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 March 31, 2014

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

Commission File Number: 0-20293

UNION 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 May 5, 2014 was 46,272,121.

UNION BANKSHARES CORPORATION

FORM 10-Q

INDEX

ITEM		PAGE

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of March 31, 2014, December 31, 2013, and March 31, 2013	2

	Consolidated Statements of Income for the three months ended March 31, 2014 and 2013	3

	Consolidated Statements of Comprehensive Income for the three months ended March 31, 2014 and 2013	4

	Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2014 and 2013	5

	Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	6

	Notes to Consolidated Financial Statements	7

	Report of Independent Registered Public Accounting Firm	43

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65

Item 4.	Controls and Procedures	67

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	67

Item 1A.	Risk Factors	68

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	68

Item 6.	Exhibits	69

	Signatures	70

Glossary of Acronyms

ALCO	–	Asset Liability Committee
ALL	–	Allowance for loan losses
ASC	–	Accounting Standards Codification
ASU	–	Accounting Standards Update
ATM	–	Automated teller machine
the Bank	–	Union First Market Bank
the Subsidiary Banks	–	Union First Market Bank and StellarOne Bank
the Company	–	Union Bankshares Corporation
Dodd-Frank Act	–	Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS	–	Earnings per share
Exchange Act	–	Securities Exchange Act of 1934
FASB	–	Financial Accounting Standards Board
Federal Reserve Bank	–	Federal Reserve Bank of Richmond
FDIC	–	Federal Deposit Insurance Corporation
FHLB	–	Federal Home Loan Bank of Atlanta
FNB	–	F.N.B. Corporation
FRB or Federal Reserve	–	Board of Governors of the Federal Reserve System
GAAP	–	Accounting principles generally accepted in the United States
HELOC	–	Home equity line of credit
LIBOR	–	London Interbank Offered Rate
NPA	–	Nonperforming assets
OREO	–	Other real estate owned
OTTI	–	Other than temporary impairment
PCI	–	Purchased Credit Impaired
SEC	–	Securities and Exchange Commission
StellarOne	–	StellarOne Corporation
TDR	–	Troubled debt restructuring
UMG	–	Union Mortgage Group, Inc.
VFG	–	Virginia Financial Group, Inc.

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	March 31,		December 31,			March 31,
	2014		2013			2013
	(Unaudited)		(Audited)			(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	117,189	$	66,090		$	52,017
Interest-bearing deposits in other banks		24,541		6,781			24,715
Money market investments		1		1			1
Federal funds sold		519		151			160
Total cash and cash equivalents		142,250		73,023			76,893

Securities available for sale, at fair value		1,078,699		677,348			583,217
Restricted stock, at cost		42,441		26,036			17,956

Loans held for sale, net		48,753		53,185			127,106

Loans, net of unearned income		5,274,198		3,039,368			2,973,547
Less allowance for loan losses		30,907		30,135			34,415
Net loans		5,243,291		3,009,233			2,939,132

Bank premises and equipment, net		151,840		82,815			83,366
Other real estate owned, net of valuation allowance		35,487		34,116			35,878
Core deposit intangibles, net		38,935		11,980			14,742
Goodwill		296,876		59,400			59,400
Other assets		216,065		149,435			113,445
Total assets	$	7,294,637	$	4,176,571		$	4,051,135

LIABILITIES
Noninterest-bearing demand deposits		1,018,663		691,674			665,992
Interest-bearing deposits:
NOW accounts		1,256,910		498,068			459,117
Money market accounts		1,414,918		940,215			945,273
Savings accounts		559,299		235,034			225,543
Time deposits of $100,000 and over		608,753		427,597			507,972
Other time deposits		827,588		444,254			507,852
Total interest-bearing deposits		4,667,468		2,545,168			2,645,757
Total deposits		5,686,131		3,236,842			3,311,749

Securities sold under agreements to repurchase		57,681		52,455			72,047
Other short-term borrowings		216,600		211,500			-
Long-term borrowings		298,417		199,359			197,674
Other liabilities		53,295		38,176			38,892
Total liabilities		6,312,124		3,738,332			3,620,362

Commitments and contingencies

STOCKHOLDERS' EQUITY
Common stock, $1.33 par value, shares authorized 100,000,000, 36,000,000, and 36,000,000, respectively; issued and outstanding, 46,677,821 shares, 24,976,434 shares, and 24,859,729 shares, respectively.		61,780		33,020			32,869
Surplus		678,143		170,770			168,304
Retained earnings		237,864		236,639			221,330
Accumulated other comprehensive income (loss)		4,726		(2,190	)		8,270
Total stockholders' equity		982,513		438,239			430,773

Total liabilities and stockholders' equity	$	7,294,637	$	4,176,571		$	4,051,135

See accompanying notes to consolidated financial statements.

- 2 -

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)

	Three Months Ended
	March 31,			March 31,
	2014			2013
	(Unaudited)			(Unaudited)
Interest and dividend income:
Interest and fees on loans	$	61,269		$	39,224
Interest on deposits in other banks		12			5
Interest and dividends on securities:
Taxable		3,648			2,069
Nontaxable		3,279			1,987
Total interest and dividend income		68,208			43,285

Interest expense:
Interest on deposits		2,256			3,962
Interest on federal funds purchased		24			15
Interest on short-term borrowings		119			54
Interest on long-term borrowings		2,051			1,501
Total interest expense		4,450			5,532

Net interest income		63,758			37,753
Provision for loan losses		-			2,050
Net interest income after provision for loan losses		63,758			35,703

Noninterest income:
Service charges on deposit accounts		4,298			2,272
Other service charges, commissions and fees		4,671			2,807
Gains (losses) on securities transactions, net		29			(11	)
Gains on sales of mortgage loans, net of commissions		2,297			3,852
Losses on sales of bank premises		(233	)		(296	)
Other operating income		3,138			1,211
Total noninterest income		14,200			9,835

Noninterest expenses:
Salaries and benefits		29,626			17,966
Occupancy expenses		5,180			2,855
Furniture and equipment expenses		2,868			1,845
Communications expense		1,098			696
Technology and data processing		3,074			1,744
Professional services		1,055			725
Marketing and advertising expense		1,065			1,052
FDIC assessment premiums and other insurance		1,393			790
OREO and credit-related expenses		1,451			574
Amortization of intangible assets		2,616			1,069
Acquisition and conversion costs		13,168			-
Other expenses		5,187			4,185
Total noninterest expenses		67,781			33,501

Income before income taxes		10,177			12,037
Income tax expense		2,362			3,054
Net income	$	7,815		$	8,983
Earnings per common share, basic	$	0.17		$	0.36
Earnings per common share, diluted	$	0.17		$	0.36

See accompanying notes to consolidated financial statements.

- 3 -

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	Three Months Ended
	March 31,
	2014			2013
	(Unaudited)			(Unaudited)
Net income	$	7,815		$	8,983
Other comprehensive income (loss):
Cash flow hedges:
Change in fair value of cash flow hedges		575			98
Reclassification adjustment for losses included in net income (net of tax, $25 and $101 for three months ended March 31, 2014 and 2013)		47			188
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (net of tax, $3,399 and $1,135 for three months ended March 31, 2014 and 2013)		6,313			(2,107	)
Reclassification adjustment for (gains) losses included in net income (net of tax, $10 and $4 for three months ended March 31, 2014 and 2013)		(19	)		7
Other comprehensive income (loss)		6,916			(1,814	)
Comprehensive income	$	14,731		$	7,169

See accompanying notes to consolidated financial statements.

- 4 -

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

THREE MONTHS ENDED MARCH 31, 2014 AND 2013

(Dollars in thousands, except share amounts)

	Common Stock			Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Balance - December 31, 2012	$	33,510		$	176,635		$	215,634		$	10,084		$	435,863
Net income - 2013								8,983						8,983
Other comprehensive loss (net of tax, $1,131)											(1,814	)		(1,814	)
Dividends on Common Stock ($.13 per share)								(3,064	)					(3,064	)
Stock purchased under stock repurchase plan (500,000 shares)		(664	)		(8,835	)								(9,499	)
Issuance of common stock under Dividend Reinvestment Plan (13,068 shares)		17			206			(223	)					-
Vesting of restricted stock under Equity Compensation Plans (5,299 shares)		7			(7	)								-
Net settle for taxes on Restricted Stock Awards (789 shares)		(1	)		(13	)								(14	)
Stock-based compensation expense					318									318
Balance - March 31, 2013	$	32,869		$	168,304		$	221,330		$	8,270		$	430,773

Balance - December 31, 2013	$	33,020		$	170,770		$	236,639		$	(2,190	)	$	438,239
Net income - 2014								7,815						7,815
Other comprehensive income (net of tax, $3,414)											6,916			6,916
Issuance of Common Stock in regard to acquisition (22,147,874 shares)		29,457			520,066									549,523
Dividends on Common Stock ($.14 per share)								(6,332	)					(6,332	)
Stock purchased under stock repurchase plan (510,515 shares)		(679	)		(12,286	)								(12,965	)
Issuance of common stock under Dividend Reinvestment Plan (10,843 shares)		14			244			(258	)					-
Issuance of common stock under Equity Compensation Plans (24,465 shares)		33			425									458
Vesting of restricted stock under Equity Compensation Plans (13,310 shares)		18			(18	)								-
Net settle for taxes on Restricted Stock Awards (61,732 shares)		(83	)		(1,432	)								(1,515	)
Stock-based compensation expense					374									374
Balance - March 31, 2014	$	61,780		$	678,143		$	237,864		$	4,726		$	982,513

See accompanying notes to consolidated financial statements.

