Form 10-Q

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2011

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

Commission File Number: 0-20293

UNION FIRST MARKET BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

VIRGINIA

54-1598552

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

1051 East Cary Street

Suite 1200

Richmond, Virginia 23219

(Address of principal executive offices) (Zip Code)

111 Virginia Street

Suite 200

Richmond, VA 23219

(Former name, former address and former fiscal year, if changed since last report)

(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.

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 October 31, 2011 was 26,057,501

UNION FIRST MARKET BANKSHARES CORPORATION

FORM 10-Q

INDEX


ITEM		PAGE

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2011, December 31, 2010 and September 30, 2010		1

	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010		2

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2011 and 2010		3

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010		4

	Notes to Condensed Consolidated Financial Statements		5

	Report of Independent Registered Public Accounting Firm		32

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		53

Item 4.	Controls and Procedures		55

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		55

Item 1A.	Risk Factors		56

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		56

Item 6.	Exhibits		56

	Signatures		57

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	September 30,			December 31,			September 30,
	2011			2010			2010
	(Unaudited)			(Audited)			(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	62,546		$	58,951		$	76,981
Interest-bearing deposits in other banks		86,872			1,449			2,329
Money market investments		199			158			143
Federal funds sold		160			595			685

Total cash and cash equivalents		149,777			61,153			80,138


Securities available for sale, at fair value		606,485			572,441			576,040


Loans held for sale		61,786			73,974			84,381


Loans, net of unearned income		2,818,342			2,837,253			2,842,267
Less allowance for loan losses		41,290			38,406			37,395

Net loans		2,777,052			2,798,847			2,804,872


Bank premises and equipment, net		90,936			90,680			91,054
Other real estate owned		34,464			36,122			26,382
Core deposit intangibles, net		22,162			26,827			28,762
Goodwill		59,400			57,567			57,567
Other assets		112,395			119,636			110,127

Total assets	$	3,914,457		$	3,837,247		$	3,859,323


LIABILITIES
Noninterest-bearing demand deposits	$	542,692		$	484,867		$	495,779
Interest-bearing deposits:
NOW accounts		395,822			381,512			359,986
Money market accounts		858,426			783,431			756,938
Savings accounts		176,531			153,724			153,928
Time deposits of $100,000 and over		511,579			563,375			577,239
Other time deposits		649,826			703,150			730,325

Total interest-bearing deposits		2,592,184			2,585,192			2,578,416

Total deposits		3,134,876			3,070,059			3,074,195


Securities sold under agreements to repurchase		70,450			69,467			69,693
Other short-term borrowings		—			23,500			41,200
Trust preferred capital notes		60,310			60,310			60,310
Long-term borrowings		155,258			154,892			154,864
Other liabilities		41,982			30,934			28,465

Total liabilities		3,462,876			3,409,162			3,428,727


Commitments and contingencies

STOCKHOLDERS’ EQUITY
Preferred stock, $10.00 par value, $1,000 liquidation value, shares authorized 500,000; issued and outstanding, 35,595 shares for all periods.		35,595			35,595			35,595
Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 26,057,501 shares, 26,004,197 shares, and 25,955,213 shares, respectively.		34,581			34,532			34,460
Surplus		186,505			185,763			184,964
Retained earnings		184,845			169,801			167,718
Discount on preferred stock		(982	)		(1,177	)		(1,240	)
Accumulated other comprehensive income		11,037			3,571			9,099

Total stockholders’ equity		451,581			428,085			430,596


Total liabilities and stockholders’ equity	$	3,914,457		$	3,837,247		$	3,859,323

See accompanying notes to condensed consolidated financial statements.

- 1 -

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Dollars in thousands, except per share amounts)


	Three Months Ended September 30					Nine Months Ended September 30
	2011			2010		2011			2010
	(Unaudited)			(Unaudited)		(Unaudited)			(Unaudited)
Interest and dividend income:
Interest and fees on loans	$	42,664		$	43,571	$	126,999		$	126,234
Interest on Federal funds sold		1			2		1			17
Interest on deposits in other banks		22			49		55			72
Interest and dividends on securities:
Taxable		3,148			3,176		10,405			10,218
Nontaxable		1,771			1,642		5,294			4,539

Total interest and dividend income		47,606			48,440		142,754			141,080


Interest expense:
Interest on deposits		5,924			7,956		18,774			23,056
Interest on Federal funds purchased		—			5		7			19
Interest on short-term borrowings		466			367		838			1,628
Interest on long-term borrowings		1,770			1,463		5,266			4,001

Total interest expense		8,160			9,791		24,885			28,704


Net interest income		39,446			38,649		117,869			112,376
Provision for loan losses		3,600			5,912		14,400			14,868

Net interest income after provision for loan losses		35,846			32,737		103,469			97,508


Noninterest income:
Service charges on deposit accounts		2,294			2,243		6,568			6,795
Other service charges, commissions and fees		3,254			2,860		9,529			8,311
Gains on securities transactions, net		499			38		483			62
Other-than-temporary impairment losses		(400	)		—		(400	)		—
Gains on sales of loans		4,861			5,962		14,132			15,701
Gains (losses) on sales of other real estate and bank premises, net		118			332		(972	)		376
Other operating income		918			918		2,714			2,948

Total noninterest income		11,544			12,353		32,054			34,193


Noninterest expenses:
Salaries and benefits		18,076			17,451		53,310			50,269
Occupancy expenses		2,885			2,947		8,307			8,453
Furniture and equipment expenses		1,756			1,691		5,097			4,874
Other operating expenses		11,920			11,895		38,562			42,336

Total noninterest expenses		34,637			33,984		105,276			105,932


Income before income taxes		12,753			11,106		30,247			25,769
Income tax expense		3,682			3,033		8,162			7,271

Net income	$	9,071		$	8,073	$	22,085		$	18,498
Dividends paid and accumulated on preferred stock		462			462		1,386			1,227
Accretion of discount on preferred stock		66			62		195			163

Net income available to common shareholders	$	8,543		$	7,549	$	20,504		$	17,108


Earnings per common share, basic	$	0.33		$	0.29	$	0.79		$	0.68

Earnings per common share, diluted	$	0.33		$	0.29	$	0.79		$	0.68

See accompanying notes to condensed consolidated financial statements.

