment		19,903			9,474			108		29,485
Loans acquired with deteriorated credit quality		221			-			-		221
Total	$	30,553		$	10,324		$	108	$	40,985

Ending Balance, Loans:
Loans individually evaluated for impairment	$	176,919		$	5,705		$	-	$	182,624
Loans collectively evaluated for impairment		1,852,887			845,504			-		2,698,391
Loans acquired with deteriorated credit quality		5,741			1,034			-		6,775
Total	$	2,035,547		$	852,243		$	-	$	2,887,790

The Company uses the past due status and trends as the primary credit quality indicator for the consumer loan portfolio segment while a risk rating system is utilized for commercial loans. Commercial loans are graded on a scale of 1 through 9. A general description of the characteristics of the risk grades follows:

Risk rated 1 loans have little or no risk and are generally secured by cash or cash equivalents;

Risk rated 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;

Risk rated 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;

Risk rated 4 loans are satisfactory loans with borrowers not as strong as risk rated 3 loans and may exhibit a greater degree of financial risk based on the type of business supporting the loan;

Risk rated 5 loans are watch loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay;

Risk rated 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if not addressed could lead to inadequately protecting the Company’s credit position;

Risk rated 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged; these have well defined weaknesses that jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected;

Risk rated 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for recovery, its classification as a loss is deferred until its more exact status is determined; and

Risk rated 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as bankable assets is not warranted.

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The following table shows all loans, excluding purchased impaired loans, in the commercial portfolios by class with their related risk rating as of June 30, 2013. The risk rating information has been updated through June 30, 2013 (dollars in thousands):

	1-3		4		5		6		7		8		Total
Commercial Construction	$	13,957	$	117,950	$	22,513	$	29,902	$	22,672	$	-	$	206,994
Commercial Real Estate - Owner Occupied		145,138		336,808		9,546		14,248		10,352		-		516,092
Commercial Real Estate - Non-Owner Occupied		215,600		434,530		32,575		36,889		13,002		-		732,596
Raw Land and Lots		4,492		103,770		12,554		26,985		32,299		-		180,100
Single Family Investment Real Estate		42,524		158,190		13,111		14,320		9,631		-		237,776
Commercial and Industrial		59,196		114,619		8,644		6,687		5,640		5,528		200,314
Other Commercial		19,160		21,904		9,519		2,932		1,035		53		54,603
Total	$	500,067	$	1,287,771	$	108,462	$	131,963	$	94,631	$	5,581	$	2,128,475

The following table shows all loans, excluding purchased impaired loans, in the commercial portfolios by class with their related risk rating as of December 31, 2012. The risk rating information has been updated through December 31, 2012 (dollars in thousands):

	1-3		4		5		6		7		8		Total
Commercial Construction	$	5,504	$	117,769	$	14,637	$	33,815	$	30,619	$	-	$	202,344
Commercial Real Estate - Owner Occupied		145,977		321,486		15,197		19,051		11,713		-		513,424
Commercial Real Estate - Non-Owner Occupied		161,343		417,412		48,840		34,646		20,519		-		682,760
Raw Land and Lots		3,943		114,053		13,260		29,194		42,148		186		202,784
Single Family Investment Real Estate		43,705		156,636		12,111		13,150		7,467		-		233,069
Commercial and Industrial		68,308		120,442		10,584		12,064		6,045		139		217,582
Other Commercial		14,189		18,260		10,710		3,489		844		59		47,551
Total	$	442,969	$	1,266,058	$	125,339	$	145,409	$	119,355	$	384	$	2,099,514

The following table shows only purchased impaired loans in the commercial portfolios by class with their related risk rating as of June 30, 2013. The credit quality indicator information has been updated through June 30, 2013 (dollars in thousands):

	4		5		6		7		8		Total
Commercial Real Estate - Owner Occupied	$	-	$	-	$	-	$	211	$	-	$	211
Raw Land and Lots		-		-		672		1,857		-		2,529
Single Family Investment Real Estate		288		-		-		11		-		299
Total	$	288	$	-	$	672	$	2,079	$	-	$	3,039

The following table shows only purchased impaired loans in the commercial portfolios by class with their related risk rating as of December 31, 2012. The credit quality indicator information has been updated through December 31, 2012 (dollars in thousands):

	5		6		7		8		Total
Commercial Real Estate - Owner Occupied	$	-	$	-	$	247	$	-	$	247
Raw Land and Lots		-		-		2,942		-		2,942
Single Family Investment Real Estate		312		-		14		-		326
Commercial and Industrial		-		-		79		-		79
Total	$	312	$	-	$	3,282	$	-	$	3,594

Loans acquired are originally recorded at fair value, with certain loans being identified as impaired at the date of purchase. The fair values were determined based on the credit quality of the portfolio, expected future cash flows, and timing of those expected future cash flows.