- 5 -

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2014 AND 2013

(Dollars in thousands)

	2014			2013
	(Unaudited)			(Unaudited)
Operating activities:
Net income	$	7,815		$	8,983
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:
Depreciation of bank premises and equipment		2,670			1,546
Writedown of OREO		256			-
Amortization, net		6,082			1,476
Accretion and amortization related to acquisition, net		(2,450	)		-
Provision for loan losses		-			2,050
(Gains) losses on the sale of investment securities		(29	)		11
Decrease in loans held for sale, net		15,809			40,592
Gains on sales of other real estate owned, net		(23	)		(284	)
Losses on bank premises, net		233			296
Stock-based compensation expenses		374			318
Net decrease in other assets		23,900			1,281
Net (decrease) increase in other liabilities		(3,571	)		6,338
Net cash and cash equivalents provided by operating activities		51,066			62,607
Investing activities:
Purchases of securities available for sale		(241,144	)		(54,999	)
Proceeds from sales of securities available for sale		259,077			15,555
Proceeds from maturities, calls and paydowns of securities available for sale		31,851			40,907
Net decrease (increase) in loans		3,292			(12,080	)
Net increase in bank premises and equipment		(2,221	)		(577	)
Proceeds from sales of other real estate owned		3,800			877
Improvements to other real estate owned		-			(30	)
Cash acquired in bank acquisitions		49,989			-
Net cash and cash equivalents provided by (used in) investing activities		104,644			(10,347	)
Financing activities:
Net (decrease) increase in noninterest-bearing deposits		(85,051	)		20,091
Net increase in NOW accounts		87,634			4,967
Net increase (decrease) in money market accounts		30,290			(11,857	)
Net increase in savings accounts		17,816			17,697
Net decrease in time deposits of $100,000 and over		(39,877	)		(658	)
Net decrease in other time deposits		(38,476	)		(16,258	)
Net decrease in short-term borrowings		(38,901	)		(60,223	)
Net increase in long-term borrowings ⁽¹⁾		436			549
Cash dividends paid - common stock		(6,332	)		(3,064	)
Repurchase of common stock		(12,965	)		(9,499	)
Issuance of common stock		458			-
Taxes paid related to net share settlement of equity awards		(1,515	)		(14	)
Net cash and cash equivalents used in financing activities		(86,483	)		(58,269	)
Increase (decrease) in cash and cash equivalents		69,227			(6,009	)
Cash and cash equivalents at beginning of the period		73,023			82,902
Cash and cash equivalents at end of the period	$	142,250		$	76,893

Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	6,212		$	5,688
Income taxes		5,800			1,400

Supplemental schedule of noncash investing and financing activities
Unrealized gain (loss) on securities available for sale	$	9,683		$	(3,231	)
Changes in fair value of interest rate swap loss		622			286
Transfers from loans to other real estate owned		1,085			2,829
Transfers from bank premises to other real estate owned		-			778

Transactions related to bank and branch acquisitions
Assets acquired		2,959,210			-
Liabilities assumed		2,647,166			-

(1) See Note 6 "Borrowings" related to 2014 activity.

See accompanying notes to consolidated financial statements.

- 6 -

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

March 31, 2014

ACCOUNTING POLICIES

Effective April 25, 2014 the Company changed its corporate name from Union First Market Bankshares Corporation to Union Bankshares Corporation. The name change was approved at the Company’s annual meeting of shareholders held April 22, 2014. The consolidated financial statements include the accounts of the Company. Significant inter-company accounts and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited 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 2013 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 January 2014, the FASB issued ASU 2014-01, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company is currently assessing the impact that ASU 2014-01 will have on its consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, “Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company is currently assessing the impact that ASU 2014-04 will have on its consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” The amendments in this ASU change the criteria for reporting discontinued operations while enhancing disclosures in this area. Under the new guidance, only disposals representing a strategic shift in operations should be presented as discontinued operations. Those strategic shifts should have a major effect on the organization’s operations and financial results and include disposals of a major geographic area, a major line of business, or a major equity method investment. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. Additionally, the new guidance requires disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify for discontinued operations reporting. The amendments in the ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The Company does not expect the adoption of ASU 2014-08 to have a material impact on its consolidated financial statements.

- 7 -

ACQUISITIONS

On January 1, 2014, the Company completed the acquisition of StellarOne, a bank holding company based in Charlottesville, Virginia, in an all stock transaction. StellarOne’s common shareholders received 0.9739 shares of the Company’s common stock in exchange for each share of StellarOne’s common stock, resulting in the Company issuing 22,147,874 common shares at a fair value of $549.5 million. As a result of the transaction, StellarOne’s former bank subsidiary, StellarOne Bank, became a wholly owned bank subsidiary of the Company. The Company expects to operate StellarOne Bank as a separate wholly-owned bank subsidiary until May 2014, at which time StellarOne Bank is expected to be merged with and into the Bank. As part of the acquisition plan and cost control efforts, the Company decided to consolidate 13 overlapping bank branches into nearby locations during 2014. In all cases, customers can use branches within close proximity or continue to use the Bank’s other delivery channels including online and mobile banking as the Company works to retain and reassign employees affected by the branch closures.

- 8 -

The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition. The following table provides a preliminary assessment of the assets purchased, liabilities assumed, and the consideration transferred (dollars in thousands, except share and per share data):

Statement of Net Assets Acquired (at fair value) and consideration transferred:

Fair value of assets acquired:
Cash and cash equivalents	$	49,989
Securities available for sale		460,892
Loans held for sale		11,377
Loans		2,238,981
Bank premise and equipment		69,618
OREO		4,319
Core deposit intangible		29,570
Other assets		94,466
Total assets	$	2,959,212

Fair value of liabilities assumed:
Deposits	$	2,479,874
Short-term borrowings		49,227
Long-term borrowings		98,697
Other liabilities		19,367
Total liabilities	$	2,647,165

Net identifiable assets acquired	$	312,047
Preliminary Goodwill ⁽¹⁾		237,476
Net assets acquired	$	549,523

Consideration :
Company's common shares issued		22,147,874
Purchase price per share of the Company's common stock ⁽²⁾	$	24.81
Value of Company common stock issued	$	549,489
Value of stock options outstanding		34
Fair value of total consideration transferred	$	549,523

(1) - No goodwill is expected to be deductible for federal income tax purposes. The goodwill will be primarily allocated to the community bank segment.

(2) - The value of the shares of common stock exchanged with StellarOne shareholders was based upon the closing price of the Company's common stock at December 31, 2013, the last trading day prior to the date of acquisition.

Fair values of the major categories of assets acquired and liabilities assumed were determined as follows:

Loans

The acquired loans were recorded at fair value at the acquisition date without carryover of StellarOne’s previously established allowance for loan losses. The fair value of the loans was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected on the loans and then applying a market-based discount rate to those cash flows. In this regard, the acquired loans were segregated into pools based on loan type and credit risk. Loan type was determined based on collateral type, purpose, and lien position. Credit risk characteristics included risk rating groups (pass rated loans and adversely classified loans), updated loan-to-value ratios and past due status. For valuation purposes, these pools were further disaggregated by maturity, pricing characteristics (e.g., fixed-rate, adjustable-rate) and re-payment structure (e.g., interest only, fully amortizing, balloon). If new information is obtained about facts and circumstances about expected cash flows that existed as of the acquisition date, management will adjust in accordance with accounting for business combinations.

- 9 -

The acquired loans were divided into loans with evidence of credit quality deterioration which are accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, (acquired impaired) and loans that do not meet this criteria, which are accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, (acquired performing).The fair values of the acquired performing loans were $2.1 billion and the fair values of the acquired impaired loans were $145.5 million. The gross contractually required principal and interest payments receivable for acquired performing loans was $2.5 billion. The best estimate of contractual cash flows not expected to be collected related to the acquired performing loans is $35.4 million.

The following table presents the acquired impaired loans receivable at the acquisition date (dollars in thousands):

Contractually required principal and interest payments	$	214,803
Nonaccretable difference		(34,696	)
Cash flows expected to be collected		180,107
Accretable difference		(34,653	)
Fair value of loans acquired with a deterioration of credit quality	$	145,454

Bank Premises

The fair value of StellarOne’s premises, including land, buildings and improvements, was determined based upon independent third party appraisals performed by licensed appraisers in the market in which the premises is located. These appraisals were based upon the highest and best use of the underlying asset(s) with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised. The Company also engaged independent appraisers to value the leasehold interests. The fair value of the leasehold interest was not material to the consolidated financial statements.

Core Deposit Intangible

The fair value of the core deposit intangible was determined based on a blended market approach and discounted cash flow analysis using a discount rate based on the estimated cost of capital for a market participant. To calculate cash flows, deposit account servicing costs (net of deposit fee income) and interest expense on deposits were compared to the cost of alternative funding sources available through the Federal Home Loan Bank. The life of the deposit base and projected deposit attrition rates were determined using StellarOne's historical deposit data.

Time Deposits

The fair value adjustment of time deposits represents a premium over the value of the contractual repayments of fixed-maturity deposits using prevailing market interest rates for similar-term time deposits. The premium is being accreted into income using the sum-of-the-months digits method over the weighted average remaining life.