- 2 -

UNION FIRST MARKET BANKSHARES CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Dollars in thousands)

(Unaudited)

Preferred
Stock

Common
Stock

Surplus

Retained
Earnings

Discount
on
Preferred
Stock

Accumulated
Other
Compre-
hensive
Income

Compre-
hensive
Income

Total

Balance - December 31, 2009

—

24,462

98,136

155,047

—

4,443

282,088

Comprehensive income:

Net income

18,498

Change in fair value of interest rate swap

(2,858

)

Unrealized holding gains arising during the period (net of tax, $4,068)

7,554

Reclassification adjustment for gains included in net income (net of tax, $22)

(40

)

Other comprehensive income (net of tax, $4,046)

4,656

Total comprehensive income

23,154

Issuance of Common stock (7,477,274 shares)

9,945

86,021

95,966

Dividends on Common Stock ($.18 per share)

(4,667

)

(4,667

)

Tax benefit from exercise of stock awards

Issuance of Preferred Stock

35,595

(1,403

)

34,192

Dividends on Preferred Stock

(997

)

(997

)

Accretion of discount on Preferred Stock

(163

)

163

—

Issuance of Common Stock under Dividend Reinvestment Plan (21,833 shares)

252

272

Issuance of Common Stock under Incentive Stock Option Plan (4,541 shares)

Issuance of Restricted Stock under Stock Incentive Plan (21,573 shares)

(26

)

—

Stock-based compensation expense

567

Balance - September 30, 2010

35,595

34,460

184,964

167,718

(1,240

)

9,099

430,596

Balance - December 31, 2010

35,595

34,532

185,763

169,801

(1,177

)

3,571

428,085

Comprehensive income:

Net income - 2011

22,085

Change in fair value of interest rate swap (cash flow hedge)

(2,826

)

Unrealized holding gains arising during the period (net of tax, $5,751)

10,346

Reclassification adjustment for losses included in net income (net of tax, $29)

(54

)

Other comprehensive income (net of tax, $5,542)

7,466

Total comprehensive income

29,551

Dividends on Common Stock ($.21 per share)

(5,460

)

(5,460

)

Tax benefit from exercise of stock awards

Dividends on Preferred Stock

(1,386

)

(1,386

)

Accretion of discount on Preferred Stock

(195

)

195

Issuance of common stock under Dividend Reinvestment Plan (18,135 shares)

243

267

Issuance of common stock under Stock Incentive Plan (6,450 shares)

Vesting of restricted stock under Stock Incentive Plan (12,243 shares)

(16

)

—

Stock-based compensation expense

467

Balance - September 30, 2011

35,595

34,581

186,505

184,845

(982

)

11,037

451,581

See accompanying notes to condensed consolidated financial statements.

- 3 -

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

(Dollars in thousands)

(Unaudited)


	2011			2010
Operating activities:
Net income	$	22,085		$	18,498
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization of bank premises and equipment		5,005			4,846
Other-than-temporary impairment recognized in earnings		400			—
Amortization, net		5,300			4,885
Provision for loan losses		14,400			14,868
Decrease (increase) in loans held for sale, net		12,188			(30,101	)
(Gains) losses on the sale of investment securities		(483	)		(62	)
Losses (gains) on sales of other real estate owned and premises, net		972			(376	)
Stock-based compensation expense		467			567
Decrease in other assets		4,263			1,021
Increase in other liabilities		11,048			3,874

Net cash and cash equivalents provided by operating activities		75,645			18,020

Investing activities:
Purchases of securities available for sale		(130,160	)		(141,868	)
Proceeds from sales of securities available for sale		18,365			106,549
Proceeds from maturities, calls and paydowns of securities available for sale		87,585			85,153
Net decrease (increase) in loans		69,306			(6,427	)
Sales of bank premises and equipment and OREO, net		6,815			6,986
Cash paid in branch acquisition		(26,437	)		—
Cash received in acquisitions		230			137,460

Net cash and cash equivalents provided by investing activities		25,704			187,853

Financing activities:
Net increase in noninterest-bearing deposits		53,459			30,440
Net decrease in interest-bearing deposits		(37,511	)		(80,932	)
Net decrease in short-term borrowings		(22,517	)		(114,858	)
Net increase (decrease) in long-term borrowings		366			(925	)
Cash dividends paid - common stock		(5,460	)		(4,667	)
Cash dividends paid - preferred stock		(1,386	)		(997	)
Tax benefit from the exercise of equity-based awards		1			3
Proceeds from the issuance of common stock		323			290

Net cash and cash equivalents used in financing activities		(12,725	)		(171,646	)

Increase in cash and cash equivalents		88,624			34,227
Cash and cash equivalents at beginning of the period		61,153			45,911

Cash and cash equivalents at end of the period	$	149,777		$	80,138


Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	25,265		$	28,291
Income taxes		4,238			8,672

Supplemental Schedule of Noncash Activities
Unrealized gains on securities available for sale	$	15,834		$	11,569
Unrealized loss on cash flow hedge		(2,826	)		(2,858	)
Transfer of loans to other real estate owned, net		9,236			11,851
Common stock issued for acquisition		—			96,083
Preferred stock issued for acquisition		—			34,192

Transactions related to acquisitions
Increase in assets and liabilities:
Loans	$	70,817		$	981,541
Securities		—			218,676
Other assets		4,324			78,542
Noninterest bearing deposits		4,366			171,117
Interest bearing deposits		44,503			1,037,206
Borrowings		—			75,789
Other liabilities		65			1,832

See accompanying notes to condensed consolidated financial statements.

- 4 -

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 30, 2011

1.	ACCOUNTING POLICIES

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

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

These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2010 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

2.	BUSINESS COMBINATIONS

On May 20, 2011 the Company completed the purchase of the NewBridge Bank branch in Harrisonburg, Virginia and a potential branch site in Waynesboro, Virginia. Under the parties’ agreement, the Company purchased loans of $72.5 million and assumed deposit liabilities of $48.7 million, and purchased the related fixed assets of the branch. The Company operates the acquired bank branch under the name Union First Market Bank (the “Harrisonburg branch”). The acquisition, which allowed the Company to establish immediately a meaningful presence in a new banking market, is consistent with the Company’s secondary growth strategy of expanding operations along the I-81 corridor. The Company’s condensed consolidated statements of income include the results of operations of the Harrisonburg branch from the closing date of the acquisition.

In connection with the acquisition, the Company recorded $1.8 million of goodwill and $9,500 of core deposit intangibles. The core deposit intangible of $9,500 was expensed in the current period. The recorded goodwill was allocated to the community banking segment of the Company and is deductible for tax purposes.

The Company acquired the $72.5 million loan portfolio at a fair value discount of $1.7 million. The discount represents expected credit losses, adjustments to market interest rates and liquidity adjustments. The performing loan portfolio fair value estimate was $70.5 million and the impaired loan portfolio fair value estimate was $276,000.

