Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

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 March 31, 2012

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

Commission File Number: 0-20293

UNION FIRST MARKET BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)


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

1051 East Cary Street

Suite 1200

Richmond, Virginia 23219

(Address of principal executive offices) (Zip Code)

(804) 633-5031

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of common stock outstanding as of May 2, 2012 was 25,942,472

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 March 31, 2012, December 31, 2011 and March 31, 2011		1

	Condensed Consolidated Statements of Income for the three months ended March 31, 2012 and 2011		2

	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011		3

	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2012 and 2011		4

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011		5

	Notes to Condensed Consolidated Financial Statements		6

	Report of Independent Registered Public Accounting Firm		35

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		36

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		55

Item 4.	Controls and Procedures		56

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings		57

Item 1A.	Risk Factors		57

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		57

Item 6.	Exhibits		58

	Signatures		59

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	March 31,		December 31,		March 31,
	2012		2011		2011
	(Unaudited)		(Audited)		(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	62,345	$	69,786	$	54,403
Interest-bearing deposits in other banks		48,504		26,556		30,050
Money market investments		179		155		178
Federal funds sold		155		162		175

Total cash and cash equivalents		111,183		96,659		84,806


Securities available for sale, at fair value		621,751		620,166		557,338
Restricted stock, at cost		20,715		20,661		25,056

Loans held for sale		73,575		74,823		50,584

Loans, net of unearned income		2,841,758		2,818,583		2,806,928
Less allowance for loan losses		40,204		39,470		40,399

Net loans		2,801,554		2,779,113		2,766,529


Bank premises and equipment, net		90,986		90,589		90,594
Other real estate owned, net of valuation allowance		37,663		32,263		38,674
Core deposit intangibles, net		19,403		20,714		25,171
Goodwill		59,400		59,400		57,567
Other assets		111,569		112,699		116,381

Total assets	$	3,947,799	$	3,907,087	$	3,812,700


LIABILITIES
Noninterest-bearing demand deposits	$	564,811	$	534,535	$	507,565
Interest-bearing deposits:
NOW accounts		434,625		412,605		381,887
Money market accounts		904,272		904,893		827,076
Savings accounts		194,473		179,157		174,244
Time deposits of $100,000 and over		516,829		511,614		521,940
Other time deposits		600,697		632,301		653,904

Total interest-bearing deposits		2,650,896		2,640,570		2,559,051

Total deposits		3,215,707		3,175,105		3,066,616


Securities sold under agreements to repurchase		53,043		62,995		66,225
Trust preferred capital notes		60,310		60,310		60,310
Long-term borrowings		155,503		155,381		155,014
Other liabilities		37,132		31,657		29,046

Total liabilities		3,521,695		3,485,448		3,377,211


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 at March 31, 2011 and zero at December 31, 2011 and March 31, 2012.		—		—		35,595
Common stock, $1.33 par value, shares authorized 36,000,000; issued and outstanding, 25,944,530 shares, 26,134,830 shares, and 26,034,989 shares, respectively.		34,396		34,672		34,559
Surplus		185,263		187,493		185,962
Retained earnings		195,933		189,824		173,655
Discount on preferred stock		—		—		(1,113	)
Accumulated other comprehensive income		10,512		9,650		6,831

Total stockholders’ equity		426,104		421,639		435,489


Total liabilities and stockholders’ equity	$	3,947,799	$	3,907,087	$	3,812,700

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 March 31
	2012			2011
	(Unaudited)			(Unaudited)
Interest and dividend income:
Interest and fees on loans	$	40,608		$	42,003
Interest on deposits in other banks		24			5
Interest and dividends on securities:
Taxable		3,454			3,630
Nontaxable		1,788			1,754

Total interest and dividend income		45,874			47,392


Interest expense:
Interest on deposits		5,335			6,684
Interest on Federal funds purchased		—			7
Interest on short-term borrowings		404			161
Interest on long-term borrowings		1,788			1,740

Total interest expense		7,527			8,592


Net interest income		38,347			38,800
Provision for loan losses		3,500			6,300

Net interest income after provision for loan losses		34,847			32,500


Noninterest income:
Service charges on deposit accounts		2,130			2,058
Other service charges, commissions and fees		3,410			2,924
Losses on securities transactions, net		(5	)		(16	)
Gains on sales of loans		5,296			4,968
Losses on sales of other real estate and bank premises, net		(58	)		(299	)
Other operating income		1,045			912

Total noninterest income		11,818			10,547


Noninterest expenses:
Salaries and benefits		19,507			17,654
Occupancy expenses		2,647			2,754
Furniture and equipment expenses		1,763			1,662
Other operating expenses		11,692			12,697

Total noninterest expenses		35,609			34,767


Income before income taxes		11,056			8,280
Income tax expense		3,133			2,086

Net income	$	7,923		$	6,194
Dividends paid and accumulated on preferred stock		—			462
Accretion of discount on preferred stock		—			64

Net income available to common shareholders	$	7,923		$	5,668


Earnings per common share, basic	$	0.31		$	0.22

Earnings per common share, diluted	$	0.31		$	0.22

See accompanying notes to condensed consolidated financial statements.

- 2 -

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands, except per share amounts)


	Three Months Ended
	March 31
	2012		2011
	(Unaudited)		(Unaudited)
Net income	$	7,923	$	6,194
Other comprehensive income:
Change in fair value of interest rate swap (cash flow hedge)		197		193
Unrealized gains on securities:
Unrealized holding gains arising during period (net of tax $355 and $1,645, respectively)		662		3,057
Reclassification adjustment for losses included in net income (net of tax $2 and $6, respectively)		3		10

Other comprehensive income		862		3,260

Comprehensive income	$	8,785	$	9,454

See accompanying notes to condensed consolidated financial statements.

