UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended June 30, 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 August 1, 2014 was 45,634,905.

UNION BANKSHARES CORPORATION

FORM 10-Q

INDEX

ITEM		PAGE

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	2

	Consolidated Statements of Income for the three and six months ended June 30, 2014 and 2013	3

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and 2013	4

	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2014 and 2013	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013	6

	Notes to Consolidated Financial Statements	7

	Report of Independent Registered Public Accounting Firm	46

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	47

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	72

Item 4.	Controls and Procedures	74

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	75

Item 1A.	Risk Factors	76

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76

Item 6.	Exhibits	77

	Signatures	78

		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 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
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.

PART I – FINANCIAL INFORMATION

Item 1 – Financial Statements

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)

	June 30,		December 31,
	2014		2013
	(Unaudited)		(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	136,799	$	66,090
Interest-bearing deposits in other banks		21,769		6,781
Money market investments		1		1
Federal funds sold		311		151
Total cash and cash equivalents		158,880		73,023

Securities available for sale, at fair value		1,094,777		677,348
Restricted stock, at cost		47,204		26,036

Loans held for sale, net		63,622		53,185

Loans, net of unearned income		5,233,069		3,039,368
Less allowance for loan losses		31,379		30,135
Net loans		5,201,690		3,009,233

Bank premises and equipment, net		145,662		82,815
Other real estate owned, net of valuation allowance		38,494		34,116
Core deposit intangibles, net		36,479		11,980
Goodwill		296,876		59,400
Other assets		223,396		149,435
Total assets	$	7,307,080	$	4,176,571

LIABILITIES
Noninterest-bearing demand deposits		1,198,919		691,674
Interest-bearing deposits		4,535,644		2,545,168
Total deposits		5,734,563		3,236,842

Securities sold under agreements to repurchase		42,276		52,455
Other short-term borrowings		200,000		211,500
Long-term borrowings		298,786		199,359
Other liabilities		54,486		38,176
Total liabilities		6,330,111		3,738,332

Commitments and contingencies

STOCKHOLDERS' EQUITY
Common stock, $1.33 par value, shares authorized 100,000,000 and 36,000,000, respectively; issued and outstanding, 45,874,662 shares and 24,976,434 shares, respectively.		60,731		33,020
Surplus		659,179		170,770
Retained earnings		246,178		236,639
Accumulated other comprehensive income (loss)		10,881		(2,190	)
Total stockholders' equity		976,969		438,239

Total liabilities and stockholders' equity	$	7,307,080	$	4,176,571

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						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2014			2013			2014			2013
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Interest and dividend income:
Interest and fees on loans	$	61,386		$	38,687		$	122,655		$	77,912
Interest on federal funds sold		-			-			-			1
Interest on deposits in other banks		9			6			21			11
Interest and dividends on securities:
Taxable		3,860			1,939			7,508			4,008
Nontaxable		3,379			2,054			6,658			4,041
Total interest and dividend income		68,634			42,686			136,842			85,973

Interest expense:
Interest on deposits		2,550			3,701			4,806			7,663
Interest on federal funds purchased		23			21			46			36
Interest on short-term borrowings		146			54			265			108
Interest on long-term borrowings		2,200			1,507			4,252			3,009
Total interest expense		4,919			5,283			9,369			10,816

Net interest income		63,715			37,403			127,473			75,157
Provision for loan losses		1,500			1,000			1,500			3,050
Net interest income after provision for loan losses		62,215			36,403			125,973			72,107

Noninterest income:
Service charges on deposit accounts		4,525			2,346			8,822			4,618
Other service charges, commissions and fees		5,412			3,222			10,083			6,029
Gains on securities transactions, net		426			53			455			42
Gains on sales of mortgage loans, net of commissions		3,030			4,668			5,328			8,520
Losses on sales of bank premises		(71	)		(34	)		(304	)		(330	)
Other operating income		3,382			1,044			6,520			2,254
Total noninterest income		16,704			11,299			30,904			21,133

Noninterest expenses:
Salaries and benefits		28,040			17,912			57,666			35,878
Occupancy expenses		5,102			2,764			10,282			5,619
Furniture and equipment expenses		2,637			1,741			5,505			3,585
Communications expense		1,351			675			2,450			1,372
Technology and data processing		2,792			2,021			5,866			3,765
Professional services		1,442			663			2,497			1,387
Marketing and advertising expense		1,692			1,108			2,757			2,160
FDIC assessment premiums and other insurance		1,593			756			2,986			1,546
OREO and credit-related expenses		2,244			984			3,694			1,558
Amortization of intangible assets		2,455			921			5,071			1,990
Acquisition and conversion costs		4,661			919			17,829			919
Other expenses		5,466			3,819			10,653			8,004
Total noninterest expenses		59,475			34,283			127,256			67,783

Income before income taxes		19,444			13,419			29,621			25,457
Income tax expense		4,664			3,956			7,026			7,011
Net income	$	14,780		$	9,463		$	22,595		$	18,446
Earnings per common share, basic	$	0.32		$	0.38		$	0.49		$	0.74
Earnings per common share, diluted	$	0.32		$	0.38		$	0.48		$	0.74

See accompanying notes to consolidated financial statements.

-3 -

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2014			2013			2014			2013
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Net income	$	14,780		$	9,463		$	22,595		$	18,446
Other comprehensive income (loss):
Cash flow hedges:
Change in fair value of cash flow hedges		(778	)		658			(203	)		756
Reclassification adjustment for losses included in net income (net of tax, $117 and $103 for the three months and $142 and $204 for the six months ended June 30, 2014 and 2013)		217			191			264			379
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period (net of tax, $3,625 and $5,233 for the three months and $7,024 and $6,368 for the six months ended June 30, 2014 and 2013)		6,733			(9,720	)		13,046			(11,827	)
Reclassification adjustment for (gains) losses included in net income (net of tax, $9 and $19 for the three months and $19 and $15 for the six months ended June 30, 2014 and 2013)		(17	)		(34	)		(36	)		(27	)
Other comprehensive income (loss)		6,155			(8,905	)		13,071			(10,719	)
Comprehensive income	$	20,935		$	558		$	35,666		$	7,727

See accompanying notes to consolidated financial statements.

-4 -

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

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

Balance - December 31, 2013	$	33,020		$	170,770		$	236,639		$	(2,190	)	$	438,239
Net income - 2014								22,595						22,595
Other comprehensive income (net of tax, $7,147)											13,071			13,071
Issuance of Common Stock in regard to acquisition (22,147,874 shares)		29,457			520,066									549,523
Dividends on Common Stock ($.28 per share)								(12,503	)					(12,503	)
Stock purchased under stock repurchase plan (1,342,075 shares)		(1,785	)		(32,121	)								(33,906	)
Issuance of common stock under Dividend Reinvestment Plan (23,187 shares)		31			522			(553	)					-
Issuance of common stock under Equity Compensation Plans (60,470 shares)		80			863									943
Vesting of restricted stock under Equity Compensation Plans (8,254 shares)		11			(11	)								-
Net settle for taxes on Restricted Stock Awards (62,287 shares)		(83	)		(1,464	)								(1,547	)
Stock-based compensation expense					554									554
Balance - June 30, 2014	$	60,731		$	659,179		$	246,178		$	10,881		$	976,969

See accompanying notes to consolidated financial statements.

-5 -

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2014 AND 2013

(Dollars in thousands)

	2014			2013
	(Unaudited)			(Unaudited)
Operating activities:
Net income	$	22,595		$	18,446
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation of bank premises and equipment		5,470			3,046
Writedown of OREO		1,073			-
Amortization, net		12,201			2,598
Accretion and amortization related to acquisition, net		(4,766	)		-
Provision for loan losses		1,500			3,050
Gains on securities transactions, net		(455	)		(42	)
Decrease in loans held for sale, net		940			58,303
Gains on sales of other real estate owned, net		(30	)		(142	)
Losses on bank premises, net		304			330
Stock-based compensation expenses		554			325
Net decrease in other assets		12,907			2,151
Net (decrease) increase in other liabilities		(3,399	)		2,813
Net cash and cash equivalents provided by operating activities		48,894			90,878
Investing activities:
Purchases of securities available for sale		(291,070	)		(106,188	)
Proceeds from sales of securities available for sale		259,077			15,585
Proceeds from maturities, calls and paydowns of securities available for sale		68,448			78,050
Net decrease (increase) in loans		41,555			(42,027	)
Net increase in bank premises and equipment		(4,879	)		(1,812	)
Proceeds from sales of other real estate owned		7,713			3,391
Improvements to other real estate owned		(59	)		(194	)
Cash acquired in bank acquisitions		49,989			-
Net cash and cash equivalents provided by (used in) investing activities		130,774			(53,195	)
Financing activities:
Net increase in noninterest-bearing deposits		95,205			22,402
Net (decrease) increase in interest-bearing deposits		(71,978	)		(54,206	)
Net decrease in short-term borrowings		(70,906	)		(2,852	)
Net increase in long-term borrowings ⁽¹⁾		881			1,104
Cash dividends paid - common stock		(12,503	)		(6,063	)
Repurchase of common stock		(33,906	)		(9,499	)
Issuance of common stock		943			96
Taxes paid related to net share settlement of equity awards		(1,547	)		(20	)
Net cash and cash equivalents (used in) provided by financing activities		(93,811	)		(49,038	)
Increase in cash and cash equivalents		85,857			(11,355	)
Cash and cash equivalents at beginning of the period		73,023			82,902
Cash and cash equivalents at end of the period	$	158,880		$	71,547

Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	13,788		$	11,166
Income taxes		5,800			4,600

Supplemental schedule of noncash investing and financing activities
Unrealized gain (loss) on securities available for sale	$	20,015		$	(18,237	)
Changes in fair value of interest rate swap loss		61			1,135
Transfers from loans to other real estate owned		2,704			4,386
Transfers from bank premises to other real estate owned		6,052			988

Transactions related to bank and branch acquisitions
Assets acquired		2,959,212			-
Liabilities assumed		2,647,165			-

(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)

June 30, 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 and its wholly-owned subsidiaries. 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 -

In June 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers: Topic 606”. This ASU applies to any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards. The guidance supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition”, most industry-specific guidance, and some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts”. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To be in alignment with the core principle, an entity must apply a five step process including: identification of the contract(s) with a customer, identification of performance obligations in the contract(s), determination of the transaction price, allocation of the transaction price to the performance obligations, and recognition of revenue when (or as) the entity satisfies a performance obligation. Additionally, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer have also been amended to be consistent with the guidance on recognition and measurement. The amendments in this ASU are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2014-09 will have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-11, “Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures”. This ASU aligns the accounting for repurchase-to-maturity transactions and repurchase agreements executed as a repurchase financing with the accounting for other typical repurchase agreements. The new guidance eliminates sale accounting for repurchase-to-maturity transactions and supersedes the guidance under which a transfer of a financial asset and a contemporaneous repurchase financing could be accounted for on a combined basis as a forward agreement. The amendments in the ASU also require a new disclosure for transactions economically similar to repurchase agreements in which the transferor retains substantially all of the exposure to the economic return on the transferred financial assets throughout the term of the transaction. Additional disclosures will be required for the nature of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The amendments in this ASU are effective for the first interim or annual period beginning after December 15, 2014; however, the disclosure for transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2014-11 will have on its consolidated financial statements.

In June 2014, the FASB issued ASU No. 2014-12, “Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period”. The new guidance applies to reporting entities that grant employees share-based payments in which the terms of the award allow a performance target to be achieved after the requisite service period. The amendments in the ASU require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. Existing guidance in “Compensation – Stock Compensation (Topic 718)”, should be applied to account for these types of awards. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and reporting entities may choose to apply the amendments in the ASU either on a prospective or retrospective basis. The Company is currently assessing the impact that ASU 2014-12 will have on its consolidated financial statements.

-8 -

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. On May 9, 2014, StellarOne Bank was merged with and into Union First Market Bank. As part of the acquisition plan and cost control efforts, the Company decided to consolidate 13 overlapping bank branches into nearby locations during the first six months of 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.

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 premises 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.

-9 -

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 regarding facts and circumstances about expected cash flows that existed as of the acquisition date, management will adjust in accordance with accounting for business combinations.

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 or PCI) 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 are 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 FHLB. 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-years digits method over the weighted average remaining life.

-10 -

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 acquisition accounting fair value adjustments as the future amortization/accretion of these adjustments represent temporary differences between book income and taxable income.

The following table 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 Statements 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, 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. 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):

	Three months ended		Six months ended
	June 30, 2013		June 30, 2013
	(unaudited)		(unaudited)
Total revenues (net interest income plus noninterest income)	$	83,116	$	164,792
Net income	$	19,344	$	37,007

Acquisition-related expenses associated with the acquisition of StellarOne were $4.7 million and $17.8 million for the three and six months ended June 30, 2014, and $919,000 for both the three and six months ended June 30, 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				For the six months ended
	June 30,				June 30,
	2014		2013		2014		2013
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Salaries and employee benefits	$	1,158	$	-	$	7,988	$	-
Professional services		124		900		3,595		900
Other costs of operations		3,379		19		6,246		19
Total	$	4,661	$	919	$	17,829	$	919

-11 -

SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of June 30, 2014 and December 31, 2013 are summarized as follows (dollars in thousands):

	Amortized		Gross Unrealized					Estimated
	Cost		Gains		(Losses)			Fair Value
June 30, 2014
U.S. government and agency securities	$	1,466	$	1,649	$	-		$	3,115
Obligations of states and political subdivisions		420,297		14,960		(2,360	)		432,897
Corporate and other bonds		79,379		335		(476	)		79,238
Mortgage-backed securities		558,424		9,108		(1,331	)		566,201
Other securities		13,321		33		(28	)		13,326
Total securities	$	1,072,887	$	26,085	$	(4,195	)	$	1,094,777

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 Bank’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 Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the Bank’s total assets. The Federal Reserve Bank requires the Bank 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 $23.8 million and $6.7 million as of June 30, 2014 and December 31, 2013 and FHLB stock in the amount of $23.4 million and $19.3 million as of June 30, 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
June 30, 2014
Obligations of states and political subdivisions	$	2,193	$	(9	)	$	57,211	$	(2,351	)	$	59,404	$	(2,360	)
Mortgage-backed securities		95,680		(230	)		50,516		(1,101	)		146,196		(1,331	)
Corporate bonds and other securities		28,852		(197	)		4,482		(307	)		33,334		(504	)
Totals	$	126,725	$	(436	)	$	112,209	$	(3,759	)	$	238,934	$	(4,195	)

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 June 30, 2014, there were $112.2 million, or 82 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 $3.8 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 June 30, 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.

	June 30, 2014				December 31, 2013
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	24,572	$	24,688	$	6,791	$	6,796
Due after one year through five years		43,770		44,894		21,666		22,497
Due after five years through ten years		286,198		292,184		116,735		119,269
Due after ten years		718,347		733,011		530,282		528,786
Total securities available for sale	$	1,072,887	$	1,094,777	$	675,474	$	677,348

Securities with an amortized cost of $348.8 million and $186.6 million as of June 30, 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 June 30, 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. During the quarter ended June 30, 2014, the trust preferred security was called at a premium. As a result, the Company recognized a gain on sale of the previously written down security of $400,000.