- 5 -

The consideration paid for the Harrisonburg branch and the amounts of acquired identifiable assets and liabilities as of the acquisition date were as follows (dollars in thousands):


Purchase price:
Cash	$	26,437

Total purchase price		26,437

Identifiable assets:
Cash and due from banks		230
Loans and leases		70,817
Core deposit intangible		10
Other assets		2,481

Total assets		73,538


Liabilities and equity:
Deposits		48,869
Other liabilities		65

Total liabilities		48,934


Net assets acquired		24,604



Goodwill resulting from acquisition	$	1,833

Harrisonburg Branch Acquisition

In the third quarter, interest income of approximately $856,000 was recorded on loans acquired in the Harrisonburg branch acquisition. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at September 30, 2011 are as follows (dollars in thousands):


Outstanding principal balance	$	58,292
Carrying amount	$	57,084

Loans obtained in the acquisition of the Harrisonburg branch for which there is specific evidence of credit deterioration and for which it was probable that the Company would be unable to collect all contractually required principal and interest payments represent less than 0.01% of the Company’s consolidated assets and, accordingly, are not considered material.

The amounts of the Harrisonburg branch revenue and earnings included in the Company’s condensed consolidated income statement for the nine months ended September 30, 2011, and the revenue and earnings of the combined entity had the acquisition date been January 1, 2010, are presented in the pro forma table below. These results combine the historical results of the Harrisonburg branch into the Company’s condensed consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair valuation adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2010. In particular, no adjustments have been made to include provision for credit losses in 2010 on the acquired loan portfolio and related branch specific income taxes. The disclosure of the Harrisonburg branch post-acquisition revenue and net income were not practicable due to combining its operations with the Company’s largest affiliate upon closing of the acquisition.

- 6 -


	Pro forma for the nine months ended September 30,
	2011		2010
(dollars in thousands)
Total revenues	$	177,034	$	179,698
Net income	$	23,894	$	21,250

The 2011 supplemental pro forma earnings were adjusted to exclude $426,000 of acquisition-related costs incurred in 2011 and $149,000 of nonrecurring income principally related to the fair value adjustments to acquisition-date loans and deposits. The 2010 supplemental pro forma earnings were adjusted to include these charges.

Acquisition-related expenses associated with the acquisition of Harrisonburg branch were $426,000 nine month period ended September 30, 2011, respectively, and are recorded in “Other operating expenses” in the Company’s condensed consolidated statements of income. There were no acquisition-related expenses related to the Harrisonburg branch for the three months ended September 30, 2011 or in 2010. Such costs included principally system conversion and integrating operations charges which have been expensed as incurred.

First Market Bank Acquisition

Interest income on acquired loans for the third quarter of 2011 was approximately $9.8 million. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at September 30, 2011 are as follows (dollars in thousands):


Outstanding principal balance	$	645,794
Carrying amount	$	636,571

Loans obtained in the acquisition of the First Market Bank for which there is specific evidence of credit deterioration and for which it was probable that the Company would be unable to collect all contractually required principal and interest payments represent less than 0.26% of the Company’s consolidated assets and, accordingly, are not considered material.

During 2011, the Company compared the expected prepayments at acquisition to actual payments and anticipated future payments on three purchased performing loan pools. The slower prepayment speed noted on real estate, commercial real estate, and auto pools during this assessment resulted in an adjustment to the fair value discount accretion rate. This is considered a change in accounting estimate and resulted in a lower effective yield in each pool.

3.	STOCK-BASED COMPENSATION

The Company’s 2011 Stock Incentive Plan (the “2011 Plan”) and the 2003 Stock Incentive Plan (the “2003 Plan”) provide for the granting of incentive stock options, non-statutory stock options, and nonvested stock awards to key employees of the Company and its subsidiaries. The 2011 Plan became effective on January 1, 2011 after its approval by shareholders at the annual meeting of shareholders held on April 26, 2011. The 2011 Plan makes available 1,000,000 shares, which may be awarded to employees of the Company and its subsidiaries in the form of incentive stock options intended to comply with the requirements of Section 422 of the Internal Revenue Code of 1986 (“incentive stock options”), non-statutory stock options, and nonvested stock. Fewer than 1,700 shares remain available for grant under the 2003 Plan. Under both plans, the option price cannot be less than the fair market value of the stock on the grant date. The Company issues new shares to satisfy stock-based awards. 904,793 shares remained available as of September 30, 2011 for issuance under the 2011 Plan.

- 7 -

For the three month and nine month periods ended September 30, 2011, the Company recognized stock-based compensation expense of approximately $182,000 and $374,000 net of tax, respectively, and less than $0.01 per common share for both periods ended September 30, 2011.

Stock Options

The following table summarizes the stock option activity for the nine months ended September 30, 2011:


	Number of Stock Options			Weighted Average Exercise Price
Options outstanding, December 31, 2010		324,776		$	19.38
Granted		134,046			12.11
Exercised		(6,450	)		8.54
Forfeited		(4,110	)		17.22
Expired		(413	)		29.77

Options outstanding, September 30, 2011		447,849			17.37

Options exercisable, September 30, 2011		210,084			21.03

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option valuation model that uses the assumptions noted in the following table for the nine months ended September 30, 2011 and 2010:


	Nine Months Ended September 30,
	2011			2010
Dividend yield (1)		2.36	%		2.48	%
Expected life in years (2)		7.0			7.0
Expected volatility (3)		41.02	%		37.92	%
Risk-free interest rate (4)		2.71	%		3.23	%

Weighted average fair value per option granted	$	4.31		$	5.53

(1)

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

(2)

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

(3)

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

(4)

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

The following table summarizes information concerning stock options issued to the Company’s employees that are vested or are expected to vest and stock options exercisable as of September 30, 2011 (dollars in thousands):


	Stock Options Vested or Expected to Vest		Exercisable
Stock options		423,735		210,084
Weighted average remaining contractual life in years		6.14		3.19
Weighted average exercise price on shares above water	$	10.67	$	10.67
Aggregate intrinsic value	$	1	$	1

The total intrinsic value for stock options exercised during the nine months ended September 30, 2011 was $37,000. There were no stock options exercised during the third quarter of 2011. The fair value of stock options vested during the nine months ended September 30, 2011 was approximately $233,000. Cash received from the exercise of stock options for the nine months ended September 30, 2011 was $56,000.

