Atlantic Union Bankshares 10Q 2016 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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

For the Quarterly Period Ended June 30, 2016



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

Commission File Number: 0-20293

UNION BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)



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

1051 East Cary Street

Suite 1200

Richmond, Virginia 23219

(Address of principal executive offices) (Zip Code)

(804) 633-5031

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



	Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).



	Yes x No ¨

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



Large accelerated filer	ý	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



	Yes ¨ No x

The number of shares of common stock outstanding as of August 1, 2016 was 43,533,044.

UNION BANKSHARES CORPORATION

FORM 10-Q

INDEX



ITEM		PAGE

	PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	2

	Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015	3

	Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015	4

	Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2016 and 2015	5

	Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015	6

	Notes to Consolidated Financial Statements	7

	Report of Independent Registered Public Accounting Firm	44

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	46

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	65

Item 4.	Controls and Procedures	68

	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	68

Item 1A.	Risk Factors	68

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

Item 6.	Exhibits	70

	Signatures	71

Glossary of Acronyms



AFS	–	Available for sale
ALCO	–	Asset Liability Committee
ALL	–	Allowance for loan losses
ASC	–	Accounting Standards Codification
ASU	–	Accounting Standards Update
ATM	–	Automated teller machine
the Bank	–	Union Bank & Trust
bps	–	Basis points
the Company	–	Union Bankshares Corporation
Dodd-Frank Act	–	Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
EPS	–	Earnings per share
Exchange Act	–	Securities Exchange Act of 1934
FASB	–	Financial Accounting Standards Board
FDIC	–	Federal Deposit Insurance Corporation
Federal Reserve	–	Board of Governors of the Federal Reserve System
Federal Reserve Bank	–	Federal Reserve Bank of Richmond
FHLB	–	Federal Home Loan Bank of Atlanta
U.S. GAAP or GAAP	–	Accounting principles generally accepted in the United States
HELOC	–	Home equity line of credit
HTM	–	Held to maturity
LIBOR	–	London Interbank Offered Rate
NPA	–	Nonperforming assets
ODCM	–	Old Dominion Capital Management, Inc.
OREO	–	Other real estate owned
OTTI	–	Other than temporary impairment
PCI	–	Purchased credit impaired
StellarOne	–	StellarOne Corporation
TDR	–	Troubled debt restructuring
UMG	–	Union Mortgage Group, Inc.

PART I – FINANCIAL INFORMATION

ITEM 1 – FINANCIAL STATEMENTS

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share data)



	June 30, 2016		December 31, 2015
	(Unaudited)		(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	128,896	$	111,323
Interest-bearing deposits in other banks	87,887		29,670
Federal funds sold	251		1,667
Total cash and cash equivalents	217,034		142,660
Securities available for sale, at fair value	949,663		903,292
Securities held to maturity, at carrying value	202,917		205,374
Restricted stock, at cost	62,206		51,828
Loans held for sale	38,114		36,030
Loans held for investment, net of deferred fees and costs	5,941,098		5,671,462
Less allowance for loan losses	35,074		34,047
Net loans held for investment	5,906,024		5,637,415
Premises and equipment, net	124,032		126,028
Other real estate owned, net of valuation allowance	13,381		15,299
Core deposit intangibles, net	19,685		23,310
Goodwill	297,659		293,522
Bank owned life insurance	176,413		173,687
Other assets	93,433		84,846
Total assets	$	8,100,561	$	7,693,291
LIABILITIES
Noninterest-bearing demand deposits	$	1,392,734	$	1,372,937
Interest-bearing deposits	4,703,092		4,590,999
Total deposits	6,095,826		5,963,936
Securities sold under agreements to repurchase	121,262		84,977
Other short-term borrowings	557,000		304,000
Long-term borrowings	274,547		291,198
Other liabilities	62,725		53,813
Total liabilities	7,111,360		6,697,924
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY
Common stock, $1.33 par value, shares authorized 100,000,000; issued and outstanding, 43,619,867 shares and 44,785,674 shares, respectively.	57,537		59,159
Additional paid-in capital	605,018		631,822
Retained earnings	317,747		298,134
Accumulated other comprehensive income	8,899		6,252
Total stockholders' equity	989,201		995,367
Total liabilities and stockholders' equity	$	8,100,561	$	7,693,291

See accompanying notes to consolidated financial statements.

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UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(Dollars in thousands, except share data)



	Three Months Ended				Six Months Ended
	June 30, 2016		June 30, 2015		June 30, 2016		June 30, 2015
Interest and dividend income:
Interest and fees on loans	$	64,747	$	62,604	$	127,694	$	123,057
Interest on deposits in other banks	65		24		112		41
Interest and dividends on securities:
Taxable	4,510		3,860		8,826		7,667
Nontaxable	3,459		3,366		6,898		6,690
Total interest and dividend income	72,781		69,854		143,530		137,455

Interest expense:
Interest on deposits	4,197		3,680		8,393		7,000
Interest on federal funds purchased	2		4		3		5
Interest on short-term borrowings	708		255		1,329		505
Interest on long-term borrowings	2,098		2,099		4,298		4,160
Total interest expense	7,005		6,038		14,023		11,670

Net interest income	65,776		63,816		129,507		125,785
Provision for credit losses	2,300		3,749		4,904		5,499
Net interest income after provision for credit losses	63,476		60,067		124,603		120,286

Noninterest income:
Service charges on deposit accounts	4,754		4,622		9,488		8,835
Other service charges and fees	4,418		4,051		8,574		7,634
Fiduciary and asset management fees	2,333		2,312		4,471		4,531
Mortgage banking income, net	2,972		2,574		5,117		4,952
Gains on securities transactions, net	3		404		146		597
Bank owned life insurance income	1,361		1,134		2,734		2,269
Other operating income	2,152		1,115		3,377		2,448
Total noninterest income	17,993		16,212		33,907		31,266

Noninterest expenses:
Salaries and benefits	28,519		25,561		56,567		53,052
Occupancy expenses	4,809		5,173		9,785		10,305
Furniture and equipment expenses	2,595		2,989		5,232		5,803
Printing, postage, and supplies	1,280		1,408		2,419		2,779
Communications expense	927		1,143		2,016		2,322
Technology and data processing	3,608		3,216		7,422		6,471
Professional services	2,548		1,669		4,537		3,017
Marketing and advertising expense	1,924		2,372		3,863		4,060
FDIC assessment premiums and other insurance	1,379		1,280		2,741		2,679
Other taxes	1,607		1,554		3,225		3,105
Loan-related expenses	855		687		1,454		1,371
OREO and credit-related expenses	894		1,965		1,463		3,152
Amortization of intangible assets	1,745		2,138		3,625		4,361
Training and other personnel costs	905		912		1,649		1,633
Other expenses	1,656		3,174		3,525		4,971
Total noninterest expenses	55,251		55,241		109,523		109,081

Income before income taxes	26,218		21,038		48,987		42,471
Income tax expense	6,881		5,690		12,689		11,422
Net income	$	19,337	$	15,348	$	36,298	$	31,049
Basic earnings per common share	$	0.44	$	0.34	$	0.82	$	0.69
Diluted earnings per common share	$	0.44	$	0.34	$	0.82	$	0.69
Dividends declared per common share	$	0.19	$	0.17	$	0.38	$	0.32
Basic weighted average number of common shares outstanding	43,746,583		45,128,698		43,998,929		45,117,396
Diluted weighted average number of common shares outstanding	43,824,183		45,209,814		44,075,706		45,198,727

See accompanying notes to consolidated financial statements.

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UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(Dollars in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2016			2015			2016			2015

Net income	$	19,337		$	15,348		$	36,298		$	31,049
Other comprehensive income (loss):
Cash flow hedges:
Change in fair value of cash flow hedges	(1,007		)	1,809			(3,688		)	319
Reclassification adjustment for losses (gains) included in net income (net of tax, $74 and $22 for the three months and $150 and $169 for the six months ended June 30, 2016 and 2015, respectively)	138			41			279			313
AFS securities:
Unrealized holding gains (losses) arising during period (net of tax, $1,991 and $3,686 for the three months and $3,624 and $1,649 for the six months ended June 30, 2016 and 2015, respectively)	3,698			(6,845		)	6,730			(3,062		)
Reclassification adjustment for losses (gains) included in net income (net of tax, $1 and $142 for the three months and $51 and $209 for the six months ended June 30, 2016 and 2015, respectively)	(2		)	(263		)	(95		)	(388		)
HTM securities:
Accretion of unrealized gain for AFS securities transferred to HTM (net of tax, $155 and $112 for the three months and $312 and $112 for the six months ended June 30, 2016 and 2015, respectively)	(287		)	(208		)	(579		)	(208		)
Other comprehensive income (loss)	2,540			(5,466		)	2,647			(3,026		)
Comprehensive income	$	21,877		$	9,882		$	38,945		$	28,023

See accompanying notes to consolidated financial statements.

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UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Dollars in thousands, except share amounts)



	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total

Balance - December 31, 2014	$	59,795		$	643,443		$	261,676		$	12,255		$	977,169
Net income - 2015							31,049						31,049
Other comprehensive income (net of taxes of $1,801)										(3,026		)	(3,026		)
Dividends on common stock ($0.32 per share)							(13,727		)				(13,727		)
Stock purchased under stock repurchase plan (181,356 shares)	(240		)	(3,890		)							(4,130		)
Issuance of common stock under Dividend Reinvestment Plan (33,710 shares)	45			656			(701		)				—
Issuance of common stock under Equity Compensation Plans (25,873 shares)	34			386									420
Issuance of common stock for services rendered (9,200 shares)	12			188									200
Vesting of restricted stock, including tax effects, under Equity Compensation Plans (20,049 shares)	26			(250		)							(224		)
Stock-based compensation expense				403									403
Balance - June 30, 2015	$	59,672		$	640,936		$	278,297		$	9,229		$	988,134

Balance - December 31, 2015	$	59,159		$	631,822		$	298,134		$	6,252		$	995,367
Net income - 2016							36,298						36,298
Other comprehensive income (net of taxes of $3,411)										2,647			2,647
Issuance of common stock in regard to acquisition (17,232 shares)	23			430									453
Dividends on common stock ($0.38 per share)							(16,685		)				(16,685		)
Stock purchased under stock repurchase plan (1,312,556 shares)	(1,747		)	(28,943		)							(30,690		)
Issuance of common stock under Equity Compensation Plans (34,227 shares)	46			436									482
Issuance of common stock for services rendered (9,552 shares)	13			227									240
Vesting of restricted stock, including tax effects, under Equity Compensation Plans (31,993 shares)	43			(441		)							(398		)
Stock-based compensation expense				1,487									1,487
Balance - June 30, 2016	$	57,537		$	605,018		$	317,747		$	8,899		$	989,201

See accompanying notes to consolidated financial statements.

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UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2016 AND 2015

(Dollars in thousands)



	2016			2015
Operating activities:
Net income	$	36,298		$	31,049
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:
Depreciation of premises and equipment	4,983			5,374
Writedown of OREO	400			1,300
Amortization, net	5,915			6,946
Amortization (accretion) related to acquisition, net	1,077			705
Provision for credit losses	4,904			5,499
Losses (gains) on securities transactions, net	(146		)	(597		)
Bank owned life insurance income	(2,734		)	(2,269		)
Decrease (increase) in loans held for sale, net	(2,084		)	3,069
Losses (gains) on sales of other real estate owned, net	(1		)	100
Losses (gains) on sales of premises, net	72			74
Stock-based compensation expenses	1,487			403
Issuance of common stock for services	240			200
Net decrease (increase) in other assets	(8,549		)	(530		)
Net increase (decrease) in other liabilities	1,796			(11,213		)
Net cash and cash equivalents provided by (used in) operating activities	43,658			40,110
Investing activities:
Purchases of securities available for sale	(122,690		)	(122,049		)
Proceeds from sales of securities available for sale	15,424			58,157
Proceeds from maturities, calls and paydowns of securities available for sale	56,414			70,086
Proceeds from maturities, calls and paydowns of securities held to maturity	610			—
Net decrease (increase) in loans held for investment	(271,689		)	(168,449		)
Net decrease (increase) in premises and equipment	(3,059		)	(3,284		)
Proceeds from sales of other real estate owned	2,138			5,609
Improvements to other real estate owned	—			(299		)
Cash paid for equity-method investments	—			(355		)
Cash paid in acquisition	(4,077		)	—
Cash acquired in acquisitions	207			—
Net cash and cash equivalents provided by (used in) investing activities	(326,722		)	(160,584		)
Financing activities:
Net increase (decrease) in noninterest-bearing deposits	19,797			90,298
Net increase (decrease) in interest-bearing deposits	112,093			57,096
Net increase (decrease) in short-term borrowings	289,285			(6,713		)
Net increase (decrease) in long-term borrowings	(16,446		)	1,027
Cash dividends paid - common stock	(16,685		)	(13,727		)
Repurchase of common stock	(30,690		)	(4,130		)
Issuance of common stock	482			420
Vesting of restricted stock, including tax effects	(398		)	(224		)
Net cash and cash equivalents provided by (used in) financing activities	357,438			124,047
Increase (decrease) in cash and cash equivalents	74,374			3,573
Cash and cash equivalents at beginning of the period	142,660			133,260
Cash and cash equivalents at end of the period	$	217,034		$	136,833
Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	14,212		$	13,784
Income taxes	15,800			12,400
Supplemental schedule of noncash investing and financing activities
Unrealized (losses) gains on securities available for sale	$	10,208		$	(5,308	)
Transfer from securities available for sale to securities held to maturity	—			201,822
Changes in fair value of interest rate swap loss	(3,409		)	632
Transfers between loans and other real estate owned	619			412
Transfers from bank premises to other real estate owned	—			402
Issuance of common stock in exchange for net assets in acquisition	453			—

See accompanying notes to consolidated financial statements.

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UNION BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Unaudited)

1. ACCOUNTING POLICIES

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. Significant inter-company accounts and transactions have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and follow general practice within the banking industry. Accordingly, the unaudited consolidated financial statements do not include all the information and footnotes required by U.S. 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 2015 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current period presentation.

Business Combinations

On May 31, 2016, the Bank completed its acquisition of ODCM, a Charlottesville, Virginia based registered investment advisor with nearly $300.0 million in assets under management. The acquisition date fair value of consideration transferred totaled $9.1 million, which consisted of $4.1 million cash, $0.5 million stock, and the remainder being contingent on achieving certain performance metrics. The contingent consideration is carried at fair value and is reported as a component of “Other Liabilities” in the Consolidated Balance Sheet. The fair value of this liability will be assessed at each reporting period.

In connection with the transaction, the Company recorded $4.1 million in goodwill and $3.8 million of amortizable assets which primarily relate to the value of customer relationships. The Company currently estimates that these other intangibles assets will be amortized over 10 years using a straight-line method. The transaction was accounted for using the acquisition method of accounting and, accordingly, assets acquired, liabilities assumed, and consideration exchanged were recorded at estimated fair values on the acquisition date. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition.

Loans

The Company originates commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial and residential real estate loans (including acquisition and development loans and residential construction loans) throughout its market area. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in those markets, as well as other factors.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

As of January 1, 2016, the Company enhanced the loan portfolio segmentation to better align with how the Company manages credit risk and to better align with industry practice. Below is a summary of the new loan segmentation.

Construction and Land Development – construction loans generally made to commercial and residential builders for specific construction projects. The successful repayment of these types of loans is generally dependent upon (a) a commitment for permanent financing from the Company, or (b) from the sale of the constructed property. These loans carry more risk than both types of commercial real estate term loans due to the dynamics of construction projects, changes in interest rates, the long-term financing market, and state and local government regulations. As in commercial real estate term lending, the Company manages risk by using specific underwriting policies and procedures for these types of loans and by avoiding excessive concentrations to any one business or industry.

Also, included in this category are loans generally made to residential home builders to support their lot and home inventory needs. Repayment relies upon the successful performance of the underlying residential real estate project. This type of lending carries a higher level of risk as compared to other commercial lending. This class of lending manages risks related to residential

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real estate market conditions, a functioning first and secondary market in which to sell residential properties, and the borrower’s ability to manage inventory and run projects. The Company manages this risk by lending to experienced builders and developers, by using specific underwriting policies and procedures for these types of loans, and by avoiding excessive concentrations with any particular customer or geographic region.

Commercial Real Estate – Owner Occupied - term loans made to support owner occupied real estate properties that rely upon the successful operation of the business occupying the property for repayment. General market conditions and economic activity may affect these types of loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by avoiding concentrations to any one business or industry.

Commercial Real Estate – Non-Owner Occupied - term loans typically made to borrowers to support income producing properties that rely upon the successful operation of the property for repayment. General market conditions and economic activity may impact the performance of these types of loans. In addition to using specific underwriting policies and procedures for these types of loans, the Company manages risk by diversifying the lending to various lines of businesses, such as retail, office, office warehouse, and hotel as well as avoiding concentrations to any one business or industry.

Residential 1-4 Family – loans generally made to both commercial and residential borrowers. Mortgage loan portfolios carry risks associated with the creditworthiness of the borrower or the tenant and changes in loan-to-value ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, experienced underwriting, requiring standards for appraisers, and not making subprime loans.

Multifamily Real Estate – loans made to real estate investors to support permanent financing for multifamily residential income producing properties that rely on the successful operation of the property for repayment. This management mainly involves property maintenance and collection of rents due from tenants. This type of lending carries a lower level of risk as compared to other commercial lending. In addition, underwriting requirements for multifamily properties are stricter than for other non-owner-occupied property types. The Company manages this risk by avoiding concentrations with any particular customer.

Commercial and Industrial – loans generally made to support the Company’s borrowers’ need for equipment/vehicle purchases and other short-term or seasonal cash flow needs. Repayment relies upon the successful operation of the business. This type of lending carries a lower level of commercial credit risk as compared to other commercial lending. The Company manages this risk by using general underwriting policies and procedures for these types of loans and by avoiding concentrations to any one business or industry.

HELOC – the consumer HELOC portfolio carries risks associated with the creditworthiness of the borrower and changes in loan-to-value ratios. The Company manages these risks through policies and procedures such as limiting loan-to-value ratios at origination, experienced underwriting, requiring standards for appraisers, and not making subprime loans.

Auto – the consumer indirect auto lending portfolio generally carries certain risks associated with the values of the collateral that management must mitigate. The Company focuses its indirect auto lending on one to two year old used vehicles where substantial depreciation has already occurred thereby minimizing the risk of significant loss of collateral values in the future. This type of lending places reliance on computer-based loan approval systems to supplement other underwriting standards.