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
Reductions for securities sold during the period (realized)		(400	)
Cumulative credit losses on investment securities, through June 30, 2014	$	-

-14 -

LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of unearned income, and consist of the following at June 30, 2014 and December 31, 2013 (dollars in thousands):

	June 30,		December 31,
	2014		2013
Commercial:
Commercial Construction	$	295,503	$	213,675
Commercial Real Estate - Owner Occupied		870,742		500,764
Commercial Real Estate - Non-Owner Occupied		1,455,369		755,905
Raw Land and Lots		212,475		187,529
Single Family Investment Real Estate		397,186		237,640
Commercial and Industrial		390,682		215,702
Other Commercial		80,337		52,490
Consumer:
Mortgage		505,004		237,414
Consumer Construction		75,815		48,984
Indirect Auto		185,319		174,843
Indirect Marine		40,189		38,633
HELOCs		498,280		281,579
Credit Card		23,432		23,211
Other Consumer		202,736		70,999
Total	$	5,233,069	$	3,039,368

The following table shows the aging of the Company’s loan portfolio, by class, at June 30, 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	$	-	$	-	$	-	$	5,446	$	1,065	$	288,992	$	295,503
Commercial Real Estate - Owner Occupied		1,684		1,436		161		31,619		682		835,160		870,742
Commercial Real Estate - Non-Owner Occupied		1,379		1,160		45		41,412		169		1,411,204		1,455,369
Raw Land and Lots		346		43		44		9,453		5,921		196,668		212,475
Single Family Investment Real Estate		742		343		77		19,661		5,737		370,626		397,186
Commercial and Industrial		661		321		322		4,944		3,794		380,640		390,682
Other Commercial		706		66		-		2,358		121		77,086		80,337
Consumer:
Mortgage		13,837		3,043		3,861		10,974		4,360		468,929		505,004
Consumer Construction		208		-		-		533		-		75,074		75,815
Indirect Auto		1,526		130		312		-		-		183,351		185,319
Indirect Marine		155		-		-		-		327		39,707		40,189
HELOCs		4,293		1,066		1,026		2,847		557		488,491		498,280
Credit Card		180		55		182		-		-		23,015		23,432
Other Consumer		2,424		567		840		1,860		366		196,679		202,736
Total	$	28,141	$	8,230	$	6,870	$	131,107	$	23,099	$	5,035,622	$	5,233,069

-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 $23.1 million and $15.0 million at June 30, 2014 and December 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 $6.9 million and $6.7 million at June 30, 2014 and December 31, 2013, respectively.

The following table shows the PCI commercial and consumer loan portfolios, by class and their delinquency status, at June 30, 2014 (dollars in thousands):

	30-89 Days Past Due		Greater than 90 Days		Current		Total
Commercial:
Commercial Construction	$	72	$	692	$	4,682	$	5,446
Commercial Real Estate - Owner Occupied		1,694		984		28,941		31,619
Commercial Real Estate - Non-Owner Occupied		4,079		2,404		34,929		41,412
Raw Land and Lots		478		158		8,817		9,453
Single Family Investment Real Estate		968		1,537		17,156		19,661
Commercial and Industrial		418		373		4,153		4,944
Other Commercial		434		772		1,152		2,358
Consumer:
Mortgage		3,475		4,061		3,438		10,974
Consumer Construction		-		533		-		533
HELOCs		285		767		1,795		2,847
Other Consumer		68		304		1,488		1,860
Total	$	11,971	$	12,585	$	106,551	$	131,107

-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 June 30, 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	$	5,777	$	5,893	$	-	$	6,106	$	117
Commercial Real Estate - Owner Occupied		3,844		3,867		-		3,877		99
Commercial Real Estate - Non-Owner Occupied		21,230		21,325		-		21,586		483
Raw Land and Lots		48,231		50,969		-		59,498		1,307
Single Family Investment Real Estate		3,198		3,614		-		3,634		74
Commercial and Industrial		3,817		6,843		-		6,923		17
Other Commercial		711		796		-		808		20
Consumer:
Mortgage		4,213		4,293		-		4,305		13
Indirect Auto		-		13		-		15		-
HELOCs		1,287		1,928		-		1,898		4
Other Consumer		101		224		-		222		-
Total impaired loans without a specific allowance	$	92,409	$	99,765	$	-	$	108,872	$	2,134

Loans with a specific allowance
Commercial:
Commercial Construction	$	679	$	679	$	91	$	677	$	8
Commercial Real Estate - Owner Occupied		3,240		3,691		281		3,723		74
Commercial Real Estate - Non-Owner Occupied		336		336		33		343		12
Raw Land and Lots		5,209		5,252		290		5,304		60
Single Family Investment Real Estate		7,830		8,076		1,023		8,115		86
Commercial and Industrial		2,798		3,077		393		3,186		48
Other Commercial		66		81		6		83		-
Consumer:
Mortgage		2,444		2,470		199		2,485		30
Indirect Marine		526		730		88		733		8
HELOCs		100		100		10		100		-
Other Consumer		276		276		102		279		5
Total impaired loans with a specific allowance	$	23,504	$	24,768	$	2,516	$	25,028	$	331
Total impaired loans	$	115,913	$	124,533	$	2,516	$	133,900	$	2,465

-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 $34.2 million and $41.8 million as of June 30, 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 June 30, 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 June 30, 2014 and December 31, 2013 (dollars in thousands):

	June 30, 2014						December 31, 2013
	No. of Loans		Recorded Investment		Outstanding Commitment		No. of Loans		Recorded Investment		Outstanding Commitment
Performing
Commercial:
Commercial Construction		2	$	1,357	$	686		1	$	684	$	-
Commercial Real Estate - Owner Occupied		4		1,467		-		4		2,278		-
Commercial Real Estate - Non-Owner Occupied		4		3,125		112		6		3,771		-
Raw Land and Lots		13		20,026		5,721		15		20,741		-
Single Family Investment Real Estate		8		1,902		-		13		3,497		-
Commercial and Industrial		7		751		-		7		1,125		-
Other Commercial		1		221		-		-		-		-
Consumer:
Mortgage		8		1,609		-		10		2,318		-
Other Consumer		3		103		-		3		106		-
Total performing		50	$	30,561	$	6,519		59	$	34,520	$	-

Nonperforming
Commercial:
Commercial Construction		2	$	518	$	-		3	$	947	$	-
Commercial Real Estate - Owner Occupied		2		161		-		3		283		-
Raw Land and Lots		1		937		-		2		3,973		-
Single Family Investment Real Estate		-		-		-		1		50		-
Commercial and Industrial		8		1,085		-		8		1,195		-
Other Commercial		1		66		-		-		-		-
Consumer:
Mortgage		2		783		-		2		794		-
Other Consumer		1		60		-		1		62		-
Total nonperforming		17	$	3,610	$	-		20	$	7,304	$	-

Total performing and nonperforming		67	$	34,171	$	6,519		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 and six months ended June 30, 2014, the Company identified one loan, totaling approximately $24,000, that went into default that had been restructured in the twelve-month period prior to the time of default. This loan was a mortgage loan which had a term modification at a market rate. During the three and six months ended June 30, 2013, the Company identified one loan, totaling approximately $43,000, that went into default that had been restructured in the twelve-month period prior to the time of default. This loan was a raw land and lot loan which was modified to an interest only loan with a market rate of interest.

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The following table shows, by class and modification type, TDRs that occurred during the three and six months ended June 30, 2014 (dollars in thousands):

	Three months ended				Six months ended
	June 30, 2014				June 30, 2014
	No. of Loans		Recorded investment at period end		No. of Loans		Recorded investment at period end
Term modification, at a market rate
Commercial:
Single Family Investment Real Estate		-	$	-		1	$	111
Commercial and Industrial		1		35		1		35
Other Commercial		-		-		2		287
Total loan term extended at a market rate		1	$	35		4	$	433

Total		1	$	35		4	$	433

-20 -

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

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

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

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

-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 six months ended June 30, 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		1,599			572			-			2,171
Loans charged off		(1,068	)		(1,359	)		-			(2,427	)
Provision charged to operations		294			1,296			(90	)		1,500
Balance, end of period	$	20,681		$	10,736		$	(38	)	$	31,379

Ending Balance, ALL:
Loans individually evaluated for impairment	$	2,117		$	399		$	-		$	2,516
Loans collectively evaluated for impairment		18,564			10,337			(38	)		28,863
Loans acquired with deteriorated credit quality		-			-			-			-
Total	$	20,681		$	10,736		$	(38	)	$	31,379

Ending Balance, Loans:
Loans individually evaluated for impairment	$	104,620		$	8,047		$	-		$	112,667
Loans collectively evaluated for impairment		3,482,781			1,506,514			-			4,989,295
Loans acquired with deteriorated credit quality		114,893			16,214			-			131,107
Total	$	3,702,294		$	1,530,775		$	-		$	5,233,069

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

-22 -

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 six months ended June 30, 2013. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):

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

Ending Balance, ALL:
Loans individually evaluated for impairment	$	6,075		$	1,502		$	-		$	7,577
Loans collectively evaluated for impairment		18,426			8,301			22			26,749
Loans acquired with deteriorated credit quality		7			-			-			7
Total	$	24,508		$	9,803		$	22		$	34,333

Ending Balance, Loans:
Loans individually evaluated for impairment	$	120,659		$	9,140		$	-		$	129,799
Loans collectively evaluated for impairment		2,007,816			859,267			-			2,867,083
Loans acquired with deteriorated credit quality		3,039			934			-			3,973
Total	$	2,131,514		$	869,341		$	-		$	3,000,855

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.

-23 -

The following table shows all loans, excluding PCI loans, in the commercial portfolios by class with their related risk rating current as of June 30, 2014 (dollars in thousands):

	1-3		4		5		6		7		8		Total
Commercial Construction	$	17,940	$	243,431	$	11,967	$	13,592	$	3,127	$	-	$	290,057
Commercial Real Estate - Owner Occupied		166,893		633,295		13,738		19,447		5,750		-		839,123
Commercial Real Estate - Non-Owner Occupied		283,010		1,058,033		30,891		21,288		20,735		-		1,413,957
Raw Land and Lots		11,191		116,476		21,565		6,394		47,396		-		203,022
Single Family Investment Real Estate		49,224		299,884		9,794		8,671		9,952		-		377,525
Commercial and Industrial		126,221		239,941		7,368		5,960		6,248		-		385,738
Other Commercial		31,599		36,203		6,845		2,556		776		-		77,979
Total	$	686,078	$	2,627,263	$	102,168	$	77,908	$	93,984	$	-	$	3,587,401

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 June 30, 2014 (dollars in thousands):

		4		5		6		7		8		Total
Commercial Construction	$	-	$	-	$	3,927	$	1,052	$	467	$	5,446
Commercial Real Estate - Owner Occupied		538		3,507		9,459		18,115		-		31,619
Commercial Real Estate - Non-Owner Occupied		695		1,125		15,236		24,356		-		41,412
Raw Land and Lots		1,435		2,156		2,092		3,770		-		9,453
Single Family Investment Real Estate		1,671		1,277		7,121		9,592		-		19,661
Commercial and Industrial		495		-		1,296		3,051		102		4,944
Other Commercial		-		-		368		1,990		-		2,358
Total	$	4,834	$	8,065	$	39,499	$	61,926	$	569	$	114,893

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.

-24 -

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 Six Months Ended						For the Six Months Ended
	June 30, 2014						June 30, 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			145,454			-			-
Accretion		(3,677	)		-			-			-
Charge-offs		-			-			(54	)		(96	)
Transfers to OREO		-			(294	)		-			(201	)
Payments received, net		-			(17,675	)		-			(295	)
Other, net		(1,365	)		-			-			-
Balance at end of period	$	32,591		$	131,107		$	3,093		$	3,973

Loans in the Company’s acquired performing loan portfolio, accounted for under ASC 310-20, totaled $2.2 billion at June 30, 2014 and $377.8 million at December 31, 2013; the remaining discount on these loans totaled $25.7 million and $3.3 million, respectively.

INTANGIBLE ASSETS

The Company’s intangible assets consist of core deposits and goodwill arising from previous acquisitions. The Company has determined that core deposit intangibles 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 2014 and determined that there was no impairment to its goodwill or intangible assets.

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

	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
June 30, 2014
Amortizable core deposit intangibles	$	76,185	$	39,706	$	36,479

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

June 30, 2013
Amortizable core deposit intangibles	$	46,615	$	32,794	$	13,821

-25 -

Amortization expense of core deposit intangibles for the three and six months ended June 30, 2014 totaled $2.5 million and $5.1 million, respectively, for the three and six months ended June 30, 2013 totaled and $921,000 and $2.0 million, respectively, and for the year ended December 31, 2013 was $3.8 million. As of June 30, 2014, the estimated remaining amortization expense of core deposit intangibles is as follows (dollars in thousands):

For the remaining six months of 2014	$	4,725
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	$	36,479

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 overnight borrowings from other financial institutions, and short-term FHLB advances. Total short-term borrowings consist of the following as of June 30, 2014 and December 31, 2013 (dollars in thousands):

	June 30,			December 31,
	2014			2013
Securities sold under agreements to repurchase	$	42,276		$	52,455
Other short-term borrowings		200,000			211,500
Total short-term borrowings	$	242,276		$	263,955

Maximum month-end outstanding balance	$	274,281		$	263,955
Average outstanding balance during the period		263,282			119,433
Average interest rate during the period		0.24	%		0.30	%
Average interest rate at end of period		0.34	%		0.30	%

Other short-term borrowings:
Federal funds purchased	$	35,000		$	31,500
FHLB	$	165,000		$	180,000

The Bank maintains federal funds lines with several correspondent banks; the remaining available balance was $90.0 million and $93.5 million at June 30, 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 Bank had a collateral dependent line of credit with the FHLB of up to $1.5 billion and $805.2 million at June 30, 2014 and December 31, 2013, respectively.

-26 -

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 $7.3 million at June 30, 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 a prior acquisition, the Company assumed subordinated debt with terms of LIBOR plus 1.45% and a maturity date of April 2016. At June 30, 2014, the carrying value of the subordinated debt was $17.5 million, with a remaining fair value discount of $897,000.

On August 23, 2012, the Company modified its fixed rate FHLB advances to floating rate advances which resulted in reducing the Company’s FHLB borrowing costs. In connection with this modification, the Company incurred a prepayment penalty of $19.6 million on the original advances, which is included as a component of long-term borrowings in the Company’s Consolidated Balance Sheet. In accordance with ASC 470-50, Modifications and Extinguishments, the Company will amortize this prepayment penalty over the term of the modified advances using the effective rate method. The amortization expense is included as a component of interest expense on long-term borrowings in the Company’s Consolidated Income Statement. Amortization expense for the three and six months ended June 30, 2014 and 2013 was $444,000 and $881,000 and $433,000 and $859,000, 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 $2.6 million at June 30, 2014. As of June 30, 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

-27 -

The carrying value of the loans and securities pledged as collateral for FHLB advances totaled $1.5 billion and $1.1 billion as of June 30, 2014 and December 31, 2013, respectively.

As of June 30, 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 six months in 2014	$	-	$	-	$	-	$	150		$	(907	)	$	(757	)
2015		-		-		10,000		175			(1,831	)		8,344
2016		-		17,500		40,000		271			(1,882	)		55,889
2017		-		-		10,000		170			(1,923	)		8,247
2018		-		-		10,000		(143	)		(1,969	)		7,888
2019		-		-		-		(286	)		(2,018	)		(2,304	)
Thereafter		93,301		-		140,000		(5,923	)		(5,899	)		221,479
Total long-term borrowings	$	93,301	$	17,500	$	210,000	$	(5,586	)	$	(16,429	)	$	298,786

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, 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 alleged 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 sought, among other things, money damages. StellarOne and the Company believe that the claims were 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 May 19, 2014, the District Court approved the memorandum of understanding and the class action settlement in the case.

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.

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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 $3.3 million and $2.0 million in loans available for sale in which the related rate lock commitment had expired as of June 30, 2014 and December 31, 2013, respectively. At June 30, 2014 and December 31, 2013, the reserves associated with these loans held for sale were $104,000 and $94,000, respectively, and are reflected on the balance sheet of the mortgage segment.

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

	June 30,		December 31,
	2014		2013
Commitments with off-balance sheet risk:
Commitments to extend credit⁽¹⁾	$	1,376,268	$	891,680
Standby letters of credit		128,030		48,107
Mortgage loan rate lock commitments		71,587		54,834
Total commitments with off-balance sheet risk	$	1,575,885	$	994,621
Commitments with balance sheet risk:
Loans held for sale	$	63,622	$	53,185
Total other commitments	$	1,639,507	$	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 June 30, 2014 and December 31, 2013, the aggregate amount of daily average required reserves was approximately $47.4 million and $16.0 million, respectively.