- 8 -

Nonvested Stock

The 2011 and 2003 Plans permit the granting of nonvested stock, but are limited 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 fifty percent on each of the third and fourth anniversaries from the date of the grant. The performance-based stock is subject to vesting on the fourth anniversary of the date of the grant dependent upon the performance of the Company’s stock price. The value of the nonvested stock awards was calculated by multiplying the fair market value of the Company’s common stock on 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 nonvested stock activity for the nine months ended September 30, 2011:

Number of
Shares of
Restricted Stock

Performance
Stock

Weighted
Average Grant-
Date Fair Value

Balance, December 31, 2010

94,277

15,000

15.93

Granted

77,225

—

11.39

Released

(12,243

)

—

23.83

Forfeited

(11,189

)

(9,000

)

12.05

Balance, September 30, 2011

148,070

6,000

12.53

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of September 30, 2011 that will be recognized in future periods is as follows (dollars in thousands):

Stock Options

Restricted
Stock

Total

For the remaining three months of 2011

171

242

For year ending December 31, 2012

262

632

894

For year ending December 31, 2013

254

398

652

For year ending December 31, 2014

252

335

For year ending December 31, 2015

176

192

For year ending December 31, 2016

—

Total

1,070

1,300

2,370

- 9 -

4.	LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of unearned income, and consist of the following at September 30, 2011 and December 31, 2010 (dollars in thousands):


	September 30, 2011		December 31, 2010
Commercial:
Commercial Construction	$	186,951	$	205,795
Commercial Real Estate		835,695		758,034
Other Commercial		918,044		975,830

Total		1,940,690		1,939,659

Consumer:
Mortgages		220,108		212,228
Consumer Construction		19,339		15,615
Indirect Auto		166,045		180,778
Indirect Marine		41,899		46,383
HELOCs		276,893		273,025
Credit Card		17,835		19,308
Other Consumer		135,533		150,257

Total		877,652		897,594


Loans, net of unearned income	$	2,818,342	$	2,837,253

The following table shows the aging of the Company’s loan portfolio, by class, at September 30, 2011 (dollars in thousands):


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and still accruing		Purchased Impaired ( net of credit mark)		Nonaccrual		Current		Total Loans

Commercial:
Commercial Construction	$	—	$	—	$	315	$	—	$	9,818	$	176,818	$	186,951
Commercial Real Estate		6,942		1,954		174		1,294		7,682		817,649		835,695
Other Commercial		4,705		1,675		3,184		7,794		29,747		870,939		918,044
Consumer:
Mortgages		5,365		1,838		4,989		—		240		207,676		220,108
Consumer Construction		—		—		—		—		210		19,129		19,339
Indirect Auto		2,424		303		548		47		9		162,714		166,045
Indirect Marine		406		—		—		—		544		40,949		41,899
HELOCs		1,412		153		1,009		822		1,102		272,395		276,893
Credit Card		145		137		217		—		—		17,336		17,835
Other Consumer		1,986		3,770		1,690		193		2,614		125,280		135,533

Total	$	23,385	$	9,830	$	12,126	$	10,150	$	51,966	$	2,710,885	$	2,818,342

- 10 -

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 2010 (dollars in thousands):


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and still Accruing		Purchased Impaired (net of credit mark)		Nonaccrual		Current		Total Loans

Commercial:
Commercial Construction	$	1,834	$	283	$	900	$	1,170	$	11,410	$	190,198	$	205,795
Commercial Real Estate		5,960		2,379		609		911		9,276		738,899		758,034
Other Commercial		7,236		1,286		3,459		10,720		38,908		914,221		975,830
Consumer:
Mortgages		5,967		1,944		4,242		—		261		199,814		212,228
Consumer Construction		159		—		—		—		218		15,238		15,615
Indirect Auto		3,457		613		729		81		14		175,884		180,778
Indirect Marine		920		181		481		—		124		44,677		46,383
HELOCs		1,155		371		1,704		980		1,329		267,486		273,025
Credit Card		292		90		199		—		—		18,727		19,308
Other Consumer		2,447		624		3,009		138		176		143,863		150,257

Total	$	29,427	$	7,771	$	15,332	$	14,000	$	61,716	$	2,709,007	$	2,837,253

Nonaccrual loans totaled $51.9 and 51.6 at September 30, 2011 and 2010, respectively. There were no non-accrual loans excluded from impaired loan disclosure in 2011 or 2010. Loans past due 90 days or more and accruing interest totaled $12.1 million and $18.6 million at September 30, 2011 and 2010, respectively.

The following table shows purchased impaired commercial and consumer loan portfolios, by class, and their delinquency status through September 30, 2011 (dollars in thousands):


	30-89 Days Past Due		Greater Than 90 Days		Current		Total

Commercial:
Commercial Real Estate	$	—	$	51	$	1,243	$	1,294
Other Commercial		—		1,907		5,887		7,794
Consumer:
Indirect Auto		13		4		30		47
HELOCs		66		32		724		822
Other Consumer		12		125		56		193

Total	$	91	$	2,119	$	7,940	$	10,150

The current column represents loans that are less than 30 days past due.

The following table shows purchased impaired commercial and consumer loan portfolios, by class, and their delinquency status through December 31, 2010 (dollars in thousands):


	30-89 Days Past Due		Greater Than 90 Days		Current		Total

Commercial:
Commercial Construction	$	—	$	1,170	$	—	$	1,170
Commercial Real Estate		—		911		—		911
Other Commercial		—		9,340		1,380		10,720
Consumer:
Indirect Auto		8		10		63		81
HELOCs		20		844		116		980
Other Consumer		81		56		1		138

Total	$	109	$	12,331	$	1,560	$	14,000

The current column represents loans that are less than 30 days past due.

- 11 -

The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. At September 30, 2011, the Company had $287.9 million in loans considered to be impaired of which $8.1 million were collectively evaluated for impairment and $279.8 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at September 30, 2011 (dollars in thousands):


Class Category	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

Loans without a specific allowance:
Commercial Construction	$	46,084	$	46,137	$	—	$	43,586	$	1,402
Commercial Real Estate		33,817		34,442		—		34,731		1,350
Other Commercial		133,340		134,279		—		140,128		4,377
Mortgage		2,901		2,947		—		2,911		127
Indirect Auto		76		95		—		112		—
HELOC		2,005		2,200		—		2,229		16
Other Consumer		728		812		—		827		26

Loans with a specific allowance:
Commercial Construction		9,241		9,461		735		9,978		206
Commercial Real Estate		6,643		6,764		1,352		6,790		72
Other Commercial		40,592		41,333		7,786		43,695		1,006
Consumer Construction		210		227		88		1,330		—
Indirect Marine		544		547		240		548		13
HELOC		1,002		1,042		890		228		—
Other Consumer		2,614		2,632		793		2,636		8