Long-term Borrowings

The Company assumed long-term borrowings in the form of FHLB advances and Trust Preferred Capital Notes. The fair value of the Trust Preferred Capital Notes assumed was valued using an income approach with consideration of the market approach. The contractual cash flows were projected and discounted using a prevailing market rate. The market rate was developed using a third party broker opinion, implied market yields for recent subordinated debt sales, and new subordinated debt issuances for instruments with similar durations and pricing characteristics. The fair value of FHLB advances represents contractual repayments discounted using interest rates currently available on borrowings with similar characteristics and remaining maturities.

Deferred Tax Assets and Liabilities

Deferred tax assets and liabilities were established for purchase accounting fair value adjustments as the future amortization/accretion of these adjustments represent temporary differences between book income and taxable income.

- 10 -

The following table discloses the impact of the merger with StellarOne (excluding the impact of merger-related expenses) since the acquisition for the three months ended March 31, 2014. The table also presents certain pro forma information as if StellarOne had been acquired on January, 1 2013. These results combine the historical results of StellarOne in the Company's Consolidated Statement of Income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2014 or January 1, 2013. In particular, no adjustments have been made to eliminate the amount of StellarOne’s provision for credit losses that would not have been necessary had the acquired loans been recorded at fair value as of January 1, 2013. Merger-related costs of $13.2 million are included in the Company’s Consolidated Statements of Income for the three months ended March 31, 2014, and are not included in the pro forma information below. The Company expects to achieve further operating cost savings and other business synergies, including branch closures, as a result of the acquisition which are not reflected in the pro forma amounts below (dollars in thousands):

	Pro forma for the three months ended
	March 31,
	2014		2013
	(unaudited)		(unaudited)
Total revenues (net interest income plus noninterest income)	$	77,958	$	80,216
Net income	$	16,831	$	14,092

Acquisition-related expenses associated with the acquisition of StellarOne were $13.2 million and $0 for the quarters ended March 31, 2014 and 2013, respectively. Such costs include legal and accounting fees, lease and contract termination expenses, system conversion, integrating operations, and employee severances, which have been expensed as incurred.

A summary of acquisition-related expenses associated with the StellarOne acquisition included in the Consolidated Statements of Income is as follows (dollars in thousands):

	For the three months ended
	March 31,
	2014		2013
	(unaudited)		(unaudited)
Salaries and employee benefits	$	6,831	$	-
Professional services		3,470		-
Other costs of operations		2,867		-
Total	$	13,168	$	-

- 11 -

SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities as of March 31, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):

	Amortized		Gross Unrealized					Estimated
	Cost		Gains		(Losses)			Fair Value
March 31, 2014
U.S. government and agency securities	$	1,552	$	1,622	$	-		$	3,174
Obligations of states and political subdivisions		427,388		10,346		(4,083	)		433,651
Corporate and other bonds		72,881		262		(521	)		72,622
Mortgage-backed securities		552,000		6,564		(2,601	)		555,963
Other securities		13,321		28		(60	)		13,289
Total securities	$	1,067,142	$	18,822	$	(7,265	)	$	1,078,699

December 31, 2013
U.S. government and agency securities	$	1,654	$	499	$	-		$	2,153
Obligations of states and political subdivisions		255,335		6,107		(6,612	)		254,830
Corporate and other bonds		9,479		115		(160	)		9,434
Mortgage-backed securities		405,389		4,954		(2,981	)		407,362
Other securities		3,617		26		(74	)		3,569
Total securities	$	675,474	$	11,701	$	(9,827	)	$	677,348

Due to restrictions placed upon the Company’s common stock investment in the Federal Reserve Bank and 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 and are included as a separate line item on the Company’s Consolidated Balance Sheet. The FHLB requires the Subsidiary Banks to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Subsidiary Banks' total assets. The Federal Reserve Bank 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 $18.2 million and $6.7 million as of March 31, 2014 and December 31, 2013 and FHLB stock in the amount of $24.3 million and $19.3 million as of March 31, 2014 and December 31, 2013, respectively.

- 12 -

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.

	Less than 12 months					More than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
March 31, 2014
Obligations of states and political subdivisions	$	59,906	$	(1,267	)	$	39,268	$	(2,816	)	$	99,174	$	(4,083	)
Mortgage-backed securities		224,200		(2,210	)		23,849		(391	)		248,049		(2,601	)
Corporate bonds and other securities		31,172		(426	)		1,720		(155	)		32,892		(581	)
Totals	$	315,278	$	(3,903	)	$	64,837	$	(3,362	)	$	380,115	$	(7,265	)

December 31, 2013
Obligations of states and political subdivisions	$	80,368	$	(5,504	)	$	8,886	$	(1,108	)	$	89,254	$	(6,612	)
Mortgage-backed securities		168,297		(2,806	)		24,254		(175	)		192,551		(2,981	)
Corporate bonds and other securities		6,804		(80	)		1,720		(154	)		8,524		(234	)
Totals	$	255,469	$	(8,390	)	$	34,860	$	(1,437	)	$	290,329	$	(9,827	)

As of March 31, 2014, there were $64.8 million, or 52 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 $3.4 million and consisted of municipal obligations, mortgage-backed securities, corporate bonds, and other securities. As of December 31, 2013, there were $34.9 million, or 23 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 $1.4 million and consisted of municipal obligations, mortgage-backed securities, corporate bonds, and other securities.

The following table presents the amortized cost and estimated fair value of securities as of March 31, 2014 and December 31, 2013, 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.

	March 31, 2014				December 31, 2013
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	24,041	$	24,134	$	6,791	$	6,796
Due after one year through five years		40,634		41,608		21,666		22,497
Due after five years through ten years		277,040		280,700		116,735		119,269
Due after ten years		725,427		732,257		530,282		528,786
Total securities available for sale	$	1,067,142	$	1,078,699	$	675,474	$	677,348

Securities with an amortized cost of $323.2 million and $186.6 million as of March 31, 2014 and December 31, 2013, 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 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 March 31, 2014, and in accordance with the guidance, no OTTI was recognized.

- 13 -

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, 2013	$	400
Cumulative credit losses on investment securities		-
Additions for credit losses not previously recognized		-
Cumulative credit losses on investment securities, through March 31, 2014	$	400

- 14 -

LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of unearned income, and consist of the following at March 31, 2014 and December 31, 2013 (dollars in thousands):

	March 31,		December 31,
	2014		2013
Commercial:
Commercial Construction	$	329,364	$	213,675
Commercial Real Estate - Owner Occupied		885,806		500,764
Commercial Real Estate - Non-Owner Occupied		1,457,825		755,905
Raw Land and Lots		233,207		187,529
Single Family Investment Real Estate		386,471		237,640
Commercial and Industrial		390,072		215,702
Other Commercial		80,790		52,490
Consumer:
Mortgage		510,539		237,414
Consumer Construction		45,855		48,984
Indirect Auto		175,913		174,843
Indirect Marine		41,037		38,633
HELOCs		496,592		281,579
Credit Card		22,316		23,211
Other Consumer		218,411		70,999
Total	$	5,274,198	$	3,039,368

The following table shows the aging of the Company’s loan portfolio, by class, at March 31, 2014 (dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and still Accruing		PCI (net of credit mark)		Nonaccrual		Current		Total Loans
Commercial:
Commercial Construction	$	1,359	$	-	$	-	$	3,877	$	1,152	$	322,976	$	329,364
Commercial Real Estate - Owner Occupied		1,641		537		231		30,768		1,376		851,253		885,806
Commercial Real Estate - Non-Owner Occupied		977		-		226		43,986		172		1,412,464		1,457,825
Raw Land and Lots		2,465		1,020		1,624		13,529		3,091		211,478		233,207
Single Family Investment Real Estate		4,574		534		959		21,055		1,794		357,555		386,471
Commercial and Industrial		903		508		395		4,940		3,655		379,671		390,072
Other Commercial		462		-		50		2,136		122		78,020		80,790
Consumer:
Mortgage		13,182		1,555		1,596		11,632		2,443		480,131		510,539
Consumer Construction		443		-		-		-		-		45,412		45,855
Indirect Auto		1,628		186		303		-		-		173,796		175,913
Indirect Marine		59		-		-		-		327		40,651		41,037
HELOCs		4,842		1,704		1,115		2,993		175		485,763		496,592
Credit Card		138		89		226		-		-		21,863		22,316
Other Consumer		2,726		977		480		3,515		415		210,298		218,411
Total	$	35,399	$	7,110	$	7,205	$	138,431	$	14,722	$	5,071,331	$	5,274,198

- 15 -

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2013 (dollars in thousands):

	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and still Accruing		PCI (net of credit mark)		Nonaccrual		Current		Total Loans
Commercial:
Commercial Construction	$	-	$	-	$	-	$	-	$	1,596	$	212,079	$	213,675
Commercial Real Estate - Owner Occupied		514		-		258		-		2,037		497,955		500,764
Commercial Real Estate - Non-Owner Occupied		185		42		1,996		-		175		753,507		755,905
Raw Land and Lots		922		545		-		2,457		2,560		181,045		187,529
Single Family Investment Real Estate		1,783		277		563		275		1,689		233,053		237,640
Commercial and Industrial		348		152		220		-		3,848		211,134		215,702
Other Commercial		87		1		50		-		126		52,226		52,490
Consumer:
Mortgage		6,779		1,399		1,141		-		2,446		225,649		237,414
Consumer Construction		-		-		208		-		-		48,776		48,984
Indirect Auto		2,237		252		349		7		-		171,998		174,843
Indirect Marine		459		-		-		-		288		37,886		38,633
HELOCs		2,124		422		1,190		787		43		277,013		281,579
Credit Card		105		133		281		-		-		22,692		23,211
Other Consumer		888		124		490		96		227		69,174		70,999
Total	$	16,431	$	3,347	$	6,746	$	3,622	$	15,035	$	2,994,187	$	3,039,368

Nonaccrual loans totaled $14.7 million, $15.0 million, and $23.0 million at March 31, 2014, December 31, 2013, and March 31, 2013, respectively. There were no nonaccrual loans excluded from impaired loan disclosure in 2014 or 2013. Loans past due 90 days or more and accruing interest totaled $7.2 million, $6.7 million, and $6.2 million at March 31, 2014, December 31, 2013, and March 31, 2013, respectively.