The Company has approximately $12.3 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 Consolidated Financial Statements.” The Company had approximately $5.5 million in deposits in other financial institutions that were uninsured at June 30, 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 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 June 30, 2014 and December 31, 2013, the Company’s indemnification reserve was $1.2 million and $627,000, respectively.

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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" in the “Notes to Consolidated Financial Statements”. 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.

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 the four prime loan swaps is six years with a fixed rate that started September 17, 2013.

During the second quarter of 2014, the Company entered into two swaps (“FHLB advance swaps”) with a total notional amount of $120.0 million. The Company designated the FHLB advance swaps as a cash flow hedge intended to protect against the variability in the expected future cash flows on the designated variable rate FHLB borrowings. The FHLB advance swaps hedge the interest rate risk, wherein the Company will receive an interest rate based on the three month LIBOR from the counterparty and pays interest of 3.46% to the same counterparty calculated on the notional amount. The swaps are deferred starting swaps with terms of six years and five years and effective dates of February 23, 2017 and February 23, 2018, respectively.

All swaps were entered into with counterparties 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 June 30, 2014, the Company had $5.7 million of cash pledged as collateral for the trust swaps and securities with a market value of $5.2 million pledged as collateral for the prime loan swaps and FHLB advance 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, prime loan swaps, and FHLB advance 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 June 30, 2014, the fair value of the Company’s cash flow hedges was an unrealized loss of $4.7 million, the amount the Company would have expected to pay if the contract was terminated. The below liability is recorded as a component of other comprehensive income recorded in the Company’s Consolidated Statements of Comprehensive Income.

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Shown below is a summary of the derivatives designated as cash flow hedges at June 30, 2014 and December 31, 2013 (dollars in thousands):

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of June 30, 2014
Pay fixed - receive floating interest rate swaps		5	$	188,000	$	-	$	5,102		0.23	%⁽¹⁾		2.77	%⁽¹⁾		2.23	⁽¹⁾

Receive fixed - pay floating interest rate swaps		4	$	55,000	$	420	$	-		4.93	%		3.55	%		5.22

(1) Due to their deferred nature, the rates and the life exclude the two FHLB advance swaps entered into in the 2nd quarter of 2014.

			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

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 June 30, 2014, the Company had securities with a market value of $1.8 million pledged as collateral for the loan swaps. Shown below is a summary regarding loan swap derivative activities at June 30, 2014 and December 31, 2013 (dollars in thousands):

			Notional						Receive			Pay			Life
	Positions		Amount		Asset		Liability		Rate			Rate			(Years)
As of June 30, 2014
Receive fixed - pay floating interest rate swaps		31	$	111,106	$	1,279	$	-		4.30	%		2.57	%		7.53
Pay fixed - receive floating interest rate swaps		31	$	111,106	$	-	$	1,279		2.57	%		4.30	%		7.53

			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.

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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 $71.6 million at June 30, 2014 with a fair value of $731,000. 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 and six months ended June 30, 2014 is summarized as follows, net of tax (dollars in thousands):

	Unrealized Gains (Losses) on Securities			Change in Fair Value of Cash Flow Hedge			Total
Balance - March 31, 2014	$	7,486		$	(2,760	)	$	4,726

Other comprehensive income (loss)		6,733			(778	)		5,955
Amounts reclassified from accumulated other comprehensive income		(17	)		217			200
Net current period other comprehensive income (loss)		6,716			(561	)		6,155

Balance - June 30, 2014	$	14,202		$	(3,321	)	$	10,881

	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		13,046			(203	)		12,843
Amounts reclassified from accumulated other comprehensive income		(36	)		264			228
Net current period other comprehensive income		13,010			61			13,071

Balance - June 30, 2014	$	14,202		$	(3,321	)	$	10,881

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

	Unrealized Gains (Losses) on Securities			Change in Fair Value of Cash Flow Hedge			Total
Balance - March 31, 2013	$	12,473		$	(4,203	)	$	8,270

Other comprehensive income (loss)		(9,720	)		658			(9,062	)
Amounts reclassified from accumulated other comprehensive income		(34	)		191			157
Net current period other comprehensive income (loss)		(9,754	)		849			(8,905	)

Balance - June 30, 2013	$	2,719		$	(3,354	)	$	(635	)

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

Other comprehensive income (loss)		(11,827	)		756			(11,071	)
Amounts reclassified from accumulated other comprehensive income		(27	)		379			352
Net current period other comprehensive income (loss)		(11,854	)		1,135			(10,719	)

Balance - June 30, 2013	$	2,719		$	(3,354	)	$	(635	)

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. Excluding OTTI recovery of $400,000 in the second quarter of 2014, the Company reported gains of $26,000 and $55,000 for the three and six months ended June 30, 2014, respectively, and gains of $53,000 and $42,000 for the three and six months ended June, 30, 2013, respectively, related to gains/losses on the sale of securities. The tax effect of these transactions during the three and six months ended June 30, 2014 and 2013 were $9,000 and $19,000 and $19,000 and $15,000, respectively, which were included as a component of income tax expense.

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 $334,000 and $406,000 and $294,000 and $583,000 for the three and six months ended June 30, 2014 and 2013, respectively. The tax effect of these transactions during the three and six months ended June 30, 2014 and 2013 were $117,000 and $142,000 and $103,000 and $204,000, 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.

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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” in the “Notes to Consolidated Financial Statements,” 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 approximately 90%. As of June 30, 2014, this derivative is recorded as a component of “Loans held for sale, net” on the Consolidated Balance Sheet

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 June 30, 2014 and December 31, 2013.

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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.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013 (dollars in thousands):

	Fair Value Measurements at June 30, 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	$	-	$	1,279	$	-	$	1,279
Cash flow hedges		-		420		-		420
Interest rate lock commitments		-		-		731		731
Securities available for sale:
U.S. government and agency securities		-		3,115		-		3,115
Obligations of states and political subdivisions		-		432,897		-		432,897
Corporate and other bonds		-		79,238		-		79,238
Mortgage-backed securities		-		566,201		-		566,201
Other securities		-		13,326		-		13,326

LIABILITIES
Interest rate swap	$	-	$	1,279	$	-	$	1,279
Cash flow hedges		-		5,102		-		5,102

	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	$	-	$	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	$	-	$	33	$	-	$	33
Cash flow hedges		-		3,562		-		3,562

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.

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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 for the three and six months ended June 30, 2014 totaled $42,000 and $86,000, respectively, and for both the three and six months ended June 30, 2013 was $186,000. 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 and six months ended June 30, 2014 totaled $817,000 and $1.1 million, respectively, and for both the three and six months ended June 30, 2013 was $0.

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The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis at June 30, 2014 and December 31, 2013 (dollars in thousands):

	Fair Value Measurements at June 30, 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	$	-	$	62,891	$	-	$	62,891
Impaired loans		-		-		13,690		13,690
Other real estate owned		-		-		38,494		38,494

	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

The following table displays quantitative information about Level 3 Fair Value Measurements at June 30, 2014 (dollars in thousands):

	Fair Value Measurements at June 30, 2014
	Fair Value		Valuation Technique(s)	Unobservable Inputs	Weighted Average
ASSETS
Commercial Construction	$	447	Market comparables	Discount applied to market comparables ⁽¹⁾		75	%
Commercial Real Estate - Owner Occupied		1,786	Market comparables	Discount applied to market comparables ⁽¹⁾		8	%
Raw Land and Lots		3,942	Market comparables	Discount applied to market comparables ⁽¹⁾		22	%
Single Family Investment Real Estate		5,360	Market comparables	Discount applied to market comparables ⁽¹⁾		19	%
Commercial and Industrial		1,073	Market comparables	Discount applied to market comparables ⁽¹⁾		31	%
Other ⁽²⁾		1,082	Market comparables	Discount applied to market comparables ⁽¹⁾		10	%
Total Impaired Loans		13,690

Other real estate owned		38,494	Market comparables	Discount applied to market comparables ⁽¹⁾		30	%
Total	$	52,184

⁽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, Indirect Marine, HELOCs, and Other Consumer.

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The following table displays quantitative information about Level 3 Fair Value Measurements at 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.

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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 June 30, 2014 and December 31, 2013, the fair value of loan commitments and standby letters of credit was immaterial.

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The carrying values and estimated fair values of the Company’s financial instruments at June 30, 2014 and December 31, 2013 are as follows (dollars in thousands):

			Fair Value Measurements at June 30, 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	$	158,880	$	158,880	$	-	$	-	$	158,880
Securities available for sale		1,094,777		-		1,094,777		-		1,094,777
Restricted stock		47,204		-		47,204		-		47,204
Interest rate lock commitments		731		-		-		731		731
Loans held for sale		62,891		-		62,891		-		62,891
Net loans		5,201,690		-		-		5,227,335		5,227,335
Interest rate swap		1,279		-		1,279		-		1,279
Cash flow hedges		420		-		420		-		420
Accrued interest receivable		22,179		-		22,179		-		22,179

LIABILITIES
Deposits	$	5,734,563	$	-	$	5,737,808	$	-	$	5,737,808
Borrowings		541,062		-		522,106		-		522,106
Accrued interest payable		2,013		-		2,013		-		2,013
Interest rate swap		1,279		-		1,279		-		1,279
Cash flow hedges		5,102		-		5,102		-		5,102

			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		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
Interest rate swap		33		-		33		-		33
Cash flow hedges		3,562		-		3,562		-		3,562

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.

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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 June 30, 2014:

	2011 Plan
Beginning Authorization		1,000,000
Granted		(510,050	)
Expired, forfeited, or cancelled		39,041
Remaining available for grant		528,991

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 common 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 that 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 common stock of the Company was issued from StellarOne stock incentive plans assumed in the acquisition, and subsequent awards from the Company will be issued from the 2011 Plan.

For the three months ended June 30, 2014 and 2013, respectively, the Company recognized stock-based compensation expense (included in salaries and benefits expense) of approximately $180,000 and $7,500 ($144,000 and $34,000 net of tax) and for the six months ended June 30, 2014 and 2013, recognized $554,000 and $325,000 ($414,000 and $269,000 net of tax), respectively. Stock-based compensation expense represents approximately $0.01 per common share for both the six months ended June 30, 2014 and 2013.

Stock Options

The following table summarizes the stock option activity for the six months ended June 30, 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		(60,470	)		16.74
Expired		(51,887	)		23.57
Options outstanding, June 30, 2014		414,806			16.87
Options exercisable, June 30, 2014		284,921			18.25

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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 June 30, 2014:

	Stock Options Vested or Expected to Vest		Exercisable
Stock options (number of shares)		418,005		284,921
Weighted average remaining contractual life in years		5.40		4.61
Weighted average exercise price on shares above water	$	15.14	$	15.83
Aggregate intrinsic value	$	3,789,016	$	2,284,944

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 six months ended June 30, 2014:

	Number of Shares of Restricted Stock			Weighted Average Grant-Date Fair Value
Balance, December 31, 2013		260,763		$	16.47
Granted		127,754			24.31
Net settle for taxes		(62,287	)		24.84
Vested		(8,254	)		12.63
Forfeited		(12,415	)		20.92
Balance, June 30, 2014		305,561			19.95

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of June 30, 2014 that will be recognized in future periods is as follows (dollars in thousands):

	Stock Options		Restricted Stock		Total
For the remaining six months of 2014	$	154	$	1,025	$	1,179
For year ending December 31, 2015		234		1,675		1,909
For year ending December 31, 2016		139		1,484		1,623
For year ending December 31, 2017		26		370		396
For year ending December 31, 2018		-		54		54
Total	$	553	$	4,608	$	5,161

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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 160,768 and 289,383 shares underlying anti-dilutive awards for the three months ended June 30, 2014 and 2013, respectively, and there were approximately 134,785 and 226,624 shares underlying anti-dilutive awards for the six months ended June 30, 2014 and 2013, respectively. Anti-dilutive awards 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 and six months ended June 30, 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 June 30, 2014
Net income, basic	$	14,780		46,195	$	0.32
Add: potentially dilutive common shares - stock awards		-		102		-
Diluted	$	14,780		46,297	$	0.32

For the Three Months ended June 30, 2013
Net income, basic	$	9,463		24,722	$	0.38
Add: potentially dilutive common shares - stock awards		-		80		-
Diluted	$	9,463		24,802	$	0.38

For the Six Months ended June 30, 2014
Net income, basic	$	22,595		46,584	$	0.49
Add: potentially dilutive common shares - stock awards		-		103		(0.01	)
Diluted	$	22,595		46,687	$	0.48

For the Six Months ended June 30, 2013
Net income, basic	$	18,446		24,892	$	0.74
Add: potentially dilutive common shares - stock awards		-		78		-
Diluted	$	18,446		24,970	$	0.74

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13.

SEGMENT REPORTING DISCLOSURES

The Company has two reportable segments: a traditional full service community bank segment and a mortgage loan origination business segment. The community bank segment provides loan, deposit, investment, and trust services to retail and commercial customers throughout Virginia. The community bank segment includes the Company’s one banking subsidiary which has 131 branches in total throughout Virginia as well as trust and wealth management services. Non-bank affiliates of the Company include Union Investment Services, Inc., which provides full brokerage services, and Union Insurance Group, LLC, which offers various lines of insurance products. The mortgage segment includes UMG, which provides a variety of mortgage loan products principally in Virginia, North Carolina, South Carolina, Maryland, and the Washington D.C. metro area. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which serves to mitigate the Company’s exposure to interest rate risk.

Profit and loss is measured by net income after taxes including realized gains and losses on the Company’s investment portfolio. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. Inter-segment transactions are recorded at cost and eliminated as part of the consolidation process.

Both of the Company’s reportable segments are service-based. The mortgage business is a fee-based business while the bank is driven principally by net interest income. The bank segment provides a distribution and referral network through its customers for the mortgage loan origination business. The mortgage segment offers a more limited referral network for the bank segment, due largely to the minimal degree of overlapping geographic markets.

The community bank segment provides the mortgage segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charged the mortgage banking segment interest at the three month LIBOR rate plus 1.5% with a floor of 2.0% through May 31, 2014; beginning on June 1, 2014, the interest rate was the one month LIBOR rate plus 1.5% with no floor. These transactions are eliminated in the consolidation process. A management fee for operations and administrative support services is charged to all subsidiaries and eliminated in the consolidated totals.

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Information about reportable segments and reconciliation of such information to the consolidated financial statements for the three and six months ended June 30, 2014 and 2013 is as follows (dollars in thousands):

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
SEGMENT FINANCIAL INFORMATION
(Dollars in thousands)
	Community Bank		Mortgage			Eliminations			Consolidated
Three Months Ended June 30, 2014
Net interest income	$	63,401	$	314		$	-		$	63,715
Provision for loan losses		1,500		-			-			1,500
Net interest income after provision for loan losses		61,901		314			-			62,215
Noninterest income		13,846		3,028			(170	)		16,704
Noninterest expenses		55,349		4,296			(170	)		59,475
Income (loss) before income taxes		20,398		(954	)		-			19,444
Income tax expense (benefit)		5,016		(352	)		-			4,664
Net income (loss)	$	15,382	$	(602	)	$	-		$	14,780
Total assets	$	7,305,078	$	77,299		$	(75,297	)	$	7,307,080

Three Months Ended June 30, 2013
Net interest income	$	36,960	$	443		$	-		$	37,403
Provision for loan losses		1,000		-			-			1,000
Net interest income after provision for loan losses		35,960		443			-			36,403
Noninterest income		6,798		4,668			(167	)		11,299
Noninterest expenses		29,793		4,657			(167	)		34,283
Income before income taxes		12,965		454			-			13,419
Income tax expense		3,796		160			-			3,956
Net income	$	9,169	$	294		$	-		$	9,463
Total assets	$	4,045,163	$	121,392		$	(109,998	)	$	4,056,557

Six Months Ended June 30, 2014
Net interest income	$	126,927	$	546		$	-		$	127,473
Provision for loan losses		1,500		-			-			1,500
Net interest income after provision for loan losses		125,427		546			-			125,973
Noninterest income		25,917		5,328			(341	)		30,904
Noninterest expenses		118,591		9,006			(341	)		127,256
Income (loss) before income taxes		32,753		(3,132	)		-			29,621
Income tax expense (benefit)		8,176		(1,150	)		-			7,026
Net income (loss)	$	24,577	$	(1,982	)	$	-		$	22,595
Total assets	$	7,305,078	$	77,299		$	(75,297	)	$	7,307,080

Six Months Ended June 30, 2013
Net interest income	$	74,147	$	1,010		$	-		$	75,157
Provision for loan losses		3,050		-			-			3,050
Net interest income after provision for loan losses		71,097		1,010			-			72,107
Noninterest income		12,945		8,522			(334	)		21,133
Noninterest expenses		59,338		8,779			(334	)		67,783
Income before income taxes		24,704		753			-			25,457
Income tax expense		6,731		280			-			7,011
Net income	$	17,973	$	473		$	-		$	18,446
Total assets	$	4,045,163	$	121,392		$	(109,998	)	$	4,056,557

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders

Union Bankshares Corporation

Richmond, Virginia

We have reviewed the accompanying consolidated balance sheet of Union Bankshares Corporation and subsidiaries as of June 30, 2014, and the related consolidated statements of income and comprehensive income for the three and six month periods ended June 30, 2014 and 2013, and the related consolidated changes in stockholders' equity and cash flows for the six month period ended June 30, 2014 and 2013. These consolidated financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the consolidated balance sheet of Union Bankshares Corporation and subsidiaries as of December 31, 2013, and the related statements of income, comprehensive income, changes in stockholder's equity, and cash flows for the year then ended (not presented herein); and in our report dated March 11, 2014, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2013, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Yount, Hyde & Barbour, P.C.