Total	$	279,797	$	282,918	$	11,884	$	289,729	$	8,603

At December 31, 2010, the Company had $284.6 million in loans considered to be impaired of which $9.7 million were collectively evaluated for impairment and $274.9 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at December 30, 2010 (dollars in thousands):


Class Category	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

Loans without a specific allowance:
Commercial Construction	$	39,184	$	39,271	$	—	$	42,001	$	1,707
Commercial Real Estate		29,522		29,643		—		29,698		1,656
Other Commercial		124,054		124,398		—		143,434		5,082
Mortgage		2,260		2,274		—		2,291		105
Indirect Auto		119		119		—		143		8
HELOC		650		650		—		650		22

Loans with a specific allowance:
Commercial Construction		18,234		18,274		3,684		18,649		970
Commercial Real Estate		10,303		10,348		1,200		9,869		664
Other Commercial		48,678		49,337		5,672		49,157		1,854
Mortgage		66		66		—		105		—
Consumer Construction		218		228		95		228		—
Indirect Auto		14		15		—		17		1
Indirect Marine		124		124		—		124		5
HELOC		1,329		1,330		606		1,330		29
Other Consumer		177		187		—		187		—

Total	$	274,932	$	276,264	$	11,257	$	297,883	$	12,103

On July 1, 2011, the Company adopted the amendments in Accounting Standards Update No. 2011-02 A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring (“ASU 2011-02”). As a result of adopting the amendments in ASU 2011-02, the Company reassessed all loans that were renewed on or after January 1, 2011 for identification as a troubled debt restructuring (“TDR”). The Company identified as troubled debt restructurings certain loans for which impairment had previously been measured collectively within their homogeneous pool. Upon identifying those loans as TDRs, the Company identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective evaluation of the impairment measurement guidance for those receivables newly identified as impaired. At September 30, 2011, the recorded investment in loans for which the allowance for

- 12 -

credit losses were previously measured collectively within their homogeneous pool and now considered impaired, due to being designated as a TDR, was $21.4 million, and the allowance for credit losses associated with those loans, on the basis of a current evaluation of loss, was $275,000. The impact of this new guidance did not have a material impact on the Company’s non-performing assets, allowance for loan losses, earnings, or capital.

The Company considers troubled debt restructurings to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Included in the impaired loan disclosure above are $116 million of loans considered to be troubled debt restructurings as of September 30, 2011. All loans that are considered to be TDRs are specifically evaluated for impairment in accordance with the Company’s allowance for loan loss methodology.

The following table provides a summary 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 September 30, 2011 (dollars in thousands):


	September 30, 2011
	Recorded Investment		Outstanding Commitment
Performing restructurings
Commercial Construction	$	21,945	$	3,831
Commercial Real Estate		5,382		—
Mortgage		1,584		—
Other Commercial		72,958		500
Other Consumer		263		—

		102,132		4,331
Nonperforming restructurings
Commercial Construction		4,556		—
Commercial Real Estate		1,077		—
Other Commercial		8,340		—
Other Consumer		270		—

		14,243		—


Total restructurings	$	116,375	$	4,331

The following table shows, by class, TDRs that occurred during the three and nine month periods ended September 30, 2011 (dollars in thousands):


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
Class	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Commercial Construction		8	$	7,072		41	$	26,501
Commercial Real Estate		—		—		8		4,294
Mortgage		1		56		5		1,045
Other Commercial		30		31,509		142		74,172
Other Consumer		1		270		3		533

		40	$	38,907		199	$	106,545

The primary modification to each loan class identified as TDRs during the period related to a renewal at the current terms and those terms were considered to be below market based on the risk characteristics of the borrower. Generally, the Company does not modify interest rates or reduce principal balances when

- 13 -

restructuring loans thus the recorded investment is unchanged after the modification is made. There were no TDRs that were restructured during the previous twelve months for which there was a payment default in the three and nine month periods ended September 30, 2011. A default for purposes of this disclosure is a TDR in which subsequent to the restructure, the borrower is 90 days past due or results in foreclosure and repossession of the applicable collateral.

The following table shows the allowance for loan loss activity, by portfolio segment, balances for allowance for credit losses, and loans based on impairment methodology for the nine months ended September 30, 2011. 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):

		$2,818,342			$2,818,342			$2,818,342			$2,818,342
	Commercial			Consumer			Unallocated			Total

Allowance for loan losses:
Balance, beginning of the year	$	28,956		$	9,488		$	(38	)	$	38,406
Recoveries credited to allowance		709			852			—			1,561
Loans charged off		(8,291	)		(4,786	)		—			(13,077	)
Provision charged to operations		9,066			5,209			125			14,400

Balance, end of year	$	30,440		$	10,763		$	87		$	41,290


Ending balance: individually evaluated for impairment		11,304			479			—			11,783


Ending balance: collectively evaluated for impairment		19,035			10,284			87			29,406


Ending balance: loans acquired with deteriorated credit quality		101			—			—			101


Total	$	30,440		$	10,763		$	87		$	41,290


Loans:
Ending balance	$	1,940,690		$	877,652		$	—		$	2,818,342


Ending balance: individually evaluated for impairment		260,629			10,080			—			270,709


Ending balance: collectively evaluated for impairment		1,670,973			867,572			—			2,538,545


Ending balance: loans acquired with deteriorated credit quality		9,088			—			—			9,088


Total	$	1,940,690		$	877,652		$	—		$	2,818,342

- 14 -

		$2,818,342		$2,818,342		$2,818,342			$2,818,342
	Commercial		Consumer		Unallocated			Total

Allowance for loan losses:
Balance, beginning of the year								$	30,484
Recoveries credited to allowance									2,103
Loans charged off									(18,549	)
Provision charged to operations									24,368

Balance, end of year	$	28,255	$	10,189	$	(38	)	$	38,406


Ending balance: individually evaluated for impairment		10,065		701		—			10,766


Ending balance: collectively evaluated for impairment		17,699		9,488		(38	)		27,149


Ending balance: loans acquired with deteriorated credit quality		491		—		—			491


Total	$	28,255	$	10,189	$	(38	)	$	38,406


Loans:
Ending balance	$	1,939,659	$	897,594	$	—		$	2,837,253


Ending balance: individually evaluated for impairment		259,386		1,547		—			260,933


Ending balance: collectively evaluated for impairment		1,667,473		896,047		—			2,563,520


Ending balance: loans acquired with deteriorated credit quality		12,800		—		—			12,800


Total	$	1,939,659	$	897,594	$	—		$	2,837,253

The Company uses a risk rating system for commercial loans. They 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

- 15 -

•

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.