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The following shows changes in the Company’s acquired loan portfolio and accretable yield for the following periods (dollars in thousands):

	For the Six Months Ended												For the Six Months Ended
	June 30, 2013												June 30, 2012
	Purchased Impaired						Purchased Nonimpaired						Purchased Impaired						Purchased Nonimpaired
	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	3,147		$	4,565		$	5,350		$	473,283		$	5,140		$	9,897		$	9,010		$	663,510
Additions		-			-			-			-			-			-			-			-
Accretion		-			-			(1,099	)		-			(38	)		-			(2,166	)		-
Charge-offs		(54	)		(96	)		-			(920	)		(1,373	)		(212	)		-			(1,032	)
Transfers to OREO		-			(201	)		-			(207	)		-			(2,371	)		-			(2,766	)
Payments received, net		-			(295	)		-			(50,374	)		-			(539	)		-			(127,264	)
Balance at end of period	$	3,093		$	3,973		$	4,251		$	421,782		$	3,729		$	6,775		$	6,844		$	532,448

INTANGIBLE ASSETS

The Company’s intangible assets consist of core deposits, trademarks, and goodwill arising from previous acquisitions. The Company has determined that core deposit intangibles and trademarks have a finite life and amortizes them over their estimated useful life. Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 14 years, using an accelerated method. The trademark intangible acquired through previous acquisitions was amortized over three years using the straight-line method. In accordance with Accounting Standards Codification (“ASC”) 350, Intangibles-Goodwill and Other (“ASC 350”), the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. Based on the annual testing during the second quarter of each year and the absence of impairment indicators subsequent to the evaluation date, the Company has recorded no impairment charges to date for goodwill or intangible assets.

Information concerning intangible assets with a finite life is presented in the following table (dollars in thousands):

	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
June 30, 2013
Amortizable core deposit intangibles	$	46,615	$	32,794	$	13,821
Trademark intangible		1,200		1,200		-

December 31, 2012
Amortizable core deposit intangibles	$	46,615	$	30,837	$	15,778
Trademark intangible		1,200		1,167		33

June 30, 2012
Amortizable core deposit intangibles	$	46,615	$	28,437	$	18,178
Trademark intangible		1,200		967		233

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Amortization expense of core deposit intangibles for the three and six months ended June 30, 2013 and 2012 totaled $921,000 and $2.0 million and $1.2 million and $2.5 million, respectively, and for the year ended December 31, 2012 was $4.9 million. Amortization expense of the trademark intangibles for the three and six months ended June 30, 2013 and 2012 was $0 and $33,000 and $100,000 and $200,000, respectively, and for the year ended December 31, 2012 was $400,000. As of June 30, 2013, the estimated remaining amortization expense of core deposit intangibles for the remainder of 2013 and for each of the five succeeding fiscal years is as follows for the years ending (dollars in thousands):

For the remaining six months of 2013	$	1,840
For the year ending December 31, 2014		2,898
For the year ending December 31, 2015		2,463
For the year ending December 31, 2016		1,862
For the year ending December 31, 2017		1,437
For the year ending December 31, 2018		906
Thereafter		2,415
	$	13,821

BORROWINGS

Short-term Borrowings

Total short-term borrowings consist of securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. Also included in total short-term borrowings are federal funds purchased, which are secured overnight borrowings from other financial institutions, and short-term FHLB advances. Total short-term borrowings consist of the following as of June 30, 2013 and December 31, 2012 (dollars in thousands):

	June 30,			December 31,
	2013			2012
Securities sold under agreements to repurchase	$	101,418		$	54,270
Other short-term borrowings		28,000			78,000
Total short-term borrowings	$	129,418		$	132,270

Maximum month-end outstanding balance	$	129,418		$	154,116
Average outstanding balance during the period		96,750			91,993
Average interest rate during the period		0.30	%		0.31	%
Average interest rate at end of period		0.29	%		0.28	%

Other short-term borrowings:
Federal Funds purchased	$	28,000		$	38,000
FHLB	$	-		$	40,000

The Bank maintains federal funds lines with several correspondent banks; the remaining available balance was $97.0 million and $87.0 million at June 30, 2013 and December 31, 2012, respectively. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with these lines and is considered to be in compliance with these covenants. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to $807.4 million and $802.2 million at June 30, 2013 and December 31, 2012, respectively.