The following table shows the PCI commercial and consumer loan portfolios, by class and their delinquency status, at March 31, 2014 (dollars in thousands):

	30-89 Days Past Due		Greater than 90 Days		Current		Total
Commercial:
Commercial Construction	$	-	$	1,608	$	2,269	$	3,877
Commercial Real Estate - Owner Occupied		1,504		830		28,434		30,768
Commercial Real Estate - Non-Owner Occupied		3,500		2,150		38,336		43,986
Raw Land and Lots		1,096		17		12,416		13,529
Single Family Investment Real Estate		3,599		803		16,653		21,055
Commercial and Industrial		727		558		3,655		4,940
Other Commercial		238		690		1,208		2,136
Consumer:
Mortgage		2,286		4,424		4,922		11,632
HELOCs		266		787		1,940		2,993
Other Consumer		421		782		2,312		3,515
Total	$	13,637	$	12,649	$	112,145	$	138,431

- 16 -

The following table shows the PCI commercial and consumer loan portfolios, by class and their delinquency status, at December 31, 2013 (dollars in thousands):

	30-89 Days Past Due		Greater than 90 Days		Current		Total
Commercial:
Raw Land and Lots	$	-	$	-	$	2,457	$	2,457
Single Family Investment Real Estate		-		-		275		275
Consumer:
Indirect Auto		-		-		7		7
HELOCs		-		31		756		787
Other Consumer		40		-		56		96
Total	$	40	$	31	$	3,551	$	3,622

The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. The following table shows the Company’s impaired loans, excluding PCI loans related to the StellarOne acquisition, by class at March 31, 2014 (dollars in thousands):

	Recorded Investment		Unpaid Principal Balance		Related Allowance		YTD Average Investment		Interest Income Recognized
Loans without a specific allowance
Commercial:
Commercial Construction	$	8,668	$	8,801	$	-	$	9,138	$	90
Commercial Real Estate - Owner Occupied		5,319		5,756		-		5,694		53
Commercial Real Estate - Non-Owner Occupied		18,069		18,161		-		18,136		218
Raw Land and Lots		51,996		54,744		-		62,928		684
Single Family Investment Real Estate		7,622		8,182		-		8,361		89
Commercial and Industrial		6,278		9,351		-		9,487		33
Other Commercial		663		758		-		745		10
Consumer:
Mortgage		3,563		3,583		-		3,985		17
Indirect Auto		-		15		-		16		-
Indirect Marine		135		339		-		339		-
HELOCs		1,306		1,948		-		1,913		5
Other Consumer		96		210		-		210		-
Total impaired loans without a specific allowance	$	103,715	$	111,848	$	-	$	120,952	$	1,199

Loans with a specific allowance
Commercial:
Commercial Construction	$	748	$	1,082	$	37	$	965	$	5
Commercial Real Estate - Owner Occupied		4,362		4,396		166		4,435		53
Commercial Real Estate - Non-Owner Occupied		515		515		61		524		8
Raw Land and Lots		1,853		1,853		113		1,863		24
Single Family Investment Real Estate		4,383		4,670		534		4,684		39
Commercial and Industrial		1,662		1,804		313		1,894		21
Other Commercial		355		370		42		372		4
Consumer:
Mortgage		1,864		1,865		220		1,872		13
Indirect Marine		393		393		80		396		4
Other Consumer		509		515		168		516		2
Total impaired loans with a specific allowance	$	16,644	$	17,463	$	1,734	$	17,521	$	173
Total impaired loans	$	120,359	$	129,311	$	1,734	$	138,473	$	1,372

- 17 -

The following table shows the Company’s impaired loans, by class, at December 31, 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	$	10,520	$	10,523	$	-	$	9,073	$	282
Commercial Real Estate - Owner Occupied		4,281		4,648		-		4,845		206
Commercial Real Estate - Non-Owner Occupied		15,012		15,100		-		15,288		572
Raw Land and Lots		52,259		52,551		-		61,606		2,024
Single Family Investment Real Estate		5,520		6,021		-		6,396		261
Commercial and Industrial		4,035		6,835		-		7,083		195
Other Commercial		55		134		-		134		-
Consumer:
Mortgage		1,361		1,361		-		1,374		60
Indirect Auto		11		19		-		26		-
Indirect Marine		495		874		-		887		42
HELOCs		1,604		1,755		-		1,921		11
Other Consumer		162		211		-		214		-
Total impaired loans without a specific allowance	$	95,315	$	100,032	$	-	$	108,847	$	3,653

Loans with a specific allowance
Commercial:
Commercial Construction	$	357	$	692	$	135	$	1,136	$	9
Commercial Real Estate - Owner Occupied		3,797		3,937		284		4,000		181
Commercial Real Estate - Non-Owner Occupied		549		597		76		616		40
Raw Land and Lots		1,875		1,905		83		1,985		101
Single Family Investment Real Estate		3,389		3,676		335		3,894		114
Commercial and Industrial		2,722		3,086		204		3,214		84
Other Commercial		255		269		35		254		6
Consumer:
Mortgage		4,041		4,147		660		4,183		123
Other Consumer		321		343		151		350		10
Total impaired loans with a specific allowance	$	17,306	$	18,652	$	1,963	$	19,632	$	668
Total impaired loans	$	112,621	$	118,684	$	1,963	$	128,479	$	4,321

The Company considers TDRs to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower’s financial difficulties. TDRs totaled $44.3 million and $41.8 million as of March 31, 2014 and December 31, 2013, respectively. All loans that are considered to be TDRs are evaluated for impairment in accordance with the Company’s allowance for loan loss methodology. For the quarter ended March 31, 2014, the recorded investment in restructured loans prior to modifications was not materially impacted by the modification.

- 18 -

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 March 31, 2014 and December 31, 2013 (dollars in thousands):

	March 31, 2014						December 31, 2013
	No. of Loans		Recorded Investment		Outstanding Commitment		No. of Loans		Recorded Investment		Outstanding Commitment
Performing
Commercial:
Commercial Construction		2	$	1,340	$	1,793		1	$	684	$	-
Commercial Real Estate - Owner Occupied		6		5,130		-		4		2,278		-
Commercial Real Estate - Non-Owner Occupied		6		4,223		142		6		3,771		-
Raw Land and Lots		15		20,312		-		15		20,741		-
Single Family Investment Real Estate		12		2,325		-		13		3,497		-
Commercial and Industrial		8		1,234		-		7		1,125		-
Other Commercial		1		227		-		-		-		-
Consumer:
Mortgage		10		2,299		-		10		2,318		-
Other Consumer		3		105		-		3		106		-
Total performing		63	$	37,195	$	1,935		59	$	34,520	$	-

Nonperforming
Commercial:
Commercial Construction		3	$	807	$	-		3	$	947	$	-
Commercial Real Estate - Owner Occupied		3		244		-		3		283		-
Raw Land and Lots		2		3,959		-		2		3,973		-
Single Family Investment Real Estate		1		24		-		1		50		-
Commercial and Industrial		8		1,140		-		8		1,195		-
Other Commercial		1		67		-		-		-		-
Consumer:
Mortgage		2		788		-		2		794		-
Other Consumer		1		61		-		1		62		-
Total nonperforming		21	$	7,090	$	-		20	$	7,304	$	-

Total performing and nonperforming		84	$	44,285	$	1,935		79	$	41,824	$	-

The Company considers a default of a restructured loan to occur when the borrower is 90 days past due following the restructure or a foreclosure and repossession of the applicable collateral occurs. During the three months ended March 31, 2014 and 2013, the Company did not identify any restructured loans that went into default that had been restructured in the twelve-month period prior to the time of default.