Winchester, Virginia

August 6, 2014

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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Union Bankshares Corporation and its subsidiaries (collectively, the “Company”). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s Annual Report on Form 10-K and management’s discussion and analysis for the year ended December 31, 2013. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Results of operations for the three and six months ended June 30, 2014 and 2013 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

FORWARD-LOOKING STATEMENTS

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of the Company will not differ materially from any future results, performance, or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic and bank industry conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, the stock and bond markets, accounting standards or interpretations of existing standards, technology, consumer spending and savings habits, and mergers and acquisitions, including integration risk in connection with the Company’s acquisition of StellarOne such as potential deposit attrition, higher than expected costs, customer loss and business disruption, including, without limitation, potential difficulties in maintaining relationships with key personnel, and other integration related-matters. More information is available on the Company’s website, http://investors.bankatunion.com and on the SEC’s website, www.sec.gov. The information on the Company’s website is not a part of this Form 10-Q. The Company does not intend or assume any obligation to update or revise any forward-looking statements that may be made from time to time by or on behalf of the Company.

CRITICAL ACCOUNTING POLICIES

General

The accounting and reporting policies of the Company are in accordance with GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations.

The more critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses, mergers and acquisitions, and goodwill and intangible assets. The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Accordingly, the Company’s significant accounting policies are discussed in detail in Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The following is a summary of the Company’s critical accounting policies that are highly dependent on estimates, assumptions, and judgments.

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Allowance for Loan Losses

The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance that management considers adequate to absorb potential losses in the portfolio. Loans are charged against the allowance when management believes the collectability of the principal is unlikely. Recoveries of amounts previously charged-off are credited to the allowance. Management’s determination of the adequacy of the allowance is based on an evaluation of the composition of the loan portfolio, the value and adequacy of collateral, current economic conditions, historical loan loss experience, and other risk factors. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions, particularly those affecting real estate values. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to make adjustments to the allowance based on their judgments about information available to them at the time of their examination.

The Company performs regular credit reviews of the loan portfolio to review the credit quality and adherence to its underwriting standards. The credit reviews consist of reviews by its Internal Audit group and reviews performed by an independent third party. Upon origination, each commercial loan is assigned a risk rating ranging from one to nine, with loans closer to one having less risk. This risk rating scale is the Company’s primary credit quality indicator. Consumer loans are generally not risk rated; the primary credit quality indicator for this portfolio segment is delinquency status. The Company has various committees that review and ensure that the allowance for loan losses methodology is in accordance with GAAP and loss factors used appropriately reflect the risk characteristics of the loan portfolio.

The Company’s ALL consists of specific, general, and unallocated components.

Specific Reserve Component - The specific reserve component relates to impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Upon being identified as impaired, for loans not considered to be collateral dependent, an allowance is established when the discounted cash flows of the impaired loan are lower than the carrying value of that loan. Nonaccrual loans under $100,000 and other impaired loans under $500,000 are aggregated based on similar risk characteristics. The level of credit impairment within the pool(s) is determined based on historical loss factors for loans with similar risk characteristics, taking into consideration environmental factors specifically related to the underlying pool. The impairment of collateral dependent loans is measured based on the fair value of the underlying collateral (based on independent appraisals), less selling costs, compared to the carrying value of the loan. If the Company determines that the value of an impaired collateral dependent loan is less than the recorded investment in the loan, it either recognizes an impairment reserve as a specific component to be provided for in the allowance for loan losses or charges off the deficiency if it is determined that such amount represents a confirmed loss. Typically, a loss is confirmed when the Company is moving towards foreclosure (or final disposition) of the underlying collateral, the collateral deficiency has not improved for two consecutive quarters, or when there is a payment default of 180 days, whichever occurs first.

The Company obtains independent appraisals from a pre-approved list of independent, third party appraisal firms located in the market in which the collateral is located. The Company’s approved appraiser list is continuously maintained to ensure the list only includes such appraisers that have the experience, reputation, character, and knowledge of the respective real estate market. At a minimum, it is ascertained that the appraiser is currently licensed in the state in which the property is located, experienced in the appraisal of properties similar to the property being appraised, has knowledge of current real estate market conditions and financing trends, and is reputable. The Company’s internal Real Estate Valuation Group, which reports to the Risk and Compliance Group, performs either a technical or administrative review of all appraisals obtained. A technical review will ensure the overall quality of the appraisal, while an administrative review ensures that all of the required components of an appraisal are present. Generally, independent appraisals are updated every 12 to 24 months or as necessary. The Company’s impairment analysis documents the date of the appraisal used in the analysis, whether the officer preparing the report deems it current, and, if not, allows for internal valuation adjustments with justification. Adjustments to appraisals generally include discounts for continued market deterioration subsequent to the appraisal date. Any adjustments from the appraised value to carrying value are documented in the impairment analysis, which is reviewed and approved by senior credit administration officers and the Special Assets Loan Committee. External appraisals are the primary source to value collateral dependent loans; however, the Company may also utilize values obtained through broker price opinions or other valuations sources. These alternative sources of value are used only if deemed to be more representative of value based on updated information regarding collateral resolution. Impairment analyses are updated, reviewed, and approved on a quarterly basis at or near the end of each reporting period.

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General Reserve Component - The general reserve component covers non-impaired loans and is derived from an estimate of credit losses adjusted for various environmental factors applicable to both commercial and consumer loan segments. The estimate of credit losses is a function of the product of net charge-off historical loss experience to the loan balance of the loan portfolio averaged during the preceding twelve quarters, as management has determined this to adequately reflect the losses inherent in the loan portfolio. The environmental factors consist of national, local, and portfolio characteristics and are applied to both the commercial and consumer segments. The following table shows the types of environmental factors management considers:

ENVIRONMENTAL FACTORS
Portfolio	National	Local
Experience and ability of lending team	Interest rates	Level of economic activity
Depth of lending team	Inflation	Unemployment
Pace of loan growth	Unemployment	Competition
Franchise expansion	Gross domestic product	Military/government impact
Execution of loan risk rating process	General market risk and other concerns
Degree of oversight / underwriting standards	Legislative and regulatory environment
Value of real estate serving as collateral
Delinquency levels in portfolio
Charge-off levels in portfolio
Credit concentrations / nature and volume of the portfolio

Unallocated Component – This component may be used to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Together, the specific, general, and any unallocated allowance for loan loss represents management’s estimate of losses inherent in the current loan portfolio. Though provisions for loan losses may be based on specific loans, the entire allowance for loan losses is available for any loan management deems necessary to charge-off. At June 30, 2014, there were no material amounts considered unallocated as part of the allowance for loan losses.

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. A loan that is classified substandard or worse is considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The impaired loan policy is the same for each of the seven classes within the commercial portfolio segment.

For the consumer loan portfolio segment, large groups of smaller balance homogeneous loans are collectively evaluated for impairment. This evaluation subjects each of the Company’s homogenous pools to a historical loss factor derived from net charge-offs experienced over the preceding twelve quarters. The Company applies payments received on impaired loans to principal and interest based on the contractual terms until they are placed on nonaccrual status. All payments received are then applied to reduce the principal balance and recognition of interest income is terminated.

Business Combinations and Acquired Loans

The Company’s merger and acquisition strategy focuses on high-growth areas with strong market demographics and targets organizations that have a comparable corporate culture, strong performance, and good asset quality, among other factors.

-49 -

Business combinations are accounted for under ASC 805, Business Combinations, using the acquisition method of accounting. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will continue to rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions. If they are necessary to implement its plan to exit an activity of an acquiree, costs that the Company expects, but is not obligated, to incur in the future are not liabilities at the acquisition date, nor are costs to terminate the employment of or relocate an acquiree’s employees. The Company does not recognize these costs as part of applying the acquisition method. Instead, the Company recognizes these costs as expenses in its post-combination financial statements in accordance with other applicable GAAP.

Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples of acquisition-related costs to the Company include systems conversions, integration planning consultants, and advertising costs. The Company will account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities will be recognized in accordance with other applicable GAAP. These acquisition-related costs are included within the Consolidated Statements of Income classified within the noninterest expense caption.

Loans acquired in a business combination are recorded at fair value on the date of the acquisition. Loans acquired with deteriorated credit quality are accounted for in accordance with ASC 310-30, Receivables—Loans and Debt Securities Acquired with Deteriorated Credit Quality, and are initially measured at fair value, which includes estimated future credit losses expected to be incurred over the life of the loans. Loans acquired in business combinations with evidence of credit deterioration are not considered to be impaired unless they deteriorate further subsequent to the acquisition. Certain acquired loans, including performing loans and revolving lines of credit (consumer and commercial), are accounted for in accordance with ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, where the discount is accreted through earnings based on estimated cash flows over the estimated life of the loan.

Goodwill and Intangible Assets

The Company follows ASC 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of this guidance discontinued the amortization of goodwill and intangible assets with indefinite lives but require an impairment review at least annually and more frequently if certain impairment indicators are evident.

ABOUT UNION BANKSHARES CORPORATION

Headquartered in Richmond, Union Bankshares Corporation is the largest community banking organization headquartered in Virginia and operates in all major banking markets of the Commonwealth. Union Bankshares Corporation is the holding company for Union First Market Bank, which provides banking, trust, and wealth management services and has a statewide presence of 131 bank branches and 200 ATMs. Non-bank affiliates of the holding company include: Union Investment Services, Inc., which provides full brokerage services; Union Mortgage Group, Inc., which provides a full line of mortgage products; and Union Insurance Group, LLC, which offers various lines of insurance products.

In May 2014, Union First Market Bank announced that it has successfully integrated StellarOne Bank into its operations. With the integration complete, the former StellarOne branches are now operating as Union First Market Bank branches.

The Company announced that, effective April 25, 2014, its corporate name changed 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. Shares of the Company’s common stock are traded on the NASDAQ Global Select Market under the symbol UBSH.

Additional information is available on the Company’s website at http://investors.bankatunion.com. The information contained on the Company’s website is not a part of this report.

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RESULTS OF OPERATIONS

Executive Overview

For the quarter ended June 30, 2014, the Company reported net income of $14.8 million and earnings per share of $0.32. Excluding after-tax acquisition-related expenses of $3.0 million, operating earnings⁽¹⁾ for the quarter were $17.8 million, which represents an increase of $7.4 million, or 71.7%, in operating earnings from the second quarter of 2013, primarily related to the StellarOne acquisition. Operating earnings per share were $0.38 and $0.42 for the quarters ended June 30, 2014 and 2013, respectively.

For the six months ended June 30, 2014, the Company reported net income of $22.6 million and diluted earnings per share of $0.48. Excluding after-tax acquisition-related expenses of $12.1 million, operating earnings⁽¹⁾ for the six months were $34.7 million, which represents an increase of $15.3 million, or 79.0%, in operating earnings from the first six months of 2013, primarily related to the StellarOne acquisition. Operating earnings per share were $0.74 and $0.78 for the six month periods ended June 30, 2014 and 2013, respectively.

The 2014 three and six month financial results include the financial results of StellarOne, which the Company acquired on January 1, 2014.

Second quarter operating earnings⁽¹⁾for the community bank segment, which excludes after-tax acquisition-related expenses of $3.0 million, were $18.4 million, or $0.40 per share; year-to-date community bank segment operating earnings were $36.6 million, or $0.79 per share.

The mortgage segment reported a net loss of $602,000, or $0.01 per share, for the quarter and a net loss of $2.0 million, or $0.04 per share, for the first six months of 2014.

Operating Return on Average Tangible Common Equity⁽¹⁾ (“ROTCE”) was 11.10% for the quarter ended June 30, 2014 compared to operating ROTCE⁽¹⁾ of 11.54% for the quarter ended June 30, 2013. The operating ROTCE⁽¹⁾ of the community bank segment was 11.59% for the second quarter of 2014.

Operating Return on Average Assets⁽¹⁾ (“ROA”) was 0.98% for the quarter ended June 30, 2014 compared to operating ROA⁽¹⁾ of 1.03% for the second quarter in 2013. The operating ROA⁽¹⁾ of the community bank segment was 1.02% for the second quarter of 2014.

Operating efficiency ratio⁽¹⁾of 66.4% was comparatively flat for the second quarter of 2014 from 66.7% in the second quarter of 2013. The operating efficiency ratio for the community bank segment was 63.9% for the second quarter of 2014.

⁽¹⁾These supplementary measures are provided because the Company believes they may be valuable to investors. For a reconciliation of the non-GAAP measures operating earnings, EPS, ROA, ROTCE, and efficiency ratio, see “NON-GAAP MEASURES” included in this Item 2.

-51 -

Net Interest Income

	For the Three Months Ended
	Dollars in thousands
	06/30/14			06/30/13			Change

Average interest-earning assets	$	6,460,798		$	3,713,392		$	2,747,406
Interest income (FTE)	$	70,735		$	43,981		$	26,754
Yield on interest-earning assets		4.39	%		4.75	%		(36	) bps
Average interest-bearing liabilities	$	5,094,175		$	2,907,523		$	2,186,652
Interest expense	$	4,919		$	5,283		$	(364	)
Cost of interest-bearing liabilities		0.39	%		0.73	%		(34	) bps
Cost of funds		0.30	%		0.57	%		(27	) bps
Net Interest Income (FTE)	$	65,816		$	38,698		$	27,118
Net Interest Margin (FTE)		4.09	%		4.18	%		(9	) bps
Core Net Interest Margin (FTE) ⁽¹⁾		3.94	%		4.14	%		(20	) bps

⁽¹⁾

Core net interest margin (FTE) excludes the impact of acquisition accounting accretion and amortization adjustments in net interest income.

For the second quarter of 2014, tax-equivalent net interest income was $65.8 million, an increase of $27.1 million from the second quarter of 2013, a result of a $2.7 billion increase in average interest-earning assets and a $2.2 billion increase in average interest-bearing liabilities, primarily due to the StellarOne acquisition. The second quarter tax-equivalent net interest margin decreased by 9 bps to 4.09% compared to 4.18% in the prior year. Core tax-equivalent net interest margin (which excludes the 15 bps impact of acquisition accounting accretion in the second quarter of 2014 and 4 basis points in the second quarter of 2013) decreased by 20 basis points from 4.14% in the second quarter of 2013 to 3.94%. Excluding the impact of acquisition accounting accretion in 2014 and 2013, the decline in net interest margin was driven by a decrease in earning asset yields outpacing the decline in cost of interest bearing liabilities. Yields on loans declined as new loans and renewed loans were originated and repriced at lower rates and investment securities yields declined driven by cash flows from securities reinvested at lower yields. In addition, the declines in net interest margin and earning asset yields were affected by the StellarOne acquisition, which carried a lower net interest margin.