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Long-term Borrowings

In connection with two bank acquisitions prior to 2006, the Company issued trust preferred capital notes to fund the cash portion of those acquisitions, collectively totaling $58.5 million. The trust preferred capital notes currently qualify for Tier 1 capital of the Company for regulatory purposes.

	Principal		Investment⁽¹⁾		Spread to 3-Month LIBOR			Rate			Maturity
Trust Preferred Capital Note - Statutory Trust I	$	22,500,000	$	696,000		2.75	%		3.02	%		6/17/2034
Trust Preferred Capital Note - Statutory Trust II		36,000,000		1,114,000		1.40	%		1.67	%		6/15/2036
Total	$	58,500,000

(1) reported as 'Other Assets' within the consolidated Balance Sheets

As part of a prior acquisition, the Company assumed subordinated debt with terms of LIBOR plus 1.45% and a maturity date of April 2016. At June 30, 2013, the carrying value of the subordinated debt, net of the purchase accounting discount, was $16.1 million.

On August 23, 2012, the Company modified its fixed rate FHLB advances to floating rate advances which resulted in reducing the Company’s FHLB borrowing costs. In connection with this modification, the Company incurred a prepayment penalty of $19.6 million on the original advances, which is included as a component of long-term borrowings in the Company’s consolidated balance sheet. In accordance with ASC 470-50, Modifications and Extinguishments, the Company will amortize this prepayment penalty over the term of the modified advances using the effective rate method. The amortization expense is included as a component of interest expense on long-term borrowings in the Company’s consolidated income statement. Amortization expense for the three and six months ended June 30, 2013 was $433,000 and $859,000, respectively, and $0 for both three and six months ended June 30, 2012.

As of June 30, 2013, the advances from the FHLB consist of the following (dollars in thousands):

Long Term Type	Spread to 3-Month LIBOR			Interest Rate			Maturity Date	Conversion Date	Option Frequency	Advance Amount
Adjustable Rate Credit		0.44	%		0.71	%	8/23/2022	n/a	n/a	$	55,000
Adjustable Rate Credit		0.45	%		0.73	%	11/23/2022	n/a	n/a		65,000
Adjustable Rate Credit		0.45	%		0.73	%	11/23/2022	n/a	n/a		10,000
Adjustable Rate Credit		0.45	%		0.73	%	11/23/2022	n/a	n/a		10,000
										$	140,000

As of December 31, 2012, the advances from the FHLB consisted of the following (dollars in thousands):

Long Term Type	Spread to 3-Month LIBOR			Interest Rate			Maturity Date	Conversion Date	Option Frequency	Advance Amount
Adjustable Rate Credit		0.44	%		0.75	%	8/23/2022	n/a	n/a	$	55,000
Adjustable Rate Credit		0.45	%		0.76	%	11/23/2022	n/a	n/a		65,000
Adjustable Rate Credit		0.45	%		0.76	%	11/23/2022	n/a	n/a		10,000
Adjustable Rate Credit		0.45	%		0.76	%	11/23/2022	n/a	n/a		10,000
										$	140,000

The carrying value of the loans and securities pledged as collateral for FHLB advances totaled $1.1 billion and $1.0 billion as of June 30, 2013 and December 31, 2012, respectively.

- 22 -

As of June 30, 2013, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):

	Subordinated Debt		FHLB Advances		Prepayment Penalty			Total Long-term Borrowings
Remaining six months in 2013	$	-	$	-	$	(885	)	$	(885	)
2014		-		-		(1,787	)		(1,787	)
2015		-		-		(1,831	)		(1,831	)
2016		16,114		-		(1,882	)		14,232
2017		-		-		(1,923	)		(1,923	)
2018		-		-		(1,969	)		(1,969	)
Thereafter		-		140,000		(7,918	)		132,082
Total long-term borrowings	$	16,114	$	140,000	$	(18,195	)	$	137,919

COMMITMENTS AND CONTINGENCIES

Litigation Matters

In the ordinary course of its operations, the Company and its subsidiaries are parties to various legal proceedings. Based on the information presently available, and after consultation with legal counsel, management believes that the ultimate outcome in such proceedings, in the aggregate, will not have a material adverse effect on the business or the financial condition or results of operations of the Company.