- 3 -

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Dollars in thousands, except share and per share amounts)

(Unaudited)


	Preferred Stock		Common Stock			Surplus			Retained Earnings			Discount on Preferred Stock			Accumulated Other Comprehensive Income		Total

Balance - December 31, 2010	$	35,595	$	34,532		$	185,763		$	169,801		$	(1,177	)	$	3,571	$	428,085

Net income - 2011										6,194								6,194
Other comprehensive income (net of tax, $1,651)																3,260		3,260
Dividends on Common Stock ($.07 per share)										(1,814	)							(1,814	)
Tax benefit from exercise of stock awards							1											1
Dividends on Preferred Stock										(462	)							(462	)
Accretion of discount on Preferred Stock										(64	)		64					—
Issuance of common stock under Dividend Reinvestment Plan (5,194 shares)				7			52											59
Issuance of common stock under Stock Incentive Plan (6,450 shares)				8			68											76
Vesting of restricted stock under Stock Incentive Plan (8,659 shares)				12			(12	)										—
Stock-based compensation expense							90											90


Balance - March 31, 2011	$	35,595	$	34,559		$	185,962		$	173,655		$	(1,113	)	$	6,831	$	435,489


Balance - December 31, 2011	$	—	$	34,672		$	187,493		$	189,824		$	—		$	9,650	$	421,639

Net income - 2012										7,923								7,923
Other comprehensive income (net of tax, $357)																862		862
Dividends on Common Stock ($.07 per share)										(1,694	)							(1,694	)
Stock purchased under stock repurchase plan (220,265 shares)				(293	)		(2,571	)										(2,864	)
Issuance of common stock under Dividend Reinvestment Plan (8,731 shares)				12			108			(120	)							—
Vesting of restricted stock under Stock Incentive Plan (4,032 shares)				5			(5	)										—
Stock-based compensation expense							238											238


Balance - March 31, 2012	$	—	$	34,396		$	185,263		$	195,933		$	—		$	10,512	$	426,104

See accompanying notes to condensed consolidated financial statements.

- 4 -

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(Dollars in thousands)


	2012			2011
Operating activities:
Net income	$	7,923		$	6,194
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation of bank premises and equipment		1,694			1,649
Amortization, net		2,285			1,571
Provision for loan losses		3,500			6,300
Losses on the sale of investment securities		5			16
Increase in loans held for sale, net		1,248			23,390
Loss on sales of other real estate owned and bank premises, net		58			299
Stock-based compensation expense		238			90
Decrease in other assets		1,914			4,761
Increase (decrease) in other liabilities		5,672			(1,888	)

Net cash and cash equivalents provided by operating activities		24,537			42,382

Investing activities:
Purchases of securities available for sale		(43,339	)		(40,971	)
Proceeds from maturities, calls and paydowns of securities available for sale		40,602			32,841
Net (increase) decrease in loans		(32,534	)		19,587
Net increase in bank premises and equipment		(2,122	)		(1,526	)
Proceeds from sales of other real estate owned		1,485			3,580
Improvements to other real estate owned		(319	)		(37	)

Net cash and cash equivalents provided by (used in) investing activities		(36,227	)		13,474

Financing activities:
Net increase in noninterest-bearing deposits		30,276			22,698
Net increase (decrease) in interest-bearing deposits		10,326			(26,141	)
Net decrease in short-term borrowings		(9,952	)		(26,742	)
Net increase in long-term borrowings		122			122
Cash dividends paid - common stock		(1,694	)		(1,814	)
Cash dividends paid - preferred stock		—			(462	)
Repurchase of common stock		(2,864	)		—
Taxes paid related to net share settlement of equity awards		—			1
Issuance of common stock		—			135

Net cash and cash equivalents (used in) provided by financing activities		26,214			(32,203	)

Increase in cash and cash equivalents		14,524			23,653
Cash and cash equivalents at beginning of the period		96,659			61,153

Cash and cash equivalents at end of the period	$	111,183		$	84,806


Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	8,394		$	8,795
Income taxes		2,914			2,464

Supplemental schedule of noncash investing and financing activities
Unrealized gain on securities available for sale	$	1,022		$	4,718
Changes in fair value of interest rate swap		197			193
Transfers from loans to other real estate owned		6,593			6,431

See accompanying notes to consolidated financial statements.

- 5 -

UNION FIRST MARKET BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2012

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 2011 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

2.	BUSINESS COMBINATIONS

Harrisonburg Branch Acquisition

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, assumed deposit liabilities of $48.9 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 Interstate Route 81 corridor. The Company’s 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 immediately upon completion of the acquisition. 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.

- 6 -

In the first quarter, interest income of approximately $751,000 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 March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):


March 31, 2012:
Outstanding principal balance	$	53,711
Carrying amount	$	52,903

December 31, 2011:
Outstanding principal balance	$	54,953
Carrying amount	$	53,359

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.

First Market Bank Acquisition

In February 2010, the Company completed the acquisition of First Market Bank. Interest income on acquired loans for the first quarter of 2012 was approximately $7.6 million. The outstanding principal balance and the carrying amount of these loans included in the consolidated balance sheet at March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):


March 31, 2012:
Outstanding principal balance	$	538,841
Carrying amount	$	526,775

December 31, 2011:
Outstanding principal balance	$	632,602
Carrying amount	$	620,048

Loans obtained in the acquisition of 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 0.20% of the Company’s consolidated assets and, accordingly, are not considered material.

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. Approximately 8,600 shares remain available for grant under the 2003 Plan, which expires in 2013. Under both plans, the option price cannot be less than the fair market value of the stock on the grant date. The Company issues new shares to satisfy stock-based awards. A stock option’s maximum term is ten years from the date of grant and vests in equal annual installments of 20% over a five year vesting schedule. There remain approximately 711,000 shares available as of March 31, 2012 for issuance under the 2011 and 2003 Plans.

For the three month periods ended March 31, 2011 and 2012, the Company recognized stock-based compensation expense of approximately $238,000 and $90,000, respectively, and less than $0.01 per common share for both periods ended March 31, 2012 and 2011.

- 7 -

Stock Options

The following table summarizes the stock option activity for the three months ended March 31, 2012:


	Number of Stock Options			Weighted Average Exercise Price
Options outstanding, December 31, 2011		422,750		$	17.70
Granted		131,657			14.40
Forfeited		(850	)		17.11
Expired		(180	)		10.67

Options outstanding, March 31, 2012		553,377			16.92

Options exercisable, March 31, 2012		189,479			22.34

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 three months ended March 31, 2012 and 2011:


	Three Months Ended March 31,
	2012			2011
Dividend yield ⁽¹⁾		2.47	%		2.48	%
Expected life in years ⁽²⁾		7.0			7.0
Expected volatility ⁽³⁾		41.53	%		37.92	%
Risk-free interest rate ⁽⁴⁾		1.24	%		3.23	%

Weighted average fair value per option granted	$	4.76		$	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 March 31, 2012:


	Stock Options Vested or Expected to Vest		Exercisable
Stock options		553,377		189,479
Weighted average remaining contractual life in years		7.03		3.06
Weighted average exercise price on shares above water	$	12.13	$	12.72
Aggregate intrinsic value	$	257,575	$	2,453

There were no stock options exercised during the first quarter of 2012; the total intrinsic value for stock options exercised during the three months ended March 31, 2012 was $0. The fair value of stock options vested during the three months ended March 31, 2011 was approximately $34,000.