Consumer and all other - portfolios carry risks associated with the creditworthiness of the borrower and changes in the economic environment. The Company manages these risks through policies and procedures such as experienced underwriting, maximum debt to income ratios, and minimum borrower credit scores. Also included in this category are loans that generally support small business lines of credit and agricultural lending neither of which are a material source of business for the Company.

Affordable Housing Entities

The Company invests in private investment funds that make equity investments in multifamily affordable housing properties that provide affordable housing tax credits for these investments. The activities of these entities are financed with a combination of invested equity capital and debt. For the three and six months ended June 30, 2016, the Company recognized amortization of $130,000 and $260,000, respectively, and tax credits of $210,000 and $420,000, respectively, associated with these investments within “Income tax expense” on the Company’s Consolidated Statements of Income. For the three and six months ended June 30, 2015, the Company recognized amortization of $104,000 and $279,000, respectively, and tax credits of $170,000 and $427,000, respectively. The carrying value of the Company’s investments in these qualified affordable housing projects was $8.1 million and $8.5 million as of June 30, 2016 and December 31, 2015, respectively. The Company recorded a liability of $5.3 million for the related unfunded commitments as of June 30, 2016, which are expected to be paid from 2016 to 2019.

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Adoption of New Accounting Standards

In February 2015, the FASB issued revised guidance to simplify the consolidation assessment required to evaluate whether organizations should consolidate certain legal entities such as limited partnerships, limited liability corporations, and securitization structures. The guidance also removed the indefinite deferral of specialized guidance for certain investment funds. The Company adopted ASU No. 2015-02, “Amendments to the Consolidation Analysis” during the first quarter of 2016. The adoption of ASU 2015-02 did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In January 2016, the FASB issued ASU No. 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” This ASU requires an entity to: (i) measure equity investments at fair value through net income, with certain exceptions; (ii) present in OCI the changes in instrument-specific credit risk for financial liabilities measured using the fair value option; (iii) present financial assets and financial liabilities by measurement category and form of financial asset; (iv) calculate the fair value of financial instruments for disclosure purposes based on an exit price and; (v) assess a valuation allowance on deferred tax assets related to unrealized losses of AFS debt securities in combination with other deferred tax assets. The ASU provides an election to subsequently measure certain nonmarketable equity investments at cost less any impairment and adjusted for certain observable price changes. The ASU also requires a qualitative impairment assessment of such equity investments and amends certain fair value disclosure requirements. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is only permitted for the provision related to instrument-specific credit risk. The Company is currently assessing the impact ASU 2016-01 will have on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” This ASU requires lessees to put most leases on their balance sheets but recognize expenses in the income statement in a manner similar to today’s accounting. The guidance also eliminates the real estate-specific provisions and changes the guidance on sale-leaseback transactions, initial direct costs and lease executory costs for all entities. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the impact ASU 2016-02 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.” This ASU clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument or a change in a critical term of the hedging relationship. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-05 to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments.” This ASU clarifies that in assessing whether an embedded contingent put or call option is clearly and closely related to the debt host, an entity is required to perform only the four-step decision sequence in ASC 815-15-25-42 (as amended by the ASU). The entity does not have to separately assess whether the event that triggers its ability to exercise the contingent option is itself indexed only to interest rates or credit risk. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-06 to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting.” This ASU simplifies the equity method of accounting by eliminating the requirement to retrospectively apply the equity method to an investment that subsequently qualifies for such accounting as a result of an increase in the level of ownership interest or degree of influence. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. The amendments should be applied prospectively and early adoption is permitted. The Company does not expect the adoption of ASU 2016-07 to have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” This ASU amends the principal-versus-agent implementation guidance and illustrations in the FASB’s new revenue standard (ASU 2014-09) and clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. The ASU has

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the same effective date as the new revenue standard (as amended by the one-year deferral and the early adoption provisions in ASU 2015-14 delaying the effective date to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017). In addition, entities are required to adopt the ASU by using the same transition method they used to adopt the new revenue standard. The Company is currently assessing the impact ASU 2016-08 will have on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted; however, if the Company elects to early adopt, then all amendments must be adopted in the same period. The Company is currently assessing the impact ASU 2016-09 will have on its consolidated financial statements.

In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing.” This ASU amends certain aspects of the FASB’s new revenue standard, specifically the standard’s guidance on identifying performance obligations and the implementation guidance on licensing. The amendments in this update affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which is not yet effective. The ASU has the same effective date as the new revenue standard (as amended by the one-year deferral and the early adoption provisions in ASU 2015-14). The Company is currently assessing the impact ASU 2016-10 will have on its consolidated financial statements.

In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients.” This ASU amends certain aspects of the FASB's new revenue standard to reduce the potential for diversity in practice at the initial application of Topic 606 by entities with transactions that fall into the scope of this guidance, as well as reducing the cost and complexity of applying Topic 606 at the transition date and on a continual basis. These amendments affect ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), that is not yet effective. The Company is currently assessing the impact ASU 2016-12 will have on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU updates the existing guidance to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and required consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This amendment is effective for fiscal years beginning after December 15, 2019. The Company is currently assessing the impact ASU 2016-13 will have on its consolidated financial statements.

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2. SECURITIES

Available for Sale

The amortized cost, gross unrealized gains and losses, and estimated fair values of securities available for sale as of June 30, 2016 and December 31, 2015 are summarized as follows (dollars in thousands):



	Amortized		Gross Unrealized					Estimated
	Cost		Gains		(Losses)			Fair Value
June 30, 2016
Obligations of states and political subdivisions	$	258,968	$	13,848	$	(30	)	$	272,786
Corporate bonds	109,757		506		(1,684		)	108,579
Mortgage-backed securities	545,428		10,165		(629		)	554,964
Other securities	13,285		49		—			13,334
Total available for sale securities	$	927,438	$	24,568	$	(2,343	)	$	949,663

December 31, 2015
Obligations of states and political subdivisions	$	257,740	$	10,479	$	(140	)	$	268,079
Corporate bonds	77,628		55		(1,704		)	75,979
Mortgage-backed securities	544,823		6,127		(2,779		)	548,171
Other securities	11,085		—		(22		)	11,063
Total available for sale securities	$	891,276	$	16,661	$	(4,645	)	$	903,292

The following table shows the gross unrealized losses and fair value (in thousands) of the Company’s available for sale investments with unrealized losses that are not deemed to be other-than-temporarily impaired as of June 30, 2016 and December 31, 2015. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.



	Less than 12 months					More than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2016
Obligations of states and political subdivisions	$	—	$	—		$	631	$	(30	)	$	631	$	(30	)
Mortgage-backed securities	67,843		(266		)	42,840		(363		)	110,683		(629		)
Corporate bonds and other securities	11,242		(331		)	36,250		(1,353		)	47,492		(1,684		)
Total available for sale	$	79,085	$	(597	)	$	79,721	$	(1,746	)	$	158,806	$	(2,343	)

December 31, 2015
Obligations of states and political subdivisions	$	8,114	$	(70	)	$	4,950	$	(70	)	$	13,064	$	(140	)
Mortgage-backed securities	287,113		(2,442		)	21,660		(337		)	308,773		(2,779		)
Corporate bonds and other securities	36,157		(751		)	19,558		(975		)	55,715		(1,726		)
Total available for sale	$	331,384	$	(3,263	)	$	46,168	$	(1,382	)	$	377,552	$	(4,645	)

As of June 30, 2016, there were $79.7 million, or 21 issues, of individual available for sale securities that had been in a continuous loss position for more than 12 months. These securities had an unrealized loss of $1.7 million and consisted of municipal obligations, mortgage-backed securities, and corporate bonds. As of December 31, 2015, there were $46.2 million, or 20 issues, of individual securities that had been in a continuous loss position for more than 12 months. These securities had an unrealized loss of $1.4 million and consisted of municipal obligations, mortgage-backed securities, corporate bonds, and other securities. The Company has determined that these securities are temporarily impaired as of June 30, 2016 and December 31, 2015 for the reasons set out below:

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Mortgage-backed securities. This category’s unrealized losses are primarily the result of interest rate fluctuations. Because the decline in market value is attributable to changes in interest rates and not credit quality, the Company does not intend to sell the investments, and it is not likely that the Company will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired. Also, the majority of the Company’s mortgage-backed securities are agency-backed securities, which have a government guarantee.

Obligations of state and political subdivisions. This category’s unrealized losses are primarily the result of interest rate fluctuations and also a certain few ratings downgrades brought about by the impact of the economic downturn on states and political subdivisions. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments and the accounting standard of “more likely than not” has not been met for the Company to be required to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

Corporate bonds. The Company’s unrealized losses in corporate debt securities are related to both interest rate fluctuations and ratings downgrades for a limited number of securities. The majority of the securities remain investment grade and the Company’s analysis did not indicate the existence of a credit loss. The contractual terms of the investments do not permit the issuer to settle the securities at a price less than the cost basis of each investment. Because the Company does not intend to sell any of the investments before recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

The following table presents the amortized cost and estimated fair value of available for sale securities as of June 30, 2016 and December 31, 2015, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	June 30, 2016				December 31, 2015
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Due in one year or less	$	11,376	$	11,512	$	8,380	$	8,370
Due after one year through five years	101,658		104,839		65,326		66,996
Due after five years through ten years	318,124		326,477		296,864		301,920
Due after ten years	496,280		506,835		520,706		526,006
Total securities available for sale	$	927,438	$	949,663	$	891,276	$	903,292

The following table presents the estimated fair value of available for sale securities which were pledged to secure public deposits, repurchase agreements, and for other purposes as permitted or required by law as of June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016		December 31, 2015
Public deposits	$	183,813	$	184,635
Repurchase agreements	122,562		126,120
Other purposes (1)	23,540		26,546
Total pledged securities	$	329,915	$	337,301

(1) The "Other purposes" category consists of borrowings, derivatives, and accounts held at the Bank.

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Held to Maturity

During the second quarter of 2015, the Company transferred securities, which it intends and has the ability to hold until maturity, with a fair value of $201.8 million on the date of transfer, from securities available for sale to securities held to maturity. The Company transferred these securities to held to maturity to reduce the impact of price volatility on capital and in consideration of changes to the regulatory environment. The securities included net pre-tax unrealized gains of $8.1 million at the date of transfer with a remaining balance of $5.9 million as of June 30, 2016.

The Company reports securities held to maturity on the Consolidated Balance Sheets at carrying value. Carrying value is amortized cost which includes any unamortized unrealized gains and losses recognized in accumulated other comprehensive income prior to reclassifying the securities from securities available for sale to securities held to maturity. Investment securities transferred into the held to maturity category from the available for sale category are recorded at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the securities held to maturity. Such unrealized gains/(losses) are accreted over the remaining life of the security with no impact on future net income.

The carrying value, gross unrealized gains and losses, and estimated fair values of securities held to maturity as of June 30, 2016 and December 31, 2015 are summarized as follows (dollars in thousands):



	Carrying		Gross Unrealized					Estimated
	Value		Gains		(Losses)			Fair Value
June 30, 2016
Obligations of states and political subdivisions ⁽¹⁾	$	202,917	$	9,153	$	(121	)	$	211,949

December 31, 2015
Obligations of states and political subdivisions	$	205,374	$	5,748	$	(1,685	)	$	209,437

(1) The carrying value includes $5.9 million of net unrealized gains present at the time of transfer from available for sale securities, net of any accretion.

The following table shows the gross unrealized losses and fair value (in thousands) of the Company’s held to maturity securities with unrealized losses that are not deemed to be other-than-temporarily impaired as of June 30, 2016 and December 31, 2015. These are aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position.



	Less than 12 months					More than 12 months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
June 30, 2016
Obligations of states and political subdivisions	$	—	$	—		$	1,148	$	(121	)	$	1,148	$	(121	)

December 31, 2015
Obligations of states and political subdivisions	$	7,056	$	(1,685	)	$	—	$	—		$	7,056	$	(1,685	)

As of June 30, 2016, there were $1.1 million, or 2 issues, of individual held to maturity securities that had been in a continuous loss position for more than 12 months. These securities had an unrealized loss of $121,000 and consisted of municipal obligations. The Company has determined that these securities are temporarily impaired as of June 30, 2016 and December 31, 2015 for the reasons set out below:

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recovery of its amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired.

The following table presents the amortized cost and estimated fair value of held to maturity securities as of June 30, 2016 and December 31, 2015, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



	June 30, 2016				December 31, 2015
	Carrying Value (1)		Estimated Fair Value		Carrying Value		Estimated Fair Value
Due in one year or less	$	857	$	857	$	1,488	$	1,491
Due after one year through five years	18,122		18,564		4,294		4,348
Due after five years through ten years	45,802		47,469		44,736		45,501
Due after ten years	138,136		145,059		154,856		158,097
Total securities held to maturity	$	202,917	$	211,949	$	205,374	$	209,437

(1) The carrying value includes $5.9 million of net unrealized gains present at the time of transfer from available for sale securities, net of any accretion.

The following table presents the estimated fair value of held to maturity securities which were pledged to secure public deposits as permitted or required by law as of June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016		December 31, 2015
Public deposits	$	211,949	$	207,140
Total pledged securities	$	211,949	$	207,140

Restricted Stock, at cost

Due to restrictions placed upon the Bank’s common stock investment in the Federal Reserve Bank and FHLB, these securities have been classified as restricted equity securities and carried at cost. These restricted securities are not subject to the investment security classifications and are included as a separate line item on the Company’s Consolidated Balance Sheets. At June 30, 2016 and December 31, 2015, the FHLB required the Bank to maintain stock in an amount equal to 4.25% of outstanding borrowings and a specific percentage of the Bank’s total assets. The Federal Reserve Bank required the Bank to maintain stock with a par value equal to 6% of its outstanding capital at both June 30, 2016 and December 31, 2015. Restricted equity securities consist of Federal Reserve Bank stock in the amount of $23.8 million for both June 30, 2016 and December 31, 2015 and FHLB stock in the amount of $38.4 million and $28.0 million as of June 30, 2016 and December 31, 2015, respectively.

Other-Than-Temporary-Impairment

During each quarter, the Company conducts an assessment of the securities portfolio for OTTI consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance, and relevant industry research and analysis. An impairment is other-than-temporary if any of the following conditions exist: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss. Based on the assessment for the quarter ended June 30, 2016, and in accordance with the guidance, no OTTI was recognized. For the year ended December 31, 2015, the Company determined that a municipal security in the available for sale portfolio incurred credit-related OTTI of $300,000. During the quarter ended March 31, 2016, the municipal security was sold. As a result, the Company recognized an additional loss on sale of the previously written down security.

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Realized Gains and Losses

The following table presents the gross realized gains and losses on the sale of securities available for sale and the proceeds from the sale of securities during the three and six months ended June 30, 2016 and 2015 (dollars in thousands). The Company did not sell any investment securities that are held to maturity.



	Three Months Ended June 30, 2016		Six Months Ended June 30, 2016
Realized gains (losses):
Gross realized gains	$	3	$	242
Gross realized losses	—		(96		)
Net realized gains	$	3	$	146

Proceeds from sales of securities	$	892	$	15,424



	Three Months Ended June 30, 2015			Six Months Ended June 30, 2015
Realized gains (losses):
Gross realized gains	$	491		$	684
Gross realized losses	(87		)	(87		)
Net realized gains	$	404		$	597

Proceeds from sales of securities	$	45,658		$	58,157

3. LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans are stated at their face amount, net of deferred fees and costs, and consist of the following at June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016		December 31, 2015
Construction and Land Development	$	765,997	$	749,720
Commercial Real Estate - Owner Occupied	831,880		860,086
Commercial Real Estate - Non-Owner Occupied	1,370,745		1,270,480
Multifamily Real Estate	337,723		322,528
Commercial & Industrial	469,054		435,365
Residential 1-4 Family	992,457		978,469
Auto	244,575		234,061
HELOC	519,196		516,726
Consumer and all other	409,471		304,027
Total loans held for investment, net(1)	$	5,941,098	$	5,671,462

(1) Loans, as presented, are net of deferred fees and costs totaling $1.9 million and $3.0 million as of June 30, 2016 and December 31, 2015, respectively.