Classified loans include loans with risk ratings of 7 and worse. The following table shows classified loans, excluding purchased impaired loans, classified in the commercial portfolios by class with their related risk ratings as of September 30, 2011. The risk rating information has been updated through September 30, 2011 (dollars in thousands):


	Commercial Construction		Commercial Real Estate		Other Commercial		Total

Risk rated 7	$	52,275	$	39,153	$	151,180	$	242,608
Risk rated 8		—		—		252		252

Total	$	52,275	$	39,153	$	151,432	$	242,860

The following table shows classified loans, excluding purchased impaired loans, classified in the commercial portfolios by class with their related risk rating as of December 31, 2010. The risk rating information has been updated through December 31, 2010 (dollars in thousands):


	Commercial Construction		Commercial Real Estate		Other Commercial		Total

Risk rated 7	$	55,633	$	41,409	$	168,719	$	265,761
Risk rated 8		—		—		376		376

Total	$	55,633	$	41,409	$	169,095	$	266,137

The following table shows only purchased impaired commercial portfolios by class with their related risk rating as of September 30, 2011. The risk rating information has been updated through September 30, 2011 (dollars in thousands):


	Commercial Construction		Commercial Real Estate		Other Commercial		Total

Risk rated 7	$	—	$	1,294	$	6,935	$	8,229
Risk rated 8		—		—		298		298

	$	—	$	1,294	$	7,233	$	8,527

The following table shows only purchased impaired commercial portfolios by class with their related risk rating as of December 31, 2010. The risk rating information has been updated through December 31, 2010 (dollars in thousands):


	Commercial Construction		Commercial Real Estate		Other Commercial		Total

Risk rated 7	$	945	$	375	$	8,164	$	9,484
Risk rated 8		225		535		2,556		3,316

Total	$	1,170	$	910	$	10,720	$	12,800

- 16 -

5.	EARNINGS PER SHARE

Basic earnings per common share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS uses as the denominator the weighted average number of common shares outstanding during the period, including the effect of potentially dilutive common shares outstanding attributable to stock awards. Dividends on preferred stock and amortization of discount on preferred stock are treated as a reduction of the numerator in calculating basic and diluted EPS. There were approximately 409,562 and 247,206 shares underlying anti-dilutive stock awards as of September 30, 2011 and 2010, respectively. Dividends paid on nonvested stock awards were approximately $12,000 and $10,000 for the three months ended September 30, 2011 and 2010, respectively.

The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three and nine months ended September 30, 2011 and 2010 (dollars and shares in thousands, except per share amounts):


	Net Income Available to Common Shareholders (Numerator)		Weighted Average Common Shares (Denominator)		Per Share Amount
For the Three Months ended September 30, 2011
Net income	$	9,071		25,987	$	0.35
Less: dividends paid and accumulated on preferred stock		462		—		0.02
Less: accretion of discount on preferred stock		66		—		—

Basic	$	8,543		25,987	$	0.33
Add: potentially dilutive common shares - stock awards		—		15		—

Diluted	$	8,543		26,002	$	0.33


For the Three Months ended September 30, 2010
Net income	$	8,073		25,882	$	0.31
Less: dividends paid and accumulated on preferred stock		462		—		0.02
Less: accretion of discount on preferred stock		62		—		—

Basic	$	7,549		25,882	$	0.29
Add: potentially dilutive common shares - stock awards		—		39		—

Diluted	$	7,549		25,921	$	0.29


For the Nine Months ended September 30, 2011
Net income	$	22,085		25,972	$	0.85
Less: dividends paid and accumulated on preferred stock		1,386		—		0.06
Less: accretion of discount on preferred stock		195		—		—

Basic	$	20,504		25,972	$	0.79
Add: potentially dilutive common shares - stock awards		—		22		—

Diluted	$	20,504		25,994	$	0.79


For the Nine Months ended September 30, 2010
Net income	$	18,498		24,993	$	0.74
Less: dividends paid and accumulated on preferred stock		1,227		—		0.05
Less: accretion of discount on preferred stock		163		—		0.01

Basic	$	17,108		24,993	$	0.68
Add: potentially dilutive common shares - stock awards		—		43		—

Diluted	$	17,108		25,036	$	0.68

- 17 -

6.	TRUST PREFERRED CAPITAL NOTES

Statutory Trust I, a wholly owned subsidiary of the Company, issued a Trust Preferred Capital Note of $22.5 million through a pooled underwriting for an acquisition in 2004. The securities have an indexed London Interbank Offer Rate (“LIBOR”) floating rate (three month LIBOR rate plus 2.75%) which adjusts and is payable quarterly. The interest rate at September 30, 2011 was 3.12%. The capital securities were redeemable at par beginning on June 17, 2009 and quarterly thereafter until the securities mature on June 17, 2034. The principal asset of Statutory Trust I is $23.2 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital notes. Of the above amount, $696,000 is reflected as the Company’s investment in Statutory Trust I and reported as “Other assets” within the consolidated balance sheet.

Statutory Trust II, a wholly owned subsidiary of the Company, issued a Trust Preferred Capital Note of $36.0 million through a pooled underwriting for an acquisition in 2006. The securities have a LIBOR-indexed floating rate (three month LIBOR plus 1.40%) that adjusts and is payable quarterly. The interest rate at September 30, 2011 was 1.77%. The capital securities were redeemable at par on March 31, 2011 and quarterly thereafter until the securities mature on March 31, 2036. The principal asset of Statutory Trust II is $37.1 million of the Company’s junior subordinated debt securities with like maturities and like interest rates to the capital notes. Of this amount, $1.1 million is reflected as the Company’s investment in Statutory Trust II reported as “Other assets” within the consolidated balance sheet.

7.	SEGMENT REPORTING DISCLOSURES

The Company has two reportable segments: a traditional full service community bank and a mortgage loan origination business. The community bank segment provides loan, deposit, investment, and trust services to retail and commercial customers throughout its 99 retail locations in Virginia. The mortgage segment 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 subject the Company to only de minimus 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 business is driven principally by net interest income. The bank segment provides a distribution and referral network through their customers for the mortgage loan origination business. The mortgage segment offers a more limited referral network for the bank, 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 charges the mortgage banking segment interest at the three month LIBOR rate plus 1.5%. 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.