Nonvested Stock

The 2003 and the 2011 Stock Incentive 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

- 8 -

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 date of the grant. The performance-based stock is subject to vesting on the fourth anniversary of the date of the grant based on 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 three months ended March 31, 2012:

Number of
Shares of
Restricted Stock

Performance
Stock

Weighted
Average Grant-
Date Fair Value

Balance, December 31, 2011

140,557

6,000

12.62

Granted

68,561

—

14.22

Vested

(3,914

)

—

13.29

Forfeited

(2,702

)

(1,500

)

13.72

Balance, March 31, 2012

202,502

4,500

13.06

The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of March 31, 2012 that will be recognized in future periods is as follows (dollars in thousands):

Stock Options

Restricted
Stock

Total

For the remaining nine months of 2012

308

679

987

For year ending December 31, 2013

389

688

1,077

For year ending December 31, 2014

382

369

751

For year ending December 31, 2015

290

102

392

For year ending December 31, 2016

168

177

For year ending December 31, 2017

—

Total

1,570

1,847

3,417

- 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 March 31, 2012 and December 31, 2011 (dollars in thousands):


	March 31,		December 31,
	2012		2011
Commercial:
Commercial Construction	$	176,664	$	185,359
Commercial Real Estate - Owner Occupied		468,392		452,407
Commercial Real Estate - Non-Owner Occupied		681,605		655,083
Raw Land and Lots		204,966		214,284
Single Family Investment Real Estate		201,103		192,437
Commercial and Industrial		209,998		212,268
Other Commercial		43,491		44,403
Consumer:
Mortgage		224,178		219,646
Consumer Construction		23,194		20,757
Indirect Auto		159,016		162,708
Indirect Marine		37,140		39,819
HELOCs		276,031		277,101
Credit Card		19,319		19,006
Other Consumer		116,661		123,305

Total	$	2,841,758	$	2,818,583

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


	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days and still Accruing		Purchased Impaired (net of credit mark)		Nonaccrual		Current		Total Loans
Commercial:
Commercial Construction	$	—	$	—	$	—	$	—	$	9,835	$	166,829	$	176,664
Commercial Real Estate - Owner Occupied		3,873		2,225		1,560		1,178		5,215		454,341		468,392
Commercial Real Estate - Non-Owner Occupied		3,442		47		374		—		1,084		676,658		681,605
Raw Land and Lots		133		191		94		5,178		13,064		186,306		204,966
Single Family Investment Real Estate		361		1,157		177		354		4,507		194,547		201,103
Commercial and Industrial		903		50		1,730		361		5,318		201,636		209,998
Other Commercial		117		23		500		—		233		42,618		43,491
Consumer:
Mortgage		5,434		3,804		3,783		—		1,096		210,061		224,178
Consumer Construction		—		—		—		—		205		22,989		23,194
Indirect Auto		1,690		245		283		31		5		156,762		159,016
Indirect Marine		71		115		598		—		261		36,095		37,140
HELOCs		1,730		404		1,271		873		855		270,898		276,031
Credit Card		204		136		297		—		—		18,682		19,319
Other Consumer		2,320		97		1,600		165		713		111,766		116,661

Total	$	20,278	$	8,494	$	12,267	$	8,140	$	42,391	$	2,750,188	$	2,841,758

- 10 -

The following table shows the aging of the Company’s loan portfolio, by class, at December 31, 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	$	—	$	—	$	490	$	—	$	10,276	$	174,593	$	185,359
Commercial Real Estate - Owner Occupied		520		—		2,482		1,292		5,962		442,151		452,407
Commercial Real Estate - Non-Owner Occupied		190		64		2,887		1,133		2,031		648,778		655,083
Raw Land and Lots		94		1,124		—		5,623		13,322		194,121		214,284
Single Family Investment Real Estate		779		70		3,637		388		5,048		182,515		192,437
Commercial and Industrial		601		185		3,369		392		5,297		202,424		212,268
Other Commercial		—		25		—		—		238		44,140		44,403
Consumer:
Mortgage		6,748		412		3,804		—		240		208,442		219,646
Consumer Construction		—		—		—		—		207		20,550		20,757
Indirect Auto		2,653		416		443		40		7		159,149		162,708
Indirect Marine		189		795		—		—		544		38,291		39,819
HELOCs		1,678		547		820		865		885		272,306		277,101
Credit Card		245		184		323		—		—		18,254		19,006
Other Consumer		1,421		443		1,657		164		777		118,843		123,305

Total	$	15,118	$	4,265	$	19,912	$	9,897	$	44,834	$	2,724,557	$	2,818,583

Nonaccrual loans totaled $42.4 million and $62.6 million at March 31, 2012 and 2011, respectively. There were no nonaccrual loans excluded from impaired loan disclosure in 2012 or 2011. Loans past due 90 days or more and accruing interest totaled $12.3 million and $10.8 million at March 31, 2012 and 2011, respectively.

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


	30-89 Days Past Due		Greater than 90 Days		Current		Total
Commercial:
Commercial Real Estate - Owner Occupied	$	—	$	228	$	950	$	1,178
Raw Land and Lots		—		—		5,178		5,178
Single Family Investment Real Estate		—		—		354		354
Commercial and Industrial		—		278		83		361
Consumer:
Indirect Auto		8		3		20		31
HELOCs		—		55		818		873
Other Consumer		—		78		87		165

Total	$	8	$	642	$	7,490	$	8,140

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, 2011 (dollars in thousands):


	30-89 Days Past Due		Greater than 90 Days		Current		Total
Commercial:
Commercial Real Estate - Owner Occupied	$	206	$	50	$	1,036	$	1,292
Commercial Real Estate - Non-Owner Occupied		—		1,133		—		1,133
Raw Land and Lots		—		—		5,623		5,623
Single Family Investment Real Estate		—		—		388		388
Commercial and Industrial		—		302		90		392
Consumer:
Indirect Auto		6		11		23		40
HELOCs		19		32		814		865
Other Consumer		—		77		87		164