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The following table shows the aging of the Company’s loan portfolio, by segment, at June 30, 2016 (dollars in thousands):



	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and still Accruing		PCI		Nonaccrual		Current		Total Loans
Construction and Land Development	$	402	$	1,177	$	116	$	5,013	$	1,604	$	757,685	$	765,997
Commercial Real Estate - Owner Occupied	912		—		439		20,692		1,661		808,176		831,880
Commercial Real Estate - Non-Owner Occupied	267		—		723		18,297		—		1,351,458		1,370,745
Multifamily Real Estate	—		—		—		2,092		—		335,631		337,723
Commercial & Industrial	2,464		62		117		1,354		263		464,794		469,054
Residential 1-4 Family	5,476		5,033		1,302		17,805		5,448		957,393		992,457
Auto	1,282		377		144		—		140		242,632		244,575
HELOC	1,347		1,228		642		1,517		1,495		512,967		519,196
Consumer and all other	1,364		412		50		400		250		406,995		409,471
Total Loans Held For Investment	$	13,514	$	8,289	$	3,533	$	67,170	$	10,861	$	5,837,731	$	5,941,098

The following table shows the aging of the Company’s loan portfolio, by segment, at December 31, 2015 (dollars in thousands):



	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days and still Accruing		PCI		Nonaccrual		Current		Total Loans
Construction and Land Development	$	3,155	$	380	$	128	$	5,986	$	2,113	$	737,958	$	749,720
Commercial Real Estate - Owner Occupied	1,714		118		103		27,388		3,904		826,859		860,086
Commercial Real Estate - Non-Owner Occupied	771		—		723		13,519		100		1,255,367		1,270,480
Multifamily Real Estate	—		—		272		1,555		—		320,701		322,528
Commercial & Industrial	1,056		27		124		1,813		429		431,916		435,365
Residential 1-4 Family	15,023		6,774		3,638		21,159		3,563		928,312		978,469
Auto	2,312		233		60		—		192		231,264		234,061
HELOC	2,589		1,112		762		1,791		1,348		509,124		516,726
Consumer and all other	1,167		689		19		526		287		301,339		304,027
Total Loans Held For Investment	$	27,787	$	9,333	$	5,829	$	73,737	$	11,936	$	5,542,840	$	5,671,462

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The following table shows the PCI loan portfolios, by segment and their delinquency status, at June 30, 2016 (dollars in thousands):



	30-89 Days Past Due		Greater than 90 Days		Current		Total
Construction and Land Development	$	3	$	361	$	4,649	$	5,013
Commercial Real Estate - Owner Occupied	1,098		1,495		18,099		20,692
Commercial Real Estate - Non-Owner Occupied	795		171		17,331		18,297
Multifamily Real Estate	—		—		2,092		2,092
Commercial & Industrial	149		—		1,205		1,354
Residential 1-4 Family	1,014		1,213		15,578		17,805
HELOC	137		510		870		1,517
Consumer and all other	—		—		400		400
Total	$	3,196	$	3,750	$	60,224	$	67,170

The following table shows the PCI loan portfolios, by segment and their delinquency status, at December 31, 2015 (dollars in thousands):



	30-89 Days Past Due		Greater than 90 Days		Current		Total
Construction and Land Development	$	369	$	241	$	5,376	$	5,986
Commercial Real Estate - Owner Occupied	1,139		1,412		24,837		27,388
Commercial Real Estate - Non-Owner Occupied	755		202		12,562		13,519
Multifamily Real Estate	—		—		1,555		1,555
Commercial & Industrial	209		21		1,583		1,813
Residential 1-4 Family	2,143		1,923		17,093		21,159
HELOC	410		458		923		1,791
Consumer and all other	—		—		526		526
Total	$	5,025	$	4,257	$	64,455	$	73,737

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The Company measures the amount of impairment by evaluating loans either in their collective homogeneous pools or individually. The following table shows the Company’s impaired loans, excluding PCI loans related to the StellarOne acquisition, by segment at June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016						December 31, 2015
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
Loans without a specific allowance
Construction and Land Development	$	29,877	$	30,354	$	—	$	33,250	$	33,731	$	—
Commercial Real Estate - Owner Occupied	11,201		11,317		—		7,781		8,983		—
Commercial Real Estate - Non-Owner Occupied	3,993		3,993		—		5,328		5,325		—
Multifamily Real Estate	3,777		3,777		—		3,828		3,828		—
Commercial & Industrial	1,154		1,572		—		711		951		—
Residential 1-4 Family	10,065		11,024		—		7,564		8,829		—
Auto	—		—		—		7		7		—
HELOC	1,900		2,046		—		1,786		2,028		—
Consumer and all other	247		297		—		211		211		—
Total impaired loans without a specific allowance	$	62,214	$	64,380	$	—	$	60,466	$	63,893	$	—

Loans with a specific allowance
Construction and Land Development	$	1,833	$	2,234	$	64	$	3,167	$	3,218	$	538
Commercial Real Estate - Owner Occupied	2,291		2,320		49		3,237		3,239		358
Commercial Real Estate - Non-Owner Occupied	267		267		1		907		907		75
Commercial & Industrial	1,334		1,456		47		1,952		1,949		441
Residential 1-4 Family	3,880		3,978		345		6,065		6,153		418
Auto	140		188		1		192		199		1
HELOC	437		491		81		769		925		76
Consumer and all other	79		446		1		363		512		95
Total impaired loans with a specific allowance	$	10,261	$	11,380	$	589	$	16,652	$	17,102	$	2,002
Total impaired loans	$	72,475	$	75,760	$	589	$	77,118	$	80,995	$	2,002

The following tables show the average recorded investment and interest income recognized for the Company’s impaired loans, excluding PCI loans related to the StellarOne acquisition, by segment for the three and six months ended June 30, 2016 and 2015 (dollars in thousands):



	Three Months Ended June 30, 2016				Six Months Ended June 30, 2016
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Construction and Land Development	$	30,524	$	495	$	30,174	$	962
Commercial Real Estate - Owner Occupied	13,567		148		13,719		292
Commercial Real Estate - Non-Owner Occupied	4,215		43		4,216		79
Multifamily Real Estate	3,791		60		3,804		120
Commercial & Industrial	2,622		31		2,861		61
Residential 1-4 Family	14,189		90		14,365		183
Auto	162		—		183		—
HELOC	2,492		11		2,519		29
Consumer and all other	374		1		572		4
Total impaired loans without a specific allowance	$	71,936	$	879	$	72,413	$	1,730

-18-



	Three Months Ended June 30, 2015				Six Months Ended June 30, 2015
	Average Investment		Interest Income Recognized		Average Investment		Interest Income Recognized
Construction and Land Development	$	40,026	$	838	$	48,772	$	1,366
Commercial Real Estate - Owner Occupied	17,871		169		18,007		341
Commercial Real Estate - Non-Owner Occupied	8,736		125		8,750		181
Multifamily Real Estate	4,597		85		4,600		147
Commercial & Industrial	4,525		60		4,659		102
Residential 1-4 Family	10,924		105		10,989		202
Auto	1		—		1		—
HELOC	1,240		6		1,244		11
Consumer and all other	460		4		518		9
Total impaired loans without a specific allowance	$	88,380	$	1,392	$	97,540	$	2,359

The Company considers TDRs to be impaired loans. A modification of a loan’s terms constitutes a TDR if the creditor grants a concession that it would not otherwise consider to the borrower for economic or legal reasons related to the borrower’s financial difficulties. All loans that are considered to be TDRs are evaluated for impairment in accordance with the Company’s allowance for loan loss methodology and are included in the preceding impaired loan tables. For the quarter ended June 30, 2016, the recorded investment in restructured loans prior to modifications was not materially impacted by the modification.

The following table provides a summary, by segment, 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 on nonaccrual status, which are considered to be nonperforming, as of June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016					December 31, 2015
	No. of Loans	Recorded Investment		Outstanding Commitment		No. of Loans	Recorded Investment		Outstanding Commitment
Performing
Construction and Land Development	5	$	3,788	$	—	6	$	3,349	$	—
Commercial Real Estate - Owner Occupied	5	2,091		—		5	1,530		—
Commercial Real Estate - Non-Owner Occupied	2	2,390		—		2	2,390		—
Commercial & Industrial	4	218		—		5	261		—
Residential 1-4 Family	27	3,323		—		27	3,173		—
Consumer and all other	1	75		—		1	77		—
Total performing	44	$	11,885	$	—	46	$	10,780	$	—

Nonperforming
Construction and Land Development	2	$	215	$	—	2	$	321	$	—
Commercial Real Estate - Owner Occupied	2	167		—		1	137		—
Commercial & Industrial	1	135		—		1	2		—
Residential 1-4 Family	7	1,141		—		6	1,142		—
HELOC	—	—		—		1	319		—
Total nonperforming	12	$	1,658	$	—	11	$	1,921	$	—

Total performing and nonperforming	56	$	13,543	$	—	57	$	12,701	$	—

The Company considers a default of a restructured loan to occur when the borrower is 90 days past due following the restructure or a foreclosure and repossession of the applicable collateral occurs. During the three and six months ended June 30, 2016 and 2015, the Company did not identify any restructured loans that went into default that had been restructured in the twelve-month period prior to default.

-19-

The following table shows, by segment and modification type, TDRs that occurred during the three and six months ended June 30, 2016 (dollars in thousands):



	Three Months Ended June 30, 2016			Six Months Ended June 30, 2016
	No. of Loans	Recorded Investment at Period End		No. of Loans	Recorded Investment at Period End
Term modification, at a market rate
Construction and Land Development	1	$	1,193	1	$	1,193
Commercial Real Estate - Owner Occupied	1	38		2	743
Residential 1-4 Family	1	100		2	476
Total loan term extended at a market rate	3	$	1,331	5	$	2,412

Term modification, below market rate
Residential 1-4 Family	1	$	37	1	$	37
Total loan term extended at a below market rate	1	$	37	1	$	37

Interest rate modification, below market rate
Commercial & Industrial	1	$	135	1	$	135
Total interest only at below market rate of interest	1	$	135	1	$	135

Total	5	$	1,503	7	$	2,584

The following table shows, by segment and modification type, TDRs that occurred during the three and six months ended June 30, 2015 (dollars in thousands):



	Three Months Ended June 30, 2015			Six Months Ended June 30, 2015
	No. of Loans	Recorded Investment at Period End		No. of Loans	Recorded Investment at Period End
Term modification, at a market rate
Commercial Real Estate - Owner Occupied	1	$	120	1	$	120
Commercial & Industrial	—	—		1	18
Total loan term extended at a market rate	1	120		2	138

Term modification, below market rate
Commercial Real Estate - Owner Occupied	1	$	873	1	$	873
Total loan term extended at a below market rate	1	$	873	1	$	873

Total	2	$	993	3	$	1,011

-20-

The following table shows the allowance for loan loss activity, balances for allowance for loan losses, and loan balances based on impairment methodology by segment for the six months ended and as of June 30, 2016. The table below includes the provision for loan losses. As discussed in Note 1 “Accounting Policies,” the Company enhanced its loan segmentation for purposes of the allowance calculation as well as its disclosures. The impact of this enhancement is reflected in the provision amounts in the table below. In addition, a $100,000 provision was recognized during the six months ended June 30, 2016 for unfunded loan commitments for which the reserves are recorded as a component of “Other Liabilities” on the Company’s Consolidated Balance Sheets. 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):



	Allowance for loan losses
	Balance, beginning of the year		Recoveries credited to allowance		Loans charged off			Provision charged to operations			Balance, end of period
Construction and Land Development	$	6,040	$	97	$	(859	)	$	5,030		$	10,308
Commercial Real Estate - Owner Occupied	4,614		62		(772		)	129			4,033
Commercial Real Estate - Non-Owner Occupied	6,929		—		—			(1,536		)	5,393
Multifamily Real Estate	1,606		—		—			(697		)	909
Commercial & Industrial	3,163		355		(1,285		)	1,793			4,026
Residential 1-4 Family	5,414		381		(295		)	600			6,100
Auto	1,703		131		(525		)	(470		)	839
HELOC	2,934		132		(800		)	(948		)	1,318
Consumer and all other	1,644		330		(729		)	903			2,148
Total	$	34,047	$	1,488	$	(5,265	)	$	4,804		$	35,074



	Loans individually evaluated for impairment				Loans collectively evaluated for impairment				Loans acquired with deteriorated credit quality				Total
	Loans		ALL		Loans		ALL		Loans		ALL		Loans		ALL
Construction and Land Development	$	31,710	$	64	$	729,274	$	10,244	$	5,013	$	—	$	765,997	$	10,308
Commercial Real Estate - Owner Occupied	13,492		49		797,696		3,984		20,692		—		831,880		4,033
Commercial Real Estate - Non-Owner Occupied	4,260		1		1,348,188		5,392		18,297		—		1,370,745		5,393
Multifamily Real Estate	3,777		—		331,854		909		2,092		—		337,723		909
Commercial & Industrial	2,488		47		465,212		3,979		1,354		—		469,054		4,026
Residential 1-4 Family	13,945		345		960,707		5,755		17,805		—		992,457		6,100
Auto	140		1		244,435		838		—		—		244,575		839
HELOC	2,337		81		515,342		1,237		1,517		—		519,196		1,318
Consumer and all other	326		1		408,745		2,147		400		—		409,471		2,148
Total loans held for investment, net	$	72,475	$	589	$	5,801,453	$	34,485	$	67,170	$	—	$	5,941,098	$	35,074

-21-

The following table shows the allowance for loan loss activity, balances for allowance for loan losses, and loan balances based on impairment methodology by segment for the six months ended and as of June 30, 2015. In addition, a $200,000 provision was recognized during the six months ended June 30, 2015 for unfunded loan commitments. 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):



	Allowance for loan losses
	Balance, beginning of the year		Recoveries credited to allowance		Loans charged off			Provision charged to operations			Balance, end of period
Construction and Land Development	$	4,856	$	345	$	(68	)	$	(205	)	$	4,928
Commercial Real Estate - Owner Occupied	4,640		8		(481		)	697			4,864
Commercial Real Estate - Non-Owner Occupied	7,256		55		(2,765		)	1,760			6,306
Multifamily Real Estate	1,374		—		—			261			1,635
Commercial & Industrial	2,610		217		(1,693		)	1,958			3,092
Residential 1-4 Family	5,607		469		(715		)	(75		)	5,286
Auto	1,297		162		(382		)	318			1,395
HELOC	2,675		146		(288		)	179			2,712
Consumer and all other	2,069		294		(643		)	406			2,126
Total	$	32,384	$	1,696	$	(7,035	)	$	5,299		$	32,344



	Loans individually evaluated for impairment				Loans collectively evaluated for impairment				Loans acquired with deteriorated credit quality				Total
	Loans		ALL		Loans		ALL		Loans		ALL		Loans		ALL
Construction and Land Development	$	48,184	$	145	$	614,653	$	4,783	$	8,397	$	—	$	671,234	$	4,928
Commercial Real Estate - Owner Occupied	18,079		657		826,665		4,207		29,838		—		874,582		4,864
Commercial Real Estate - Non-Owner Occupied	8,438		81		1,192,226		6,225		16,982		—		1,217,646		6,306
Multifamily Real Estate	4,621		—		308,849		1,635		3,004		—		316,474		1,635
Commercial & Industrial	4,427		460		418,826		2,632		2,940		—		426,193		3,092
Residential 1-4 Family	10,024		256		957,411		5,030		24,157		—		991,592		5,286
Auto	—		—		216,420		1,395		—		—		216,420		1,395
HELOC	1,058		4		509,225		2,708		1,840		—		512,123		2,712
Consumer and all other	384		7		283,054		2,119		683		—		284,121		2,126
Total loans held for investment, net	$	95,215	$	1,610	$	5,327,329	$	30,734	$	87,841	$	—	$	5,510,385	$	32,344

-22-

The Company uses a risk rating system and past due status as the primary credit quality indicators for the loan categories. The risk rating system on a scale of 0 through 9 is used to determine risk level as used in the calculation of the allowance for loan losses; on those loans without a risk rating, the Company uses past due status to determine risk level. The risk levels, as described below, do not necessarily follow the regulatory definitions of risk levels with the same name. A general description of the characteristics of the risk levels follows:

Pass is determined by the following criteria:

•Risk rated 0 loans have little or no risk and are generally secured by General Obligation Municipal Credits;

•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; or

•Loans that are not risk rated but that are 0 to 29 days past due.

Special Mention is determined by the following criteria:

•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; or

•Loans that are not risk rated but that are 30 to 89 days past due.

Substandard is determined by the following criteria:

•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; or

•Loans that are not risk rated but that are 90 to 149 days past due.

Doubtful is determined by the following criteria:

•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;

•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; or

•Loans that are not risk rated but that are over 149 days past due.

The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of June 30, 2016 (dollars in thousands):



	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	684,002	$	47,592	$	29,274	$	116	$	760,984
Commercial Real Estate - Owner Occupied	779,574		25,352		6,262		—		811,188
Commercial Real Estate - Non-Owner Occupied	1,317,192		30,997		4,259		—		1,352,448
Multifamily Real Estate	324,718		7,136		3,777		—		335,631
Commercial & Industrial	449,708		15,953		2,039		—		467,700
Residential 1-4 Family	943,154		22,467		6,876		2,155		974,652
Auto	242,596		1,698		103		178		244,575
HELOC	511,936		3,718		1,438		587		517,679
Consumer and all other	405,742		3,083		37		209		409,071
Total	$	5,658,622	$	157,996	$	54,065	$	3,245	$	5,873,928

-23-

The following table shows the recorded investment in all loans, excluding PCI loans, by segment with their related risk level as of December 31, 2015 (dollars in thousands):



	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	663,067	$	52,650	$	27,980	$	37	$	743,734
Commercial Real Estate - Owner Occupied	800,979		20,856		8,931		1,932		832,698
Commercial Real Estate - Non-Owner Occupied	1,228,956		22,341		5,664		—		1,256,961
Multifamily Real Estate	315,128		2,017		3,828		—		320,973
Commercial & Industrial	414,333		16,724		2,396		99		433,552
Residential 1-4 Family	912,839		34,728		8,037		1,706		957,310
Auto	230,670		3,109		194		88		234,061
HELOC	507,514		4,801		1,611		1,009		514,935
Consumer and all other	299,014		3,996		231		260		303,501
Total	$	5,372,500	$	161,222	$	58,872	$	5,131	$	5,597,725

The following table shows the recorded investment in only PCI loans by segment with their related risk level as of June 30, 2016 (dollars in thousands):



	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	1,071	$	2,432	$	1,269	$	241	$	5,013
Commercial Real Estate - Owner Occupied	5,407		9,813		5,472		—		20,692
Commercial Real Estate - Non-Owner Occupied	5,335		12,400		562		—		18,297
Multifamily Real Estate	350		1,742		—		—		2,092
Commercial & Industrial	104		434		816		—		1,354
Residential 1-4 Family	8,677		5,224		3,285		619		17,805
HELOC	861		146		79		431		1,517
Consumer and all other	181		195		24		—		400
Total	$	21,986	$	32,386	$	11,507	$	1,291	$	67,170

The following table shows the recorded investment in only PCI loans by segment with their related risk level as of December 31, 2015 (dollars in thousands):



	Pass		Special Mention		Substandard		Doubtful		Total
Construction and Land Development	$	2,059	$	1,778	$	1,908	$	241	$	5,986
Commercial Real Estate - Owner Occupied	5,260		15,530		6,598		—		27,388
Commercial Real Estate - Non-Owner Occupied	4,442		7,827		1,250		—		13,519
Multifamily Real Estate	356		1,199		—		—		1,555
Commercial & Industrial	144		359		1,289		21		1,813
Residential 1-4 Family	9,098		6,380		4,605		1,076		21,159
HELOC	923		410		20		438		1,791
Consumer and all other	57		379		90		—		526
Total	$	22,339	$	33,862	$	15,760	$	1,776	$	73,737

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

-24-

The following shows changes in the accretable yield for loans accounted for under ASC 310-30, Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, for the periods presented (dollars in thousands):



	For the Six Months Ended June 30,
	2016			2015
Balance at beginning of period	$	22,139		$	28,956
Additions	—			—
Accretion	(2,792		)	(3,106		)
Reclass of nonaccretable difference due to improvement in expected cash flows	3,450			2,976
Other, net (1)	(2,139		)	(4,784		)
Balance at end of period	$	20,658		$	24,042

(1) This line item represents changes in the cash flows expected to be collected due to the impact of non-credit changes such as prepayment assumptions, changes in interest rates on variable rate PCI loans, and discounted payoffs that occurred in the quarter.