Litigation Relating to the StellarOne Acquisition

In a joint press release issued on June 10, 2013, the Company announced the signing of a definitive merger agreement for the acquisition of StellarOne Corporation (“StellarOne”), creating the largest community banking institution in Virginia. The Company expects to close the merger on or around January 1, 2014, subject to customary closing conditions, including regulary and shareholder approvals. On June 14, 2013, Jaclyn Crescente, individually and on behalf of all other StellarOne shareholders, filed a class action complaint against StellarOne, its current directors, StellarOne Bank and the Company, in the U.S. District Court for the Western District of Virginia, Charlottesville Division (Case No. 3:13-cv-00021-NKM). The complaint alleges that the StellarOne directors breached their fiduciary duties by approving the merger with the Company, and that the Company aided and abetted in such breaches of duty. The complaint seeks, among other things, an order enjoining the defendants from proceeding with or consummating the merger, as well as other equitable relief and/or money damages in the event that the transaction is completed. StellarOne and the Company believe that the claims are without merit.

Financial Instruments with off-balance sheet risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contractual amounts of these instruments reflect the extent of the Company’s involvement in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk.

Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Letters of credit written are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers.

- 23 -

Union Mortgage Group, Inc., a wholly owned subsidiary of Union First Market Bank, uses rate lock commitments during the origination process and for loans held for sale. These commitments to sell loans are designed to mitigate the mortgage company’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale. At June 30, 2013, the Company held approximately $3.0 million of the loans available for sale in which the related rate lock commitment had expired; accordingly, a valuation adjustment of $186,000 was recorded to properly reflect the lower cost or market of these loans. This valuation adjustment was recorded within the mortgage segment; there was no valuation adjustment recorded in the prior year.

The following table presents the balances of commitments and contingencies (dollars in thousands):

	June 30,		December 31,
	2013		2012
Commitments with off-balance sheet risk:
Commitments to extend credit⁽¹⁾	$	931,133	$	844,766
Standby letters of credit		54,396		45,536
Mortgage loan rate lock commitments		119,244		133,326
Total commitments with off-balance sheet risk	$	1,104,773	$	1,023,628
Commitments with balance sheet risk:
Loans held for sale	$	109,395	$	167,698
Total other commitments	$	1,214,168	$	1,191,326

(1) Includes unfunded overdraft protection.

The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the periods ended June 30, 2013 and December 31, 2012, the aggregate amount of daily average required reserves was approximately $15.0 million and $14.2 million, respectively.

The Company has approximately $8.2 million in deposits in other financial institutions of which $3.4 million serves as collateral for the cash flow hedge further discussed in Note 7 “Derivatives.” The Dodd-Frank Act, which was signed into law on July 21, 2010, provided unlimited deposit insurance coverage for transaction accounts expired on December 31, 2012. As of January 1, 2013, the deposit insurance coverage for transaction accounts is insured up to at least $250,000. The Company had approximately $3.9 million in deposits in other financial institutions that were uninsured at June 30, 2013. On an annual basis, the Company’s management evaluates the loss risk of its uninsured deposits in financial counter-parties.

For asset/liability management purposes, the Company uses interest rate swap agreements to hedge various exposures or to modify the interest rate characteristics of various balance sheet accounts. See Note 7 “Derivatives” in these “Notes to the Consolidated Financial Statements” for additional information.

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DERIVATIVES

During the second quarter of 2010, the Company entered into an interest rate swap agreement (the “trust swap”) as part of the management of interest rate risk. The Company designated the trust swap as a cash flow hedge intended to protect against the variability of cash flows associated with the aforementioned Statutory Trust II preferred capital securities. The trust swap hedges the interest rate risk, wherein the Company receives interest of LIBOR from a counterparty and pays a fixed rate of 3.51% to the same counterparty calculated on a notional amount of $36.0 million. The term of the trust swap is six years with a fixed rate that started June 15, 2011. The trust swap was entered into with a counterparty that met the Company’s credit standards and the agreement contains collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with ASC 815, Derivatives and Hedging, the trust swap is designated as a cash flow hedge, with the effective portion of the derivative’s unrealized gain or loss recorded as a component of other comprehensive income. The ineffective portion of the unrealized gain or loss, if any, would be recorded in other expense. The Company has assessed the effectiveness of the hedging relationship by comparing the changes in cash flows on the designated hedged item. There was no hedge ineffectiveness for this trust swap. At June 30, 2013, the fair value of the trust swap agreement was an unrealized loss of $3.4 million, the amount the Company would have expected to pay if the contract was terminated. The below liability is recorded as a component of other comprehensive income recorded in the Company’s Consolidated Statements of Comprehensive Income.