- 19 -

The following table shows, by class and modification type, TDRs that occurred during the three months ended March 31, 2014 and 2013 (dollars in thousands):

	Three months ended				Three months ended
	March 31, 2014				March 31, 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:
Single Family Investment Real Estate		-	$	-		1	$	210
Consumer:
Mortgage		-		-		1		608
Total interest only at market rate of interest		-	$	-		2	$	818

Term modification, at a market rate
Commercial:
Commercial Real Estate - Owner Occupied		1	$	2,732		-	$	-
Single Family Investment Real Estate		1		113		1		630
Commercial and Industrial		-		-		1		56
Other Commercial		2		296		-		-
Consumer:
Mortgage		-		-		1		166
Total loan term extended at a market rate		4	$	3,141		3	$	852

Term modification, below market rate
Commercial:
Commercial Real Estate - Owner Occupied		-	$	-		1	$	206
Commercial and Industrial		-		-		1		10
Total loan term extended at a below market rate		-	$	-		2	$	216

Total		4	$	3,141		7	$	1,886

- 20 -

The following table shows the allowance for loan loss activity, balances for allowance for credit losses, and loans based on impairment methodology by portfolio segment for the three months ended March 31, 2014. 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	$	19,856		$	10,227		$	52		$	30,135
Recoveries credited to allowance		1,408			251			-			1,659
Loans charged off		(307	)		(580	)		-			(887	)
Provision charged to operations		(643	)		843			(200	)		-
Balance, end of period	$	20,314		$	10,741		$	(148	)	$	30,907

Ending Balance, ALL:
Loans individually evaluated for impairment	$	1,266		$	468		$	-		$	1,734
Loans collectively evaluated for impairment		19,048			10,273			(148	)		29,173
Loans acquired with deteriorated credit quality		-			-			-			-
Total	$	20,314		$	10,741		$	(148	)	$	30,907

Ending Balance, Loans:
Loans individually evaluated for impairment	$	109,756		$	6,972		$	-		$	116,728
Loans collectively evaluated for impairment		3,533,488			1,485,551			-			5,019,039
Loans acquired with deteriorated credit quality		120,291			18,140			-			138,431
Total	$	3,763,535		$	1,510,663		$	-		$	5,274,198

The following table shows the allowance for loan loss activity, balances for allowance for credit losses, and loans based on impairment methodology by portfolio segment for the year ended December 31, 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		1,496			1,285			-			2,781
Loans charged off		(8,534	)		(5,084	)		-			(13,618	)
Provision charged to operations		2,073			3,919			64			6,056
Balance, end of period	$	19,856		$	10,227		$	52		$	30,135

Ending Balance, ALL:
Loans individually evaluated for impairment	$	1,152		$	811		$	-		$	1,963
Loans collectively evaluated for impairment		18,704			9,416			52			28,172
Loans acquired with deteriorated credit quality		-			-			-			-
Total	$	19,856		$	10,227		$	52		$	30,135

Ending Balance, Loans:
Loans individually evaluated for impairment	$	101,894		$	7,105		$	-		$	108,999
Loans collectively evaluated for impairment		2,059,079			867,668			-			2,926,747
Loans acquired with deteriorated credit quality		2,732			890			-			3,622
Total	$	2,163,705		$	875,663		$	-		$	3,039,368

- 21 -

The following table shows the allowance for loan loss activity, balances for allowance for credit losses, and loans based on impairment methodology by portfolio segment for the three months ended March 31, 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		575			259			-			834
Loans charged off		(2,583	)		(802	)		-			(3,385	)
Provision charged to operations		1,869			135			46			2,050
Balance, end of period	$	24,682		$	9,699		$	34		$	34,415

Ending Balance, ALL:
Loans individually evaluated for impairment	$	5,560		$	1,765		$	-		$	7,325
Loans collectively evaluated for impairment		19,105			7,934			34			27,073
Loans acquired with deteriorated credit quality		17			-			-			17
Total	$	24,682		$	9,699		$	34		$	34,415

Ending Balance, Loans:
Loans individually evaluated for impairment	$	132,990		$	8,737		$	-		$	141,727
Loans collectively evaluated for impairment		1,974,131			853,670			-			2,827,801
Loans acquired with deteriorated credit quality		3,078			941			-			4,019
Total	$	2,110,199		$	863,348		$	-		$	2,973,547

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.

- 22 -

The following table shows all loans, excluding PCI loans, in the commercial portfolios by class with their related risk rating current as of March 31, 2014 (dollars in thousands):

	1-3		4		5		6		7		8		Total
Commercial Construction	$	47,607	$	242,307	$	16,990	$	11,859	$	6,724	$	-	$	325,487
Commercial Real Estate - Owner Occupied		174,211		641,475		15,104		19,150		5,098		-		855,038
Commercial Real Estate - Non-Owner Occupied		288,260		1,046,263		21,231		45,394		12,691		-		1,413,839
Raw Land and Lots		7,441		134,740		18,699		9,756		49,042		-		219,678
Single Family Investment Real Estate		44,097		287,765		15,435		7,869		10,250		-		365,416
Commercial and Industrial		119,056		243,786		11,006		3,687		7,498		99		385,132
Other Commercial		30,414		37,504		8,391		1,328		1,017		-		78,654
Total	$	711,086	$	2,633,840	$	106,856	$	99,043	$	92,320	$	99	$	3,643,244

The following table shows all loans, excluding PCI loans, in the commercial portfolios by class with their related risk rating current as of December 31, 2013 (dollars in thousands):

	1-3		4		5		6		7		8		Total
Commercial Construction	$	24,399	$	148,251	$	20,370	$	13,772	$	6,883	$	-	$	213,675
Commercial Real Estate - Owner Occupied		149,632		324,394		10,017		10,926		5,795		-		500,764
Commercial Real Estate - Non-Owner Occupied		224,702		453,279		21,953		46,084		9,887		-		755,905
Raw Land and Lots		8,648		98,927		14,132		16,439		46,926		-		185,072
Single Family Investment Real Estate		38,327		168,564		12,302		11,522		6,650		-		237,365
Commercial and Industrial		68,748		123,585		8,254		8,752		3,822		2,541		215,702
Other Commercial		18,593		23,160		8,529		1,897		311		-		52,490
Total	$	533,049	$	1,340,160	$	95,557	$	109,392	$	80,274	$	2,541	$	2,160,973

The following table shows only PCI loans in the commercial portfolios by class with their related risk rating and credit quality indicator information current as of March 31, 2014 (dollars in thousands):

	4		5		6		7		8		Total
Commercial Construction	$	-	$	-	$	2,239	$	1,165	$	473	$	3,877
Commercial Real Estate - Owner Occupied		247		2,034		11,020		17,467		-		30,768
Commercial Real Estate - Non-Owner Occupied		-		364		23,447		19,758		417		43,986
Raw Land and Lots		1,245		1,244		6,094		4,946		-		13,529
Single Family Investment Real Estate		1,363		484		7,830		11,284		94		21,055
Commercial and Industrial		317		-		1,398		3,117		108		4,940
Other Commercial		-		-		301		1,835		-		2,136
Total	$	3,172	$	4,126	$	52,329	$	59,572	$	1,092	$	120,291

The following table shows only PCI loans in the commercial portfolios by class with their related risk rating and credit quality indicator information current as of December 31, 2013 (dollars in thousands):

	4		5		6		7		8		Total
Raw Land and Lots	$	-	$	653	$	-	$	1,804	$	-	$	2,457
Single Family Investment Real Estate		275		-		-		-		-		275
Total	$	275	$	653	$	-	$	1,804	$	-	$	2,732

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.

- 23 -

The following shows changes in the Company’s PCI loan portfolio and accretable yield for loans accounted for under ASC 310-30 for the periods presented (dollars in thousands):

	For the Three Months Ended						For the Three Months Ended
	March 31, 2014						March 31, 2013
	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	2,980		$	3,622		$	3,147		$	4,565
Additions		34,653			146,094			-			-
Accretion		(1,846	)		-			-			-
Charge-offs		-			(1,830	)		(11	)		(96	)
Transfers to OREO		-			(232	)		-			(201	)
Payments received, net		-			(9,223	)		-			(249	)
Other, net		(1,365	)		-			-			-
Balance at end of period	$	34,422		$	138,431		$	3,136		$	4,019

Loans in the Company’s acquired performing loan portfolio, accounted for under ASC 310-20, totaled $2.3 billion at March 31, 2014 and $377.8 million at December 31, 2013; the remaining discount on these loans totaled $25.5 million and $3.3 million, respectively.

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. On January 1, 2014, the Company completed the acquisition of StellarOne and acquired intangible assets of $29.6 million and recorded $237.5 million of goodwill. See Note 2 “Acquisitions” in the “Notes to Consolidated Financial Statements” for additional information.

In accordance with ASC 350, Intangibles-Goodwill and Other, the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. The Company performed its annual impairment testing in the second quarter of 2013 and determined that there was no impairment to its goodwill or intangible assets. Subsequently, the Company determined that additional evaluation was necessary at December 31, 2013 and March 31, 2014 due to potential indicators based on the net losses recorded at the mortgage segment during the three most recent quarters. Based on this additional testing, the Company still 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
March 31, 2014
Amortizable core deposit intangibles	$	76,185	$	37,250	$	38,935

December 31, 2013
Amortizable core deposit intangibles	$	46,615	$	34,635	$	11,980

March 31, 2013
Amortizable core deposit intangibles	$	46,615	$	31,873	$	14,742

- 24 -

Amortization expense of core deposit intangibles for the three months ended March 31, 2014 and 2013, and for the year ended December 31, 2013 totaled $2.6 million, $1.0 million, and $3.8 million, respectively. As of March 31, 2014, the estimated remaining amortization expense of core deposit intangibles is as follows (dollars in thousands):

For the remaining nine months of 2014	$	7,181
For the year ending December 31, 2015		8,444
For the year ending December 31, 2016		6,932
For the year ending December 31, 2017		5,589
For the year ending December 31, 2018		4,144
For the year ending December 31, 2019		3,093
Thereafter		3,552
Total estimated amortization expense	$	38,935

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 March 31, 2014 and December 31, 2013 (dollars in thousands):

	March 31,			December 31,
	2014			2013
Securities sold under agreements to repurchase	$	57,681		$	52,455
Other short-term borrowings		216,600			211,500
Total short-term borrowings	$	274,281		$	263,955

Maximum month-end outstanding balance	$	274,281		$	263,955
Average outstanding balance during the period		249,110			119,433
Average interest rate during the period		0.23	%		0.30	%
Average interest rate at end of period		0.22	%		0.30	%

Other short-term borrowings:
Federal Funds purchased	$	31,600		$	31,500
FHLB	$	185,000		$	180,000

The Subsidiary Banks maintain federal funds lines with several correspondent banks; the remaining available balance was $173.4 million and $93.5 million at March 31, 2014 and December 31, 2013, 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 $1.4 billion and $805.2 million at March 31, 2014 and December 31, 2013, respectively.