The carrying value of the Company’s PCI loan portfolio, accounted for under ASC 310-30, totaled $67.2 million at June 30, 2016 and $73.7 million at December 31, 2015. The outstanding balance of the Company’s PCI loan portfolio totaled $83.1 million at June 30, 2016 and $90.3 million at December 31, 2015. The carrying value of the Company’s acquired performing loan portfolio, accounted for under ASC 310-20, Receivables – Nonrefundable Fees and Other Costs, totaled $1.2 billion at June 30, 2016 and $1.4 billion at December 31, 2015; the remaining discount on these loans totaled $19.1 million at June 30, 2016 and $20.8 million at December 31, 2015.

4. INTANGIBLE ASSETS

The Company’s intangible assets consist of core deposits, goodwill, and other intangibles arising from previous and current acquisitions. The Company has determined that core deposit intangibles have finite lives and amortizes them over their estimated useful lives. Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 4 to 14 years, using an accelerated method. On January 1, 2014, the Company completed the acquisition of StellarOne and acquired intangible assets of $29.6 million and recorded $234.1 million of goodwill. On May 31, 2016, the Company completed the acquisition of ODCM and recorded goodwill of $4.1 million and other amortizable intangible assets of $3.8 million. The Company currently estimates that these other intangibles assets will be amortized over 10 years using a straight-line method. The intangible values and amortization method are preliminary and subject to refinement for up to one year after the closing date of the acquisition.

In accordance with ASC 350, Intangibles-Goodwill and Other, the Company reviews the carrying value of indefinite lived intangible assets at least annually or more frequently if certain impairment indicators exist. The Company performed its annual impairment testing in the second quarter of 2016 and determined that there was no impairment to its goodwill or intangible assets.

-25-

Amortization expense of core deposit intangibles for the three and six months ended June 30, 2016 totaled $1.7 million and $3.6 million, respectively; and the three and six months ended June 30, 2015 totaled $2.1 million and $4.4 million, respectively.

As of June 30, 2016, the estimated remaining amortization expense of core deposit intangibles and other amortizable intangible assets is as follows (dollars in thousands):



For the remaining six months of 2016	$	3,495
For the year ending December 31, 2017	5,966
For the year ending December 31, 2018	4,520
For the year ending December 31, 2019	3,469
For the year ending December 31, 2020	2,404
For the year ending December 31, 2021	1,411
Thereafter	2,184
Total estimated amortization expense	$	23,449

5. BORROWINGS

Short-term Borrowings

The Company classifies all borrowings that will mature within a year from the date on which the Company enters into them as short-term borrowings. Total short-term borrowings consist primarily of advances from the FHLB, federal funds purchased (which are secured overnight borrowings from other financial institutions), and other lines of credit. Also included in total short-term borrowings are securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the date sold. Total short-term borrowings consist of the following as of June 30, 2016 and December 31, 2015 (dollars in thousands):



	June 30, 2016			December 31, 2015
Securities sold under agreements to repurchase	$	121,262		$	84,977
Other short-term borrowings	557,000			304,000
Total short-term borrowings	$	678,262		$	388,977

Maximum month-end outstanding balance	$	678,262		$	445,761
Average outstanding balance during the period	564,443			379,783
Average interest rate during the period	0.47		%	0.25		%
Average interest rate at end of period	0.48		%	0.27		%

Other short-term borrowings:
Federal funds purchased	$	—		$	—
FHLB	$	541,000		$	304,000
Other lines of credit	16,000			—

The Bank maintains federal funds lines with several correspondent banks; the remaining available balance was $175.0 million at June 30, 2016 and December 31, 2015, respectively. The Company has certain restrictive covenants related to certain asset quality, capital, and profitability metrics associated with these lines and is considered to be in compliance with these covenants. Additionally, the Company had a collateral dependent line of credit with the FHLB of up to $2.3 billion and $1.5 billion at June 30, 2016 and December 31, 2015, respectively.

-26-

Long-term Borrowings

In connection with two bank acquisitions prior to 2006, the Company issued trust preferred capital notes to fund the cash portion of those acquisitions, collectively totaling $58.5 million. In connection with the acquisition of StellarOne, the Company acquired trust preferred capital notes totaling $32.0 million with a remaining fair value discount of $6.9 million at June 30, 2016. The trust preferred capital notes currently qualify for Tier 1 capital of the Company for regulatory purposes.



	Trust Preferred Capital Securities(1)		Investment(1)		Spread to 3-Month LIBOR		Rate		Maturity
Trust Preferred Capital Note - Statutory Trust I	$	22,500,000	$	696,000	2.75	%	3.40	%	6/17/2034
Trust Preferred Capital Note - Statutory Trust II	36,000,000		1,114,000		1.40	%	2.05	%	6/15/2036
VFG Limited Liability Trust I Indenture	20,000,000		619,000		2.73	%	3.38	%	3/18/2034
FNB Statutory Trust II Indenture	12,000,000		372,000		3.10	%	3.75	%	6/26/2033
Total	$	90,500,000	$	2,801,000

(1)The total of the trust preferred capital securities and investments in the respective trusts represents the principal asset of the Company's junior subordinated debt securities with like maturities and like interest rates to the capital securities. The Company's investment in the trusts is reported in "Other Assets" within the Consolidated Balance Sheets.

On August 23, 2012, the Company modified its fixed rate FHLB advances to floating rate advances, which resulted in reducing the Company’s FHLB borrowing costs. In connection with this modification, the Company incurred a prepayment penalty of $19.6 million on the original advances, which is included as a component of long-term borrowings in the Company’s Consolidated Balance Sheets. In accordance with ASC 470-50, Modifications and Extinguishments, the Company will amortize this prepayment penalty over the term of the modified advances using the effective rate method. The amortization expense is included as a component of interest expense on long-term borrowings in the Company’s Consolidated Statements of Income. Amortization expense for the three and six months ended June 30, 2016 and 2015 was $466,000 and $930,000 and $455,000 and $902,000, respectively.

In connection with the StellarOne acquisition, the Company assumed $70.0 million in long-term borrowings with the FHLB of which there is $60.0 million remaining at June 30, 2016 that had a remaining fair value premium of $875,000.

As of June 30, 2016, the Company had long-term advances from the FHLB consisting of the following (dollars in thousands):



Long-term Type	Spread to 3-Month LIBOR		Interest Rate		Maturity Date	Advance Amount
Adjustable Rate Credit	0.44	%	1.09	%	8/23/2022	$	55,000
Adjustable Rate Credit	0.45	%	1.11	%	11/23/2022	65,000
Adjustable Rate Credit	0.45	%	1.11	%	11/23/2022	10,000
Adjustable Rate Credit	0.45	%	1.11	%	11/23/2022	10,000
Fixed Rate	—		3.62	%	11/28/2017	10,000
Fixed Rate	—		3.75	%	7/30/2018	5,000
Fixed Rate	—		3.97	%	7/30/2018	5,000
Fixed Rate Hybrid	—		2.11	%	10/5/2016	25,000
Fixed Rate Hybrid	—		0.91	%	7/25/2016	15,000
						$	200,000

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As of December 31, 2015, the Company had long-term advances from the FHLB consisting of the following (dollars in thousands):



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

Adjustable Rate Credit	0.44	%	1.05	%	8/23/2022	$	55,000
Adjustable Rate Credit	0.45	%	1.07	%	11/23/2022	65,000
Adjustable Rate Credit	0.45	%	1.07	%	11/23/2022	10,000
Adjustable Rate Credit	0.45	%	1.07	%	11/23/2022	10,000
Fixed Rate	—		3.62	%	11/28/2017	10,000
Fixed Rate	—		3.75	%	7/30/2018	5,000
Fixed Rate	—		3.97	%	7/30/2018	5,000
Fixed Rate Hybrid	—		2.11	%	10/5/2016	25,000
Fixed Rate Hybrid	—		0.91	%	7/25/2016	15,000
						$	200,000

The carrying value of the loans and securities pledged as collateral for FHLB advances totaled $1.9 billion as of June 30, 2016 and December 31, 2015, respectively.

As of June 30, 2016, the contractual maturities of long-term debt are as follows for the years ending (dollars in thousands):



	Trust Preferred Capital Notes		FHLB Advances		Fair Value Premium (Discount)			Prepayment Penalty			Total Long-term Borrowings
For the remaining six months of 2016	$	—	$	40,000	$	190		$	(952	)	$	39,238
2017	—		10,000		170			(1,922		)	8,248
2018	—		10,000		(143		)	(1,970		)	7,887
2019	—		—		(286		)	(2,018		)	(2,304		)
2020	—		—		(301		)	(2,074		)	(2,375		)
2021	—		—		(316		)	(2,119		)	(2,435		)
Thereafter	93,301		140,000		(5,306		)	(1,707		)	226,288
Total Long-term borrowings	$	93,301	$	200,000	$	(5,992	)	$	(12,762	)	$	274,547

6. COMMITMENTS AND CONTINGENCIES

Litigation Matters

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

Financial Instruments with Off-Balance Sheet Risk

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

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The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support off-balance sheet financial instruments with credit risk. The Company considers credit losses related to off-balance sheet commitments by undergoing a similar process in evaluating losses for loans that are carried on balance sheet. The Company considers historical loss rates, current economic conditions, risk ratings, and past due status among other factors in the consideration of whether credit losses are inherent in the Company’s off-balance sheet commitments to extend credit. The Company does not expect credit losses arising from off-balance sheet commitments to have a material adverse impact on the Company’s consolidated financial statements.

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

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

UMG, a wholly owned subsidiary of the Bank, uses rate lock commitments and best efforts contracts during the origination process and for loans held for sale. These best efforts contracts are designed to mitigate UMG’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale.

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



	June 30, 2016		December 31, 2015
Commitments with off-balance sheet risk:
Commitments to extend credit (1)	$	1,606,131	$	1,557,350
Standby letters of credit	80,593		139,371
Mortgage loan rate lock commitments	71,861		50,369
Total commitments with off-balance sheet risk	$	1,758,585	$	1,747,090
Commitments with balance sheet risk:
Loans held for sale	$	38,114	$	36,030
Total other commitments	$	1,796,699	$	1,783,120

(1) Includes unfunded overdraft protection.

The Company must maintain a reserve against its deposits in accordance with Regulation D of the Federal Reserve Act. For the final weekly reporting period in the periods ended June 30, 2016 and December 31, 2015, the aggregate amount of daily average required reserves was approximately $50.4 million and $48.7 million, respectively.

As of June 30, 2016, the Company had approximately $50.2 million in deposits in other financial institutions, of which $18.4 million and $14.4 million serve as collateral for the cash flow hedges and loan swaps, respectively, as discussed in Note 7 “Derivatives”. The Company had approximately $15.8 million in deposits in other financial institutions that were uninsured at June 30, 2016. On an annual basis, the Company’s management evaluates the loss risk of its uninsured deposits in financial counterparties.

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

In the ordinary course of business, the Company records an indemnification reserve relating to mortgage loans previously sold based on historical statistics and loss rates; as of June 30, 2016 and December 31, 2015, the Company’s indemnification reserve for such mortgage loans was approximately $366,000 and $450,000, respectively.

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7. DERIVATIVES

The Company is exposed to economic risks arising from its business operations and uses derivatives primarily to manage risk associated with changing interest rates, and to assist customers with their risk management objectives. The Company designates certain derivatives as hedging instruments in a qualifying hedge accounting relationship (cash flow or fair value hedge). The remaining are classified as free standing derivatives consisting of customer accommodation loan swaps and interest rate lock commitments that do not qualify for hedge accounting.

Cash Flow Hedges

The Company designates derivatives as cash flow hedges when they are used to manage exposure to variability in cash flows related to forecasted transactions on variable rate borrowings such as trust preferred capital notes, FHLB borrowings, and prime commercial loans. The Company uses interest rate swap agreements as part of its hedging strategy by exchanging a notional amount, equal to the principal amount of the borrowings, for fixed-rate interest based on benchmarked interest rates.

All swaps were entered into with counterparties that met the Company’s credit standards and the agreements contain collateral provisions protecting the at-risk party. The Company believes that the credit risk inherent in the contract is not significant.

The terms and conditions of the interest rate swaps vary and amounts receivable or payable are recognized as accrued under the terms of the agreements. The Company assesses the effectiveness of each hedging relationship on a periodic basis using statistical regression analysis. The Company also measures the ineffectiveness of each hedging relationship using the change in variable cash flows method which compares the cumulative changes in cash flows of the hedging instrument relative to cumulative changes in the hedged item’s cash flows. In accordance with ASC 815, Derivatives and Hedging, the effective portions of the derivatives’ unrealized gains or losses are recorded as a component of other comprehensive income. Based on the Company’s assessment its cash flow hedges are highly effective, but to the extent that any ineffectiveness exists in the hedge relationships, the amounts would be recorded in interest income and interest expense in the Company’s Consolidated Statements of Income.

On June 13, 2016, the Company terminated three interest rate swaps designated as cash flow hedges prior to their maturity. The unrealized gain of $1.3 million within accumulated Other Comprehensive Income will be re-classified into earnings over a three year period using the effective interest method. The estimated net amount of gains expected to be reclassified into earnings within the next twelve months is $373,000.

Fair Value Hedge

Derivatives are designated as fair value hedges when they are used to manage exposure to changes in the fair value of certain financial assets and liabilities, referred to as the hedged items, which fluctuate in value as a result of movements in interest rates. During the normal course of business, the Company enters into interest rate swaps to convert certain long-term fixed-rate loans to floating rates to hedge the Company’s exposure to interest rate risk. The Company pays a fixed interest rate to the counterparty and receives a floating rate from the same counterparty calculated on the aggregate notional amount. At June 30, 2016 and December 31, 2015, the aggregate notional amount of the related hedged items was $43.8 million and $61.2 million, respectively, with fair value amounts of $3.6 million and $689,000, respectively.

The Company applies hedge accounting in accordance with ASC 815 and the fair value hedge and the underlying hedged item, attributable to the risk being hedged, are recorded at fair value with unrealized gains and losses being recorded in the Company’s Consolidated Statements of Income. Statistical regression analysis is used to assess hedge effectiveness, both at inception of the hedging relationship and on an ongoing basis. The regression analysis involves regressing the periodic change in fair value of the hedging instrument against the periodic changes in fair value of the asset being hedged due to changes in the hedged risk. The Company’s fair value hedges continue to be highly effective and had no material impact on the Consolidated Statements of Income, but if any ineffectiveness exists, portions of the unrealized gains or losses would be recorded in interest income and interest expense in the Company’s Consolidated Statements of Income.

Loan Swaps

During the normal course of business, the Company enters into interest rate swap loan relationships (“loan swaps”) with borrowers to meet their financing needs. Upon entering into the loan swaps, the Company enters into offsetting positions with a third party in order to minimize interest rate risk. These back-to-back loan swaps qualify as financial derivatives with fair values as reported in “Other Assets” and “Other Liabilities” in the Company’s Consolidated Balance Sheets.

Interest Rate Lock Commitments

During the normal course of business, the Company enters into commitments to originate mortgage loans whereby the interest rate on the loan is determined prior to funding (“rate lock commitments”). Rate lock commitments on mortgage loans that are intended to be sold in the secondary market are considered to be derivatives. The period of time between issuance of a loan commitment, closing, and sale of the loan generally ranges from 30 to 120 days. The Company protects itself from changes in

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interest rates through the use of best efforts forward delivery commitments, whereby the Company commits to sell a loan at the time the borrower commits to an interest rate with the intent that the buyer has assumed interest rate risk on the loan. The correlation between the rate lock commitments and the best efforts contracts is high due to their similarity.

The market values of rate lock commitments and best efforts forward delivery commitments is not readily ascertainable with precision because rate lock commitments and best efforts contracts are not actively traded in stand-alone markets. The Company determines the fair value of rate lock commitments and best efforts contracts by measuring the change in the value of the underlying asset while taking into consideration the probability that the rate lock commitments will close. The fair value of the rate lock commitments is reported as a component of “Other Assets” in the Company’s Consolidated Balance Sheets; the fair value of the Company’s best efforts forward delivery commitments is recorded as a component of “Other Liabilities” in the Company’s Consolidated Balance Sheets. Any impact to income is recorded in current period earnings as a component of “Mortgage banking income, net” in the Company’s Consolidated Statements of Income.

The following table summarizes key elements of the Company’s derivative instruments as of June 30, 2016 and December 31, 2015, segregated by derivatives that are considered accounting hedges and those that are not (dollars in thousands):



	June 30, 2016									December 31, 2015
			Derivative ⁽²⁾									Derivative⁽²⁾
	Notional or Contractual Amount ⁽¹⁾			Assets		Liabilities		Collateral Pledged ⁽³⁾		Notional or Contractual Amount ⁽¹⁾			Assets		Liabilities		Collateral Pledged ⁽³⁾
Derivatives designated as accounting hedges:
Interest rate contracts:
Cash flow hedges	$	220,500		$	382	$	17,263	$	21,774	$	263,000		$	946	$	10,352	$	14,449
Fair value hedges	43,845			—		3,816		—		61,150			—		888		—
Derivatives not designated as accounting hedges:
Loan Swaps⁽⁴⁾
Pay fixed - receive floating interest rate swaps	218,614			11,948		—		—		138,969			3,758		—		—
Pay floating - receive fixed interest rate swaps	218,614			—		11,948		15,885		138,969			—		3,758		5,983
Other contracts:
Interest rate lock commitments	71,861			1,712		—		—		50,369			701		—		—

(1) Notional amounts are not recorded on the balance sheet and are generally used only as a basis on which interest and other payments are determined.

(2) Balances represent fair value of derivative financial instruments.

(3) Collateral pledged is comprised of both cash and securities.

(4) Prior period reflects reclassifications to conform to the current presentation.