Shown below is a summary of the derivative designated as a cash flow hedge at June 30, 2013 and December 31, 2012 (dollars in thousands):

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of June 30, 2013
Pay fixed - receive floating interest rate swaps		1	$	36,000	$	-	$	3,354		0.27	%		3.51	%		3.96

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of December 31, 2012
Pay fixed - receive floating interest rate swaps		1	$	36,000	$	-	$	4,489		0.31	%		3.51	%		4.46

During the normal course of business, the Company enters into interest rate swap loan relationships (“loan swaps”) with borrowers to meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with counterparties in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values reported in other assets and other liabilities. Shown below is a summary regarding loan swap derivative activities at June 30, 2013 and December 31, 2012 (dollars in thousands):

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of June 30, 2013
Receive fixed - pay floating interest rate swaps		1	$	730	$	21	$	-		4.58	%		2.94	%		9.09
Pay fixed - receive floating interest rate swaps		1	$	730	$	-	$	21		2.94	%		4.58	%		9.09

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of December 31, 2012
Receive fixed - pay floating interest rate swaps		1	$	744	$	18	$	-		4.58	%		2.96	%		9.59
Pay fixed - receive floating interest rate swaps		1	$	744	$	-	$	18		2.96	%		4.58	%		9.59

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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The change in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2013 are summarized as follows net of tax (dollars in thousands):

	Unrealized Gains (losses) on Securities			Change in FV of Cash Flow Hedge			Total
Balance - March 31, 2013	$	12,473		$	(4,203	)	$	8,270
Other comprehensive income (loss)		(9,720	)		849			(8,871	)
Reclassification adjustment for losses included in net income		(34	)		-			(34	)
Net current period other comprehensive income (loss)		(9,754	)		849			(8,905	)
Balance - June 30, 2013	$	2,719		$	(3,354	)	$	(635	)

	Unrealized Gains (losses) on Securities			Change in FV of Cash Flow Hedge			Total
Balance - December 31, 2012	$	14,573		$	(4,489	)	$	10,084
Other comprehensive income (loss)		(11,827	)		1,135			(10,692	)
Reclassification adjustment for losses included in net income		(27	)		-			(27	)
Net current period other comprehensive income (loss)		(11,854	)		1,135			(10,719	)
Balance - June 30, 2013	$	2,719		$	(3,354	)	$	(635	)

The change in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2012 are summarized as follows net of tax (dollars in thousands):

	Unrealized Gains (losses) on Securities			Change in FV of Cash Flow Hedge			Total
Balance - March 31, 2012	$	14,607		$	(4,096	)	$	10,511
Other comprehensive income (loss)		992			(487	)		505
Reclassification adjustment for losses included in net income		(6	)		-			(6	)
Net current period other comprehensive income (loss)		986			(487	)		499
Balance - June 30, 2012	$	15,593		$	(4,583	)	$	11,010

	Unrealized Gains (losses) on Securities			Change in FV of Cash Flow Hedge			Total
Balance - December 31, 2011	$	13,943		$	(4,293	)	$	9,650
Other comprehensive income (loss)		1,653			(290	)		1,363
Reclassification adjustment for losses included in net income		(3	)		-			(3	)
Net current period other comprehensive income (loss)		1,650			(290	)		1,360
Balance - June 30, 2012	$	15,593		$	(4,583	)	$	11,010

Reclassifications of unrealized gains (losses) on available-for-sale (“AFS”) securities are reported in the income statement as "Gains on securities transactions, net" with the corresponding income tax effect being reflected as a component of income tax expense. The Company reported gains of $53,000 and $42,000 for the three and six months ended June 30, 3013, respectively, and gains of $10,000 and $5,000 for the three and six months ended June 30, 2012, respectively, related to gains/losses on the sale of securities. The tax effect of these transactions during the three and six months ended for June 30, 2013 and 2012 was $19,000 and $15,000 and $4,000 and $2,000, respectively, which was included as a component of income tax expense.

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FAIR VALUE MEASUREMENTS

The Company follows ASC 820, Fair Value Measurements and Disclosures, (“ASC 820”) to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This codification clarifies that 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 willing market participants.