-52 -

	For the Six Months Ended
	Dollars in thousands
	06/30/14			06/30/13			Change

Average interest-earning assets	$	6,446,641		$	3,724,597		$	2,722,044
Interest income (FTE)	$	140,907		$	88,524		$	52,383
Yield on interest-earning assets		4.41	%		4.79	%		(38	) bps
Average interest-bearing liabilities	$	5,101,507		$	2,931,758		$	2,169,749
Interest expense	$	9,369		$	10,816		$	(1,447	)
Cost of interest-bearing liabilities		0.37	%		0.74	%		(37	) bps
Cost of funds		0.30	%		0.58	%		(28	) bps
Net Interest Income (FTE)	$	131,538		$	77,708		$	53,830
Net Interest Margin (FTE)		4.11	%		4.21	%		(10	) bps
Core Net Interest Margin (FTE) ⁽¹⁾		3.97	%		4.16	%		(19	) bps

⁽¹⁾

Core net interest margin (FTE) excludes the impact of acquisition accounting accretion and amortization adjustments in net interest income.

For the six months ended June 30, 2014, tax-equivalent net interest income was $131.5 million, an increase of $53.8 million from the same period of 2013, a result of a $2.7 billion increase in average interest-earning assets and a $2.2 billion increase in average interest-bearing liabilities, primarily due to the StellarOne acquisition. The year-to-date tax-equivalent net interest margin decreased by 10 bps to 4.11% compared to 4.21% in the prior year. Core tax-equivalent net interest margin (which excludes the 14 bps impact of acquisition accounting accretion in 2014 and 5 basis points in 2013) decreased by 19 basis points from 4.16% for the six months ended June 30, 2013 to 3.97%. Excluding the impact of acquisition accounting accretion in 2014 and 2013, the decline in net interest margin was driven by a decrease in earning asset yields outpacing the decline in cost of interest bearing liabilities. Yields on loans declined as new loans and renewed loans were originated and repriced at lower rates and investment securities yields declined driven by cash flows from securities reinvested at lower yields. In addition, the declines in net interest margin and earning asset yields were affected by the StellarOne acquisition, which carried a lower net interest margin.

The Company continues to believe that net interest margin will decline modestly over the next several quarters as decreases in earning asset yields are projected to outpace declines in interest-bearing liabilities rates.

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The following table shows interest income on earning assets and related average yields as well as interest expense on interest-bearing liabilities and related average rates paid for the periods indicated (dollars in thousands):

AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)

	For the Three Months Ended June 30,
	2014								2013

	Average Balance			Interest Income / Expense		Yield / Rate (1)			Average Balance			Interest Income / Expense		Yield / Rate (1)
	(Dollars in thousands)
Assets:
Securities:
Taxable	$	727,829		$	3,860		2.13	%	$	389,662		$	1,939		2.00	%
Tax-exempt		405,978			5,198		5.14	%		219,930			3,160		5.76	%
Total securities		1,133,807			9,058		3.20	%		609,592			5,099		3.35	%
Loans, net (2) (3)		5,246,710			61,125		4.67	%		2,975,200			37,928		5.11	%
Loans held for sale		52,895			543		4.12	%		117,467			948		3.24	%
Federal funds sold		522			-		0.17	%		446			-		0.23	%
Money market investments		1			-		0.00	%		1			-		0.00	%
Interest-bearing deposits in other banks		26,863			9		0.13	%		10,686			6		0.23	%
Total earning assets		6,460,798			70,735		4.39	%		3,713,392			43,981		4.75	%
Allowance for loan losses		(30,822	)							(34,874	)
Total non-earning assets		844,754								359,178
Total assets	$	7,274,730							$	4,037,696

Liabilities and Stockholders' Equity:
Interest-bearing deposits:
Transaction and money market accounts	$	2,574,630			1,150		0.18	%	$	1,403,644			669		0.19	%
Regular savings		557,366			264		0.19	%		225,753			169		0.30	%
Time deposits (4)		1,411,665			1,136		0.32	%		979,011			2,863		1.17	%
Total interest-bearing deposits		4,543,661			2,550		0.23	%		2,608,408			3,701		0.57	%
Other borrowings (5)		550,514			2,369		1.73	%		299,115			1,582		2.12	%
Total interest-bearing liabilities		5,094,175			4,919		0.39	%		2,907,523			5,283		0.73	%

Noninterest-bearing liabilities:
Demand deposits		1,149,435								656,720
Other liabilities		52,226								38,813
Total liabilities		6,295,836								3,603,056
Stockholders' equity		978,894								434,640
Total liabilities and stockholders' equity	$	7,274,730							$	4,037,696

Net interest income				$	65,816							$	38,698

Interest rate spread (6)							4.00	%							4.02	%
Interest expense as a percent of average earning assets							0.30	%							0.57	%
Net interest margin (7)							4.09	%							4.18	%

(1) Rates and yields are annualized and calculated from actual, not rounded amounts in thousands, which appear above.

(2) Nonaccrual loans are included in average loans outstanding.

(3) Interest income on loans includes $219 thousand and $534 thousand for the three months ended June 30, 2014 and 2013 in accretion of the fair market value adjustments related to acquisitions.

(4) Interest expense on certificates of deposits includes $2.5 million and $2 thousand for the three months ended June 30, 2014 and 2013 in accretion of the fair market value adjustments related to acquisitions.

(5) Interest expense on borrowings includes $75 thousand and $122 thousand for the three months ended June 30, 2014 and 2013 in amortization of the fair market value adjustments related to acquisitions.

(6) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 35%.

(7) Core net interest margin excludes purchase accounting adjustments and was 3.94% and 4.14% for the three months ended June 30, 2014 and 2013.

-54 -

AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)

	For the Six Months Ended June 30,
	2014								2013

	Average Balance			Interest Income / Expense		Yield / Rate (1)			Average Balance			Interest Income / Expense		Yield / Rate (1)
	(Dollars in thousands)
Assets:
Securities:
Taxable	$	705,847		$	7,508		2.15	%	$	389,986		$	4,008		2.07	%
Tax-exempt		399,454			10,243		5.17	%		214,967			6,216		5.83	%
Total securities (2)		1,105,301			17,751		3.24	%		604,953			10,224		3.41	%
Loans, net (3) (4)		5,263,225			122,174		4.68	%		2,970,584			76,142		5.17	%
Loans held for sale		51,340			961		3.77	%		137,008			2,146		3.16	%
Federal funds sold		396			-		0.17	%		486			1		0.24	%
Money market investments		1			-		0.00	%		1			-		0.00	%
Interest-bearing deposits in other banks		26,378			21		0.16	%		11,565			11		0.19	%
Total earning assets		6,446,641			140,907		4.41	%		3,724,597			88,524		4.79	%
Allowance for loan losses		(30,873	)							(35,208	)
Total non-earning assets		846,539								357,983
Total assets	$	7,262,307							$	4,047,372

Liabilities and Stockholders' Equity:
Interest-bearing deposits:
Transaction and money market accounts	$	2,561,043			2,289		0.18	%	$	1,400,142			1,416		0.20	%
Regular savings		553,145			510		0.19	%		221,110			326		0.30	%
Time deposits (5)		1,437,228			2,007		0.28	%		1,010,283			5,921		1.18	%
Total interest-bearing deposits		4,551,416			4,806		0.21	%		2,631,535			7,663		0.59	%
Other borrowings (6)		550,091			4,563		1.68	%		300,223			3,153		2.12	%
Total interest-bearing liabilities		5,101,507			9,369		0.37	%		2,931,758			10,816		0.74	%

Noninterest-bearing liabilities:
Demand deposits		1,118,242								643,193
Other liabilities		54,229								36,120
Total liabilities		6,273,978								3,611,071
Stockholders' equity		988,329								436,301
Total liabilities and stockholders' equity	$	7,262,307							$	4,047,372

Net interest income				$	131,538							$	77,708

Interest rate spread (7)							4.04	%							4.05	%
Interest expense as a percent of average earning assets							0.30	%							0.58	%
Net interest margin (8)							4.11	%							4.21	%

(1) Rates and yields are annualized and calculated from actual, not rounded amounts in thousands, which appear above.

(2) Interest income on securities includes $0 and $15 thousand for the six months ended June 30, 2014 and 2013 in accretion of the fair market value adjustments.

(3) Nonaccrual loans are included in average loans outstanding.

(4) Interest income on loans includes $765 thousand and $1.1 million for the six months ended June 30, 2014 and 2013 in accretion of the fair market value adjustments related to acquisitions.

(5) Interest expense on certificates of deposits includes $5.4 million and $4 thousand for the six months ended June 30, 2014 and 2013 in accretion of the fair market value adjustments related to acquisitions.

(6) Interest expense on borrowings includes $151 thousand and $244 thousand for the six months ended June 30, 2014 and 2013 in amortization of the fair market value adjustments related to acquisitions.

(7) Income and yields are reported on a taxable equivalent basis using the statutory federal corporate tax rate of 35%.

(8) Core net interest margin excludes purchase accounting adjustments and was 3.97% and 4.16% for the six months ended June 30, 2014 and 2013.

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The Volume Rate Analysis table below presents changes in interest income and interest expense and distinguishes between the changes related to increases or decreases in average outstanding balances of earning assets and interest-bearing liabilities (volume), and the changes related to increases or decreases in average interest rates on such assets and liabilities (rate). Changes attributable to both volume and rate have been allocated proportionally. Results, on a taxable equivalent basis, are as follows (dollars in thousands):

	Three Months Ended									Six Months Ended
	June 30, 2014 vs. June 30, 2013									June 30, 2014 vs. June 30, 2013
	Increase (Decrease) Due to Change in:									Increase (Decrease) Due to Change in:
	Volume			Rate			Total			Volume			Rate			Total
Earning Assets:
Securities:
Taxable	$	1,788		$	133		$	1,921		$	3,342		$	158		$	3,500
Tax-exempt		2,410			(372	)		2,038			4,800			(773	)		4,027
Total securities		4,198			(239	)		3,959			8,142			(615	)		7,527
Loans, net		26,709			(3,512	)		23,197			53,851			(7,819	)		46,032
Loans held for sale		(615	)		210			(405	)		(1,538	)		353			(1,185	)
Federal funds sold		-			-			-			-			(1	)		(1	)
Interest-bearing deposits in other banks		6			(3	)		3			11			(1	)		10
Total earning assets	$	30,298		$	(3,544	)	$	26,754		$	60,466		$	(8,083	)	$	52,383

Interest-Bearing Liabilities:
Interest-bearing deposits:
Transaction and money market accounts	$	525		$	(44	)	$	481		$	1,054		$	(181	)	$	873
Regular savings		175			(80	)		95			342			(158	)		184
Time Deposits		917			(2,644	)		(1,727	)		1,822			(5,736	)		(3,914	)
Total interest-bearing deposits		1,617			(2,768	)		(1,151	)		3,218			(6,075	)		(2,857	)
Other borrowings		1,123			(336	)		787			2,178			(768	)		1,410
Total interest-bearing liabilities		2,740			(3,104	)		(364	)		5,396			(6,843	)		(1,447	)

Change in net interest income	$	27,558		$	(440	)	$	27,118		$	55,070		$	(1,240	)	$	53,830

The Company’s fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. The 2014 and remaining estimated discount/premium and net accretion impact are reflected in the following table (dollars in thousands):

	Loan Accretion			Certificates of Deposit		Borrowings			Total
For the quarter ended March 31, 2014	$	(546	)	$	2,921	$	75		$	2,450
For the quarter ended June 30, 2014		(219	)		2,460		75			2,316
For the remaining six months of 2014		158			3,534		150			3,842
For the years ending:
2015		1,701			1,843		175			3,719
2016		2,619			-		271			2,890
2017		3,057			-		170			3,227
2018		2,695			-		(143	)		2,552
2019		2,152			-		(286	)		1,866
Thereafter		13,178			-		(5,923	)		7,255

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Noninterest Income

	For the Three Months Ended
	Dollars in thousands
	06/30/14			06/30/13			$			%
Noninterest income:
Service charges on deposit accounts	$	4,525		$	2,346		$	2,179			92.9	%
Other service charges, commissions and fees		5,412			3,222			2,190			68.0	%
Gains on securities transactions, net		426			53			373			NM
Gains on sales of mortgage loans, net of commissions		3,030			4,668			(1,638	)		-35.1	%
Losses on bank premises, net		(71	)		(34	)		(37	)		NM
Other operating income		3,382			1,044			2,338			223.9	%
Total noninterest income	$	16,704		$	11,299		$	5,405			47.8	%

Mortgage segment operations	$	(3,028	)	$	(4,668	)	$	1,640			-35.1	%
Intercompany eliminations		170			167			3			1.8	%
Community Bank segment	$	13,846		$	6,798		$	7,048			103.7	%

NM - Not Meaningful

For the quarter ended June 30, 2014, noninterest income increased $5.4 million, or 47.8%, to $16.7 million from $11.3 million in the second quarter of 2013. The significant majority of this increase is concentrated in customer related noninterest income (service charges on deposit accounts, debit card interchange income, and income from wealth management services) due to the current quarter impact of the StellarOne acquisition. Gains on sales of mortgage loans, net of commissions, decreased $1.6 million, or 35.1%, from the second quarter of 2013, primarily driven by the decline in mortgage loan originations of $103.1 million from $298.2 million during the second quarter of 2013. Gains on sales of mortgage loans include the results of StellarOne’s mortgage segment beginning in the first quarter of 2014.

	For the Six Months Ended
	Dollars in thousands
	06/30/14			06/30/13			$			%
Noninterest income:
Service charges on deposit accounts	$	8,822		$	4,618		$	4,204			91.0	%
Other service charges, commissions and fees		10,083			6,029			4,054			67.2	%
Gains on securities transactions		455			42			413			NM
Gains on sales of mortgage loans, net of commissions		5,328			8,520			(3,192	)		-37.5	%
Losses on bank premises, net		(304	)		(330	)		26			NM
Other operating income		6,520			2,254			4,266			189.3	%
Total noninterest income	$	30,904		$	21,133		$	9,771			46.2	%

Mortgage segment operations	$	(5,328	)	$	(8,522	)	$	3,194			-37.5	%
Intercompany eliminations		341			334			7			2.1	%
Community Bank segment	$	25,917		$	12,945		$	12,972			100.2	%

NM - Not Meaningful

For the six months ended June 30, 2014, noninterest income increased $9.8 million, or 46.2%, to $30.9 million from $21.1 million in the first six months of 2013. The significant majority of this increase is concentrated in customer related noninterest income (service charges on deposit accounts, debit card interchange income, and income from wealth management services) due to the current year impact of the StellarOne acquisition. Gains on sales of mortgage loans, net of commissions, which include the results of StellarOne’s mortgage segment beginning in the first quarter of 2014, decreased $3.2 million, or 37.5%, compared to the first six months of 2013, primarily driven by the decline in mortgage loan originations of $222.2 million from $566.3 million during the first six months of 2013.

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Noninterest expense

	For the Three Months Ended
	Dollars in thousands
	06/30/14			06/30/13			$		%
Noninterest expense:
Salaries and benefits	$	28,040		$	17,912		$	10,128		56.5	%
Occupancy expenses		5,102			2,764			2,338		84.6	%
Furniture and equipment expenses		2,637			1,741			896		51.5	%
OREO and credit-related expenses ⁽¹⁾		2,244			984			1,260		128.0	%
Acquisition-related expenses		4,661			919			3,742		NM
Other operating expenses		16,791			9,963			6,828		68.5	%
Total noninterest expense	$	59,475		$	34,283		$	25,192		73.5	%

Mortgage segment operations	$	(4,296	)	$	(4,657	)	$	361		-7.8	%
Intercompany eliminations		170			167			3		1.8	%
Community Bank segment	$	55,349		$	29,793		$	25,556		85.8	%

NM - Not Meaningful

⁽¹⁾ OREO related costs include foreclosure related expenses, gains/losses on the sale of OREO, valuation reserves, and asset resolution related legal expenses.