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8. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The change in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2016 is summarized as follows, net of tax (dollars in thousands):



	Unrealized Gains (Losses) on AFS Securities			Unrealized Gain for AFS Securities Transferred to HTM			Change in Fair Value of Cash Flow Hedge			Total
Balance - March 31, 2016	$	10,716		$	4,140		$	(8,497	)	$	6,359
Other comprehensive income (loss)	3,698			(287		)	(1,007		)	2,404
Amounts reclassified from accumulated other comprehensive income	(2		)	—			138			136
Net current period other comprehensive income (loss)	3,696			(287		)	(869		)	2,540
Balance - June 30, 2016	$	14,412		$	3,853		$	(9,366	)	$	8,899



	Unrealized Gains (Losses) on AFS Securities			Unrealized Gain for AFS Securities Transferred to HTM			Change in Fair Value of Cash Flow Hedge			Total
Balance - December 31, 2015	$	7,777		$	4,432		$	(5,957	)	$	6,252
Other comprehensive income (loss)	6,730			(579		)	(3,688		)	2,463
Amounts reclassified from accumulated other comprehensive income	(95		)	—			279			184
Net current period other comprehensive income (loss)	6,635			(579		)	(3,409		)	2,647
Balance - June 30, 2016	$	14,412		$	3,853		$	(9,366	)	$	8,899

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The change in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2015 is summarized as follows, net of tax (dollars in thousands):



	Unrealized Gains (Losses) on AFS Securities			Unrealized Gain for AFS Securities Transferred to HTM			Change in Fair Value of Cash Flow Hedge			Total
Balance - March 31, 2015	$	21,097		$	—		$	(6,402	)	$	14,695
Unrealized gain transferred from AFS to HTM	(5,251		)	5,251			—			—
Other comprehensive income (loss)	(6,845		)	(208		)	1,809			(5,244		)
Amounts reclassified from accumulated other comprehensive income	(263		)	—			41			(222		)
Net current period other comprehensive income (loss)	(7,108		)	(208		)	1,850			(5,466		)
Balance - June 30, 2015	$	8,738		$	5,043		$	(4,552	)	$	9,229



	Unrealized Gains (Losses) on AFS Securities			Unrealized Gain for AFS Securities Transferred to HTM			Change in Fair Value of Cash Flow Hedge			Total
Balance - December 31, 2014	$	17,439		$	—		$	(5,184	)	$	12,255
Unrealized gain transferred from AFS to HTM	(5,251		)	5,251			—			—
Other comprehensive income (loss)	(3,062		)	(208		)	319			(2,951		)
Amounts reclassified from accumulated other comprehensive income	(388		)	—			313			(75		)
Net current period other comprehensive income (loss)	(3,450		)	(208		)	632			(3,026		)
Balance - June 30, 2015	$	8,738		$	5,043		$	(4,552	)	$	9,229

Reclassifications of unrealized gains (losses) on available for sale securities are reported in the Company’s Consolidated Statements of Income as “Gains on securities transactions, net” with the corresponding income tax effect being reflected as a component of income tax expense. The Company reported gains of $3,000 and $404,000 for the three months and $146,000 and $597,000 for the six months ended June 30, 2016 and 2015, respectively, related to the sale of securities. The tax effect of these transactions during the three and six months ended June 30, 2016 and 2015 were $1,000 and $51,000 and $142,000 and $209,000, respectively, which amounts were included as a component of income tax expense.

Reclassifications of the change in fair value of cash flow hedges are reported in interest income and interest expense in the Company’s Consolidated Statements of Income with the corresponding income tax effect being reflected as a component of income tax expense. The Company reported net interest expense of $212,000 and $429,000 and $63,000 and $482,000 for the three and six months ended June 30, 2016 and 2015, respectively. The tax effect of these transactions during the three and six months ended June 30, 2016 and 2015 were $74,000 and $150,000 and $22,000 and $169,000, respectively, which were included as a component of income tax expense.

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9. FAIR VALUE MEASUREMENTS

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

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



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

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

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

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

Derivative instruments

As discussed in Note 7 “Derivatives”, the Company records derivative instruments at fair value on a recurring basis. The Company utilizes derivative instruments as part of the management of interest rate risk to modify the re-pricing characteristics of certain portions of the Company’s interest-bearing assets and liabilities. The Company has contracted with a third party vendor to provide valuations for derivatives using standard valuation techniques and therefore classifies such valuations as Level 2. Third party valuations are validated by the Company using Bloomberg Valuation Service’s derivative pricing functions. The Company has considered counterparty credit risk in the valuation of its derivative assets and has considered its own credit risk in the valuation of its derivative liabilities.

During the ordinary course of business, the Company enters into interest rate lock commitments related to the origination of mortgage loans held for sale as well as best effort forward delivery commitments to mitigate interest rate risk; these instruments are recorded at estimated fair value based on the value of the underlying loan, which in turn is based on quoted prices for similar loans in the secondary market. However, this value is adjusted by a pull-through rate which considers the likelihood that the loan in a lock position will ultimately close. The pull-through rate is derived from the Company’s internal data and is adjusted using significant management judgment. The pull-through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. As such, interest rate lock commitments are classified as Level 3. An increase in the pull-through rate utilized in the fair value measurement of the interest rate lock commitment derivative will result in positive fair value adjustments while a decrease in the pull-through rate will result in a negative fair value adjustment. The Company’s weighted average pull-through rate was approximately 80% as of June 30, 2016 and December 31, 2015. As of June 30, 2016, the interest rate lock commitments are recorded as a component of “Other Assets” on the Company’s Consolidated Balance Sheets.

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).

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

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

The Company primarily uses Bloomberg Valuation Service, an independent information source that draws on quantitative models and market data contributed from over 4,000 market participants, to validate third party valuations. Any material differences between valuation sources are researched by further analyzing the various inputs that are utilized by each pricing source. No material differences were identified during the validation as of June 30, 2016 and December 31, 2015.

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

Loans held for sale

Loans held for sale are carried at fair 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). Gains and losses on the sale of loans are recorded within the mortgage segment and are reported on a separate line item in the Company’s Consolidated Statements of Income.

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The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis at June 30, 2016 and December 31, 2015 (dollars in thousands):



	Fair Value Measurements at June 30, 2016 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Securities available for sale:
Obligations of states and political subdivisions	$	—	$	272,786	$	—	$	272,786
Corporate and other bonds	—		108,579		—		108,579
Mortgage-backed securities	—		554,964		—		554,964
Other securities	—		13,334		—		13,334
Loans held for sale	—		38,114		—		38,114
Derivatives:
Interest rate swap	—		11,948		—		11,948
Cash flow hedges	—		382		—		382
Interest rate lock commitments	—		—		1,712		1,712

LIABILITIES
Derivatives:
Interest rate swap	$	—	$	11,948	$	—	$	11,948
Cash flow hedges	—		17,263		—		17,263
Fair value hedges	—		3,816		—		3,816



	Fair Value Measurements at December 31, 2015 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Securities available for sale:
Obligations of states and political subdivisions	$	—	$	268,079	$	—	$	268,079
Corporate and other bonds	—		75,979		—		75,979
Mortgage-backed securities	—		548,171		—		548,171
Other securities	—		11,063		—		11,063
Loans held for sale	—		36,030		—		36,030
Derivatives:
Interest rate swap	—		3,758		—		3,758
Cash flow hedges	—		946		—		946
Interest rate lock commitments	—		—		701		701

LIABILITIES
Derivatives:
Interest rate swap	$	—	$	3,758	$	—	$	3,758
Cash flow hedges	—		10,352		—		10,352
Fair value hedges	—		888		—		888

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Certain assets are measured at fair value on a nonrecurring basis in accordance with U.S. 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.

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreements will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral dependent loans are reported at the fair value of the underlying collateral if repayment is solely from the underlying value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the Company’s collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser using observable market data. When evaluating the fair value, management may discount the appraisal further if, based on their understanding of the market conditions, it is determined the collateral is further impaired below the appraised value (Level 3). For the periods ending June 30, 2016 and December 31, 2015, the Level 3 weighted averages related to impaired loans were 3.0% and 7.0%, respectively. The value of business equipment is based upon an outside appraisal, of one year or less, if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Collateral dependent impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Company’s Consolidated Statements of Income.

Other real estate owned

OREO is evaluated for impairment at least quarterly by the Bank’s Special Asset Loan Committee and any necessary write downs to fair values are recorded as impairment and included as a component of noninterest expense. Fair values of OREO are carried at fair value less selling costs. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as Level 3 valuation. For the periods ending June 30, 2016 and December 31, 2015, the Level 3 weighted averages related to OREO were approximately 31.0% and 32.0%, respectively.

Total valuation expenses related to OREO properties for the three and six months ended June 30, 2016 and 2015 totaled $274,000 and $400,000 and $710,000 and $1.3 million, respectively.

-37-

The following tables summarize the Company’s financial assets that were measured at fair value on a nonrecurring basis at June 30, 2016 and December 31, 2015 (dollars in thousands):



	Fair Value Measurements at June 30, 2016 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Impaired loans	$	—	$	—	$	3,585	$	3,585
Other real estate owned	—		—		13,381		13,381



	Fair Value Measurements at December 31, 2015 using
	Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Level 1		Level 2		Level 3		Balance
ASSETS
Impaired loans	$	—	$	—	$	2,214	$	2,214
Other real estate owned	—		—		15,299		15,299

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

Cash and cash equivalents

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

Held to Maturity Securities

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 IDC, which evaluates securities based on market data. IDC utilizes evaluated pricing models that vary by asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

-38-

Loans

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

Bank owned life insurance

The carrying value of bank owned life insurance approximates fair value. The Company records these policies at their cash surrender value, which is estimated using information provided by insurance carriers.

Deposits

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

Borrowings

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

Accrued interest

The carrying amounts of accrued interest approximate fair value.

-39-

The carrying values and estimated fair values of the Company’s financial instruments at June 30, 2016 and December 31, 2015 are as follows (dollars in thousands):



			Fair Value Measurements at June 30, 2016 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Balance
ASSETS
Cash and cash equivalents	$	217,034	$	217,034	$	—	$	—	$	217,034
Securities available for sale	949,663		—		949,663		—		949,663
Held to maturity securities	202,917		—		211,949		—		211,949
Restricted stock	62,206		—		62,206		—		62,206
Loans held for sale	38,114		—		38,114		—		38,114
Net loans	5,906,024		—		—		5,938,305		5,938,305
Derivatives:
Interest rate lock commitments	1,712		—		—		1,712		1,712
Interest rate swap	11,948		—		11,948		—		11,948
Cash flow hedges	382		—		382		—		382
Accrued interest receivable	21,664		—		21,664		—		21,664
Bank owned life insurance	176,413		—		176,413		—		176,413

LIABILITIES
Deposits	$	6,095,826	$	—	$	6,098,700	$	—	$	6,098,700
Borrowings	952,809		—		932,278		—		932,278
Accrued interest payable	1,595		—		1,595		—		1,595
Derivatives:
Interest rate swap	11,948		—		11,948		—		11,948
Cash flow hedges	17,263		—		17,263		—		17,263
Fair value hedges	3,816		—		3,816		—		3,816

-40-



			Fair Value Measurements at December 31, 2015 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Total Fair Value
	Carrying Value		Level 1		Level 2		Level 3		Balance
ASSETS
Cash and cash equivalents	$	142,660	$	142,660	$	—	$	—	$	142,660
Securities available for sale	903,292		—		903,292		—		903,292
Held to maturity securities	205,374		—		209,437		—		209,437
Restricted stock	51,828		—		51,828		—		51,828
Loans held for sale	36,030		—		36,030		—		36,030
Net loans	5,637,415		—		—		5,671,155		5,671,155
Derivatives:
Interest rate lock commitments	701		—		—		701		701
Interest rate swap	3,758		—		3,758		—		3,758
Cash flow hedges	946		—		946		—		946
Accrued interest receivable	20,760		—		20,760		—		20,760
Bank owned life insurance	173,687		—		173,687		—		173,687

LIABILITIES
Deposits	$	5,963,936	$	—	$	5,957,484	$	—	$	5,957,484
Borrowings	680,175		—		659,364		—		659,364
Accrued interest payable	1,578		—		1,578		—		1,578
Derivatives:
Interest rate swap	3,758		—		3,758		—		3,758
Cash flow hedges	10,352		—		10,352		—		10,352
Fair value hedges	888		—		888		—		888

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

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10. EARNINGS PER SHARE

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

There were approximately 407 and 53,625 shares underlying anti-dilutive awards for the three months ended June 30, 2016 and 2015, respectively, and there were approximately 1,116 and 56,151 shares underlying anti-dilutive awards for the six months ended June 30, 2016 and 2015, respectively. Anti-dilutive awards were excluded from the calculation of diluted EPS.

The following is a reconciliation of the denominators of the basic and diluted EPS computations for the three and six months ended June 30, 2016 and 2015 (in thousands except per share data):



	Net Income Available to Common Shareholders (Numerator)		Weighted Average Common Shares (Denominator)	Per Share Amount
Three months ended June 30, 2016
Net income, basic	$	19,337	43,747	$	0.44
Add: potentially dilutive common shares - stock awards	—		77	—
Diluted	$	19,337	43,824	$	0.44
Three months ended June 30, 2015
Net income, basic	$	15,348	45,129	$	0.34
Add: potentially dilutive common shares - stock awards	—		81	—
Diluted	$	15,348	45,210	$	0.34
Six months ended June 30, 2016
Net income, basic	$	36,298	43,999	$	0.82
Add: potentially dilutive common shares - stock awards	—		77	—
Diluted	$	36,298	44,076	$	0.82
Six months ended June 30, 2015
Net income, basic	$	31,049	45,117	$	0.69
Add: potentially dilutive common shares - stock awards	—		82	—
Diluted	$	31,049	45,199	$	0.69

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11. SEGMENT REPORTING DISCLOSURES

The Company has two reportable segments: a traditional full service community bank segment and a mortgage loan origination business segment. The community bank segment includes one subsidiary bank, the Bank, which provides loan, deposit, investment, and trust services to retail and commercial customers throughout its 120 retail locations in Virginia as of June 30, 2016. The mortgage segment includes UMG, which provides a variety of mortgage loan products principally in Virginia, North Carolina, Maryland, and the Washington D.C. metro area. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which serves to mitigate the Company’s exposure to interest rate risk.

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

Both of the Company’s reportable segments are service-based. The mortgage business is a primarily 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.

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. The interest rate on the warehouse line of credit for each of the three and six months ended June 30, 2016 and 2015 was the three month LIBOR rate plus 0.15% with no floor. These transactions are eliminated in the consolidation process.

During 2015, the mortgage segment began originating loans with the intent that they be held for investment purposes. The community bank segment provides the mortgage segment with the long-term funds needed to originate these loans through a long-term funding facility and charges the mortgage segment interest. The interest charged is determined by the community bank segment based on the cost of funds available to the community bank segment for similar durations of the loans being funded by the mortgage segment.

A management fee for operations and administrative support services is charged to all subsidiaries and eliminated in the consolidated totals.

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Information about reportable segments and reconciliation of such information to the consolidated financial statements for each of the three and six months ended June 30, 2016 and 2015 is as follows (dollars in thousands):

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

SEGMENT FINANCIAL INFORMATION



	Community Bank		Mortgage			Eliminations			Consolidated
Three Months Ended June 30, 2016
Net interest income	$	65,478	$	298		$	—		$	65,776
Provision for credit losses	2,260		40			—			2,300
Net interest income after provision for credit losses	63,218		258			—			63,476
Noninterest income	14,940		3,207			(154		)	17,993
Noninterest expenses	52,766		2,639			(154		)	55,251
Income before income taxes	25,392		826			—			26,218
Income tax expense	6,594		287			—			6,881
Net income	$	18,798	$	539		$	—		$	19,337
Total assets	$	8,094,176	$	75,802		$	(69,417	)	$	8,100,561

Three Months Ended June 30, 2015
Net interest income	$	63,441	$	375		$	—		$	63,816
Provision for credit losses	3,700		49			—			3,749
Net interest income after provision for credit losses	59,741		326			—			60,067
Noninterest income	13,523		2,860			(171		)	16,212
Noninterest expenses	52,365		3,047			(171		)	55,241
Income before income taxes	20,899		139			—			21,038
Income tax expense	5,646		44			—			5,690
Net income	$	15,253	$	95		$	—		$	15,348
Total assets	$	7,495,564	$	55,563		$	(53,421	)	$	7,497,706

Six Months Ended June 30, 2016
Net interest income	$	128,903	$	604		$	—		$	129,507
Provision for credit losses	4,760		144			—			4,904
Net interest income after provision for credit losses	124,143		460			—			124,603
Noninterest income	28,548		5,684			(325		)	33,907
Noninterest expenses	104,610		5,238			(325		)	109,523
Income before income taxes	48,081		906			—			48,987
Income tax expense	12,376		313			—			12,689
Net income	$	35,705	$	593		$	—		$	36,298
Total assets	$	8,094,176	$	75,802		$	(69,417	)	$	8,100,561

Six Months Ended June 30, 2015
Net interest income	$	125,164	$	621		$	—		$	125,785
Provision for credit losses	5,450		49			—			5,499
Net interest income after provision for credit losses	119,714		572			—			120,286
Noninterest income	26,371		5,236			(341		)	31,266
Noninterest expenses	103,337		6,085			(341		)	109,081
Income (loss) before income taxes	42,748		(277		)	—			42,471
Income tax expense (benefit)	11,527		(105		)	—			11,422
Net income (loss)	$	31,221	$	(172	)	$	—		$	31,049
Total assets	$	7,495,564	$	55,563		$	(53,421	)	$	7,497,706

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Review Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors of Union Bankshares Corporation

We have reviewed the consolidated balance sheet of Union Bankshares Corporation (the “Company”) as of June 30, 2016, and the related consolidated statements of income and comprehensive income for the three and six-month periods ended June 30, 2016 and 2015, and the consolidated statements of changes in stockholders’ equity and cash flows for the six-month periods ended June 30, 2016 and 2015. These financial statements are the responsibility of the Company's management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity, and cash flows for the year then ended, not presented herein, and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated February 25, 2016. In our opinion, the accompanying consolidated balance sheet of the Company as of December 31, 2015, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Richmond, Virginia

August 4, 2016

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

Management’s discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Union Bankshares Corporation and its subsidiaries (collectively, the “Company”). This discussion and analysis should be read with the consolidated financial statements, the notes to the financial statements, and the other financial data included in this report, as well as the Company’s Annual Report on Form 10-K and management’s discussion and analysis for the year ended December 31, 2015. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Results of operations for the three and six months ended June 30, 2016 and 2015 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

FORWARD-LOOKING STATEMENTS

Certain statements in this report may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as “expect,” “believe,” “estimate,” “plan,” “project,” “anticipate,” “intend,” “will,” or words of similar meaning or other statements concerning opinions or judgment of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance, or achievements of the Company will not differ materially from any projected future results, performance, or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic and bank industry conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, stock and bond markets, accounting standards or interpretations of existing standards, mergers and acquisitions, technology, information security, and consumer spending and savings habits. More information is available on the Company’s website, http://investors.bankatunion.com and on the Securities and Exchange Commission’s website, www.sec.gov. The information on the Company’s website is not a part of this Form 10-Q. The Company does not intend or assume any obligation to update or revise any forward-looking statements that may be made from time to time by or on behalf of the Company.