Total	$	231	$	1,605	$	8,061	$	9,897

- 11 -

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

The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. At March 31, 2012, the Company had $242.7 million in loans considered to be impaired of which $11.9 million were collectively evaluated for impairment and $230.8 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at March 31, 2012 (dollars in thousands):


			Unpaid				YTD		Interest
	Recorded		Principal		Related		Average		Income
	Investment		Balance		Allowance		Investment		Recognized
Loans without a specific allowance
Commercial:
Commercial Construction	$	39,176	$	39,605	$	—	$	39,458	$	448
Commercial Real Estate - Owner Occupied		22,416		22,955		—		23,143		289
Commercial Real Estate - Non-Owner Occupied		37,390		37,589		—		39,324		480
Raw Land and Lots		47,290		47,398		—		47,713		402
Single Family Investment Real Estate		11,375		11,706		—		11,756		136
Commercial and Industrial		7,395		7,892		—		8,288		96
Other Commercial		1,250		1,250		—		1,254		18
Consumer:
Mortgage		3,005		3,005		—		3,007		28
Indirect Auto		10		10		—		11		—
HELOCs		1,426		1,526		—		1,527		3
Other Consumer		792		817		—		827		8

Total impaired loans without a specific allowance	$	171,525	$	173,753	$	—	$	176,308	$	1,908


Loans with a specific allowance
Commercial:
Commercial Construction	$	8,971	$	9,015	$	851	$	9,035	$	60
Commercial Real Estate - Owner Occupied		6,934		7,063		1,547		7,079		44
Commercial Real Estate - Non-Owner Occupied		6,943		6,969		941		6,981		68
Raw Land and Lots		16,677		16,920		1,830		16,995		43
Single Family Investment Real Estate		4,795		4,859		1,484		4,864		51
Commercial and Industrial		12,407		12,572		3,578		12,588		100
Consumer:
Mortgage		961		961		162		1,028		17
Consumer Construction		205		226		83		226		—
Indirect Marine		261		271		99		272		—
HELOCs		755		811		552		1,020		—
Other Consumer		355		355		161		355		—

Total impaired loans with a specific allowance	$	59,264	$	60,022	$	11,288	$	60,443	$	383

Total loans individually evaluated for impairment	$	230,789	$	233,775	$	11,288	$	236,751	$	2,291

- 12 -

At December 31, 2011, the Company had $255.1 million in loans considered to be impaired of which $12.3 million were collectively evaluated for impairment and $242.8 million were individually evaluated for impairment. The following table shows the Company’s impaired loans individually evaluated for impairment, by class, at December 31, 2011 (dollars in thousands):


			Unpaid				YTD		Interest
	Recorded		Principal		Related		Average		Income
	Investment		Balance		Allowance		Investment		Recognized
Loans without a specific allowance
Commercial:
Commercial Construction	$	40,475	$	40,524	$	—	$	37,835	$	1,690
Commercial Real Estate - Owner Occupied		20,487		21,010		—		23,364		1,183
Commercial Real Estate - Non-Owner Occupied		37,799		37,855		—		38,084		2,002
Raw Land and Lots		46,791		46,890		—		47,808		1,306
Single Family Investment Real Estate		11,285		11,349		—		11,684		637
Commercial and Industrial		9,467		9,959		—		10,216		423
Other Commercial		1,257		1,257		—		1,269		75
Consumer:
Mortgage		1,202		1,202		—		1,225		70
HELOCs		349		349		—		350		11
Other Consumer		—		—		—		1		—

Total impaired loans without a specific allowance	$	169,112	$	170,395	$	—	$	171,836	$	7,397


Loans with a specific allowance
Commercial:
Commercial Construction	$	12,927	$	13,297	$	583	$	13,811	$	343
Commercial Real Estate - Owner Occupied		8,679		8,788		1,961		8,681		267
Commercial Real Estate - Non-Owner Occupied		8,858		8,879		1,069		9,010		322
Raw Land and Lots		22,188		22,429		991		24,553		973
Single Family Investment Real Estate		9,020		9,312		1,140		9,571		321
Commercial and Industrial		8,980		9,133		3,320		10,448		369
Other Commercial		150		150		3		153		10
Consumer:
Mortgage		535		535		11		536		32
Consumer Construction		207		226		86		228		—
Indirect Auto		71		71		—		93		5
Indirect Marine		544		547		263		548		9
HELOCs		785		825		587		1,034		—
Other Consumer		777		804		284		815		5

Total impaired loans with a specific allowance	$	73,721	$	74,996	$	10,298	$	79,481	$	2,656

Total loans individually evaluated for impairment	$	242,833	$	245,391	$	10,298	$	251,317	$	10,053

The Company considers troubled debt restructurings (“TDRs”) to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession to the borrower for economic or legal reasons related to the borrower’s financial difficulties that it would not otherwise consider. Included in the impaired loan disclosures above are $99.8 million and $112.6 million of loans considered to be troubled debt restructurings as of March 31, 2012 and December 31, 2011, respectively. All loans that are considered to be TDRs are specifically evaluated for impairment in accordance with the Company’s allowance for loan loss methodology.

- 13 -

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


	Modified to Interest Only						Term Modification at Market Rate						Term Modification below Market Rate						Total
	No. of Loans		Recorded Investment		Outstanding Commitment		No. of Loans		Recorded Investment		Outstanding Commitment		No. of Loans		Recorded Investment		Outstanding Commitment		No. of Loans		Recorded Investment		Outstanding Commitment
Performing
Commercial:
Commercial Construction		—	$	—	$	—		11	$	15,437	$	2,649		—	$	—	$	—		11	$	15,437	$	2,649
Commercial Real Estate - Owner Occupied		2		398		—		8		7,554		347		3		555		—		13		8,507		347
Commercial Real Estate - Non-Owner Occupied		1		301		—		9		17,157		—		—		—		—		10		17,458		—
Raw Land and Lots		3		329		—		9		24,391		174		4		6,994		—		16		31,714		174
Single Family Investment Real Estate		2		180		—		8		4,915		—		1		385		—		11		5,480		—
Commercial and Industrial		—		—		—		12		4,784		192		2		356		—		14		5,140		192
Other Commercial		—		—		—		2		302		—		—		—		—		2		302		—
Consumer:
Mortgage		2		604		—		5		807		—		1		507		—		8		1,918		—
Other Consumer		—		—		—		1		108		—		—		—		—		1		108		—