For the quarter ended June 30, 2014, noninterest expense increased $25.2 million to $59.5 million from $34.3 million when compared to the second quarter in 2013. Excluding acquisition-related costs of $4.7 million in the current quarter and $919,000 in the second quarter of 2013, noninterest expense increased $21.5 million, or 64.3%, compared to the second quarter of the prior year; the increase is primarily due to the acquisition of StellarOne in 2014. The Company’s operating efficiency ratio, which excludes acquisition costs, was 66.4% compared to 66.7% for the first quarter in 2013.

	For the Six Months Ended
	Dollars in thousands
	06/30/14			06/30/13			$			%
Noninterest expense:
Salaries and benefits	$	57,666		$	35,878		$	21,788			60.7	%
Occupancy expenses		10,282			5,619			4,663			83.0	%
Furniture and equipment expenses		5,505			3,585			1,920			53.6	%
OREO and credit-related expenses ⁽¹⁾		3,694			1,558			2,136			137.1	%
Acquisition-related expenses		17,829			919			16,910			NM
Other operating expenses		32,280			20,224			12,056			59.6	%
Total noninterest expense	$	127,256		$	67,783		$	59,473			87.7	%

Mortgage segment operations	$	(9,006	)	$	(8,779	)	$	(227	)		2.6	%
Intercompany eliminations		341			334			7			2.1	%
Community Bank segment	$	118,591		$	59,338		$	59,253			99.9	%

NM - Not Meaningful

⁽¹⁾ OREO related costs include foreclosure related expenses, gains/losses on the sale of OREO, valuation reserves, and asset resolution related legal expenses.

For the six months ended June 30, 2014, noninterest expense increased $59.5 million to $127.3 million from $67.8 million when compared to the first six months in 2013. Excluding acquisition-related costs of $17.8 million in the first six months of the year compared to $919,000 during the same period in the prior year, noninterest expense increased $42.6 million, or 63.7%; the increase is primarily due to the acquisition of StellarOne in 2014. The Company’s operating efficiency ratio, which excludes acquisition costs, was 67.4% compared to 67.7% for the first six months in 2013.

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SEGMENT INFORMATION

Community Bank Segment

For the three months ended June 30, 2014, net income of $15.4 million, which included the full-quarter impact of the StellarOne acquisition, increased $6.2 million, or 67.8%, from the prior year’s second quarter. Excluding after-tax acquisition-related costs of $3.0 million and $919,000 in the second quarters of 2014 and 2013, respectively, net income increased $8.3 million, or 82.6%. Net interest income increased $26.4 million from the same period last year, largely a result of an increase of $2.7 billion in average earning assets and $2.2 billion in average interest bearing liabilities resulting from the StellarOne acquisition. The provision for loan losses for the current quarter was $1.5 million, an increase of $500,000 from the same quarter a year ago. The increase in provision was driven by increases in specific reserves on impaired loans.

Noninterest income increased $7.0 million from $6.8 million in the second quarter of 2013 to $13.8 million. The majority of the current quarter increase was in customer related noninterest income (services charges on deposit accounts, debit card interchange income, and income from wealth management services) and is due to the acquisition of StellarOne. Noninterest expense increased $25.5 million from $29.8 million in the second quarter of 2013 to $55.3 million in the current quarter. Excluding current quarter and prior year second quarter acquisition-related costs of $4.7 million and $919,000, respectively, noninterest expense increased $21.8 million compared to the second quarter of 2013. The increase in noninterest expense is largely related to the acquisition of StellarOne. The community banking segment’s operating efficiency ratio was 63.9% compared to 64.1% in the second quarter of 2013.

For the six months ended June 30, 2014, net income increased $6.6 million, or 36.7%, to $24.6 million when compared to the same period a year ago; excluding after-tax acquisition-related costs of $12.1 million and $919,000, respectively, in 2014 and 2013, net income increased $17.7 million, or 93.9%. These year-to-date earnings reflect a two-quarter impact of the StellarOne acquisition. Net interest income was $126.9 million, an increase of $52.8 million from the first six months of 2013, largely a result of an increase of $2.7 billion in average earning assets and $2.2 billion in average interest bearing liabilities resulting from the StellarOne acquisition. The provision for loan losses declined $1.6 million due to improvements in asset quality and current year recovery of a loan that was previously charged-off in 2012.

Noninterest income increased $13.0 million from $12.9 million in the first six months of 2013 to $25.9 million. The majority of this year-to-date increase was in customer related noninterest income (services charges on deposit accounts, debit card interchange income, and income from wealth management services) and is due to the acquisition of StellarOne. Noninterest expense increased $59.3 million from $59.3 million in the first six months of 2013 to $118.6 million in the current year. Excluding acquisition-related costs of $17.8 million and $919,000, respectively, in 2014 and 2013, noninterest expense increased $42.3 million compared to the same period in 2013. The increase in noninterest expense is largely related to the acquisition of StellarOne. The community banking segment’s operating efficiency ratio was 64.2% compared to 65.2% during the first six months of 2013.

Mortgage Segment

The mortgage segment reported a net loss of $602,000 for the second quarter of 2014, a decline of $896,000 from income of $294,000 in the second quarter of 2013. Despite improvements in lowering operating expenses, gains on sales of mortgage loans declined related to lower mortgage loan origination volumes. Gains on sales of mortgage loans, net of commissions, which includes the results of StellarOne’s mortgage segment beginning in the first quarter of 2014, decreased $1.6 million, or 35.1%, from the second quarter of 2013 primarily driven by the decline in mortgage loan originations. Noninterest expense decreased $361,000, largely a result of lower salary expenses and other cost control initiatives.

The mortgage segment reported a net loss of $2.0 million for the first six months of 2014, a reduction of $2.5 million from the first six months of 2013, as elevated expense levels resulting from excess loan origination processing capacity and restructuring charges outpaced revenue generated by lower mortgage loan origination volumes. Gains on sales of mortgage loans, net of commissions, which include the results of StellarOne’s mortgage segment beginning in the first quarter of 2014, decreased $3.2 million, or 37.5%, compared to the first six months of 2013 primarily driven by the decline in mortgage loan originations. Noninterest expense increased $227,000, largely a result of additional salary and office rental expenses related to the addition of StellarOne’s mortgage operation, partially offset by lower volume-related loan production expenses.

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Income Taxes

The provision for income taxes is based upon the results of operations, adjusted for the effect of certain tax-exempt income and non-deductible expenses. In addition, certain items of income and expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate.

In assessing the ability to realize deferred tax assets, management considers the scheduled reversal of temporary differences, projected future taxable income, and tax planning strategies. Management continues to believe that it is not likely that the Company will realize its deferred tax asset related to net operating losses generated at the state level and accordingly has established a valuation allowance. The Company’s bank subsidiary is not subject to a state income tax in its primary place of business (Virginia). The Company’s other subsidiaries are subject to state income taxes and have generated losses for state income tax purposes for which the Company is currently not able to utilize. State net operating loss carryovers will begin to expire after 2026.

The effective tax rate for the three months ended June 30, 2014 and 2013 was 24.0% and 29.5%, respectively; the effective tax rate for the six months ended June 30, 2014 and 2013 was 23.7% and 27.5%, respectively. The decline in the effective tax rate is primarily related to tax-exempt interest income on the investment portfolio and tax-exempt bank-owned life insurance income being a larger percentage of pre-tax income during 2014 due to elevated merger-related costs included in pre-tax income.

BALANCE SHEET

At June 30, 2014, total assets were $7.3 billion, an increase of $3.1 billion from December 31, 2013 and an increase of $3.3 billion from June 30, 2013, reflecting the impact of the StellarOne acquisition.

On January 1, 2014 the Company acquired StellarOne. Below is a summary of the transaction and related impact on the Company’s balance sheet:

The fair value of assets acquired equaled $2.959 billion and the fair value of liabilities assumed equaled $2.647 billion.

Total goodwill arising from the transaction equaled $237.5 million.

Gross loans acquired equaled $2.283 billion with a fair value of $2.239 billion.

Total deposits acquired equaled $2.469 billion with a fair value of $2.480 billion.

At June 30, 2014, loans net of unearned income were $5.2 billion, an increase of $2.2 billion from December 31, 2013. At June 30, 2014, total deposits were $5.7 billion, an increase of $2.5 billion from December 31, 2013.

On January 31, 2014, the Company’s Board of Directors authorized a share repurchase program to purchase up to $65.0 million worth of the Company’s common stock on the open market or in privately negotiated transactions. The repurchase program is authorized through December 31, 2015. During the six months ended June 30, 2014, approximately 1.3 million common shares had been repurchased and, as of June 30, 2014, approximately $31.1 million remained available under the repurchase program. As of July 30, 2014, approximately 1.6 million common shares had been repurchased and approximately $24.9 million remained available under the repurchase program.

Securities

At June 30, 2014, the Company had total investments in the amount of $1.1 billion, or 15.6% of total assets, as compared to $703.4 million, or 16.8% of total assets, at December 31, 2013. The Company seeks to diversify its portfolio to minimize risk. It focuses on purchasing mortgage-backed securities for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to the tax benefits and the higher yield offered from these securities. All of the Company’s mortgage-backed securities are investment grade. The investment portfolio has a high percentage of municipals and mortgage-backed securities; therefore a higher taxable equivalent yield exists on the portfolio compared to its peers. The Company does not engage in structured derivative or hedging activities within the investment portfolio.

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The table below sets forth a summary of the securities available for sale and restricted stock, at fair value for the following periods (dollars in thousands):

	June 30,		December 31,
	2014		2013
U.S. government and agency securities	$	3,115	$	2,153
Obligations of states and political subdivisions		432,897		254,830
Corporate and other bonds		79,238		9,434
Mortgage-backed securities		566,201		407,362
Other securities		13,326		3,569
Total securities available for sale, at fair value		1,094,777		677,348

Federal Reserve Bank stock		23,834		6,734
Federal Home Loan Bank stock		23,370		19,302
Total restricted stock		47,204		26,036
Total investments	$	1,141,981	$	703,384

During each quarter and at year end, the Company conducts an assessment of the securities portfolio for OTTI consideration. The Company determined that a single issuer trust preferred security incurred credit-related OTTI of $400,000 during the year ended December 31, 2011. During the quarter ended June 30, 2014, the trust preferred security was called at a premium. As a result, the Company booked a gain on sale of the previously written down security of $400,000. No OTTI was recognized in 2012, 2013, or for the first six months of 2014. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes, and credit risk changes, to determine whether adjustments are needed. 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.

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The following table summarizes the contractual maturity of securities available for sale at fair value and their weighted average yields as of June 30, 2014 (dollars in thousands):

	1 Year or Less		1 - 5 Years		5 - 10 Years		Over 10 Years and Equity Securities		Total
U.S. government and agency securities:
Amortized cost	$	-	$	1,406	$	-	$	60	$	1,466
Fair value		-		1,439		-		1,676		3,115
Weighted average yield ⁽¹⁾		-		2.82		-		-		2.70

Mortgage backed securities:
Amortized cost		34		19,886		157,694		380,810		558,424
Fair value		34		20,433		159,671		386,063		566,201
Weighted average yield ⁽¹⁾		2.56		2.52		1.71		1.91		1.88

Obligations of states and political subdivisions:
Amortized cost		10,714		20,937		117,371		271,275		420,297
Fair value		10,806		21,472		121,354		279,265		432,897
Weighted average yield ⁽¹⁾		6.58		3.32		4.77		5.06		4.93

Corporate bonds and other securities:
Amortized cost		13,824		1,541		11,133		66,202		92,700
Fair value		13,848		1,550		11,159		66,007		92,564
Weighted average yield ⁽¹⁾		2.12		1.27		1.02		1.49		1.52

Total securities available for sale:
Amortized cost		24,572		43,770		286,198		718,347		1,072,887
Fair value		24,688		44,894		292,184		733,011		1,094,777
Weighted average yield ⁽¹⁾		4.06		2.87		2.94		3.06		3.04

⁽¹⁾ Yields on tax-exempt securities have been computed on a tax-equivalent basis.

As of June 30, 2014, the Company maintained a diversified municipal bond portfolio with approximately 75% of its holdings in general obligation issues and the remainder backed by revenue bonds. Issuances within the State of Washington represented 10% and issuances within the State of Texas represented 15% of the municipal portfolio; no other state had a concentration above 10%. Approximately 95% of municipal holdings are considered investment grade by Moody’s or Standard & Poor’s. The non-investment grade securities are principally insured Texas municipalities with no underlying rating. When purchasing municipal securities, the Company focuses on strong underlying ratings for general obligation issuers or bonds backed by essential service revenues.

Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with banks, money market investments, federal funds sold, securities available for sale, loans held for sale, and loans maturing or re-pricing within one year. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through federal funds lines with several correspondent banks, a line of credit with the FHLB, the purchase of brokered certificates of deposit, and a corporate line of credit with a large correspondent bank. Management considers the Company’s overall liquidity to be sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.

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As of June 30, 2014, the cash, interest-bearing deposits in other banks, money market investments, federal funds sold, loans held for sale, and loans that mature within one year totaled $1.8 billion, or 27.4%, of total earning assets. As of June 30, 2014, approximately $1.5 billion, or 29.1%, of total loans are scheduled to mature within one year based on contractual maturity, adjusted for expected prepayments.

Loan Portfolio

Loans, net of unearned income, were $5.2 billion at June 30, 2014 and were $3.0 billion at both December 31, 2013 and June 30, 2013. Loans secured by real estate continue to represent the Company’s largest category, comprising 85.7% of the total loan portfolio at June 30, 2014.

The following table presents the Company’s composition of loans, net of unearned income, in dollar amounts and as a percentage of total gross loans as of the quarter ended (dollars in thousands):

	June 30,				March 31,				December 31,				September 30,				June 30,
	2014				2014				2013				2013				2013
Loans secured by real estate:
Residential 1-4 family	$	940,121	18.0	%	$	930,744	17.6	%	$	475,688	15.7	%	$	473,967	15.8	%	$	478,356	15.9	%
Commercial		2,052,530	39.3	%		2,066,468	39.3	%		1,094,451	36.0	%		1,085,971	36.2	%		1,104,915	36.8	%
Construction, land development and other land loans		613,027	11.7	%		650,066	12.3	%		470,684	15.5	%		469,867	15.7	%		456,730	15.2	%
Second mortgages		66,477	1.3	%		67,695	1.3	%		34,891	1.1	%		36,185	1.2	%		37,862	1.3	%
Equity lines of credit		517,411	9.9	%		519,308	9.8	%		302,965	10.0	%		300,329	10.0	%		298,572	9.9	%
Multifamily		257,819	4.9	%		258,522	4.9	%		146,433	4.8	%		123,594	4.1	%		122,942	4.1	%
Farm land		29,528	0.6	%		32,500	0.6	%		20,769	0.7	%		21,082	0.7	%		22,130	0.7	%
Total real estate loans		4,476,913	85.7	%		4,525,303	85.8	%		2,545,881	83.8	%		2,510,995	83.7	%		2,521,507	83.9	%

Commercial Loans		373,406	7.1	%		368,949	7.0	%		194,809	6.4	%		185,910	6.2	%		182,439	6.1	%

Consumer installment loans
Personal		299,663	5.7	%		300,809	5.7	%		238,368	7.8	%		240,549	8.0	%		235,837	7.9	%
Credit cards		23,432	0.4	%		22,316	0.4	%		23,211	0.8	%		21,978	0.7	%		21,878	0.7	%
Total consumer installment loans		323,095	6.1	%		323,125	6.1	%		261,579	8.6	%		262,527	8.7	%		257,715	8.6	%

All other loans		59,655	1.1	%		56,821	1.1	%		37,099	1.2	%		42,814	1.4	%		39,194	1.4	%
Gross loans	$	5,233,069	100.0	%	$	5,274,198	100.0	%	$	3,039,368	100.0	%	$	3,002,246	100.0	%	$	3,000,855	100.0	%

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The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of June 30, 2014 (dollars in thousands):

					Variable Rate						Fixed Rate
	Total Maturities		Less than 1 year		Total		1-5 years		More than 5 years		Total		1-5 years		More than 5 years
Loans secured by real estate:
Residential 1-4 family	$	940,121	$	91,240	$	281,975	$	38,382	$	243,593	$	566,906	$	283,500	$	283,406
Commercial		2,052,530		401,263		172,662		144,092		28,570		1,478,605		957,377		521,228
Construction, land development and other land loans		613,027		414,119		9,486		3,388		6,098		189,422		167,052		22,370
Second mortgages		66,477		11,397		5,740		2,859		2,881		49,340		19,720		29,620
Equity lines of credit		517,411		346,587		2,518		370		2,148		168,306		21,512		146,794
Multifamily		257,819		69,228		25,950		22,508		3,442		162,641		120,220		42,421
Farm land		29,528		16,907		1,021		804		217		11,600		8,920		2,680
Total real estate loans		4,476,913		1,350,741		499,352		212,403		286,949		2,626,820		1,578,301		1,048,519

Commercial Loans		373,406		144,703		50,006		50,006		-		178,697		145,393		33,304

Consumer installment loans
Personal		299,663		44,722		-		-		-		254,941		114,420		140,521
Credit cards		23,432		23,432		-		-		-		-		-		-
Total consumer installment loans		323,095		68,154		-		-		-		254,941		114,420		140,521

All other loans		59,655		17,277		3,111		3,111		-		39,267		6,978		32,289
Gross loans	$	5,233,069	$	1,580,875	$	552,469	$	265,520	$	286,949	$	3,099,725	$	1,845,092	$	1,254,633

While the current economic environment is challenging, the Company remains committed to originating soundly underwritten loans to qualifying borrowers within its markets. The Company is focused on providing community-based financial services and discourages the origination of portfolio loans outside of its principal trade areas. As reflected in the loan table, at June 30, 2014, the largest component of the Company’s loan portfolio consisted of real estate loans, concentrated in commercial, construction, and residential 1-4 family. The risks attributable to these concentrations are mitigated by the Company’s credit underwriting and monitoring processes, including oversight by a centralized credit administration function and credit policy and risk management committee, as well as seasoned bankers focusing their lending to borrowers with proven track records in markets with which the Company is familiar. UMG serves as a mortgage brokerage operation, selling the majority of its loan production in the secondary market or selling loans to meet the Bank’s current asset/liability management needs.