CRITICAL ACCOUNTING POLICIES

The accounting and reporting policies of the Company are in accordance with U.S. GAAP and conform to general practices within the banking industry. The Company’s financial position and results of operations are affected by management’s application of accounting policies, including estimates, assumptions, and judgments made to arrive at the carrying value of assets and liabilities and amounts reported for revenues, expenses, and related disclosures. Different assumptions in the application of these policies could result in material changes in the Company’s consolidated financial position and/or results of operations. The Company evaluates its critical accounting estimates and assumptions on an ongoing basis and updates them, as needed. Management has discussed the Company’s critical accounting policies and estimates with the Audit Committee of the Board of Directors.

The critical accounting and reporting policies include the Company’s accounting for the allowance for loan losses, acquired loans, and goodwill and intangible assets. The Company’s accounting policies are fundamental to understanding the Company’s consolidated financial position and consolidated results of operations. Accordingly, the Company’s significant accounting policies are discussed in detail in Note 1 “Summary of Significant Accounting Policies” in the “Notes to the Consolidated Financial Statements” contained in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

The Company provides additional information on its critical accounting policies and estimates listed above under “MD&A—Critical Accounting Policies” in its 2015 Form 10-K.

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ABOUT UNION BANKSHARES CORPORATION

Headquartered in Richmond, Union Bankshares Corporation is the largest community banking organization headquartered in Virginia and operates in all major banking markets of the Commonwealth. Union Bankshares Corporation is the holding company for Union Bank & Trust, which provides banking, trust, and wealth management services and has a statewide presence of 120 bank branches and approximately 200 ATMs. Non-bank affiliates of the holding company include: Union Mortgage Group, Inc., which provides a full line of mortgage products; Union Insurance Group, LLC, which offers various lines of insurance products; and Old Dominion Capital Management, Inc., which provides investment advisory services.

Shares of the Company’s common stock are traded on the NASDAQ Global Select Market under the symbol UBSH. Additional information is available on the Company’s website at http://investors.bankatunion.com. The information contained on the Company’s website is not a part of or incorporated into this report.

RESULTS OF OPERATIONS

Executive Overview

For the quarter ended June 30, 2016, the Company reported net income of $19.3 million and earnings per share of $0.44. These results represent an increase of $4.0 million, or 26.0%, from $15.3 million in earnings from the second quarter of 2015. Earnings per share of $0.44 for the current quarter represent an increase of $0.10, or 29.4%, in earnings per share from the second quarter of 2015. This increase is primarily attributable to increases in net interest income, resulting from higher average loan balances, and higher noninterest income.

For the six months ended June 30, 2016, the Company reported net income of $36.3 million and earnings per share of $0.82. These results represent an increase of $5.2 million, or 16.9%, from $31.0 million in earnings from the first six months of 2015. Earnings per share of $0.82 for the current period represent an increase of $0.13, or 18.8%, in earnings per share from the first six months of 2015. This increase is primarily attributable to increases in net interest income, resulting from higher average loan balances, and noninterest income.


•	Return on Average Tangible Common Equity (“ROTCE”) was 11.60% for the quarter ended June 30, 2016 compared to 9.20% for the second quarter of 2015; ROTCE was 10.86% for the six months ended June 30, 2016 compared to 9.43% for first six months of 2015.


•	Return on Average Assets (“ROA”) was 0.98% for the quarter ended June 30,2016 compared to 0.83% for the second quarter of 2015; ROA was 0.93% for the six months ended June 30, 2016 compared to 0.84% for first six months of 2015.


•	Net income for the second quarter of 2016 for the community bank segment was $18.8 million, or $0.43 per share, compared to $15.3 million, or $0.34 per share, in the second quarter of 2015. Net income for the community bank segment for the six months ended June 30, 2016 was $35.7 million, or $0.81 per share.

•

The mortgage segment reported net income of $539,000 for the second quarter of 2016, an improvement of $444,000 from $95,000 in the second quarter of 2015. The mortgage segment had net income of $593,000 in the first six months of 2016, an improvement of $765,000 from a loss of $172,000 in the first six months of 2015. The improvement was largely a result of higher gain on sale margins and cost control initiatives in personnel costs.


•	On May 31, 2016, Union Bank & Trust completed its acquisition of ODCM, a Charlottesville, Virginia based registered investment advisor with nearly $300.0 million in assets under management.


•	During the second quarter of 2016, the Company closed five branches and opened a new stand-alone branch as part of its continuing efforts to become more efficient. The Company plans to close an additional five in-store branches in the Richmond market on September 30, 2016, in relation to which the Company anticipates incurring approximately $400,000 in closure costs in the third quarter of 2016.


•	Loans held for investment grew $457.5 million, or 8.3%, from the second quarter of 2015, while average loan balances increased $441.4 million, or 8.1%, from the same quarter in the prior year, adjusting for the sale of the credit card portfolio in the third quarter of 2015. Period end loan balances grew $269.6 million, or 9.6% (annualized), from December 31, 2015.


•	Deposits grew $311.4 million, or 5.4%, from June 30, 2015, while average deposit balances increased $315.6 million, or 5.5%, from the same quarter in the prior year. Period end deposit balances increased $131.9 million, or 4.4% (annualized), from December 31, 2015.


•	Asset quality continued to improve as nonperforming assets and past due loan levels continued to decline.

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Net Interest Income



	For the Three Months Ended June 30,
	2016			2015			Change
	(Dollars in thousands)
Average interest-earning assets	$	7,153,627		$	6,676,440		$	477,187
Interest income (FTE)	$	75,232		$	72,145		$	3,087
Yield on interest-earning assets	4.23		%	4.33		%	(10		)	bps
Core yield on interest-earning assets (1)	4.16		%	4.27		%	(11		)	bps
Average interest-bearing liabilities	$	5,523,926		$	5,134,310		$	389,616
Interest expense	$	7,005		$	6,038		$	967
Cost of interest-bearing liabilities	0.51		%	0.47		%	4			bps
Core cost of interest-bearing liabilities (1)	0.52		%	0.53		%	(1		)	bps
Cost of funds	0.39		%	0.36		%	3			bps
Core cost of funds (1)	0.40		%	0.41		%	(1		)	bps
Net Interest Income (FTE)	$	68,227		$	66,107		$	2,120
Net Interest Margin (FTE)	3.84		%	3.97		%	(13		)	bps
Core Net Interest Margin (FTE) (1)	3.76		%	3.86		%	(10		)	bps

(1) Core metrics exclude the impact of acquisition accounting accretion and amortization adjustments in net interest income.

For the second quarter of 2016, tax-equivalent net interest income was $68.2 million, an increase of $2.1 million from the second quarter of 2015, primarily driven by higher average loan balances. Net accretion related to acquisition accounting decreased $401,000 from the second quarter of 2015 to $1.4 million in the second quarter of 2016. The second quarter 2016 tax-equivalent net interest margin decreased by 13 basis points to 3.84% compared to 3.97% in the comparable quarter in the prior year. Core tax-equivalent net interest margin (which excludes the 8 basis point impact of acquisition accounting accretion in the second quarter of 2016 and 11 basis points in the second quarter of 2015) decreased by 10 basis points to 3.76% in the second quarter of 2016 from 3.86% in the second quarter of 2015. The decrease in core tax-equivalent net interest margin was driven by the 11 basis point decline in interest-earning asset yields outpacing the 1 basis point reduction in cost of funds. The decline in interest-earning asset yields was primarily driven by lower loan yields, as new and renewed loans were originated and re-priced at lower rates.

-48-



	For the Six Months Ended June 30,
	2016			2015			Change
	(Dollars in thousands)
Average interest-earning assets	$	7,061,307		$	6,626,704		$	434,603
Interest income (FTE)	$	148,471		$	141,907		$	6,564
Yield on interest-earning assets	4.23		%	4.32		%	(9		)	bps
Core yield on interest-earning assets (1)	4.16		%	4.27		%	(11		)	bps
Average interest-bearing liabilities	$	5,451,862		$	5,115,281		$	336,581
Interest expense	$	14,023		$	11,670		$	2,353
Cost of interest-bearing liabilities	0.52		%	0.46		%	6			bps
Core cost of interest-bearing liabilities (1)	0.52		%	0.54		%	(2		)	bps
Cost of funds	0.40		%	0.36		%	4			bps
Core cost of funds (1)	0.40		%	0.42		%	(2		)	bps
Net Interest Income (FTE)	$	134,448		$	130,237		$	4,211
Net Interest Margin (FTE)	3.83		%	3.96		%	(13		)	bps
Core Net Interest Margin (FTE) (1)	3.76		%	3.85		%	(9		)	bps

(1) Core metrics exclude the impact of acquisition accounting accretion and amortization adjustments in net interest income.

For the first six months of 2016, tax-equivalent net interest income was $134.4 million, an increase of $4.2 million from the same period of 2015, primarily driven by higher average loan balances. Net accretion related to acquisition accounting decreased $1.1 million from the first six months of 2015 to $2.5 million in the first six months of 2016. The tax-equivalent net interest margin decreased by 13 basis points to 3.83% for the first six months of 2016 compared to 3.96% in the comparable period in the prior year. Core tax-equivalent net interest margin (which excludes the 7 basis point impact of acquisition accounting accretion in the first six months of 2016 and 11 basis points in the first six months of 2015) decreased by 9 basis points to 3.76% for the first six months of 2016 from 3.85% for the first six months of 2015. The decrease in core tax-equivalent net interest margin was driven by the 11 basis point decline in interest-earning asset yields outpacing the 2 basis point reduction in cost of funds. The decline in interest-earning asset yields was primarily driven by lower loan yields, as new and renewed loans were originated and re-priced at lower rates.

-49-

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

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



	For the Three Months Ended June 30,
	2016							2015
	Average Balance			Interest Income / Expense		Yield / Rate (1)		Average Balance			Interest Income / Expense		Yield / Rate (1)
	(Dollars in thousands)
Assets:
Securities:
Taxable	$	755,655		$	4,510	2.40	%	$	720,939		$	3,860	2.15	%
Tax-exempt	447,117			5,321		4.79	%	422,404			5,179		4.92	%
Total securities	1,202,772			9,831		3.29	%	1,143,343			9,039		3.17	%
Loans, net (2) (3)	5,863,007			65,115		4.47	%	5,448,126			62,687		4.62	%
Loans held for sale	30,698			220		2.88	%	43,307			395		3.66	%
Federal funds sold	906			1		0.47	%	572			—		0.17	%
Money market investments	—			—		—	%	1			—		—	%
Interest-bearing deposits in other banks	56,244			65		0.47	%	41,091			24		0.23	%
Total earning assets	7,153,627			$	75,232	4.23	%	6,676,440			$	72,145	4.33	%
Allowance for loan losses	(35,282		)					(31,675		)
Total non-earning assets	831,231							814,681
Total assets	$	7,949,576						$	7,459,446

Liabilities and Stockholders' Equity:
Interest-bearing deposits:
Transaction and money market accounts	$	2,882,468		$	1,448	0.20	%	$	2,632,835		$	1,201	0.18	%
Regular savings	595,870			224		0.15	%	564,348			262		0.19	%
Time deposits (4)	1,164,561			2,525		0.87	%	1,233,904			2,217		0.72	%
Total interest-bearing deposits	4,642,899			4,197		0.36	%	4,431,087			3,680		0.33	%
Other borrowings (5)	881,027			2,808		1.28	%	703,223			2,358		1.34	%
Total interest-bearing liabilities	5,523,926			$	7,005	0.51	%	$	5,134,310		$	6,038	0.47	%

Noninterest-bearing liabilities:
Demand deposits	1,382,646							1,278,876
Other liabilities	55,857							55,167
Total liabilities	6,962,429							6,468,353
Stockholders' equity	987,147							991,093
Total liabilities and stockholders' equity	$	7,949,576						$	7,459,446

Net interest income				$	68,227						$	66,107

Interest rate spread (6)						3.72	%						3.86	%
Cost of funds						0.39	%						0.36	%
Net interest margin (7)						3.84	%						3.97	%

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

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

(3) Interest income on loans includes $1.3 million and $1.1 million for the three months ended June 30, 2016 and 2015, respectively, in accretion of the fair market value adjustments related to acquisitions.

(4) Interest expense on certificates of deposits includes $0 and $614,000 for the three months ended June 30, 2016 and 2015, respectively, in accretion of the fair market value adjustments related to acquisitions.

(5) Interest expense on borrowings includes $143,000 and $137,000 for the three months ended June 30, 2016 and 2015, respectively, in accretion of the fair market value adjustments related to acquisitions.

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

(7) Core net interest margin excludes purchase accounting adjustments and was 3.76% and 3.86% for the three months ended June 30, 2016 and 2015, respectively.

-50-

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



	For the Six Months Ended June 30,
	2016							2015
	Average Balance			Interest Income / Expense		Yield / Rate (1)		Average Balance			Interest Income / Expense		Yield / Rate (1)
	(Dollars in thousands)
Assets:
Securities:
Taxable	$	749,690		$	8,826	2.37	%	$	725,646		$	7,667	2.13	%
Tax-exempt	445,271			10,612		4.79	%	417,841			10,293		4.97	%
Total securities	1,194,961			19,438		3.27	%	1,143,487			17,960		3.17	%
Loans, net (2) (3)	5,786,502			128,442		4.46	%	5,404,643			123,214		4.60	%
Loans held for sale	29,001			477		3.31	%	40,901			691		3.41	%
Federal funds sold	859			2		0.47	%	681			1		0.19	%
Money market investments	—			—		—	%	1			—		—	%
Interest-bearing deposits in other banks	49,984			112		0.45	%	36,991			41		0.22	%
Total earning assets	7,061,307			$	148,471	4.23	%	6,626,704			$	141,907	4.32	%
Allowance for loan losses	(35,158		)					(32,330		)
Total non-earning assets	831,054							816,958
Total assets	$	7,857,203						$	7,411,332

Liabilities and Stockholders' Equity:
Interest-bearing deposits:
Transaction and money market accounts	$	2,846,214		$	2,841	0.20	%	$	2,612,526		$	2,361	0.18	%
Regular savings	588,397			442		0.15	%	559,876			529		0.19	%
Time deposits (4)	1,168,267			5,110		0.88	%	1,251,531			4,110		0.66	%
Total interest-bearing deposits	4,602,878			8,393		0.37	%	4,423,933			7,000		0.32	%
Other borrowings (5)	848,984			5,630		1.33	%	691,348			4,670		1.36	%
Total interest-bearing liabilities	5,451,862			$	14,023	0.52	%	$	5,115,281		$	11,670	0.46	%

Noninterest-bearing liabilities:
Demand deposits	1,359,597							1,251,201
Other liabilities	57,463							58,006
Total liabilities	6,868,922							6,424,488
Stockholders' equity	988,281							986,844
Total liabilities and stockholders' equity	$	7,857,203						$	7,411,332

Net interest income				$	134,448						$	130,237

Interest rate spread (6)						3.71	%						3.86	%
Cost of funds						0.40	%						0.36	%
Net interest margin (7)						3.83	%						3.96	%

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

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

(3) Interest income on loans includes $2.3 million and $1.7 million for the six months ended June 30, 2016 and 2015, respectively, in accretion of the fair market value adjustments related to acquisitions.

(4) Interest expense on certificates of deposits includes $0 and $1.7 million for the six months ended June 30, 2016 and 2015, respectively, in accretion of the fair market value adjustments related to acquisitions.

(5) Interest expense on borrowings includes $205,000 and $275,000 for the six months ended June 30, 2016 and 2015, respectively, in accretion of the fair market value adjustments related to acquisitions.

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

(7) Core net interest margin excludes purchase accounting adjustments and was 3.76% and 3.85% for the six months ended June 30, 2016 and 2015, respectively.

-51-

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



	Three Months Ended June 30, 2016 vs. June 30, 2015 Increase (Decrease) Due to Change in:									Six Months Ended June 30, 2016 vs. June 30, 2015 Increase (Decrease) Due to Change in:
	Volume			Rate			Total			Volume			Rate			Total
Earning Assets:
Securities:
Taxable	$	192		$	458		$	650		$	261		$	898		$	1,159
Tax-exempt	296			(154		)	142			661			(342		)	319
Total securities	488			304			792			922			556			1,478
Loans, net (1)	4,659			(2,231		)	2,428			8,538			(3,310		)	5,228
Loans held for sale	(100		)	(75		)	(175		)	(196		)	(18		)	(214		)
Federal funds sold	—			1			1			—			1			1
Interest-bearing deposits in other banks	11			30			41			18			53			71
Total earning assets	$	5,058		$	(1,971	)	$	3,087		$	9,282		$	(2,718	)	$	6,564
Interest-Bearing Liabilities:
Interest-bearing deposits:
Transaction and money market accounts	$	120		$	127		$	247		$	221		$	259		$	480
Regular savings	13			(51		)	(38		)	26			(113		)	(87		)
Time Deposits (2)	(130		)	438			308			(289		)	1,289			1,000
Total interest-bearing deposits	3			514			517			(42		)	1,435			1,393
Other borrowings (3)	572			(122		)	450			1,047			(87		)	960
Total interest-bearing liabilities	575			392			967			1,005			1,348			2,353
Change in net interest income	$	4,483		$	(2,363	)	$	2,120		$	8,277		$	(4,066	)	$	4,211

(1) The rate-related change in interest income on loans includes the impact of higher accretion of the acquisition-related fair market value adjustments of $207,000 and $652,000 for the three- and six-month change, respectively.

(2) The rate-related change in interest expense on time deposits includes the impact of lower accretion of the acquisition-related fair market value adjustments of $614,000 and $1.7 million for the three- and six-month change, respectively.

(3) The rate-related change in interest expense on other borrowings includes the impact of higher (lower) accretion of the acquisition-related fair market value adjustments of $6,000 and $69,000 for the three- and six-month change, respectively.