Total performing		10	$	1,812	$	—		65	$	75,455	$	3,362		11	$	8,797	$	—		86	$	86,064	$	3,362


Nonperforming
Commercial:
Commercial Construction		—	$	—	$	—		1	$	846	$	—		4	$	4,523	$	—		5	$	5,369	$	—
Commercial Real Estate - Owner Occupied		—		—		—		1		908		—		—		—		—		1		908		—
Commercial Real Estate - Non-Owner Occupied		1		216		—		1		73		—		—		—		—		2		289		—
Raw Land and Lots		1		341		—		2		353		—		3		3,567		—		6		4,261		—
Single Family Investment Real Estate		1		92		—		1		520		—		2		714		—		4		1,326		—
Commercial and Industrial		—		—		—		3		1,123		—		—		—		—		3		1,123		—
Consumer:
Indirect Marine		—		—		—		1		261		—		—		—		—		1		261		—
Other Consumer		—		—		—		1		206		—		—		—		—		1		206		—

Total nonperforming		3	$	649	$	—		11	$	4,290	$	—		9	$	8,804	$	—		23	$	13,743	$	—


Total performing and nonperforming		13	$	2,461	$	—		76	$	79,745	$	3,362		20	$	17,601	$	—		109	$	99,807	$	3,362


	Modified to Interest Only						Term Modification at Market Rate						Term Modification below Market Rate						Total
	No. of Loans		Recorded Investment		Outstanding Commitment		No. of Loans		Recorded Investment		Outstanding Commitment		No. of Loans		Recorded Investment		Outstanding Commitment		No. of Loans		Recorded Investment		Outstanding Commitment
Performing
Commercial:
Commercial Construction		—	$	—	$	—		14	$	21,461	$	3,185		—	$	—	$	—		14	$	21,461	$	3,185
Commercial Real Estate - Owner Occupied		2		398		—		7		7,052		180		2		546		—		11		7,996		180
Commercial Real Estate - Non-Owner Occupied		1		301		—		15		21,476		13		—		—		—		16		21,777		13
Raw Land and Lots		—		—		—		11		25,425		1		4		7,025		—		15		32,450		1
Single Family Investment Real Estate		—		—		—		10		6,750		—		2		1,775		—		12		8,525		—
Commercial and Industrial		—		—		—		10		4,629		204		2		362		—		12		4,991		204
Other Commercial		—		—		—		4		864		—		—		—		—		4		864		—
Consumer:
Mortgage		—		—		—		—		—		—		1		507		—		1		507		—
Other Consumer		—		—		—		2		263		—		—		—		—		2		263		—

Total performing		3	$	699	$	—		73	$	87,920	$	3,583		11	$	10,215	$	—		87	$	98,834	$	3,583


Nonperforming
Commercial:
Commercial Construction		—	$	—	$	—		1	$	762	$	—		4	$	4,591	$	—		5	$	5,353	$	—
Commercial Real Estate - Non-Owner Occupied		1		218		—		1		74		—		—		—		—		2		292		—
Raw Land and Lots		1		341		—		2		358		—		3		3,643		—		6		4,342		—
Single Family Investment Real Estate		1		93		—		1		529		—		2		720		—		4		1,342		—
Commercial and Industrial		—		—		—		3		1,134		—		—		—		—		3		1,134		—
Consumer:
Mortgage		1		538		—		4		538		—		—		—		—		5		1,076		—
Other Consumer		—		—		—		1		265		—		—		—		—		1		265		—

Total nonperforming		4	$	1,190	$	—		13	$	3,660	$	—		9	$	8,954	$	—		26	$	13,804	$	—


Total performing and nonperforming		7	$	1,889	$	—		86	$	91,580	$	3,583		20	$	19,169	$	—		113	$	112,638	$	3,583

- 14 -

The Company considers a default of a restructured loan to occur when subsequent to the restructure, the borrower is 90 days past due or results in foreclosure and repossession of the applicable collateral; the Company identified one restructured loan, totaling approximately $453,000, that went into default in the first quarter that had been restructured during the previous twelve months. This loan was a commercial real estate (owner occupied) loan for which the term had been extended at a market rate. The following table shows, by class and modification type, TDRs that occurred during the three month period ended March 31, 2012 (dollars in thousands):


	All Restructurings
	No. of Loans		Recorded investment at period end
Interest only at market rate of interest
Commercial:
Raw Land and Lots		3	$	329
Single Family Investment Real Estate		2		180
Consumer:
Mortgage		1		202

Total interest only at market rate of interest		6	$	711


Loan term extended at a market rate
Commercial:
Commercial Real Estate - Owner Occupied		2	$	1,701
Raw Land and Lots		1		604
Commercial and Industrial		1		104
Consumer:
Mortgage		1		273
Other Consumer		1		206

Total loan term extended at a market rate		6	$	2,888


Loan term extended at a below market rate
Commercial:
Commercial Real Estate - Owner Occupied		1	$	10

Total loan term extended at a below market rate		1	$	10

Total		13	$	3,609

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 restructuring loans, thus the recorded investment is unchanged after the modification is made.

- 15 -

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 three months ended March 31, 2012. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories (dollars in thousands):


	Commercial			Consumer			Unallocated			Total

Allowance for loan losses:
Balance, beginning of the year	$	27,891		$	11,498		$	81		$	39,470
Recoveries credited to allowance		66			275			—			341
Loans charged off		(1,399	)		(1,708	)		—			(3,107	)
Provision charged to operations		3,086			479			(65	)		3,500

Balance, end of year	$	29,644		$	10,544		$	16		$	40,204


Ending balance: individually evaluated for impairment		10,070			1,057			—			11,127


Ending balance: collectively evaluated for impairment		19,413			9,487			16			28,916


Ending balance: loans acquired with deteriorated credit quality		161			—			—			161


Total	$	29,644		$	10,544		$	16		$	40,204


Loans:
Ending balance	$	1,986,219		$	855,539		$	—		$	2,841,758


Ending balance: individually evaluated for impairment		215,948			6,701			—			222,649


Ending balance: collectively evaluated for impairment		1,763,200			847,769			—			2,610,969


Ending balance: loans acquired with deteriorated credit quality		7,071			1,069			—			8,140