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy under ASC 820 based on these two types of inputs are as follows:

	Level 1		Valuation is based on quoted prices in active markets for identical assets and liabilities.

	Level 2		Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the markets.

	Level 3		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market. These unobservable inputs reflect the Company’s assumptions about what market participants would use and information that is reasonably available under the circumstances without undue cost and effort.

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements.

Interest rate swap agreement used for interest rate risk management

Interest rate swaps are recorded at fair value on a recurring basis. The Company utilizes an interest rate swap agreement as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third party vendor to provide valuations for interest rate swaps using standard swap valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using Bloomberg Valuation Service’s derivative pricing functions. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data (Level 2). If the inputs used to provide the evaluation for certain securities are unobservable and/or there is little, if any, market activity then the security would fall to the lowest level of the hierarchy (Level 3).

The Company’s investment portfolio is primarily valued using fair value measurements that are considered to be Level 2. The Company has contracted with a third party portfolio accounting service vendor for valuation of its securities portfolio. The vendor’s primary source for security valuation is Interactive Data Corporation (“IDC”), which evaluates securities based on market data. IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

- 27 -

The vendor utilizes proprietary valuation matrices for valuing all municipals securities. The initial curves for determining the price, movement, and yield relationships within the municipal matrices are derived from industry benchmark curves or sourced from a municipal trading desk. The securities are further broken down according to issuer, credit support, state of issuance, and rating to incorporate additional spreads to the industry benchmark curves.

The Company uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during our validation as of June 30, 2013 and December 31, 2012.

The carrying value of restricted Federal Reserve Bank of Richmond and FHLB stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2013 and December 31, 2012 (dollars in thousands):

	Fair Value Measurements at June 30, 2013 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Interest rate swap - loans	$	-	$	21	$	-	$	21
Securities available for sale:
U.S. government and agency securities		-		2,798		-		2,798
Obligations of states and political subdivisions		-		236,716		-		236,716
Corporate and other bonds		-		5,626		-		5,626
Mortgage-backed securities		-		333,770		-		333,770
Other securities		-		3,402		-		3,402

LIABILITIES
Interest rate swap - loans	$	-	$	21	$	-	$	21
Cash flow hedge - trust - preferred		-		3,354		-		3,354

	Fair Value Measurements at December 31, 2012 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Interest rate swap - loans	$	-	$	18	$	-	$	18
Securities available for sale:
U.S. government and agency securities		-		2,849		-		2,849
Obligations of states and political subdivisions		-		229,778		-		229,778
Corporate and other bonds		-		7,212		-		7,212
Mortgage-backed securities		-		342,174		-		342,174
Other securities		-		3,369		-		3,369

LIABILITIES
Interest rate swap - loans	$	-	$	18	$	-	$	18
Cash flow hedge - trust preferred		-		4,489		-		4,489

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Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements.

Loans held for sale

Loans held for sale are carried at the lower of cost or market value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. Nonrecurring fair value adjustments of $186,000 and $0 were recorded on loans held for sale during the six months ended June 30, 2013 and the year ended December 31, 2012, respectively. Gains and losses on the sale of loans are recorded within income from the mortgage segment on the Consolidated Statements of Income.

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. When evaluating the fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3). The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other real estate owned (“OREO”)

Fair values of OREO are carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation. Total valuation expenses related to OREO properties for both the six months ended June 30, 2013 and June 30, 2012 were $0 and for the year ended December 31, 2012 were $301,000.

- 29 -

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis at June 30, 2013 and December 31, 2012 (dollars in thousands):

	Fair Value Measurements at June 30, 2013 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Loans held for sale	$	-	$	109,395	$	-	$	109,395
Impaired loans		-		-		23,978		23,978
Other real estate owned		-		-		35,153		35,153

	Fair Value Measurements at December 31, 2012 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Loans held for sale	$	-	$	167,698	$	-	$	167,698
Impaired loans		-		-		30,104		30,104
Other real estate owned		-		-		32,834		32,834

The following table displays quantitative information about Level 3 Fair Value Measurements for June 30, 2013 (dollars in thousands):