The Company’s fully taxable equivalent net interest margin includes the impact of acquisition accounting fair value adjustments. The net accretion impact for 2016 as well as the remaining estimated net accretion impact are reflected in the following table (dollars in thousands):



	Loan Accretion		Borrowings Accretion (Amortization)			Total
For the quarter ended March 31, 2016	$	1,084	$	62		$	1,146
For the quarter ended June 30, 2016	1,259		143			1,402
For the remaining six months of 2016	2,195		190			2,385
For the years ending:
2017	4,285		170			4,455
2018	3,815		(143		)	3,672
2019	3,018		(286		)	2,732
2020	2,477		(301		)	2,176
2021	2,112		(316		)	1,796
Thereafter	8,766		(5,306		)	3,460

-52-

Noninterest Income



	For the Three Months Ended
	June 30,						Change
	2016			2015			$			%
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	4,754		$	4,622		$	132		2.9	%
Other service charges and fees	4,418			4,051			367			9.1	%
Fiduciary and asset management fees	2,333			2,312			21			0.9	%
Mortgage banking income, net	2,972			2,574			398			15.5	%
Gains on securities transactions, net	3			404			(401		)	(99.3	)%
Bank owned life insurance income	1,361			1,134			227			20.0	%
Other operating income	2,152			1,115			1,037			93.0	%
Total noninterest income	17,993			16,212			$	1,781		11.0	%

Mortgage segment operations	$	(3,207	)	(2,860		)	$	(347	)	12.1	%
Intercompany eliminations	154			171			(17		)	(9.9	)%
Community Bank segment	$	14,940		$	13,523		$	1,417		10.5	%

For the quarter ended June 30, 2016, noninterest income increased $1.8 million, or 11.0%, to $18.0 million from $16.2 million for the second quarter of 2015. Customer-related fee income increased $499,000 due to higher overdraft and debit card interchange fees. Mortgage banking income increased $398,000 related to higher gain on sale margins. Other operating income increased $1.0 million from the prior year primarily due to an increase in loan-related interest rate swap fees. These increases were partially offset by a decrease in gains on securities transactions of $401,000 in the current quarter.



	For the Six Months Ended
	June 30,						Change
	2016			2015			$			%
	(Dollars in thousands)
Noninterest income:
Service charges on deposit accounts	$	9,488		$	8,835		$	653		7.4	%
Other service charges and fees	8,574			7,634			940			12.3	%
Fiduciary and asset management fees	4,471			4,531			(60		)	(1.3	)%
Mortgage banking income, net	5,117			4,952			165			3.3	%
Gains on securities transactions, net	146			597			(451		)	(75.5	)%
Bank owned life insurance income	2,734			2,269			465			20.5	%
Other operating income	3,377			2,448			929			37.9	%
Total noninterest income	33,907			31,266			$	2,641		8.4	%

Mortgage segment operations	$	(5,684	)	(5,236		)	$	(448	)	8.6	%
Intercompany eliminations	325			341			(16		)	(4.7	)%
Community Bank segment	$	28,548		$	26,371		$	2,177		8.3	%

For the six months ended June 30, 2016, noninterest income increased $2.6 million, or 8.4%, to $33.9 million from $31.3 million for the first six months of 2015. Customer-related fee income increased $1.6 million due to higher overdraft, debit card interchange, and letter of credit fees. Bank owned life insurance increased $465,000 compared to the prior year due to increased investments in bank owned life insurance at the end of 2015, and other operating income increased $929,000, primarily related to higher loan-related interest rate swap fees. These increases were partially offset by a decrease in gains on securities transactions of $451,000 in the first six months of 2016.

-53-

Noninterest expense



	For the Three Months Ended
	June 30,						Change
	2016			2015			$			%
	(Dollars in thousands)
Noninterest expense:
Salaries and benefits	$	28,519		$	25,561		$	2,958		11.6	%
Occupancy expenses	4,809			5,173			(364		)	(7.0	)%
Furniture and equipment expenses	2,595			2,989			(394		)	(13.2	)%
Technology and data processing	3,608			3,216			392			12.2	%
Professional services	2,548			1,669			879			52.7	%
Marketing and advertising expense	1,924			2,372			(448		)	(18.9	)%
OREO and credit-related expenses ⁽¹⁾	894			1,965			(1,071		)	(54.5	)%
Other operating expenses	10,354			12,296			(1,942		)	(15.8	)%
Total noninterest expense	$	55,251		$	55,241		$	10		—	%

Mortgage segment operations	$	(2,639	)	$	(3,047	)	$	408		(13.4	)%
Intercompany eliminations	154			171			(17		)	(9.9	)%
Community Bank segment	$	52,766		$	52,365		$	401		0.8	%

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

For the quarter ended June 30, 2016, noninterest expense remained consistent with the second quarter of 2015 at $55.3 million. Salaries and benefits expense increased $3.0 million primarily related to annual merit adjustments as well as increases in incentive and equity-based compensation and benefit-related costs. Professional fees increased $879,000 due to higher project-related consulting expenses, and technology and software costs increased $392,000 due to investments in infrastructure to support the Company's growth. The majority of declines in noninterest expense were related to non-recurring branch closure costs of $1.3 million recorded in the second quarter of 2015 and decreases in OREO and credit-related costs of $1.1 million related to lower valuation adjustments and legal-related expenses as well as lower losses on sales of OREO. Other declines in noninterest expenses were related to a decrease in marketing and advertising expense of $448,000 due to timing of advertising campaigns, a decrease in furniture and equipment expenses of $394,000 related to lower depreciation expenses, lower core deposit intangible amortization expense of $393,000, and a decline in occupancy expenses of $364,000 due to lower rental expenses.



	For the Six Months Ended
	June 30,						Change
	2016			2015			$			%
	(Dollars in thousands)
Noninterest expense:
Salaries and benefits	$	56,567		$	53,052		$	3,515		6.6	%
Occupancy expenses	9,785			10,305			(520		)	(5.0	)%
Furniture and equipment expenses	5,232			5,803			(571		)	(9.8	)%
Technology and data processing	7,422			6,471			951			14.7	%
Professional services	4,537			3,017			1,520			50.4	%
Marketing and advertising expense	3,863			4,060			(197		)	(4.9	)%
OREO and credit-related expenses ⁽¹⁾	1,463			3,152			(1,689		)	(53.6	)%
Other operating expenses	20,654			23,221			(2,567		)	(11.1	)%
Total noninterest expense	$	109,523		$	109,081		$	442		0.4	%

Mortgage segment operations	$	(5,238	)	$	(6,085	)	$	847		(13.9	)%
Intercompany eliminations	325			341			(16		)	(4.7	)%
Community Bank segment	$	104,610		$	103,337		$	1,273		1.2	%

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

-54-

For the six months ended June 30, 2016, noninterest expense increased $422,000 to $109.5 million from $109.1 million when compared to the first six months of 2015. Salaries and benefits expense increased $3.5 million primarily related to annual merit adjustments as well as increases in incentive and equity-based compensation and benefit-related costs. Professional fees increased $1.5 million due to higher project-related consulting expenses, and technology and software costs increased $951,000 due to investments in infrastructure to support the Company's growth. These increases were partially offset by declines in OREO and credit-related costs of $1.7 million related to lower valuation adjustments and OREO and legal-related expenses as well as lower non-recurring branch closure costs of $1.0 million in the current year. Other declines in noninterest expenses were related to lower core deposit intangible amortization expense of $736,000, a decrease in furniture and equipment expenses of $571,000 related to lower depreciation expenses, lower occupancy expenses of $520,000 due to lower rental expenses, a decline in printing costs of $360,000, and lower communications expenses of $306,000.

SEGMENT INFORMATION

Community Bank Segment

For the three months ended June 30, 2016, the community bank segment reported net income of $18.8 million, which was an increase of $3.5 million from the second quarter of 2015. Net interest income increased $2.0 million in the current quarter to $65.5 million at June 30, 2016, primarily driven by higher average loan balances. The provision for credit losses for the quarter ended June 30, 2016 was $2.3 million, a decrease of $1.4 million compared to the same quarter one year ago. The decrease in the provision for loan losses in the current period compared to the same period in the prior year was primarily driven by lower charge-off levels and improving asset quality metrics.

Noninterest income increased $1.4 million, or 10.5%, from $13.5 million in the second quarter of 2015 to $14.9 million in the second quarter of 2016. Customer-related noninterest income (service charges on deposit accounts and other service charges) increased $499,000 primarily due to higher overdraft fees and debit card interchange fees. Other increases in noninterest income were related to an increase in income from bank owned life insurance of $227,000 and an increase in loan-related interest-rate swap fees of $909,000 in the current quarter.

Noninterest expense increased $401,000, or 0.8%, from $52.4 million in the second quarter of 2015 to $52.8 million in the current quarter. The increase in noninterest expense is driven by increases in salaries and benefits expense primarily related to annual merit adjustments and increases in incentive and equity-based compensation and benefit-related costs, increases in technology and software costs, and increases in professional fees due to higher project-related consulting expenses. These increases in noninterest expense were partially offset by decreases in OREO and credit-related expenses and other operating expenses as well as non-recurring branch closure costs recorded in the second quarter of 2015. The community banking segment’s efficiency ratio (tax-effected) was 63.77% compared to 66.07% for the second quarter of 2015.

For the six months ended June 30, 2016, the community bank segment reported net income of $35.7 million, which was $4.5 million higher than net income in the first six months of 2015. Net interest income increased $3.7 million from $125.2 million in the first six months of 2015 to $128.9 million in the first six months of 2016, primarily driven by loan growth. The provision for credit losses for the six months ended June 30, 2016 was $4.8 million, a decrease of $690,000 compared to the same period a year ago. The decrease in the provision for loan losses in the current period compared to the same period in the prior year was primarily driven by lower charge-off levels and improving asset quality metrics.

Noninterest income increased $2.2 million, or 8.3%, from $26.4 million in the second quarter of 2015 to $28.5 million in the second quarter of 2016. Customer-related noninterest income (service charges on deposit accounts and other service charges) increased $1.6 million primarily due to higher overdraft, debit card interchange, and letter of credit fees. Other increases in noninterest income were related to an increase in income from bank owned life insurance of $465,000 and an increase in loan-related interest-rate swap fees of $1.4 million in the first six months of 2016.

Noninterest expense increased $1.3 million, or 1.2%, from $103.3 million in the second quarter of 2015 to $104.6 million in the current quarter. The increase in noninterest expense is driven by increases in salaries and benefits expense primarily related to annual merit adjustments and increases in incentive and equity-based compensation and benefit-related costs, increases in technology and software costs, and increases in professional fees due to higher project-related consulting expense. These increases in noninterest expense were partially offset by decreases in OREO and credit related expenses, branch closure costs, and other operating expenses. The community banking segment’s efficiency ratio (tax-effected) was 64.51% compared to 66.25% for the first six months of 2015.

-55-

Mortgage Segment

The mortgage segment reported net income of $539,000 for the second quarter of 2016, an improvement of $444,000 from net income of $95,000 in the second quarter of 2015. The improvement was primarily due to a reduction in noninterest expense of $408,000, largely a result of cost control initiatives in personnel costs as well as lower volume-driven expenses. Mortgage banking income, net of commissions, increased $398,000 to $3.0 million in the current quarter due to increased gain on sale margins.

The mortgage segment reported net income of $593,000 for the first six months of 2016, an improvement of $765,000 from a net loss of $172,000 in the first six months of 2015. The improvement was primarily due to a reduction in noninterest expense of $847,000, largely a result of cost control initiatives in personnel costs as well as lower volume-driven expenses. Mortgage banking income, net of commissions, increased $165,000 to $5.1 million in the first six months of 2016 due to increased gain on sale margins, despite lower origination volume of $40.7 million, or 14.6%, as volume declined from $279.0 million for the first six months of 2015 to $238.3 million for the first six months of 2016.

Income Taxes

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

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

The effective tax rate for the three months ended June 30, 2016 and 2015 was 26.2% and 27.0%, respectively; the effective tax rate for the six months ended June 30, 2016 and 2015 was 25.9% and 26.9%, respectively. The decrease in the effective tax rate is primarily related to increases in tax-exempt interest income on the investment portfolio and tax-exempt bank owned life insurance income.

BALANCE SHEET

Assets

At June 30, 2016, total assets were $8.1 billion, an increase of $407.3 million, from $7.7 billion at December 31, 2015. The increase in assets was mostly related to loan growth.

Loans held for investment, net of deferred fees and costs, were $5.9 billion at June 30, 2016, an increase of $269.6 million, or 9.6% (annualized), from December 31, 2015. The increase was primarily driven by growth in non-owner occupied commercial real estate, commercial and industrial, and consumer loans. Quarterly average loans increased $441.4 million, or 8.1%, from the same quarter in the prior year, adjusting for the sale of the credit card portfolio in the third quarter of 2015. For additional information on the Company’s loan activity, please refer to “Loan Portfolio” below or Note 3 “Loans and Allowance for Loan Losses” in Part I, Item 1 – Financial Statements, of this report.

Liabilities and Stockholders’ Equity

At June 30, 2016, total liabilities were $7.1 billion, an increase of $413.4 million from December 31, 2015.


•	Total deposits at June 30, 2016 were $6.1 billion, an increase of $131.9 million, or 4.4% (annualized), when compared to $6.0 billion at December 31, 2015, while quarterly average deposits increased $315.6 million, or 5.5%, from June 30, 2015. The net increase in deposits from year-end 2015 was primarily related to increases in low-cost

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deposits, partially offset by continued run-off in time deposits. For further discussion on this topic, see “Deposits” below.

•

The Company’s short term borrowings generally include secured financing transactions, such as customer repurchase agreements, advances from the FHLB, and other lines of credit. Short-term borrowings at June 30, 2016 were $678.3 million, an increase of $289.3 million from December 31, 2015, primarily due to an increase in FHLB advances. For additional information on the Company’s borrowings activity, please refer to Note 5 “Borrowings” in Part I, Item 1 – Financial Statements, of this report.

At June 30, 2016, stockholders’ equity was $989.2 million, a decrease of $6.2 million from $995.4 million reported at December 31, 2015. The Company’s capital ratios continue to exceed the minimum capital requirements for regulatory purposes but have decreased from prior periods primarily due to share repurchases. The total risk-based capital ratios at June 30, 2016 and December 31, 2015 were 11.79% and 12.46%, respectively. The Tier 1 risk-based capital ratios were 11.27% and 11.93% at June 30, 2016 and December 31, 2015, respectively. The common equity Tier 1 risk-based capital ratios were 9.94% and 10.55% at June 30, 2016 and December 31, 2015, respectively. The Company’s common equity to total asset ratios at June 30, 2016 and December 31, 2015 were 12.21% and 12.94%, respectively, while its tangible common equity to tangible assets ratios were 8.59% and 9.20%, respectively, at the same dates.

On October 29, 2015, the Company’s Board of Directors authorized a share repurchase program to purchase up to $25.0 million worth of the Company’s common stock on the open market or in privately negotiated transactions. This share repurchase program was completed on February 19, 2016. On February 25, 2016, the Company’s Board of Directors authorized a new share repurchase program to purchase up to $25.0 million worth of the Company’s common stock on the open market or in privately negotiated transactions. The Company repurchased approximately 1.3 million shares as of June 30, 2016 and had approximately $15.5 million available for repurchase under the current program.

Also, the Company declared and paid a cash dividend of $0.19 per share during the second quarter of 2016, consistent with the dividend paid in the prior quarter, and an increase of $0.02 per share, or 11.8%, compared to the dividends paid during the same quarter in the prior year. For the six months ended June 30, 2016, the Company paid dividends of $0.38, which is an increase of $0.06 or 18.8% compared to the dividends paid during the first six months of 2015.

Securities

At June 30, 2016, the Company had total investments in the amount of $1.2 billion, or 15.0% of total assets, as compared to $1.2 billion, or 15.1% of total assets, at December 31, 2015. The Company seeks to diversify its portfolio to minimize risk. It focuses on purchasing mortgage-backed securities for cash flow and reinvestment opportunities and securities issued by states and political subdivisions due to the tax benefits and the higher yield offered from these securities. The majority of the Company’s mortgage-backed securities are investment grade. The investment portfolio has a high percentage of municipals and mortgage-backed securities; therefore a higher taxable equivalent yield exists on the portfolio compared to its peers. The Company does not engage in structured derivative or hedging activities within the investment portfolio.

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



	June 30, 2016		December 31, 2015
Available for Sale:
Obligations of states and political subdivisions	$	272,786	$	268,079
Corporate and other bonds	108,579		75,979
Mortgage-backed securities	554,964		548,171
Other securities	13,334		11,063
Total securities available for sale, at fair value	949,663		903,292

Held to Maturity:
Obligations of states and political subdivisions, at carrying value	202,917		205,374

Federal Reserve Bank stock	23,808		23,808
Federal Home Loan Bank stock	38,398		28,020
Total restricted stock, at cost	62,206		51,828
Total investments	$	1,214,786	$	1,160,494

During each quarter and at year end, the Company conducts an assessment of the securities portfolio for OTTI consideration. No OTTI was recognized for the quarter ended June 30, 2016. For the year ended December 31, 2015, the Company determined that a municipal security in the available for sale portfolio incurred credit-related OTTI of $300,000. During the quarter ended March 31, 2016, the municipal security was sold. As a result, the Company recognized an additional loss on sale of the previously written down security. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes, and credit risk changes, to determine whether adjustments are needed. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

The following table summarizes the contractual maturity of securities available for sale at fair value and their weighted average yields as of June 30, 2016 (dollars in thousands):



	1 Year or Less		1 - 5 Years		5 - 10 Years		Over 10 Years		Total
Mortgage backed securities:
Amortized cost	$	—	$	48,118	$	189,283	$	308,027	$	545,428
Fair value	—		48,721		193,017		313,226		554,964
Weighted average yield ⁽¹⁾	—		1.97		2.15		2.12		2.12

Obligations of states and political subdivisions:
Amortized cost	5,091		48,506		82,603		122,768		258,968
Fair value	5,177		51,084		87,244		129,281		272,786
Weighted average yield ⁽¹⁾	7.06		4.79		4.62		4.08		4.45

Corporate bonds and other securities:
Amortized cost	5,785		5,534		46,238		65,485		123,042
Fair value	5,835		5,534		46,216		64,328		121,913
Weighted average yield ⁽¹⁾	0.75		0.57		3.92		2.66		2.95

Total securities available for sale:
Amortized cost	10,876		102,158		318,124		496,280		927,438
Fair value	11,012		105,339		326,477		506,835		949,663
Weighted average yield ⁽¹⁾	3.70		3.24		3.05		2.67		2.88

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

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The following table summarizes the contractual maturity of securities held to maturity at carrying value and their weighted average yields as of June 30, 2016 (dollars in thousands):



	1 Year or Less		1 - 5 Years		5 - 10 Years		Over 10 Years		Total
Obligations of states and political subdivisions:
Carrying Value	$	857	$	18,122	$	45,802	$	138,136	$	202,917
Fair value	857		18,564		47,469		145,059		211,949
Weighted average yield ⁽¹⁾	0.69		2.40		3.02		3.43		3.23

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

As of June 30, 2016, the Company maintained a diversified municipal bond portfolio with approximately 74% of its holdings in general obligation issues and the remainder backed by revenue bonds. Issuances within the State of Texas represented 13%, the State of Washington represented 12%, and the Commonwealth of Virginia represented 12% of the municipal portfolio; no other state had a concentration above 10%. Substantially all municipal holdings are considered investment grade by Moody’s or Standard & Poor’s. The non-investment grade securities are principally insured Texas municipalities with no underlying rating. When purchasing municipal securities, the Company focuses on strong underlying ratings for general obligation issuers or bonds backed by essential service revenues.