Total	$	1,986,219		$	855,539		$	—		$	2,841,758

- 16 -

The following table shows the allowance for loan loss activity, portfolio segment types, balances for allowance for loan losses, and loans based on impairment methodology for the year ended December 31, 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):


	Commercial			Consumer			Unallocated			Total

Allowance for loan losses:
Balance, beginning of the year	$	28,255		$	10,189		$	(38	)	$	38,406
Recoveries credited to allowance		924			1,206			—			2,130
Loans charged off		(10,891	)		(6,975	)		—			(17,866	)
Provision charged to operations		9,603			7,078			119			16,800

Balance, end of year	$	27,891		$	11,498		$	81		$	39,470


Ending balance: individually evaluated for impairment		8,982			1,231			—			10,213


Ending balance: collectively evaluated for impairment		18,824			10,267			81			29,172


Ending balance: loans acquired with deteriorated credit quality		85			—			—			85


Total	$	27,891		$	11,498		$	81		$	39,470


Loans:
Ending balance	$	1,956,241		$	862,342		$	—		$	2,818,583


Ending balance: individually evaluated for impairment		229,535			3,401			—			232,936


Ending balance: collectively evaluated for impairment		1,717,878			857,872			—			2,575,750


Ending balance: loans acquired with deteriorated credit quality		8,828			1,069			—			9,897


Total	$	1,956,241		$	862,342		$	—		$	2,818,583

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 risk;

•

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;

- 17 -

•

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.

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


	1-3		4		5		6		7		8		Total
Commercial Construction	$	13,480	$	74,692	$	10,700	$	32,623	$	45,169	$	—	$	176,664
Commercial Real Estate - Owner Occupied		91,635		308,483		18,609		24,178		24,309		—		467,214
Commercial Real Estate - Non-Owner Occupied		141,066		421,129		44,562		39,764		35,084		—		681,605
Raw Land and Lots		4,424		100,739		14,360		32,932		47,058		275		199,788
Single Family Investment Real Estate		33,473		125,271		15,767		13,563		12,675		—		200,749
Commercial and Industrial		36,829		124,074		18,884		9,371		20,287		192		209,637
Other Commercial		5,491		17,135		15,470		3,481		1,852		62		43,491

Total	$	326,398	$	1,171,523	$	138,352	$	155,912	$	186,434	$	529	$	1,979,148

The following table shows all loans, excluding purchased impaired loans, in the commercial portfolios by class with their related risk rating as of December 31, 2011. The risk rating information has been updated through December 31, 2011 (dollars in thousands):


	1-3		4		5		6		7		8		Total
Commercial Construction	$	10,099	$	84,299	$	6,079	$	36,650	$	48,232	$	—	$	185,359
Commercial Real Estate - Owner Occupied		88,430		296,825		17,604		21,158		26,389		709		451,115
Commercial Real Estate - Non-Owner Occupied		149,346		367,244		58,844		38,662		39,854		—		653,950
Raw Land and Lots		4,368		99,374		18,767		33,673		52,204		275		208,661
Single Family Investment Real Estate		32,741		116,570		11,928		14,358		16,452		—		192,049
Commercial and Industrial		35,120		123,872		22,079		11,559		19,066		180		211,876
Other Commercial		6,364		15,918		16,739		3,807		1,512		63		44,403

Total	$	326,468	$	1,104,102	$	152,040	$	159,867	$	203,709	$	1,227	$	1,947,413

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


	6		7		8		Total
Commercial Real Estate - Owner Occupied	$	—	$	1,178	$	—	$	1,178
Raw Land and Lots		—		5,178		—		5,178
Single Family Investment Real Estate		337		17		—		354
Commercial and Industrial		—		83		278		361

Total	$	337	$	6,456	$	278	$	7,071

The following table shows only purchased impaired loans in the commercial portfolios by class with their related risk rating as of December 31, 2011. The credit quality indicator information has been updated through December 31, 2011 (dollars in thousands):


	6		7		8		Total
Commercial Real Estate - Owner Occupied	$	—	$	1,292	$	—	$	1,292
Commercial Real Estate - Non-Owner Occupied		—		1,133		—		1,133
Raw Land and Lots		—		5,623		—		5,623
Single Family Investment Real Estate		369		19		—		388
Commercial and Industrial		—		91		301		392

Total	$	369	$	8,158	$	301	$	8,828

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

- 18 -

future cash flows, and timing of those expected future cash flows. The contractually required payments, cash flows expected to be collected, and fair value as of the date of acquisition were $1,080,780, $1,072,726, and $1,052,358 respectively (dollars in thousands).

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


	For the Three Months Ended March 31, 2012												For the Twelve Months Ended December 31, 2011
	Purchased Impaired						Purchased Nonimpaired						Purchased Impaired						Purchased Nonimpaired
	Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans			Accretable Yield			Carrying Amount of Loans
Balance at beginning of period	$	5,140		$	9,897		$	9,010		$	663,510		$	8,169		$	13,999		$	13,589		$	799,898
Additions		—			—			—			—			122			276			1,593			70,524
Accretion		(18	)		—			(1,256	)		—			(66	)		—			(6,172	)		—
Charged off		(3	)		(3	)		—			(541	)		(3,073	)		(1,329	)		—			(5,988	)
Transfers to OREO		—			(1,713	)		—			(2,766	)		(12	)		(174	)		—			(2,341	)
Payments received, net		—			(41	)		—			(88,665	)		—			(2,875	)		—			(198,583	)

Balance at end of period	$	5,119		$	8,140		$	7,754		$	571,538		$	5,140		$	9,897		$	9,010		$	663,510

5.	EARNINGS PER SHARE

Basic earnings per common share (“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. Amortization of discount and dividends on the preferred stock is treated as a reduction of the numerator in calculating basic and diluted EPS. There were approximately 559,939 and 333,386 shares underlying anti-dilutive stock awards as of March 31, 2012 and 2011, respectively. Dividends paid on nonvested stock awards were approximately $6,000 and $3,000 for the three months ended March 31, 2012 and 2011, respectively.