- 18 -

Information about reportable segments and reconciliation of such information to the consolidated financial statements for three and nine months ended September 30, 2011 and 2010 was as follows (dollars in thousands):


	Community Bank		Mortgage		Eliminations			Consolidated
Three Months Ended September 30, 2011
Net interest income	$	39,208	$	238	$	—		$	39,446
Provision for loan losses		3,600		—		—			3,600

Net interest income after provision for loan losses		35,608		238		—			35,846
Noninterest income		6,798		4,862		(116	)		11,544
Noninterest expenses		30,392		4,361		(116	)		34,637

Income before income taxes		12,014		739		—			12,753
Income tax expense		3,407		275		—			3,682

Net income	$	8,607	$	464		—		$	9,071

Total assets	$	3,902,362	$	70,055	$	(57,960	)	$	3,914,457


Three Months Ended September 30, 2010
Net interest income	$	38,100	$	548	$	—		$	38,648
Provision for loan losses		5,912		—		—			5,912

Net interest income after provision for loan losses		32,188		548		—			32,736
Noninterest income		6,509		5,962		(118	)		12,353
Noninterest expenses		28,999		5,103		(118	)		33,984

Income before income taxes		9,698		1,407		—			11,105
Income tax expense		2,525		508		—			3,033

Net income	$	7,173	$	899	$	—		$	8,072

Total assets	$	3,849,574	$	91,736	$	(81,987	)	$	3,859,323


Nine Months Ended September 30, 2011
Net interest income	$	116,862	$	1,007	$	—		$	117,869
Provision for loan losses		14,400		—		—			14,400

Net interest income after provision for loan losses		102,462		1,007		—			103,469
Noninterest income		18,270		14,135		(351	)		32,054
Noninterest expenses		92,013		13,614		(351	)		105,276

Income before income taxes		28,719		1,528		—			30,247
Income tax expense		7,593		569		—			8,162

Net income	$	21,126	$	959	$	—		$	22,085

Total assets	$	3,902,362	$	70,055	$	(57,960	)	$	3,914,457


Nine Months Ended September 30, 2010
Net interest income	$	110,844	$	1,532	$	—		$	112,376
Provision for loan losses		14,868		—		—			14,868

Net interest income after provision for loan losses		95,976		1,532		—			97,508
Noninterest income		18,838		15,706		(351	)		34,193
Noninterest expenses		92,671		13,612		(351	)		105,932

Income before income taxes		22,143		3,626		—			25,769
Income tax (benefit) expense		5,919		1,352		—			7,271

Net income	$	16,224	$	2,274	$	—		$	18,498

Total assets	$	3,849,574	$	91,736	$	(81,987	)	$	3,859,323

8.	RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). This amends previous guidance to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 became effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures were effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the

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existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures were required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. This was effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption was permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this guidance modify step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this update were effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

The Securities Exchange Commission (“SEC”) has issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting,” which requires companies to submit financial statements in extensible business reporting language (“XBRL”) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly reports for fiscal periods ending on or after June 15, 2010. All remaining filers were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Company complied with this Rule beginning with the filing on the June 30, 2011 Form 10-Q.

In March 2011, the SEC issued Staff Accounting Bulletin (“SAB”) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the SAB. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB series. The effective date for SAB 114 was March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (“ASU 2011-02”). This clarifies the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this guidance became effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption was permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period was required. As a result of applying these amendments, the Company identified receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, and in accordance with the ASU, the Company applied the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has adopted ASU 2011-02 and included the required disclosures in Note 4 to the consolidated financial statements.

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In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements” (“ASU 2011-03”). The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). This ASU is the result of joint efforts by the FASB and International Accounting Standards Board to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and international financial reporting standards. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income” (“ASU 2011-05”). The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its consolidated financial statements.

In August 2011, the SEC issued Final Rule No. 33-9250, “Technical Amendments to Commission Rules and Forms related to the FASB’s Accounting Standards Codification.” The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the release did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is

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less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company is currently assessing the impact that ASU 2011-08 will have on its consolidated financial statements.

9.	GOODWILL AND INTANGIBLE ASSETS

The Company adopted ASC 350, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of this statement 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.

Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 14 years. In connection with the First Market Bank acquisition in 2010, the Company recorded $26.4 million of core deposit intangible, $1.2 million of trademark intangible and $1.1 million in goodwill. None of the goodwill recognized will be deductible for income tax purposes. The core deposit intangible on that acquisition is being amortized over an average of 4.3 years using an accelerated method and the trademark intangible is being amortized over three years using the straight-line method.

In the recent acquisition of the Harrisonburg branch, the Company recorded $1.8 million in goodwill and $9,500 of core deposit intangible. The goodwill is deductible for tax purposes.

Based on the annual testing during the second quarter of each year and the absence of impairment indicators during the quarter ended September 30, 2011, the Company has recorded no impairment charges to date for goodwill or intangible assets.

Information concerning goodwill and intangible assets is presented in the following table (in thousands):


	Gross Carrying Value		Accumulated Amortization		Net Carrying Value
September 30, 2011
Amortizable core deposit intangibles	$	46,615	$	24,453	$	22,162
Unamortizable goodwill		59,742		342		59,400
Trademark intangible		1,200		667		533

December 31, 2010
Amortizable core deposit intangibles	$	46,615	$	19,788	$	26,827
Unamortizable goodwill		57,909		342		57,567
Trademark intangible		1,200		367		833

September 30, 2010
Amortizable core deposit intangibles	$	46,615	$	17,853	$	28,762
Unamortizable goodwill		57,909		342		57,567
Trademark intangible		1,200		267		933

Amortization expense of the core deposit intangibles for the three and nine month periods ended September 30, 2011 totaled $1.5 million and $4.6 million, respectively compared to $1.9 million and $5.3 million, respectively in 2010. The Harrisonburg branch core deposit intangible of $9,500 was expensed in the second quarter of 2011. Amortization expense of the trademark intangibles for the three and nine month periods ended September 30, 2011 was $100,000 and $300,000, respectively compared to $100,000 and $267,000, respectively for 2010.

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As of September 30, 2011, the estimated remaining amortization expense of core deposit and trademark intangibles for each of the five succeeding fiscal years is as follows (dollars in thousands):


2012	$	5,597
2013		4,199
2014		3,124
2015		2,557
2016		2,022
Thereafter		5,196

	$	22,695

10.

COMMITMENTS AND CONTINGENCIES

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 payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case by case basis. At September 30, 2011 and 2010, the Company had outstanding loan commitments approximating $735.1 million and $858.8 million, respectively.

Letters of credit written are conditional commitments issued by the Company to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of standby letters of credit whose contract amounts represent credit risk totaled approximately $40.2 million and $39.7 million at September 30, 2011, and 2010, respectively.