- 25 -

Long-term Borrowings

In connection with certain 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. In connection with the acquisition of StellarOne, the Company acquired trust preferred capital notes totaling $32.0 million with a remaining fair value discount of $7.4 million at March 31, 2014. 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	%		2.98	%		6/17/2034
Trust Preferred Capital Note - Statutory Trust II		36,000,000		1,114,000		1.40	%		1.63	%		6/15/2036
VFG Limited Liability Trust I Indenture		20,000,000		619,000		2.73	%		2.96	%		3/18/2034
FNB Statutory Trust II Indenture		12,000,000		372,000		3.10	%		3.33	%		6/26/2033
Total	$	90,500,000	$	2,801,000

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

As part of acquisitions prior to 2006, the Company assumed subordinated debt with terms of LIBOR plus 1.45% and a maturity date of April 2016. At March 31, 2014, the carrying value of the subordinated debt was $17.5 million, with a remaining fair value discount of $1.0 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 months ended March 31, 2014 and 2013 was $436,000 and $426,000, respectively.

In connection with the StellarOne acquisition, the Company assumed $70.0 million in long-term borrowings with the FHLB with a remaining fair value premium of $2.9 million at March 31, 2014. As of March 31, 2014, the advances from the FHLB consisted of the following (dollars in thousands):

Long Term Type	Spread to 3-Month LIBOR	Interest Rate	Maturity Date	Advance Amount

Adjustable Rate Credit	0.44%	0.67%	8/23/2022	$	55,000
Adjustable Rate Credit	0.45%	0.68%	11/23/2022		65,000
Adjustable Rate Credit	0.45%	0.68%	11/23/2022		10,000
Adjustable Rate Credit	0.45%	0.68%	11/23/2022		10,000
Fixed Rate	-	3.62%	11/28/2017		10,000
Fixed Rate	-	3.44%	7/28/2015		10,000
Fixed Rate	-	3.75%	7/30/2018		5,000
Fixed Rate	-	3.97%	7/30/2018		5,000
Fixed Rate Hybrid	-	2.11%	10/5/2016		25,000
Fixed Rate Hybrid	-	0.91%	7/25/2016		15,000
				$	210,000

As of December 31, 2013, the advances from the FHLB consisted of the following (dollars in thousands):

Long Term Type	Spread to 3-Month LIBOR	Interest Rate	Maturity Date	Advance Amount

Adjustable Rate Credit	0.44%	0.69%	8/23/2022	$	55,000
Adjustable Rate Credit	0.45%	0.70%	11/23/2022		65,000
Adjustable Rate Credit	0.45%	0.70%	11/23/2022		10,000
Adjustable Rate Credit	0.45%	0.70%	11/23/2022		10,000
				$	140,000

- 26 -

The carrying value of the loans and securities pledged as collateral for FHLB advances totaled $1.5 billion and $1.1 billion as of March 31, 2014 and December 31, 2013, respectively.

As of March 31, 2014, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):

	Trust Preferred Capital Notes		Subordinated Debt		FHLB Advances		Fair Value Premium (Discount)			Prepayment Penalty			Total Long-term Borrowings
Remaining nine months in 2014	$	-	$	-	$	-	$	225		$	(1,351	)	$	(1,126	)
2015		-		-		-		175			(1,831	)		(1,656	)
2016		-		17,500		-		271			(1,882	)		15,889
2017		-		-		-		169			(1,923	)		(1,754	)
2018		-		-		-		(142	)		(1,969	)		(2,111	)
2019		-		-		-		(286	)		(2,018	)		(2,304	)
Thereafter		93,301		-		210,000		(5,923	)		(5,899	)		291,479
Total long-term borrowings	$	93,301	$	17,500	$	210,000	$	(5,511	)	$	(16,873	)	$	298,417

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 press release issued on June 10, 2013, the Company announced the signing of a definitive merger agreement for the acquisition of StellarOne. The Company closed the acquisition of StellarOne on January 1, 2014. On June 14, 2013, in response to the initial announcement of the definitive merger agreement, 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 (the “District Court”) (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, money damages. StellarOne and the Company believe that the claims are without merit; however, in order to eliminate the expense and uncertainties of further litigation, all the defendants entered into a memorandum of understanding with the plaintiffs in order to settle the litigation prior to the merger. Under the terms of the memorandum of understanding, the plaintiffs agreed to settle the lawsuit and release the defendants from all claims, subject to approval by the District Court. On February 3, 2014, the District Court granted preliminary approval to the memorandum of understanding and to a class action settlement in the case. If the District Court grants final approval, the lawsuit will be dismissed.

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 Sheet. 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.

- 27 -

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 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.

UMG, a wholly owned subsidiary of the Bank, uses rate lock commitments during the origination process and for loans held for sale. These commitments to sell loans are designed to mitigate UMG’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale. The Company held approximately $2.8 million and $2.0 million in loans available for sale in which the related rate lock commitment had expired as of March 31, 2014 and December 31, 2013, respectively. At March 31, 2014 and December 31, 2013, the reserves associated with these loans held for sale were $94,000 and are reflected on the balance sheet of the mortgage segment.

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

	March 31,		December 31,
	2014		2013
Commitments with off-balance sheet risk:
Commitments to extend credit⁽¹⁾	$	1,461,441	$	891,680
Standby letters of credit		72,922		48,107
Mortgage loan rate lock commitments		53,147		54,834
Total commitments with off-balance sheet risk	$	1,587,510	$	994,621
Commitments with balance sheet risk:
Loans held for sale	$	48,753	$	53,185
Total other commitments	$	1,636,263	$	1,047,806

(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 March 31, 2014 and December 31, 2013, the aggregate amount of daily average required reserves was approximately $28.8 million and $16.0 million, respectively.

The Company has approximately $11.7 million in deposits in other financial institutions, of which $5.7 million serves as collateral for the trust swaps discussed in Note 8 “Derivatives” in the “Notes to the Consolidated Financial Statements.” The Company had approximately $4.9 million in deposits in other financial institutions that were uninsured at March 31, 2014. 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 8 “Derivatives” in the “Notes to Consolidated Financial Statements” for additional information.

As disclosed in the Company’s Form 10-Q as of September 30, 2013, UMG has identified errors with respect to disclosures made to certain customers during the period from November 2011 through August 2013 in connection with certain loans originated under insured loan programs administered by the United States Department of Agriculture and Federal Housing Administration. These disclosure errors understated to the borrowers the amount of mortgage insurance premiums that were required to be assessed over the life of the loans under guidelines enacted by these loan programs. The Company has taken remedial action with respect to the affected borrowers to address the disclosure errors. Virtually all of these loans were sold to third parties prior to the identification of the errors. At December 31, 2013, the Company accrued $966,000 for estimated contractual claims related to the errors. In the ordinary course of business, the Company records an indemnification reserve relating to mortgage loans previously sold based on historical statistics and loss rates; as of March 31, 2014 and December 31, 2013, the Company’s indemnification reserve was $1.1 million and $627,000, respectively.

- 28 -

DERIVATIVES

The Company has three interest rate swap agreements (the “trust swaps”) as part of the management of interest rate risk related to the Trust Preferred Capital Notes further described in Note 6 "Borrowings". The Company designated the trust swaps as a cash flow hedge intended to protect against the variability of cash flows associated with the aforementioned preferred capital securities. The trust swaps hedge the interest rate risk, wherein the Company receives interest of LIBOR from a counterparty and pays a weighted average fixed rate of 2.77% to the same counterparty calculated on a notional amount of $68.0 million. The terms of the trust swaps range from three to six years. The trust swaps were 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. As of March 31, 2014, the Company had $5.7 million of cash pledged as collateral for the trust swaps.

During the third quarter of 2013, the Company entered into eight interest rate swap agreements (the “prime loan swaps”) as part of the management of interest rate risk. The Company designated the prime loan swaps as cash flow hedges intended to protect the Company against the variability in the expected future cash flows on the designated variable rate loan products. During the first quarter of 2014, the Company discontinued four of the prime loan swaps with a total notional amount of $45.0 million, which were in place at December 31, 2013. The unrealized gain reclassified to earnings related to these four prime loan swaps were not material to the Company’s consolidated financial statements. The remaining four prime loan swaps hedge the underlying cash flows, wherein the Company receives a fixed interest rate ranging from 4.71% to 5.20% from the counterparty and pays interest based on the Wall Street Journal prime index, with a spread of up to 1.00%, to the same counterparty calculated on a notional amount of $55.0 million. One of the four prime loan swaps contains a floor rate of 4.00%. The terms of each of the prime loan swaps is six years with a fixed rate that started September 17, 2013. The prime loan swaps were entered into with a counterparty that met the Company’s credit standards and the agreement contains collateral provision protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant. As of March 31, 2014, the Company had securities with a market value of $5.5 million pledged as collateral for the prime loan swaps.