The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three months ended March 31, 2012 and 2011 (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 March 31, 2012
Net income, basic	$	7,923		25,857	$	0.31
Add: potentially dilutive common shares - stock awards		—		22		—

Diluted	$	7,923		25,879	$	0.31


For the Three Months ended March 31, 2011
Net income	$	6,194		25,958	$	0.24
Less: dividends paid and accumulated on preferred stock		462		—		0.02
Less: accretion of discount on preferred stock		64		—		—

Basic	$	5,668		25,958	$	0.22
Add: potentially dilutive common shares - stock awards		—		23		—

Diluted	$	5,668		25,981	$	0.22

- 19 -

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 March 31, 2012 was 3.22%. 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 March 31, 2012 was 1.87%. The capital securities were redeemable at par on June 15, 2011 and quarterly thereafter until the securities mature on June 15, 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 business for 2012 includes one subsidiary bank, which provides loan, deposit, investment, and trust services to retail and commercial customers throughout its 98 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 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 charges the mortgage banking segment interest at the three month LIBOR rate plus 1.5% basis points, floor of 2%. 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.

- 20 -

Information about reportable segments and reconciliation of such information to the consolidated financial statements for three months ended March 31, 2012 and 2011 was as follows (dollars in thousands):


	Community Bank		Mortgage		Eliminations			Consolidated
Three Months Ended March 31, 2012
Net interest income	$	38,038	$	309	$	—		$	38,347
Provision for loan losses		3,500		—		—			3,500

Net interest income after provision for loan losses		34,538		309		—			34,847
Noninterest income		6,637		5,298		(117	)		11,818
Noninterest expenses		30,494		5,232		(117	)		35,609

Income before income taxes		10,681		375		—			11,056
Income tax expense		2,992		141		—			3,133

Net income	$	7,689	$	234		—		$	7,923

Total assets	$	3,940,249	$	83,637	$	(76,087	)	$	3,947,799


Three Months Ended March 31, 2011
Net interest income	$	38,313	$	487	$	—		$	38,800
Provision for loan losses		6,300		—		—			6,300

Net interest income after provision for loan losses		32,013		487		—			32,500
Noninterest income		5,695		4,969		(117	)		10,547
Noninterest expenses		29,956		4,928		(117	)		34,767

Income before income taxes		7,752		528		—			8,280
Income tax expense		1,887		199		—			2,086

Net income	$	5,865	$	329	$	—		$	6,194

Total assets	$	3,807,228	$	55,260	$	(49,788	)	$	3,812,700

8.	RECENT ACCOUNTING PRONOUNCEMENTS

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” 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 became effective during the quarter ended March 31, 2012 and was applied prospectively to transactions or modifications of existing transactions that occurred on or after the effective date. The adoption of the new guidance did not have a material impact on the Company’s 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.” This ASU is the result of joint efforts by the FASB and International Accounting Standards Board (IASB) 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 (IFRS). The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. The Company has included the required disclosures in its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” 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

- 21 -

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 were applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. The Company has included the required Statements of Comprehensive Income using the two-statement approach in its 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 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. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

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

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has included the required disclosures in its consolidated financial statements.

9.	GOODWILL AND INTANGIBLE ASSETS

The Company follows ASC 350, Goodwill and Other Intangible Assets, in accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of this section 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. Based on the annual testing performed each year the Company has recorded no impairment charges to date.

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, 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. The acquired trademark intangible is included as a component of other assets in the consolidated balance sheet.

- 22 -

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 March 31, 2012, 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
March 31, 2012
Amortizable core deposit intangibles	$	46,615	$	27,212	$	19,403
Unamortizable goodwill		59,742		342		59,400
Trademark intangible		1,200		867		333

December 31, 2011
Amortizable core deposit intangibles	$	46,615	$	25,901	$	20,714
Unamortizable goodwill		59,742		342		59,400
Trademark intangible		1,200		767		433

March 31, 2011
Amortizable core deposit intangibles	$	46,615	$	21,444	$	25,171
Unamortizable goodwill		57,909		342		57,567
Trademark intangible		1,200		467		733

Amortization expense of the core deposit intangibles for the three month periods ended March 31, 2012 and 2011 totaled $1.3 million and $1.7 million, respectively. 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 month periods ended March 31, 2012 and 2011 was both $100,000, respectively.

As of March 31, 2012, 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):


2013	$	4,994
2014		3,567
2015		2,734
2016		2,348
2017		1,728
Thereafter		4,365

	$	19,736

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 March 31, 2012 and 2011 and at December 31, 2011, the Company had outstanding loan commitments approximating $798.7 million, $758.4 million, and $720.3 million, respectively.

- 23 -

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 $46.6 million and $36.0 million at March 31, 2012 and 2011, and $38.1 million at December 31, 2011, respectively.

At March 31, 2012, 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 $102.7 million and loans held for sale of $73.6 million compared to $104.7 million and $50.6 million at March 31, 2012 and 2011, At December 31, 2011, Union Mortgage had rate lock commitments to originate mortgage loans amounting to $45.8 million and loans held for sale of $74.8 million. Union Mortgage has entered into corresponding agreements on a best-efforts basis to sell loans on a servicing released basis totaling approximately $176.3 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.

11.

SECURITIES

The amortized cost, gross unrealized gains and losses, and estimated fair values of investment securities as of March 31, 2012 and December 31, 2011 are summarized as follows (dollars in thousands):


	Amortized Cost		Gross Unrealized					Estimated Fair Value
	Amortized Cost		Gains		(Losses)			Estimated Fair Value
March 31, 2012
U.S. government and agency securities	$	3,592	$	165	$	(3	)	$	3,754
Obligations of states and political subdivisions		189,817		11,724		(281	)		201,260
Corporate and other bonds		12,179		261		(532	)		11,908
Mortgage-backed securities		391,136		10,687		(169	)		401,654
Other securities		3,106		69		—			3,175

Total securities	$	599,830	$	22,906	$	(985	)	$	621,751


December 31, 2011
U.S. government and agency securities	$	3,933	$	351	$	—		$	4,284
Obligations of states and political subdivisions		189,117		11,337		(247	)		200,207
Corporate and other bonds		12,839		188		(787	)		12,240
Mortgage-backed securities		390,329		10,434		(445	)		400,318
Other securities		3,044		77		(4	)		3,117

Total securities	$	599,262	$	22,387	$	(1,483	)	$	620,166

Due to restrictions placed upon the Company’s common stock investment in the Federal Reserve Bank and Federal Home Loan Bank of Atlanta, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications. The Federal Home Loan Bank requires the Bank to maintain stock in an amount equal to 4.5% of outstanding borrowings and a specific percentage of the member’s total assets. The Federal Reserve Bank of Richmond requires the Company to maintain stock with a par value equal to 6% of its outstanding capital. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $6.8 million and $6.7 million and Federal Home Loan Bank of Atlanta stock in the amount of $13.9 million as of March 31, 2012 and December 31, 2011.