Asset Quality

Overview

During the second quarter, the Company continued to have improvement in asset quality when compared to the prior year period, as 2014 year-to-date charge-off and provision levels and nonperforming assets were lower. The Company experienced increases in OREO from the prior year due to closed bank premises related to the StellarOne acquisition that were moved to OREO; however, nonaccrual loans and foreclosed property balances declined from the prior year. The magnitude of any change in the real estate market and its impact on the Company is still largely dependent upon continued recovery of residential housing and commercial real estate and the pace at which the local economies in the Company’s operating markets improve. All metrics discussed below exclude PCI loans aggregating $131.1 million (net of fair value mark).

Troubled Debt Restructurings

The total recorded investment in TDRs as of June 30, 2014 was $34.2 million, a decrease of $7.6 million, or 18.2%, from $41.8 million at December 31, 2013 and a decline of $18.8 million, or 35.5%, from $53.0 million at June 30, 2013. Of the $34.2 million of TDRs at June 30, 2014, $30.6 million, or 89.5%, were considered performing while the remaining $3.6 million were considered nonperforming. The decrease in the TDR balance from December 31, 2013 is attributable to loans removed from TDR status of $4.1 million, charge-offs of $2.9 million, and net payments of $1.9 million, partially offset by $433,000 in additions and $849,000 in acquired TDRs. The TDRs related to the StellarOne acquisition were related to loans with a revolving feature and, therefore, excluded from being classified as PCI in accordance with ASC 310-30. Loans removed from TDR status represent restructured loans with a market rate of interest at the time of the restructuring. These loans have performed in accordance with their modified terms for twelve consecutive months and were no longer considered impaired. Loans removed from TDR status are collectively evaluated for impairment; due to the significant improvement in the expected future cash flows, these loans are grouped based on their primary risk characteristics, typically using the Company’s internal risk rating system as its primary credit quality indicator. Impairment is measured based on historical loss experience taking into consideration environmental factors. The significant majority of these loans have been subject to new credit decisions due to the improvement in the expected future cash flows, the financial condition of the borrower, and other factors considered during re-underwriting. The TDR activity during the quarter did not have a material impact on the Company’s allowance for loan losses, financial condition, or results of operations.

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Nonperforming Assets

At June 30, 2014, nonperforming assets totaled $61.6 million, an increase of $12.4 million, or 25.3%, from December 31, 2013 and a decline of $582,000, or 0.94%, from a year ago. In addition, NPAs as a percentage of total outstanding loans decreased 44 basis points to 1.18% in the current quarter from 1.62% as of December 31, 2013 and declined 89 basis points from 2.07% a year earlier.

The following table shows a summary of assets quality balances and related ratios as of and for the quarters ended (dollars in thousands):

	June 30,			March 31,			December 31,			September 30,			June 30,
	2014			2014			2013			2013			2013
Nonaccrual loans, excluding PCI loans	$	23,099		$	14,722		$	15,035		$	19,941		$	27,022
Foreclosed properties		33,739			35,487			34,116			35,576			35,020
Real estate investment		4,755			-			-			133			133
Total nonperforming assets		61,593			50,209			49,151			55,650			62,175
Loans past due 90 days and accruing interest		6,870			7,205			6,746			7,326			6,291
Total nonperforming assets and loans past due 90 days and accruing interest	$	68,463		$	57,414		$	55,897		$	62,976		$	68,466

Performing Restructurings	$	30,561		$	37,195		$	34,520		$	39,287		$	39,826

Balances
Allowance for loan losses	$	31,379		$	30,907		$	30,135		$	33,877		$	34,333
Average loans, net of unearned income		5,246,710			5,279,924			3,004,186			2,997,083			2,847,087
Loans, net of unearned income		5,233,069			5,274,198			3,039,368			3,002,246			3,000,855

Ratios
NPAs to total loans		1.18	%		0.95	%		1.62	%		1.85	%		2.07	%
NPAs & loans 90 days past due to total loans		1.31	%		1.09	%		1.84	%		2.10	%		2.28	%
NPAs to total loans & OREO		1.17	%		0.95	%		1.60	%		1.83	%		2.05	%
NPAs & loans 90 days past due to total loans & OREO		1.30	%		1.08	%		1.82	%		2.07	%		2.26	%
ALL to nonaccrual loans		135.85	%		209.94	%		200.43	%		169.89	%		127.06	%
ALL to nonaccrual loans & loans 90 days past due		104.70	%		140.95	%		138.35	%		124.24	%		103.06	%

Nonperforming assets at June 30, 2014 included $23.1 million in nonaccrual loans (excluding PCI loans), a net increase of $8.1 million, or 53.6%, from December 31, 2013 and a net decrease of $3.9 million, or 14.5%, from June 30, 2013. The following table shows the activity in nonaccrual loans for the quarter ended (dollars in thousands):

	June 30,			March 31,			December 31,			September 30,			June 30,
	2014			2014			2013			2013			2013
Beginning Balance	$	14,722		$	15,035		$	19,941		$	27,022		$	23,033
Net customer payments		(1,088	)		(959	)		(1,908	)		(5,574	)		(3,196	)
Additions		11,087			1,362			3,077			3,020			7,934
Charge-offs		(137	)		(152	)		(4,336	)		(1,669	)		(476	)
Loans returning to accruing status		(523	)		-			(1,018	)		(1,068	)		-
Transfers to OREO		(962	)		(564	)		(721	)		(1,790	)		(273	)
Ending Balance	$	23,099		$	14,722		$	15,035		$	19,941		$	27,022

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The net increase in nonaccrual loan levels in the current quarter is primarily related to three credit relationships; the related loans were previously identified as impaired and evaluated for specific reserves in prior quarters.

The following table presents the composition of nonaccrual loans (excluding PCI loans) and the coverage ratio, which is the allowance for loan losses expressed as a percentage of nonaccrual loans, at the quarters ended (dollars in thousands):

	June 30,			March 31,			December 31,			September 30,			June 30,
	2014			2014			2013			2013			2013
Raw Land and Lots	$	5,921		$	3,091		$	2,560		$	3,087		$	4,573
Commercial Construction		1,065			1,152			1,596			1,167			5,103
Commercial Real Estate		851			1,548			2,212			3,962			2,716
Single Family Investment Real Estate		5,737			1,794			1,689			2,076			2,859
Commercial and Industrial		3,794			3,655			3,848			6,675			7,291
Other Commercial		121			122			126			472			471
Consumer		5,610			3,360			3,004			2,502			4,009
Total	$	23,099		$	14,722		$	15,035		$	19,941		$	27,022

Coverage Ratio		135.85	%		209.94	%		200.43	%		169.89	%		127.06	%

Nonperforming assets at June 30, 2014 also included $38.5 million in OREO, an increase of $4.4 million, or 12.8%, from December 31, 2013 and an increase of $3.3 million, or 9.5%, from the prior year. The following table shows the activity in OREO for the quarters ended (dollars in thousands):

	June 30,			March 31,			December 31,			September 30,			June 30,
	2014			2014			2013			2013			2013
Beginning Balance	$	35,487		$	34,116		$	35,709		$	35,153		$	35,878
Additions		7,671			5,404			1,326			2,841			1,768
Capitalized Improvements		59			-			101			266			164
Valuation Adjustments		(817	)		(256	)		(300	)		(491	)		-
Proceeds from sales		(3,913	)		(3,800	)		(2,483	)		(1,773	)		(2,436	)
Gains (losses) from sales		7			23			(237	)		(287	)		(221	)
Ending Balance	$	38,494		$	35,487		$	34,116		$	35,709		$	35,153

Of the $7.7 million in additions to OREO in the current quarter, $6.1 million related to acquired bank premises no longer used in operations.

The following table presents the composition of the OREO portfolio at the quarter ended (dollars in thousands):

	June 30,		March 31,		December 31,		September 30,		June 30,
	2014		2014		2013		2013		2013
Land	$	11,378	$	11,387	$	10,310	$	10,310	$	10,310
Land Development		10,509		11,314		10,904		10,901		10,894
Residential Real Estate		6,019		7,408		7,379		7,995		7,274
Commercial Real Estate		5,833		5,378		5,523		6,370		6,542
Former Bank Premises ⁽¹⁾		4,755		-		-		133		133
Total	$	38,494	$	35,487	$	34,116	$	35,709	$	35,153

⁽¹⁾ Includes closed branch property and land previously held for branch sites.

Included in land development is $8.7 million, with a valuation adjustment of $718,000, related to a residential community in the Northern Neck region of Virginia, which includes developed residential lots, a golf course, and undeveloped land. Foreclosed properties were adjusted to their fair values at the time of each foreclosure and any losses were taken as loan charge-offs against the allowance for loan losses at that time. OREO asset balances are also evaluated at least quarterly by the Bank’s Special Asset Loan Committee and any necessary write downs to fair values are recorded as impairment through noninterest expense.

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Past Due Loans

At June 30, 2014, total accruing past due loans, excluding PCI loans, were $43.2 million, or 0.83% of total loans, compared to $26.5 million, or 0.87%, at December 31, 2013 and $29.7 million, or 0.99%, a year ago. At June 30, 2014, loans past due 90 days or more and accruing interest, excluding PCI loans, totaled $6.9 million, or 0.13% of total loans, compared to $6.7 million, or 0.22%, at December 31, 2013 and $6.3 million, or 0.21%, a year ago.

Charge-offs and delinquencies

For the quarter ended June 30, 2014, net charge-offs were $1.0 million, or 0.08% on an annualized basis, compared to net charge-offs of $1.1 million, or 0.14%, for the same quarter last year. For the six months ended June 30, 2014, net charge-offs were $256,000, or 0.01% on an annualized basis, compared to $3.6 million, or 0.24%, for the same period in the prior year. The decrease in net charge-offs for the first six months of 2014 compared to net charge-offs for the first six months of 2013 is partially attributable to one recovery, recognized in the first quarter of 2014, of $1.2 million on a loan previously charged off in a prior year.

Provision

The provision for loan losses for the quarter ended June 30, 2014 was $1.5 million, an increase of $500,000 from the same quarter in the prior year. The increase in the provision in the second quarter of 2014 compared to the second quarter of 2013 is driven by increases in specific reserves on impaired loans. The provision for loan losses for the six months ended June 30, 2014 was $1.5 million compared to $3.1 million during the same period in the prior year. The decrease in the year-to-date provision for loan losses in the current year compared to the prior year is driven by improving asset quality, the impact of lower historical loss factors, and the first quarter’s net loan recovery in 2014.

Allowance for Loan Losses

The allowance for loan losses increased $1.2 million from December 31, 2013 to $31.4 million at June 30, 2014. The ALL as a percentage of the total loan portfolio, adjusted for acquisition accounting (non-GAAP), was 1.11% at June 30, 2014, an increase from 1.10% from December 31, 2013 and a decrease from 1.29% at June 30, 2013. The allowance for loan losses as a percentage of the total loan portfolio, unadjusted for acquisition accounting, was 0.60% at June 30, 2014, 0.99% at December 31, 2013, and 1.14% at June 30, 2013. The decrease in the unadjusted allowance ratio was primarily attributable to improving credit quality metrics (as a percentage of total loans) and the acquisition of StellarOne. In acquisition accounting, there is no carryover of previously established allowance for loan losses.

The nonaccrual loan coverage ratio was 135.8% at June 30, 2014, compared to 200.4% at December 31, 2013, and 127.1% at June 30, 2013. The current level of the allowance for loan losses reflects specific reserves related to nonperforming loans, current risk ratings on loans, net charge-off activity, loan growth, delinquency trends, and other credit risk factors that the Company considers important in assessing the adequacy of the allowance for loan losses.

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The following table summarizes activity in the allowance for loan losses during the quarters ended (dollars in thousands):

	June 30,			March 31,			December 31,			September 30,			June 30,
	2014			2014			2013			2013			2013
Balance, beginning of period	$	30,907		$	30,135		$	33,877		$	34,333		$	34,415
Loans charged-off:
Commercial		476			70			2,619			147			274
Real estate		695			438			2,342			2,104			1,175
Consumer		369			379			876			342			354
Total loans charged-off		1,540			887			5,837			2,593			1,803
Recoveries:
Commercial		84			65			161			46			293
Real estate		193			1,392			524			80			143
Consumer		235			202			204			211			285
Total recoveries		512			1,659			889			337			721
Net charge-offs		1,028			(772	)		4,948			2,256			1,082
Provision for loan losses		1,500			-			1,206			1,800			1,000
Balance, end of period	$	31,379		$	30,907		$	30,135		$	33,877		$	34,333

Allowance for loan losses to loans		0.60	%		0.59	%		0.99	%		1.13	%		1.14	%
ALL to loans, adjusted for acquisition		1.11	%		1.09	%		1.10	%		1.25	%		1.29	%
Net charge-offs to total loans		0.08	%		(0.06	)%		0.65	%		0.30	%		0.14	%
Provision to total loans		0.11	%		0.00	%		0.16	%		0.24	%		0.13	%

The following table shows both an allocation of the allowance for loan losses among loan categories based upon the loan portfolio’s composition and the ratio of the related outstanding loan balances to total loans as of the quarters ended (dollars in thousands):

	June 30,					March 31,					December 31,					September 30,					June 30,
	2014					2014					2013					2013					2013
	$		% (1)			$		% (1)			$		% (1)			$		% (1)			$		% (1)
Commercial	$	2,239		7.1	%	$	2,162		7.0	%	$	1,932		6.4	%	$	2,098		6.2	%	$	2,087		6.1	%
Real estate		26,876		85.7	%		26,519		85.8	%		25,242		83.8	%		28,334		83.6	%		28,849		84.0	%
Consumer		2,264		7.2	%		2,226		7.2	%		2,961		9.8	%		3,445		10.2	%		3,397		9.9	%
Total	$	31,379		100.0	%	$	30,907		100.0	%	$	30,135		100.0	%	$	33,877		100.0	%	$	34,333		100.0	%

(1) The percent represents the loan balance divided by total loans.