Amounts receivable or payable are recognized as accrued under the terms of the agreements. In accordance with ASC 815, Derivatives and Hedging, the Company has designated the trust swaps and prime loan swaps as cash flow hedges, with the effective portions of the derivatives’ unrealized gains or losses recorded as a component of other comprehensive income. The ineffective portions of the unrealized gains or losses, if any, would be recorded in “Other expense” in the Consolidated Statements of Income. The Company has assessed the effectiveness of each hedging relationship by comparing the changes in cash flows on the designated hedged item. The Company’s cash flow hedges are deemed to be effective. At March 31, 2014, the fair value of the Company’s cash flow hedges was an unrealized loss of $3.8 million, the amount the Company would have expected to pay if the contract was terminated. The below asset and liability are recorded as a component of other comprehensive income recorded in the Company’s Consolidated Statements of Comprehensive Income.

- 29 -

Shown below is a summary of the derivatives designated as cash flow hedges at March 31, 2014 and December 31, 2013 (dollars in thousands):

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of March 31, 2014
Pay fixed - receive floating interest rate swaps		3	$	68,000	$	-	$	3,784		0.23	%		2.77	%		2.88

Receive fixed - pay floating interest rate swaps		4	$	55,000	$	13	$	-		4.93	%*		3.55	%*		5.47

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of December 31, 2013
Pay fixed - receive floating interest rate swaps		1	$	36,000	$	-	$	3,046		0.25	%		3.51	%		3.46

Receive fixed - pay floating interest rate swaps		8	$	100,000	$	-	$	516		5.17	%*		3.89	%*		5.72

*The prime loan swaps receive rate and pay rate are weighted average rates. The pay weighted average rate takes into consideration the floor rate discussed above.

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” in the Consolidated Balance Sheet. As of March 31, 2014, the Company had securities with a market value of $1.0 million pledged as collateral for the loan swaps. Shown below is a summary regarding loan swap derivative activities at March 31, 2014 and December 31, 2013 (dollars in thousands):

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of March 31, 2014
Receive fixed - pay floating interest rate swaps		31	$	112,100	$	16	$	-		4.30	%		2.56	%		7.78
Pay fixed - receive floating interest rate swaps		31	$	112,100	$	-	$	16		2.56	%		4.30	%		7.78

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of December 31, 2013
Receive fixed - pay floating interest rate swaps		1	$	718	$	33	$	-		4.58	%		2.92	%		8.59
Pay fixed - receive floating interest rate swaps		1	$	718	$	-	$	33		2.92	%		4.58	%		8.59

In the ordinary course of business the Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (“rate lock commitments”). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. The period of time between issuance of a loan commitment, closing, and sale of the loan generally ranges from 30 to 120 days. The Company protects itself from changes in interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. The correlation between the rate lock commitments and the best efforts contracts is high due to their similarity.

- 30 -

The market value of rate lock commitments and best efforts contracts is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close.

During the first quarter of 2014, and in connection with the acquisition of StellarOne, the Company began recording the rate lock commitments derivative on its balance sheet at fair value. Because the amounts associated with the rate lock commitments were determined to be immaterial, the Company did not record the value of the rate locks in any period prior to January 1, 2014. While the rate lock commitment derivative is still considered immaterial to the consolidated financial statements, the Company began recording this asset on its Consolidated Balance Sheet within “Loans held for sale, net” post-acquisition when integrating the acquired mortgage operations of StellarOne. The Company’s derivative related to rate lock commitments had a notional amount of $53.1 million at March 31, 2014 with a fair value of $538,000. This derivative instrument does not qualify for hedge accounting; as a result, changes in fair value are recognized in current period earnings as a component of “Gain on sale of mortgage loans, net of commissions.”

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The change in accumulated other comprehensive income (loss) for the three months ended March 31, 2014 is summarized as follows, net of tax (dollars in thousands):

	Unrealized Gains (Losses) on Securities			Change in Fair Value of Cash Flow Hedges			Total
Balance - December 31, 2013	$	1,192		$	(3,382	)	$	(2,190	)

Other comprehensive income		6,313			575			6,888
Amounts reclassified from accumulated other comprehensive income		(19	)		47			28
Net current period other comprehensive income		6,294			622			6,916

Balance - March 31, 2014	$	7,486		$	(2,760	)	$	4,726

The change in accumulated other comprehensive income (loss) for the three months ended March 31, 2013 is summarized as follows, net of tax (dollars in thousands):

	Unrealized Gains (Losses) on Securities			Change in Fair Value of Cash Flow Hedges			Total
Balance - December 31, 2012	$	14,573		$	(4,489	)	$	10,084

Other comprehensive income (loss)		(2,107	)		98			(2,009	)
Amounts reclassified from accumulated other comprehensive income		7			188			195
Net current period other comprehensive income (loss)		(2,100	)		286			(1,814	)

Balance - March 31, 2013	$	12,473		$	(4,203	)	$	8,270

Reclassifications of unrealized gains (losses) on available for sale securities are reported in the Consolidated 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 $29,000 and losses of $11,000 for the three months ended March 31, 2014 and 2013, respectively, related to gains/losses on the sale of securities. The tax effect of these transactions during the three months ended March 31, 2014 and 2013 were $10,000 and $4,000, respectively, which were included as a component of income tax expense.

- 31 -

Reclassifications of the change in fair value of cash flow hedges are reported in interest income and interest expense in the Consolidated Income Statement with the corresponding income tax effect being reflected as a component of income tax expense. The Company reported net interest expense of $72,000 and $289,000 for the three months ended March 31, 2014 and 2013, respectively. The tax effect of these transactions during the three months ended March 31, 2014 and 2013 were $25,000 and $101,000, respectively, which were included as a component of income tax expense.

10.

FAIR VALUE MEASUREMENTS

The Company follows ASC 820, Fair Value Measurements and Disclosures, 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.

Derivative instruments

As discussed in Note 8 “Derivatives,” the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments 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 derivatives using standard 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 derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.

During the ordinary course of business, the Company enters into interest rate lock commitments related to the origination of mortgage loans held for sale that are recorded at estimated fair value based on the value of the underlying loan, which in turn is based on quoted prices for similar loans in the secondary market. However, this value is adjusted by a pull-through rate which considers the likelihood that the loan in a lock position will ultimately close. The pull-through rate is derived from the Company’s internal data and is adjusted using significant management judgment. The pull-through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. As such, interest rate lock commitments are classified as Level 3. The Company used a weighted average pull-through rate of 80%. As of March 31, 2014, this derivative is recorded as a component of “Loans held for sale, net” on the Consolidated Balance Sheet. For further discussion please refer to Note 8 “Derivatives” in the “Notes to Consolidated Financial Statements.”

- 32 -

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.

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 the validation as of March 31, 2014 and December 31, 2013.

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

- 33 -

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at March 31, 2014 and December 31, 2013 (dollars in thousands):

	Fair Value Measurements at March 31, 2014 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	$	-	$	16	$	-	$	16
Cash flow hedge - prime loan swap		-		13		-		13
Interest rate lock commitments		-		-		538		538
Securities available for sale:
U.S. government and agency securities		-		3,174		-		3,174
Obligations of states and political subdivisions		-		433,651		-		433,651
Corporate and other bonds		-		72,622		-		72,622
Mortgage-backed securities		-		555,963		-		555,963
Other securities		-		13,289		-		13,289

LIABILITIES
Interest rate swap - loans	$	-	$	16	$	-	$	16
Cash flow hedge - trust preferred		-		3,784		-		3,784

	Fair Value Measurements at December 31, 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	$	-	$	33	$	-	$	33
Securities available for sale:
U.S. government and agency securities		-		2,153		-		2,153
Obligations of states and political subdivisions		-		254,830		-		254,830
Corporate and other bonds		-		9,434		-		9,434
Mortgage-backed securities		-		407,362		-		407,362
Other securities		-		3,569		-		3,569

LIABILITIES
Interest rate swap - loans	$	-	$	33	$	-	$	33
Cash flow hedge - prime loan swap		-		516		-		516
Cash flow hedge - trust preferred		-		3,046		-		3,046

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.

- 34 -

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 $44,000, $363,000 and $0 were recorded on loans held for sale during the three months ended March 31, 2014, the year ended December 31, 2013, and the three months ended March 31, 2013, respectively. Gains and losses on the sale of loans are recorded within the mortgage segment and are reported on a separate line item in 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 dependent loans are reported at the fair value of the underlying collateral if repayment is solely from the underlying 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). Collateral dependent 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

Fair values of OREO are carried at 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 the three months ended March 31, 2014, the year ended December 31, 2013, and the three months ended March 31, 2013 were $256,000, $791,000 and $0, respectively.