At September 30, 2011, Union Mortgage Group, Inc. (“Union Mortgage”), a wholly owned subsidiary of Union First Market Bank, a wholly owned subsidiary of Union First Market Bankshares Corporation, had rate lock commitments to originate mortgage loans amounting to $132.7 million and loans held for sale of $61.8 million compared to $161.5 million and $84.4 million, respectively, at September 30, 2011 and 2010. Union Mortgage has entered into corresponding agreements on a best-efforts basis to sell loans on a servicing released basis totaling approximately $194.5 million. These commitments to sell loans are designed to mitigate the mortgage company’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale.

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11.

SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities as of September 30, 2011 and December 31, 2010 are summarized as follows (dollars in thousands):


			Gross Unrealized
	Amortized Cost		Gains		(Losses)			Estimated Fair Value
September 30, 2011
U.S. government and agency securities	$	7,973	$	584	$	—		$	8,557
Obligations of states and political subdivisions		181,710		10,863		(248	)		192,325
Corporate and other bonds		14,466		279		(450	)		14,295
Mortgage-backed securities		354,707		12,067		(222	)		366,552
Federal Reserve Bank stock - restricted		6,714		—		—			6,714
Federal Home Loan Bank stock - restricted		15,103		—		—			15,103
Other securities		2,950		—		(11	)		2,939

Total securities	$	583,623	$	23,793	$	(931	)	$	606,485


December 31, 2010
U.S. government and agency securities	$	9,610	$	454	$	(103	)	$	9,961
Obligations of states and political subdivisions		176,431		2,189		(3,588	)		175,032
Corporate and other bonds		15,543		380		(858	)		15,065
Mortgage-backed securities		334,696		9,767		(425	)		344,038
Federal Reserve Bank stock - restricted		6,716		—		—			6,716
Federal Home Loan Bank stock - restricted		18,345		—		—			18,345
Other securities		3,259		32		(7	)		3,284

Total securities	$	564,600	$	12,822	$	(4,981	)	$	572,441

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


	Less than 12 months					More than 12 months					Total
	Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses
As of September 30, 2011
Obligations of states and political subdivisions	$	3,966	$	(244	)	$	679	$	(4	)	$	4,645	$	(248	)
Mortgage-backed securities		31,458		(222	)		—		—			31,458		(222	)
Corporate bonds and other securities		2,397		(116	)		4,073		(345	)		6,470		(461	)

Totals	$	37,821	$	(582	)	$	4,752	$	(349	)	$	42,573	$	(931	)


As of December 31, 2010
U.S. government and agency securities	$	43	$	(103	)	$	—	$	—		$	43	$	(103	)
Obligations of states and political subdivisions		82,952		(2,451	)		14,762		(1,137	)		97,714		(3,588	)
Mortgage-backed securities		49,515		(425	)		—		—			49,515		(425	)
Corporate bonds and other securities		—		(7	)		4,104		(858	)		4,104		(865	)

Totals	$	132,510	$	(2,986	)	$	18,866	$	(1,995	)	$	151,376	$	(4,981	)

As of September 30, 2011, there were $4.8 million, or 4 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 $348 thousand and consisted of corporate and municipal obligations.

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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 September 30, 2011:


	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	$	—		$	7,913		$	—		$	60		$	7,973
Fair value		—			8,418			—			139			8,557
Weighted average yield (1)		—			3.69	%		—			—			3.66	%

Mortgage backed securities:
Amortized cost	$	1,522		$	11,288		$	47,182		$	294,715		$	354,707
Fair value		1,548			11,730			49,708			303,566			366,552
Weighted average yield (1)		4.17	%		4.19	%		3.92	%		3.20	%		3.33	%

Obligations of states and political subdivisions:
Amortized cost	$	559		$	8,112		$	36,424		$	136,615		$	181,710
Fair value		561			8,387			38,510			144,867			192,325
Weighted average yield (1)		5.16	%		4.60	%		4.53	%		4.17	%		4.27	%

Other securities:
Amortized cost	$	2,001		$	1,518		$	924		$	34,790		$	39,233
Fair value		2,019			1,480			947			34,605			39,051
Weighted average yield (1)		5.69	%		5.35	%		4.67	%		5.16	%		5.18	%

Total securities available for sale:
Amortized cost	$	4,082		$	28,831		$	84,530		$	466,180		$	583,623
Fair value		4,128			30,016			89,165			483,176			606,485
Weighted average yield (1)		5.05	%		4.23	%		4.19	%		3.63	%		3.75	%

(1)

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

During each quarter the Company conducts an assessment of the securities portfolio for other-than-temporary impairment (“OTTI”) consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is OTTI if any of the following conditions exists: 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 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, and was recognized in earnings for the quarter ended September 30, 2011. No OTTI had been recognized prior to the current quarter. There is a possibility that the Company will sell the security before recovering all unamortized costs. The significant inputs the Company considered in determining the amount of the credit loss are as follows:

•

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

•

The continued interest payment deferral by the issuer;

•

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

•

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

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


	OTTI Losses
Cumulative credit losses on investment securities, through December 31, 2010	$	—
Cumulative credit losses on investment securities		—
Additions for credit losses not previously regognized		400

Cumulative credit losses on investment securities, through September 30, 2011	$	400

12.

FAIR VALUE MEASUREMENTS

The Company adopted ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. This statement clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants.

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


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

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

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

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

Interest rate swap agreement used for interest rate risk management

Interest rate swaps are recorded at fair value on a recurring basis. The Company utilizes an interest rate swap agreement as part of the management of interest rate risk to modify the repricing characteristics of certain portions of the Company’s interest-bearing liabilities. The Company determines the fair value of its interest rate swap using externally developed pricing models based on market observable inputs and therefore classifies such valuation as Level 2. The Company has considered counterparty credit risk in the valuation of its interest rate swap assets and has considered its own credit risk in the valuation of its interest rate swap liabilities.

Securities available for sale

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider 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

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then the security would fall to the lowest level of the hierarchy (Level 3). The carrying value of restricted Federal Reserve Bank and Federal Home Loan Bank stock approximates fair value based on the redemption provisions of each entity and is therefore excluded from the following table.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis (dollars in thousands):


	Fair Value Measurements at September 30, 2011 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS

Interest rate swap - loans	$	—	$	93			$	93
Securities available for sale:
U.S. government and agency securities		—		8,557		—		8,557
Obligations of states and political subdivisions		—		192,325		—		192,325
Corporate and other bonds		—		14,296		—		14,296
Mortgage-backed securities		—		366,460		—

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company