	Fair Value Measurements at June 30, 2013
	Fair Value		Valuation Technique(s)	Unobservable Inputs	Weighted Average
ASSETS
Commercial Construction	$	10,995	Market comparables	Discount applied to market comparables ⁽¹⁾		12	%
Commercial Real Estate - Owner Occupied		2,209	Market comparables	Discount applied to market comparables ⁽¹⁾		14	%
Commercial Real Estate - Non-Owner Occupied		342	Market comparables	Discount applied to market comparables ⁽¹⁾		0	%
Raw Land and Lots		1,852	Market comparables	Discount applied to market comparables ⁽¹⁾		6	%
Single Family Investment Real Estate		2,374	Market comparables	Discount applied to market comparables ⁽¹⁾		25	%
Commercial and Industrial		3,375	Market comparables	Discount applied to market comparables ⁽¹⁾		43	%
Other ⁽²⁾		2,831	Market comparables	Discount applied to market comparables ⁽¹⁾		19	%
Total Impaired Loans		23,978

Other real estate owned		35,153	Market comparables	Discount applied to market comparables ⁽¹⁾		31	%
Total	$	59,131

⁽¹⁾ A discount percentage (in addition to expected selling costs) is applied based on age of independent appraisals, current market conditions, and experience within the local market.

⁽²⁾ The "Other" category of the impaired loans section from the table above consists of Other Commercial, Mortgage, Consumer Construction, HELOCs, and Other Consumer.

- 30 -

The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2012 (dollars in thousands):

	Fair Value Measurements at December 31, 2012
	Fair Value		Valuation Technique(s)	Unobservable Inputs	Weighted Average
ASSETS
Commercial Construction	$	3,190	Market comparables	Discount applied to market comparables ⁽¹⁾		6	%
Commercial Real Estate - Owner Occupied		2,001	Market comparables	Discount applied to market comparables ⁽¹⁾		13	%
Commercial Real Estate - Non-Owner Occupied		13,100	Market comparables	Discount applied to market comparables ⁽¹⁾		9	%
Raw Land and Lots		7,300	Market comparables	Discount applied to market comparables ⁽¹⁾		6	%
Single Family Investment Real Estate		1,241	Market comparables	Discount applied to market comparables ⁽¹⁾		6	%
Commercial and Industrial		1,810	Market comparables	Discount applied to market comparables ⁽¹⁾		23	%
Other ⁽²⁾		1,462	Market comparables	Discount applied to market comparables ⁽¹⁾		27	%
Total Impaired Loans		30,104

Other real estate owned		32,834	Market comparables	Discount applied to market comparables ⁽¹⁾		33	%
Total	$	62,938

⁽¹⁾ A discount percentage (in addition to expected selling costs) is applied based on age of independent appraisals, current market conditions, and experience within the local market.

⁽²⁾ The "Other" category of the impaired loans section from the table above consists of Other Commercial, Mortgage, Consumer Construction, HELOCs, and Other Consumer.

ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments for interim periods and excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

Cash and cash equivalents

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Loans

The fair value of performing loans is estimated by discounting expected future cash flows using a yield curve that is constructed by adding a loan spread to a market yield curve. Loan spreads are based on spreads currently observed in the market for loans of similar type and structure. Fair value for impaired loans and their respective level within the fair value hierarchy, are described in the previous disclosure related to fair value measurements of assets that are measured on a nonrecurring basis.

Deposits

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposits is estimated by discounting the future cash flows using the rates currently offered for deposits of similar remaining maturities.

Borrowings

The carrying value of the Company’s repurchase agreements is a reasonable estimate of fair value. Other borrowings are discounted using the current yield curve for the same type of borrowing. For borrowings with embedded optionality, a third party source is used to value the instrument. The Company validates all third party valuations for borrowings with optionality using Bloomberg’s derivative pricing functions.

Accrued interest

The carrying amounts of accrued interest approximate fair value.

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Commitments to extend credit and standby letters of credit

The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. 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. At June 30, 2013 and December 31, 2012, the fair value of loan commitments and standby letters of credit was immaterial.

The carrying values and estimated fair values of the Company’s financial instruments as of June 30, 2013 and December 31, 2012 are as follows (dollars in thousands):

			Fair Value Measurements at June 30, 2013 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Balance
ASSETS
Cash and cash equivalents	$	71,547	$	71,547	$	-	$	-	$	71,547
Securities available for sale		582,312		-		582,312		-		582,312
Restricted stock		17,956		-		17,956		-		17,956
Loans held for sale		109,395		-		109,395		-		109,395
Net loans		2,966,522		-		-		2,998,353		2,998,353
Interest rate swap - loans		21		-		21		-		21
Accrued interest receivable		17,013		-		17,013		-		17,013