The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis at March 31, 2014 and December 31, 2013 (dollars in thousands):

	Fair Value Measurements at March 31, 2014 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	$	-	$	48,215	$	-	$	48,215
Impaired loans		-		-		3,865		3,865
Other real estate owned		-		-		35,487		35,487

	Fair Value Measurements at December 31, 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	$	-	$	53,185	$	-	$	53,185
Impaired loans		-		-		7,985		7,985
Other real estate owned		-		-		34,116		34,116

- 35 -

The following table displays quantitative information about Level 3 Fair Value Measurements for March 31, 2014 (dollars in thousands):

	Fair Value Measurements at March 31, 2014
	Fair Value		Valuation Technique(s)	Unobservable Inputs	Weighted Average
ASSETS
Commercial Construction	$	434	Market comparables	Discount applied to market comparables ⁽¹⁾		8	%
Commercial Real Estate - Owner Occupied		149	Market comparables	Discount applied to market comparables ⁽¹⁾		0	%
Raw Land and Lots		606	Market comparables	Discount applied to market comparables ⁽¹⁾		0	%
Single Family Investment Real Estate		2,023	Market comparables	Discount applied to market comparables ⁽¹⁾		2	%
Commercial and Industrial		341	Market comparables	Discount applied to market comparables ⁽¹⁾		16	%
Other ⁽²⁾		312	Market comparables	Discount applied to market comparables ⁽¹⁾		21	%
Total Impaired Loans		3,865

Other real estate owned		35,487	Market comparables	Discount applied to market comparables ⁽¹⁾		30	%
Total	$	39,352

⁽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.

The following table displays quantitative information about Level 3 Fair Value Measurements for December 31, 2013 (dollars in thousands):

	Fair Value Measurements at December 31, 2013
	Fair Value		Valuation Technique(s)	Unobservable Inputs	Weighted Average
ASSETS
Commercial Construction	$	219	Market comparables	Discount applied to market comparables ⁽¹⁾		0	%
Commercial Real Estate - Owner Occupied		2,043	Market comparables	Discount applied to market comparables ⁽¹⁾		17	%
Raw Land and Lots		908	Market comparables	Discount applied to market comparables ⁽¹⁾		10	%
Single Family Investment Real Estate		1,332	Market comparables	Discount applied to market comparables ⁽¹⁾		0	%
Commercial and Industrial		1,719	Market comparables	Discount applied to market comparables ⁽¹⁾		28	%
Other ⁽²⁾		1,764	Market comparables	Discount applied to market comparables ⁽¹⁾		0	%
Total Impaired Loans		7,985

Other real estate owned		34,116	Market comparables	Discount applied to market comparables ⁽¹⁾		33	%
Total	$	42,101

⁽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.

- 36 -

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 deposit 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.

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 March 31, 2014 and December 31, 2013, the fair value of loan commitments and standby letters of credit was immaterial.

- 37 -

The carrying values and estimated fair values of the Company’s financial instruments as of March 31, 2014 and December 31, 2013 are as follows (dollars in thousands):

			Fair Value Measurements at March 31, 2014 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	$	142,250	$	142,250	$	-	$	-	$	142,250
Securities available for sale		1,078,699		-		1,078,699		-		1,078,699
Restricted stock		42,441		-		42,441		-		42,441
Interest rate lock commitments		538		-		-		538		538
Loans held for sale		48,215		-		48,215		-		48,215
Net loans		5,243,291		-		-		5,294,475		5,294,475
Interest rate swap - loans		16		-		16		-		16
Cash flow hedge - prime loan swap		13		-		13		-		13
Accrued interest receivable		22,140		-		22,140		-		22,140

LIABILITIES
Deposits	$	5,686,131	$	-	$	5,690,618	$	-	$	5,690,618
Borrowings		572,698		-		550,111		-		550,111
Accrued interest payable		2,136		-		2,136		-		2,136
Interest rate swap - loans		16		-		16		-		16
Cash flow hedge - trust preferred		3,784		-		3,784		-		3,784

			Fair Value Measurements at December 31, 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	$	73,023	$	73,023	$	-	$	-	$	73,023
Securities available for sale		677,348		-		677,348		-		677,348
Restricted stock		26,036		-		26,036		-		26,036
Loans held for sale		53,185		-		53,185		-		53,185
Net loans		3,009,233		-		-		3,035,504		3,035,504
Interest rate swap - loans		33		-		33		-		33
Accrued interest receivable		15,000		-		15,000		-		15,000

LIABILITIES
Deposits	$	3,236,843	$	-	$	3,238,777	$	-	$	3,238,777
Borrowings		463,314		-		443,237		-		443,237
Accrued interest payable		902		-		902		-		902
Cash flow hedge - prime loan swap		516		-		516		-		516
Cash flow hedge - trust preferred		3,046		-		3,046		-		3,046
Interest rate swap - loans		33		-		33		-		33

- 38 -

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.

11.

STOCK-BASED COMPENSATION

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) provides for the granting of stock-based awards in the form of incentive stock options (“incentive stock options,” intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986), non-statutory stock options, and nonvested stock to attract, retain, and reward key employees of the Company and its subsidiaries. The Company issues new shares to satisfy stock-based awards. Under the plan, the option price cannot be less than the fair market value of the stock on the grant date, and the 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 2011 Plan became effective on January 1, 2011 after its approval by shareholders at the annual meeting of shareholders held on April 26, 2011. The following table summarizes the shares available in the 2011 Plan as of March 31, 2014:

	2011 Plan
Beginning Authorization		1,000,000
Granted		(510,050	)
Expired, forfeited, or cancelled		26,972
Remaining available for grant		516,922

In connection with the acquisition of StellarOne, each outstanding option to acquire StellarOne common stock, whether or not exercisable, was assumed by the Company and converted into an option to acquire the same number of whole shares of the Company’s commons stock, subject to the exchange ratio of 0.9739. The exercise price per share of each new option was equal to the price under the original StellarOne option divided by the exchange ratio of 0.9739. Each converted StellarOne stock option has the same terms and conditions as were in effect prior to the completion of the acquisition. Restricted StellarOne stock awards which were unvested and outstanding prior to the merger were accelerated and converted into restricted stock awards of the Company on the same basis as stock options. Restricted stock was issued from existing StellarOne stock incentive plans, and subsequent awards will be issued from the 2011 Plan.

For the three months ended March 31, 2014 and 2013, the Company recognized stock-based compensation expense (included in salaries and benefits expense) of approximately $374,000 and $318,000 ($270,000 and $235,000 net of tax), respectively, or approximately $0.01 per common share for both three months ended March 31, 2014 and 2013.

Stock Options

The following table summarizes the stock option activity for the three months ended March 31, 2014:

	Number of Stock Options			Weighted Average Exercise Price
Options outstanding, December 31, 2013		402,946		$	16.48
Options converted upon StellarOne acquisition		124,217			20.88
Exercised		(24,465	)		18.77
Expired		(20,879	)		23.45
Options outstanding, March 31, 2014		481,819			17.20
Options exercisable, March 31, 2014		303,683			19.09

- 39 -

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model. The model uses variables which include the historical dividend yield of the Company’s common stock, the average contractual life and vesting schedule of the option, the historic volatility of the Company’s common stock price, and the risk-free interest rate at the time the option was granted. Other than options that were assumed and converted upon completion of the StellarOne merger, the Company has not granted incentive compensation in the form of options since February 2012.

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 March 31, 2014:

	Stock Options Vested or Expected to Vest		Exercisable
Stock options (number of shares)		481,819		303,683
Weighted average remaining contractual life in years		5.17		4.17
Weighted average exercise price on shares above water	$	15.20	$	16.12
Aggregate intrinsic value	$	4,226,094	$	2,186,962

Nonvested Stock

The 2011 Plan permits the granting of nonvested stock but limits such grants to one-third of the aggregate number of total awards granted. This equity component of compensation is divided between restricted (time-based) stock grants and performance-based stock grants. Generally, the restricted stock vests 50% on each of the third and fourth anniversaries from the grant date. The performance-based stock is subject to vesting based on achieving certain performance metrics; the grant of performance-based stock is subject to approval by the Company’s Compensation Committee in its sole discretion. The value of the nonvested stock awards is calculated by multiplying the fair market value of the Company’s common stock on the grant date by the number of shares awarded. Employees have the right to vote the shares and to receive cash or stock dividends (restricted stock), if any, except for the nonvested stock under the performance-based component (performance stock).

The following table summarizes the restricted stock activity for the three months ended March 31, 2014:

	Number of Shares of Restricted Stock			Weighted Average Grant-Date Fair Value
Balance, December 31, 2013		260,763		$	16.47
Granted		122,606			24.86
Net settle for taxes		(61,732	)		24.83
Vested		(13,310	)		11.79
Forfeited		(1,765	)		18.53
Balance, March 31, 2014		306,562			21.89

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of March 31, 2014 that will be recognized in future periods is as follows (dollars in thousands):

	Stock Options		Restricted Stock		Total
For the remaining nine months of 2014	$	237	$	1,521	$	1,758
For year ending December 31, 2015		241		1,736		1,977
For year ending December 31, 2016		143		1,486		1,629
For year ending December 31, 2017		28		418		446
For year ending December 31, 2018		-		55		55
Total	$	649	$	5,216	$	5,865

- 40 -

12.

EARNINGS PER SHARE

Basic EPS was computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common shares outstanding during the period, including the effect of dilutive potential common shares outstanding attributable to stock awards.

There were approximately 212,306 and 234,300 shares underlying anti-dilutive awards as of March 31, 2014 and 2013, respectively, which were excluded from the calculation of diluted EPS.

The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three months ended March 31, 2014 and 2013 (in thousands except per share data):

	Net Income Available to Common Shareholders (Numerator)		Weighted Average Common Shares (Denominator)		Per Share Amount
For the Three Months ended March 31, 2014
Net income, basic	$	7,815		46,977	$	0.17