- 24 -

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 March 31, 2012
U.S. government and agency securities	$	14	$	(3	)	$	—	$	—		$	14	$	(3	)
Obligations of states and political subdivisions		6,994		(191	)		413		(90	)		7,407		(281	)
Mortgage-backed securities		58,274		(169	)		—		—			58,274		(169	)
Corporate bonds and other securities		100		—			3,884		(532	)		3,984		(532	)

Totals	$	65,382	$	(363	)	$	4,297	$	(622	)	$	69,679	$	(985	)


As of December 31, 2011
Obligations of states and political subdivisions	$	5,429	$	(152	)	$	1,090	$	(95	)	$	6,519	$	(247	)
Mortgage-backed securities		97,203		(445	)		—		—			97,203		(445	)
Corporate bonds and other securities		2,342		(165	)		3,790		(626	)		6,132		(791	)

Totals	$	104,974	$	(762	)	$	4,880	$	(721	)	$	109,854	$	(1,483	)

As of March 31, 2012, there were $4.3 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 $622 thousand and consisted of corporate and municipal obligations.

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


	March 31, 2012				December 31, 2011
	Amortized		Estimated		Amortized		Estimated
	Cost		Fair Value		Cost		Fair Value
Due in one year or less	$	4,047	$	4,110	$	6,046	$	6,098
Due after one year through five years		18,360		19,014		18,771		19,408
Due after five years through ten years		72,181		76,281		76,044		80,214
Due after ten years		502,137		519,171		495,357		511,329

Subtotal	$	596,725	$	618,576	$	596,218	$	617,049

Other securities		3,106		3,175		3,044		3,117

Total securities available for sale	$	599,830	$	621,751	$	599,262	$	620,166

Securities with an amortized cost of $163.9 million and $172.1 million as of March 31, 2012 and December 31, 2011, respectively, were pledged to secure public deposits, repurchase agreements and for other purposes.

During each quarter the Company conducts an assessment of the securities portfolio for other-than-temporary impairment (“OTTI”) consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is 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 March 31, 2012, and in accordance with the guidance, no OTTI was recognized.

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

•

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

- 25 -

•

The continued interest payment deferral by the issuer;

•

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

•

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

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


	OTTI Losses
Cumulative credit losses on investment securities, through December 31, 2011	$	400
Cumulative credit losses on investment securities		—
Additions for credit losses not previously recognized		—

Cumulative credit losses on investment securities, through March 31, 2012	$	400

12.

FAIR VALUE MEASUREMENTS

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

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


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

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

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

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

Interest rate swap agreement used for interest rate risk management

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

- 26 -

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 modes, 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 thousands of participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during our validation as of March 31, 2012 and December 31, 2011.

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

- 27 -

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011 (dollars in thousands):


	Fair Value Measurements at March 31, 2012 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS

Interest rate swap - loans	$	—	$	44	$	—	$	44
Securities available for sale:
U.S. government and agency securities		—		3,754		—		3,754
Obligations of states and political subdivisions		—		201,260		—		201,260
Corporate and other bonds		—		11,908		—		11,908
Mortgage-backed securities		—		401,654		—		401,654
Other securities		—		3,175		—		3,175

Total	$	—	$	621,795	$	—	$	621,795


LIABILITIES

Interest rate swap - loans	$	—	$	44	$	—	$	44
Cash flow hedge - trust		—		4,096		—		4,096

Total	$	—	$	4,140	$	—	$	4,140


	Fair Value Measurements at December 31, 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	$	—	$	66	$	—	$	66
Securities available for sale:
U.S. government and agency securities		—		4,284		—		4,284
Obligations of states and political subdivisions		—		200,207		—		200,207
Corporate and other bonds		—		12,240		—		12,240
Mortgage-backed securities		—		400,318		—		400,318
Other securities		—		3,117		—		3,117

Total	$	—	$	620,232	$	—	$	620,232

LIABILITIES
Interest rate swap - loans	$	—	$	66	$	—	$	66
Cash flow hedge - trust		—		4,293		—		4,293

Total	$	—	$	4,359	$	—	$	4,359

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

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

Loans held for sale

Loans held for sale are carried at the lower of cost or market value. These loans currently consist of residential loans originated for sale in the secondary market. Fair value is based on the price secondary markets are currently offering for similar loans using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during March 31, 2012 and December 31, 2011. Gains and losses on the sale of loans are recorded within income from the mortgage segment on the Consolidated Statements of Income.

- 28 -

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the property is more than two years old, then a Level 3 valuation is considered to measure the fair value. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other real estate owned

Fair values of other real estate owned are carried at the lower of carrying value or fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as Level 2 valuation. 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 March 31, 2012 and December 31, 2011 were $0 and $707,000, respectively.

The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis at March 31, 2012 and December 31, 2011 (dollars in thousands):


	Fair Value Measurements at March 31, 2012 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Loans held for sale	$	—	$	73,575	$	—	$	73,575
Impaired loans		—		33,254		14,652		47,906
Other real estate owned		—		—		37,663		37,663

Total	$	—	$	106,829	$	52,315	$	159,144


	Fair Value Measurements at December 31, 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
Loans held for sale	$	—	$	74,823	$	—	$	74,823
Impaired loans		—		28,525		34,898		63,423
Other real estate owned		—		—		32,263		32,263

Total	$	—	$	103,348	$	67,161	$	170,509

- 29 -

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the year ended March 31, 2012 were as follows:


	Fair Value Measurements at March 31, 2012
	Impaired Loans			Other Real Estate Owned
Balance - January 1, 2012	$	34,898		$	32,263
Total gains (losses) realized/unrealized:
Included in earnings		—			(27	)
Additions		13,890			6,912
Sales		—			(1,485	)
Net Payments		(25,603	)		—
Transfers from Level 2		—			—
Transfers to Level 2		(8,533	)		—

Balance - March 31, 2012	$	14,652		$	37,663

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

Fair Value Measurements at March 31, 2012

Fair Value

Valuation Technique(s)

Unobservable Inputs

Weighted Average

ASSETS

Commercial Construction

3,609

Market comparables