Deposits

As of June 30, 2014, total deposits were $5.7 billion, an increase of $2.5 billion, or 77.2%, from December 31, 2013 and an increase of $2.5 billion, or 75.6%, from June 30, 2013, a result of the addition of the deposit accounts acquired through the StellarOne acquisition. Total interest-bearing deposits consist of NOW, money market, savings, and time deposit account balances. Total time deposit balances of $1.4 billion accounted for 30.6% of total interest-bearing deposits at June 30, 2014. The Company continues to experience a shift from time deposits into lower cost transaction (demand deposits, NOW, money market, and savings) accounts. This shift is driven by the Company’s focus on acquiring low cost deposits and customer preference for liquidity in a historically low interest rate environment.

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The community bank segment may also borrow additional funds by purchasing certificates of deposit through a nationally recognized network of financial institutions. The Company utilizes this funding source when rates are more favorable than other funding sources. As of both June 30, 2014 and 2013, there were none purchased and included in certificates of deposit on the Company’s Consolidated Balance Sheet. Maturities of time deposits as of June 30, 2014 are as follows (dollars in thousands):

	Within 3 Months		3 - 12 Months		Over 12 Months		Total		Percent Of Total Deposits
Maturities of time deposits of $100,000 and over	$	74,839	$	219,210	$	294,410	$	588,459		10.26	%
Maturities of other time deposits		102,076		323,149		374,745		799,970		13.95	%
Total time deposits	$	176,915	$	542,359	$	669,155	$	1,388,429		24.21	%

Capital Resources

Capital resources represent funds, earned or obtained, over which financial institutions can exercise greater or longer control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders.

The FRB and the FDIC have adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital, principally consisting of common equity, retained earnings, and a limited amount of perpetual preferred stock, less certain intangible items. The table below shows the Company exceeded the definition of “well capitalized” for regulatory purposes.

Prior to the StellarOne acquisition and in connection with two bank acquisitions prior to 2006, the Company issued trust preferred capital notes to fund the cash portion of those acquisitions, collectively totaling $58.5 million. In connection with the StellarOne acquisition, the Company acquired $32.0 million in trust preferred securities issued by StellarOne’s finance subsidiaries. These trust preferred capital notes currently qualify for Tier 1 capital of the Company for regulatory purposes.

The following table summarizes the Company’s regulatory capital and related ratios for the periods presented (dollars in thousands):

	June 30,			December 31,			June 30,
	2014			2013			2013
Tier 1 capital	$	727,802		$	428,489		$	415,219
Tier 2 capital		35,433			36,870			41,119
Total risk-based capital		763,235			465,359			456,338
Risk-weighted assets		5,625,736			3,284,430			3,174,791

Capital ratios:
Tier 1 risk-based capital ratio		12.94	%		13.05	%		13.08	%
Total risk-based capital ratio		13.57	%		14.17	%		14.37	%
Leverage ratio (Tier 1 capital to average adjusted assets)		10.48	%		10.70	%		10.45	%
Common equity to assets		13.37	%		10.49	%		10.56	%
Tangible common equity to tangible assets		9.23	%		8.94	%		8.92	%

In July 2013, the FRB issued revised final rules that make technical changes to its market risk capital rules to align it with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The final new capital rules require the Company to comply with the following new minimum capital ratios, effective January 1, 2015: (1) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6% of risk-weighted assets (increased from the current requirement of 4%); (3) a total capital ratio of 8% of risk-weighted assets (unchanged from current requirement); and, (4) a leverage ratio of 4% of total assets.

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Had the new minimum capital ratios described above been effective as of June 30, 2014, based on management’s interpretation and understanding of the new rules, the Company would have remained “well capitalized” as of such date.

NON-GAAP MEASURES

In reporting the results of June 30, 2014, the Company has provided supplemental performance measures on an operating or tangible basis. Operating measures exclude acquisition costs unrelated to the Company’s normal operations. The Company believes these measures are useful to investors as they exclude non-operating adjustments resulting from acquisition activity and allow investors to see the combined economic results of the organization. Tangible common equity is used in the calculation of certain capital and per share ratios. The Company believes tangible common equity and the related ratios are meaningful measures of capital adequacy because they provide a meaningful base for period-to-period and company-to-company comparisons, which the Company believes will assist investors in assessing the capital of the Company and its ability to absorb potential losses.

These measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be viewed as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies.

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The following table reconciles these non-GAAP measures from their respective GAAP basis measures for each of the periods presented (dollars in thousands, except per share amounts):

	Three Months Ended						Six Months Ended
	June 30, 2014			June 30, 2013			June 30, 2014			June 30, 2013
Alternative Performance Measures (non-GAAP)
Operating Earnings
Net Income (GAAP)	$	14,780		$	9,463		$	22,595		$	18,446
Plus: Merger and conversion related expense, after tax		3,043			919			12,059			919
Net operating earnings (non-GAAP)	$	17,823		$	10,382		$	34,654		$	19,365

Operating earnings per share - Basic	$	0.38		$	0.42		$	0.74		$	0.78
Operating earnings per share - Diluted		0.38			0.42			0.74			0.78

Operating ROA		0.98	%		1.03	%		0.96	%		0.96	%
Operating ROE		7.30	%		9.58	%		7.07	%		8.95	%
Operating ROTCE		11.10	%		11.54	%		10.71	%		10.78	%

Community Bank Segment Operating Earnings
Net Income (GAAP)	$	15,382		$	9,169		$	24,577		$	17,973
Plus: Merger and conversion related expense, after tax		3,043			919			12,059			919
Net operating earnings (non-GAAP)	$	18,425		$	10,088		$	36,636		$	18,892

Operating earnings per share - Basic	$	0.40		$	0.41		$	0.79		$	0.76
Operating earnings per share - Diluted		0.40			0.41			0.79			0.76

Operating ROA		1.02	%		1.01	%		1.02	%		0.95	%
Operating ROE		7.60	%		9.52	%		7.56	%		8.92	%
Operating ROTCE		11.59	%		11.51	%		11.52	%		10.80	%

Operating Efficiency Ratio FTE
Net Interest Income (GAAP)	$	63,715		$	37,403		$	127,473		$	75,157
FTE adjustment		2,101			1,295			4,065			2,551
Net Interest Income (FTE)	$	65,816			38,698			131,538			77,708
Noninterest Income (GAAP)		16,704			11,299			30,904			21,133
Noninterest Expense (GAAP)	$	59,475		$	34,283		$	127,256		$	67,783
Merger and conversion related expense		4,661			919			17,829			919
Noninterest Expense (Non-GAAP)	$	54,814		$	33,364		$	109,427		$	66,864

Operating Efficiency Ratio FTE (non-GAAP)		66.43	%		66.73	%		67.36	%		67.65	%

Community Bank Segment Operating Efficiency Ratio FTE
Net Interest Income (GAAP)	$	63,401		$	36,960		$	126,927		$	74,147
FTE adjustment		2,102			1,294			4,064			2,553
Net Interest Income (FTE)	$	65,503			38,254			130,991			76,700
Noninterest Income (GAAP)		13,846			6,798			25,917			12,945
Noninterest Expense (GAAP)	$	55,349		$	29,793		$	118,591		$	59,338
Merger and conversion related expense		4,661			919			17,829			919
Noninterest Expense (Non-GAAP)	$	50,688		$	28,874		$	100,762		$	58,419

Operating Efficiency Ratio FTE (non-GAAP)		63.88	%		64.09	%		64.22	%		65.17	%

Tangible Common Equity
Ending equity	$	976,969		$	428,429		$	976,969		$	428,429
Less: Ending goodwill		296,876			59,400			296,876			59,400
Less: Ending core deposit intangibles		36,479			13,821			36,479			13,821
Ending tangible common equity	$	643,614		$	355,208		$	643,614		$	355,208

Average equity	$	978,894		$	434,640		$	988,329		$	436,301
Less: Average trademark intangible		-			-			-			3
Less: Average goodwill		296,876			59,400			296,876			59,400
Less: Average core deposit intangibles		37,962			14,266			39,199			14,741
Average tangible common equity	$	644,056		$	360,974		$	652,254		$	362,157

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The allowance for loan losses, adjusted for acquisition accounting (non-GAAP) ratio includes an adjustment for the credit mark on acquired performing loans. The acquired performing loans are reported net of the related credit mark in loans, net of unearned income, on the Company’s Consolidated Balance Sheet; therefore, the credit mark is added back to the balance to represent the total loan portfolio. The adjusted allowance for loan losses, including the credit mark, represents the total reserve on the Company’s loan portfolio. The PCI loans, net of the respective credit mark, are removed from the loans, net of unearned income, as these loans are not covered by the allowance established by the Company unless changes in expected cash flows indicate that one of the PCI loan pools are impaired, at which time an allowance for PCI loans will be established. GAAP requires the acquired allowance for loan losses not be carried over in an acquisition or merger. The Company believes the presentation of the allowance for loan losses, adjusted for acquisition accounting ratio is useful to investors because the acquired loans were purchased at a market discount with no allowance for loan losses carried over to the Company, and the credit mark on the purchased performing loans represents the allowance associated with those purchased loans. The Company believes that this measure is a better reflection of the reserves on the Company’s loan portfolio. The following table shows the allowance for loan losses as a percentage of the total loan portfolio, adjusted for acquisition accounting (dollars in thousands):

	June 30,		December 31,		June 30,
	2014		2013		2013
Allowance for loan losses	$	31,379	$	30,135	$	34,333
Remaining credit mark on purchased performing loans		25,632		3,341		4,251
Adjusted allowance for loan losses		57,011		33,476		38,584

Loans, net of unearned income	$	5,233,069	$	3,039,368	$	3,000,855
Remaining credit mark on purchased performing loans		25,632		3,341		4,251
Less: PCI loans, net of credit mark		131,107		3,622		3,973
Adjusted loans, net of unearned income	$	5,127,594	$	3,039,087	$	3,001,133

Allowance for loan losses ratio		0.60%		0.99%		1.14%
Allowance for loan losses ratio, adjusted for acquisition accounting		1.11%		1.10%		1.29%

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates, and equity prices. The Company’s market risk is composed primarily of interest rate risk. The ALCO of the Company is responsible for reviewing the interest rate sensitivity position of the Company and establishing policies to monitor and limit exposure to this risk. The Company’s Board of Directors reviews and approves the guidelines established by ALCO.

Interest rate risk is monitored through the use of three complementary modeling tools: static gap analysis, earnings simulation modeling, and economic value simulation (net present value estimation). Each of these models measures changes in a variety of interest rate scenarios. While each of the interest rate risk models has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Company, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap, which measures aggregate re-pricing values, is less utilized because it does not effectively measure the options risk impact on the Company and is not addressed here. Earnings simulation and economic value models, which more effectively measure the cash flow and optionality impacts, are utilized by management on a regular basis and are explained below.

The Company determines the overall magnitude of interest sensitivity risk and then formulates policies and practices governing asset generation and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, the states of the national, regional, and local economies, and other financial and business risk factors. The Company uses computer simulation modeling to measure and monitor the effect of various interest rate scenarios and business strategies on net interest income. This modeling reflects interest rate changes and the related impact on net interest income and net income over specified time horizons.

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EARNINGS SIMULATION ANALYSIS

Management uses simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model calculates an earnings estimate based on current and projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better analysis of the sensitivity of earnings to changes in interest rates than other analyses, such as the static gap analysis discussed above.

Assumptions used in the model are derived from historical trends and management’s outlook and include loan and deposit growth rates and projected yields and rates. Such assumptions are monitored by management and periodically adjusted as appropriate. All maturities, calls, and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage-backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are reflected in the different rate scenarios.

The Company uses its simulation model to estimate earnings in rate environments where rates are instantaneously shocked up or down around a “most likely” rate scenario, based on implied forward rates. The analysis assesses the impact on net interest income over a 12 month time horizon after an immediate increase or “shock” in rates, of 100 basis points up to 300 basis points. The shock down 200 or 300 basis points analysis is not as meaningful as interest rates across most of the yield curve are at historic lows and cannot decrease another 200 or 300 basis points. The model, under all scenarios, does not drop the index below zero.

The following table represents the interest rate sensitivity on net interest income for the Company across the rate paths modeled for balances ended June 30, 2014 (dollars in thousands):

	Change In Net Interest Income
	%			$
Change in Yield Curve:
+300 basis points		5.18			13,737
+200 basis points		3.64			9,650
+100 basis points		1.54			4,092
Most likely rate scenario		-			-
-100 basis points		(1.68	)		(4,454	)
-200 basis points		(4.55	)		(12,068	)
-300 basis points		(5.36	)		(14,194	)

ECONOMIC VALUE SIMULATION

Economic value simulation is used to calculate the estimated fair value of assets and liabilities over different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The net economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in net economic value over different rate environments is an indication of the longer-term earnings capability of the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation. The economic value simulation uses instantaneous rate shocks to the balance sheet.

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The following chart reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the period ended June 30, 2014 (dollars in thousands):

	Change In Economic Value of Equity
	%			$
Change in Yield Curve:
+300 basis points		(1.36	)		(17,882	)
+200 basis points		(0.15	)		(1,911	)
+100 basis points		0.33			4,272
Most likely rate scenario		-			-
-100 basis points		(2.57	)		(33,735	)
-200 basis points		(7.71	)		(101,081	)
-300 basis points		(8.63	)		(113,170	)

The shock down 200 or 300 basis points analysis is not as meaningful since interest rates across most of the yield curve are at historic lows and cannot decrease another 200 or 300 basis points. While management considers this scenario highly unlikely, the natural floor increases the Company’s sensitivity in rates down scenarios.

ITEM 4 – CONTROLS AND PROCEDURES

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

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

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ITEM 1A - RISK FACTORS

There have been no other material changes with respect to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(a) Sales of Unregistered Securities – None

(b) Use of Proceeds – Not Applicable

The following information describes the Company’s stock repurchases during the six months ended June 30, 2014:

Period	Total number of shares purchased ⁽¹⁾		Average price paid per share ($)		Total number of shares purchased as part of publicly announced plan		Approximate value of shares that may yet be purchased under the plan ($)

February 26 - February 28, 2014		206,886		25.01		206,886		59,826,000

March 3 - March 31, 2014		303,629		25.62		303,629		52,047,000

April 1 - April 30, 2014		390,818		25.14		390,818		42,222,000

May 1 - May 30, 2014		251,642		24.93		251,642		35,948,000

June 1 - June 30, 2014		189,100		25.47		189,100		31,131,000

Total		1,342,075		25.24		1,342,075		31,131,000

⁽¹⁾On January 31, 2014, the Company’s Board of Directors authorized a share repurchase program to purchase up to $65.0 million worth of the Company’s common stock on the open market or in privately negotiated transactions. The repurchase program is authorized through December 31, 2015. The Company intends to continue to repurchase shares under this program.

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ITEM 6 – EXHIBITS

The following exhibits are filed as part of this Form 10-Q and this list includes the Exhibit Index:

Exhibit No.		Description
3.01		Bylaws of Union Bankshares Corporation, as amended as of June 26, 2014 (incorporated by reference to Exhibit 3.1 to Current Report on Form 8-K filed on July 1, 2014)
31.01		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02		Certification of Principal Financial and Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01		Certification of Principal Executive Officer and Principal Financial and Accounting Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.00		Interactive data files formatted in eXtensible Business Reporting Language for the quarter ended June 30, 2014 pursuant to Rule 405 of Regulation S-T ⁽¹⁾: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements. (1) These files are furnished and deemed not filed

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	Union Bankshares Corporation
	(Registrant)

Date: August 6, 2014	By:	/s/ G. William Beale
	G. William Beale,
	President and Chief Executive Officer
	(principal executive officer)

Date: August 6, 2014	By:	/s/ Robert M. Gorman
	Robert M. Gorman,
	Executive Vice President and Chief Financial Officer
	(principal financial and accounting officer)

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