LIABILITIES
Deposits	$	3,265,963	$	-	$	3,271,083	$	-	$	3,271,083
Borrowings		327,647		-		309,859		-		309,859
Accrued interest payable		1,063		-		1,063		-		1,063
Cash flow hedge - trust preferred		3,354		-		3,354		-		3,354
Interest rate swap - loans		21		-		21		-		21

- 32 -

			Fair Value Measurements at December 31, 2012 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Balance
ASSETS
Cash and cash equivalents	$	82,902	$	82,902	$	-	$	-	$	82,902
Securities available for sale		585,382		-		585,382		-		585,382
Restricted stock		20,687		-		20,687		-		20,687
Loans held for sale		167,698		-		167,698		-		167,698
Net loans		2,931,931		-		-		2,956,339		2,956,339
Interest rate swap - loans		18		-		18		-		18
Accrued interest receivable		19,663		-		19,663		-		19,663

LIABILITIES
Deposits	$	3,297,767	$	-	$	3,309,149	$	-	$	3,309,149
Borrowings		329,395		-		309,019		-		309,019
Accrued interest payable		1,414		-		1,414		-		1,414
Cash flow hedge – trust preferred		4,489		-		4,489		-		4,489
Interest rate swap - loans		18		-		18		-		18

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

10.

STOCK-BASED COMPENSATION

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) and the 2003 Stock Incentive Plan (the “2003 Plan”) provide for the granting of incentive stock options, non-statutory stock options, and nonvested stock awards to key employees of the Company and its subsidiaries. The 2011 and 2003 Plans authorize shares, which may be awarded to employees of the Company and its subsidiaries in the form of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986 (“incentive stock options”), non-statutory stock options, and nonvested stock. The 2003 Plan expired in June 2013. Under both plans, the option price cannot be less than the fair market value of the stock on the grant date. The Company issues new shares to satisfy stock-based awards. A stock option’s maximum term is ten years from the date of grant and vests in equal annual installments of 20% over a five year vesting schedule. The following table summarizes the shares available in each plan as of June 30, 2013:

	2003 Plan ⁽¹⁾			2011 Plan
Beginning Authorization		525,000			1,000,000
Granted		(626,425	)		(372,999	)
Expired, forfeited, or cancelled		101,425			26,857
Remaining available for grant		0			653,858

⁽¹⁾ The 2003 Plan expired in June 2013.

- 33 -

For the three month and six month periods ended June 30, 2013 and 2012, respectively, the Company recognized stock-based compensation expense of approximately $7,500 and $376,000 ($34,000 and $289,000, net of tax), respectively, and $325,000 and $615,000 ($269,000 and $465,000, net of tax), respectively. These expenses were less than $0.01 per common share for the quarter ended June 30, 2013, and approximately $0.01 for the six months ended June 30, 2013. Stock based compensation expense was $0.01 and $0.02 for the three and six month periods, respectively, ended June 30, 2012.

Stock Options

The following table summarizes the stock option activity for the six months ended June 30, 2013:

	Number of Stock Options			Weighted Average Exercise Price
Options outstanding, December 31, 2012		500,578		$	16.92
Exercised		(7,423	)		14.04
Expired		(44,888	)		18.80
Options outstanding, June 30, 2013		448,267			16.78
Options exercisable, June 30, 2013		237,222			19.25

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table. No options have been granted since February of 2012:

	Six Months Ended June 30,
	2013		2012
Dividend yield ⁽¹⁾		-		2.47	%
Expected life in years ⁽²⁾		-		7.0
Expected volatility ⁽³⁾		-		41.53	%
Risk-free interest rate ⁽⁴⁾		-		1.24	%

Weighted average fair value per option granted	$	-	$	4.76

(1) Calculated as the ratio of historical dividends paid per share of common stock to the stock price on the date of grant.

(2) Based on the average of the contractual life and vesting schedule for the respective option.

(3) Based on the monthly historical volatility of the Company’s stock price over the expected life of the options.

(4) Based upon the U.S. Treasury bill yield curve, for periods within the contractual life of the option, in effect at the time of grant.

The following table summarizes information concerning stock options issued to the Company’s employees that are vested or are expected to vest and stock options exercisable as of June 30, 2013:

	Stock Options Vested or Expected to Vest		Exercisable
Stock options		435,371		237,222
Weighted average remaining contractual life in years		6.30		4.91
Weighted average exercise price on shares above water	$	14.36	$