Liquidity

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

As of June 30, 2016, the cash, interest-bearing deposits in other banks, money market investments, federal funds sold, loans held for sale, and loans that mature within one year totaled $2.1 billion, or 28.5%, of total earning assets. As of June 30, 2016, approximately $1.8 billion, or 30.8%, of total loans are scheduled to mature within one year based on contractual maturity, adjusted for expected prepayments.

Loan Portfolio

Loans, net of deferred fees and costs, were $5.9 billion at June 30, 2016, $5.7 billion at December 31, 2015, and $5.5 billion at June 30, 2015. Loans secured by real estate continue to represent the Company’s largest category, comprising 81.6% of the total loan portfolio at June 30, 2016.

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



	June 30, 2016				March 31, 2016				December 31, 2015				September 30, 2015				June 30, 2015
Loans secured by real estate:
Residential 1-4 family	$	941,446	15.8	%	$	926,556	16.0	%	$	925,490	16.3	%	$	935,266	16.9	%	$	937,557	17.0	%
Commercial	2,202,625		37.1	%	2,145,454		37.2	%	2,130,566		37.6	%	2,087,186		37.6	%	2,092,228		38.0	%
Construction, land development and other land loans	765,997		12.9	%	776,698		13.4	%	749,720		13.2	%	694,644		12.5	%	671,233		12.2	%
Second mortgages	51,014		0.9	%	51,921		0.9	%	52,977		0.9	%	52,547		0.9	%	54,224		1.0	%
Equity lines of credit	519,196		8.7	%	517,122		9.0	%	517,050		9.1	%	514,730		9.3	%	512,499		9.3	%
Multifamily	337,723		5.7	%	323,270		5.6	%	322,528		5.7	%	329,959		6.0	%	316,474		5.7	%
Farm land	30,384		0.5	%	29,724		0.5	%	28,963		0.5	%	26,984		0.5	%	25,061		0.5	%
Total real estate loans	4,848,385		81.6	%	4,770,745		82.6	%	4,727,294		83.3	%	4,641,316		83.7	%	4,609,276		83.7	%

Commercial & industrial loans	469,054		7.9	%	453,208		7.8	%	435,366		7.7	%	409,654		7.4	%	426,024		7.7	%

Consumer installment loans
Personal	510,684		8.6	%	447,341		7.7	%	403,857		7.1	%	389,379		7.0	%	354,485		6.4	%
Credit cards	—		—	%	—		—	%	—		—	%	—		—	%	26,349		0.5	%
Total consumer installment loans	510,684		8.6	%	447,341		7.7	%	403,857		7.1	%	389,379		7.0	%	380,834		6.9	%

All other loans	112,975		1.9	%	109,208		1.9	%	104,945		1.9	%	103,272		1.9	%	94,251		1.7	%
Gross loans	$	5,941,098	100.0	%	$	5,780,502	100.0	%	$	5,671,462	100.0	%	$	5,543,621	100.0	%	$	5,510,385	100.0	%

The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of June 30, 2016 (dollars in thousands):



						Variable Rate						Fixed Rate
	Total Maturities			Less than 1 year		Total		1-5 years		More than 5 years		Total		1-5 years		More than 5 years
Loans secured by real estate:
Residential 1-4 family	$	941,446		$	80,299	$	347,195	$	15,781	$	331,414	$	513,952	$	284,997	$	228,955
Commercial	2,202,625		��	233,354		677,040		178,687		498,353		1,292,231		957,832		334,399
Construction, land development and other land loans	765,997			449,333		205,032		173,682		31,350		111,632		87,643		23,989
Second mortgages	51,014			4,084		5,053		922		4,131		41,877		15,192		26,685
Equity lines of credit	519,196			37,343		481,583		39,585		441,998		270		145		125
Multifamily	337,723			26,111		98,195		28,885		69,310		213,417		167,240		46,177
Farm land	30,384			6,864		8,159		4,751		3,408		15,361		10,910		4,451
Total real estate loans	4,848,385			837,388		1,822,257		442,293		1,379,964		2,188,740		1,523,959		664,781

Commercial & industrial loans	469,054			149,201		123,130		114,102		9,028		196,723		134,817		61,906
Consumer loans	510,684			15,017		7,872		7,656		216		487,795		205,446		282,349
All other loans	112,975			12,766		40,550		11,961		28,589		59,659		22,937		36,722
Gross loans	$	5,941,098		$	1,014,372	$	1,993,809	$	576,012	$	1,417,797	$	2,932,917	$	1,887,159	$	1,045,758

While the current economic environment is challenging, the Company remains committed to originating soundly underwritten loans to qualifying borrowers within its markets. The Company is focused on providing community-based financial services and discourages the origination of portfolio loans outside of its principal trade areas. As reflected in the loan table, at June 30, 2016, the largest component of the Company’s loan portfolio consisted of real estate loans, concentrated in commercial, construction, and residential 1-4 family. The risks attributable to these concentrations are mitigated by the Company’s credit underwriting and monitoring processes, including oversight by a centralized credit administration function and credit policy and risk management committee, as well as seasoned bankers focusing their lending to borrowers with proven track records in markets with which the Company is familiar. UMG serves as a mortgage brokerage operation, selling the majority of its loan production in the secondary market or selling loans to meet the Bank’s current asset/liability management needs.

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Asset Quality

Overview

During the second quarter of 2016, the Company experienced declines in total past due loan levels and OREO balances from the prior year. OREO balances declined from December 31, 2015 primarily as a result of sales of foreclosed property. Past due and nonaccrual loans decreased from December 31, 2015. The combined past due and nonaccrual loan balances decreased $18.7 million, or 34.0%, from December 31, 2015. The allowance for loan losses increased from December 31, 2015 due to loan growth in the current period.

Troubled Debt Restructurings

The total recorded investment in TDRs as of June 30, 2016 was $13.5 million, an increase of $842,000, or 6.6%, from $12.7 million at December 31, 2015 and a decline of $8.6 million, or 38.8%, from $22.1 million at June 30, 2015. Of the $13.5 million of TDRs at June 30, 2016, $11.9 million, or 87.8%, were considered performing while the remaining $1.7 million were considered nonperforming. Loans removed from TDR status represent restructured loans with a market rate of interest at the time of the restructuring. These loans have performed in accordance with their modified terms for twelve consecutive months and were no longer considered impaired. Loans removed from TDR status are collectively evaluated for impairment; due to the significant improvement in the expected future cash flows, these loans are grouped based on their primary risk characteristics, typically using the Company’s internal risk rating system as its primary credit quality indicator. Impairment is measured based on historical loss experience taking into consideration environmental factors. The significant majority of these loans have been subject to new credit decisions due to the improvement in the expected future cash flows, the financial condition of the borrower, and other factors considered during re-underwriting. The TDR activity during the quarter did not have a material impact on the Company’s allowance for loan losses, financial condition, or results of operations.

Nonperforming Assets

At June 30, 2016, nonperforming assets totaled $24.2 million, a decrease of $3.0 million, or 11.0%, from December 31, 2015 and a decline of $7.5 million, or 23.6%, from a year ago. In addition, NPAs as a percentage of total outstanding loans decreased 7 basis points to 0.41% in the current quarter from 0.48% as of December 31, 2015 and declined 17 basis points from 0.58% a year earlier. All nonaccrual and past due loan metrics discussed below exclude PCI loans, which totaled $67.2 million (net of fair value mark of $15.9 million) at June 30, 2016.

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



	June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			June 30, 2015
Nonaccrual loans, excluding PCI loans	$	10,861		$	13,092		$	11,936		$	12,966		$	9,521
Foreclosed properties	10,076			10,941			11,994			18,789			18,917
Former bank premises	3,305			3,305			3,305			3,305			3,305
Total nonperforming assets	24,242			27,338			27,235			35,060			31,743
Loans past due 90 days and accruing interest	3,533			5,723			5,829			5,164			10,903
Total nonperforming assets and loans past due 90 days and accruing interest	$	27,775		$	33,061		$	33,064		$	40,224		$	42,646

Performing Restructurings	$	11,885		$	11,486		$	10,780		$	9,468		$	19,880

Balances
Allowance for loan losses	$	35,074		$	34,399		$	34,047		$	33,269		$	32,344
Average loans, net of deferred fees and costs	5,863,007			5,709,998			5,612,366			5,525,119			5,448,126
Loans, net of deferred fees and costs	5,941,098			5,780,502			5,671,462			5,543,621			5,510,385

Ratios
NPAs to total loans	0.41		%	0.47		%	0.48		%	0.63		%	0.58		%
NPAs & loans 90 days past due to total loans	0.47		%	0.57		%	0.58		%	0.73		%	0.77		%
NPAs to total loans & OREO	0.41		%	0.47		%	0.48		%	0.63		%	0.57		%
NPAs & loans 90 days past due to total loans & OREO	0.47		%	0.57		%	0.58		%	0.72		%	0.77		%
ALL to nonaccrual loans	322.94		%	262.75		%	285.25		%	256.59		%	339.71		%
ALL to nonaccrual loans & loans 90 days past due	243.67		%	182.83		%	191.65		%	183.50		%	158.36		%

Nonperforming assets at June 30, 2016 included $10.9 million in nonaccrual loans, a net decrease of $1.1 million, or 9.0%, from December 31, 2015 and an increase of $1.3 million, or 14.1%, from June 30, 2015. The following table shows the activity in nonaccrual loans for the quarter ended (dollars in thousands):



	June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			June 30, 2015
Beginning Balance	$	13,092		$	11,936		$	12,966		$	9,521		$	17,385
Net customer payments	(2,859		)	(1,204		)	(1,493		)	(1,104		)	(4,647		)
Additions	2,568			5,150			2,344			5,213			581
Charge-offs	(1,096		)	(1,446		)	(1,245		)	(541		)	(2,171		)
Loans returning to accruing status	(396		)	(932		)	(402		)	(123		)	(919		)
Transfers to OREO	(448		)	(412		)	(234		)	—			(708		)
Ending Balance	$	10,861		$	13,092		$	11,936		$	12,966		$	9,521

The additions to nonaccrual loans in the second quarter of 2016 were comprised of several smaller credit relationships, the majority of which were secured by residential 1-4 family property and owner-occupied commercial real estate.

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



	June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			June 30, 2015
Construction and Land Development	$	1,604		$	2,156		$	2,113		$	3,142		$	2,401
Commercial Real Estate - Owner Occupied	1,661			2,816			3,904			3,989			3,625
Commercial Real Estate - Non-owner Occupied	—			—			100			200			200
Commercial and Industrial	263			810			429			403			564
Residential 1-4 Family	5,448			5,696			3,563			3,960			2,128
HELOC	1,495			973			1,348			937			493
Consumer and All Other	390			641			479			335			110
Total	$	10,861		$	13,092		$	11,936		$	12,966		$	9,521

Coverage Ratio	322.94		%	262.75		%	285.25		%	256.59		%	339.71		%

Nonperforming assets at June 30, 2016 also included $13.4 million in OREO, a decrease of $1.9 million, or 12.5%, from December 31, 2015 and a decrease of $8.8 million, or 39.8%, from the prior year. The following table shows the activity in OREO for the quarters ended (dollars in thousands):



	June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			June 30, 2015
Beginning Balance	$	14,246		$	15,299		$	22,094		$	22,222		$	25,434
Additions of foreclosed property	501			456			234			1,082			904
Additions of former bank premises	—			—			1,822			—			—
Capitalized improvements	—			—			—			9			243
Valuation adjustments	(274		)	(126		)	(4,229		)	(473		)	(710		)
Proceeds from sales	(1,086		)	(1,390		)	(4,961		)	(767		)	(3,511		)
Gains (losses) from sales	(6		)	7			339			21			(138		)
Ending Balance	$	13,381		$	14,246		$	15,299		$	22,094		$	22,222

During the second quarter of 2016, the majority of sales of OREO were related to residential real estate.

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



	June 30, 2016		March 31, 2016		December 31, 2015		September 30, 2015		June 30, 2015
Land	$	4,759	$	4,874	$	5,731	$	7,139	$	7,254
Land Development	2,416		2,616		2,918		6,700		7,013
Residential Real Estate	2,412		2,707		2,601		3,517		3,217
Commercial Real Estate	489		744		744		1,433		1,433
Former Bank Premises ⁽¹⁾	3,305		3,305		3,305		3,305		3,305
Total	$	13,381	$	14,246	$	15,299	$	22,094	$	22,222

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

Past Due Loans

At June 30, 2016, total accruing past due loans were $25.3 million, or 0.43% of total loans, compared to $42.9 million, or 0.76%, at December 31, 2015 and $33.5 million, or 0.61%, a year ago. At June 30, 2016, loans past due 90 days or more and accruing interest totaled $3.5 million, or 0.06% of total loans, compared to $5.8 million, or 0.10%, at December 31, 2015 and $10.9 million, or 0.20%, a year ago.

Charge-offs and delinquencies

For the quarter ended June 30, 2016, net charge-offs were $1.6 million, or 0.11% on an annualized basis, compared to $2.2 million, or 0.16%, for the same quarter last year. For the six months ended June 30, 2016, net charge-offs were $3.8 million, or 0.13% on an annualized basis, compared to $5.3 million, or 0.20%, for the same period last year. The decrease in net

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charge-off levels is attributable to improving asset quality. The majority of net charge-offs in the second quarter of 2016 were related to commercial loans and loans secured by residential 1-4 family property.

Provision

The provision for loan losses for the quarter ended June 30, 2016 was $2.3 million, a decrease of $1.2 million compared to the same quarter a year ago. The provision for loan losses for the six months ended June 30, 2016 was $4.8 million, a decrease of $495,000 compared to the six months ended June 30, 2015. The decline in provision for loan losses in the current year compared to the prior periods was primarily driven by lower charge-off levels and improving asset quality metrics.

Allowance for Loan Losses

The allowance for loan losses of $35.1 million at June 30, 2016, is an increase of $1.0 million compared to the allowance for loan losses at December 31, 2015. The allowance for loan losses as a percentage of the total loan portfolio, unadjusted for acquisition accounting, was 0.59% at June 30, 2016, 0.60% at December 31, 2015, and 0.59% at June 30, 2015. The ALL as a percentage of the total loan portfolio, adjusted for acquisition accounting (non-GAAP), was 0.92% at June 30, 2016, a decrease from 0.98% at December 31, 2015 and 1.02% at June 30, 2015. In acquisition accounting, there is no carryover of previously established allowance for loan losses, as acquired loans are recorded at fair value.

The nonaccrual loan coverage ratio was 322.9% at June 30, 2016, compared to 285.3% at December 31, 2015, and 339.7% at June 30, 2015. The current level of the allowance for loan losses reflects specific reserves related to nonperforming loans, current risk ratings on loans, net charge-off activity, loan growth, delinquency trends, and other credit risk factors that the Company considers important in assessing the adequacy of the allowance for loan losses.

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



	June 30, 2016			March 31, 2016			December 31, 2015			September 30, 2015			June 30, 2015
Balance, beginning of period	$	34,399		$	34,047		$	33,269		$	32,344		$	30,977
Loans charged-off:
Commercial	668			617			280			388			1,022
Real estate	1,299			1,427			1,360			1,480			1,722
Consumer	318			936			525			468			461
Total loans charged-off	2,285			2,980			2,165			2,336			3,205
Recoveries:
Commercial	117			238			182			559			120
Real estate	281			391			561			565			720
Consumer	262			199			190			175			183
Total recoveries	660			828			933			1,299			1,023
Net charge-offs	1,625			2,152			1,232			1,037			2,182
Provision for loan losses	2,300			2,504			2,010			1,962			3,549
Balance, end of period	$	35,074		$	34,399		$	34,047		$	33,269		$	32,344

Allowance for loan losses to loans	0.59		%	0.60		%	0.60		%	0.60		%	0.59		%
ALL to loans, adjusted for acquisition accounting (Non-GAAP)	0.92		%	0.95		%	0.98		%	1.01		%	1.02		%
Net charge-offs to average loans	0.11		%	0.15		%	0.09		%	0.07		%	0.16		%
Provision to average loans	0.16		%	0.18		%	0.14		%	0.14		%	0.26		%

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



	June 30, 2016				March 31, 2016				December 31, 2015				September 30, 2015				June 30, 2015
	$		% ⁽¹⁾		$		% ⁽¹⁾		$		% ⁽¹⁾		$		% ⁽¹⁾		$		% ⁽¹⁾
Commercial	$	4,026	7.9	%	$	4,225	7.8	%	$	3,163	7.7	%	$	2,790	7.4	%	$	3,092	7.7	%
Real estate	28,061		81.6	%	27,576		82.6	%	27,537		83.3	%	26,638		83.7	%	25,731		83.7	%
Consumer	2,987		10.5	%	2,598		9.6	%	3,347		9.0	%	3,841		8.9	%	3,521		8.6	%
Total	$	35,074	100.0	%	$	34,399	100.0	%	$	34,047	100.0	%	$	33,269	100.0	%	$	32,344	100.0	%

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

Deposits

As of June 30, 2016, total deposits were $6.1 billion, an increase of $131.9 million, or 4.4% (annualized), from December 31, 2015. Total interest-bearing deposits consist of NOW, money market, savings, and time deposit account balances. Total time deposit balances of $1.2 billion accounted for 25.0% of total interest-bearing deposits at June 30, 2016.

The following table presents the deposit balances by major categories as of the quarters ended (dollars in thousands):



	June 30, 2016				December 31, 2015
Deposits:	Amount		% of total deposits		Amount		% of total deposits
Non-interest bearing	$	1,392,734	22.8	%	$	1,372,937	23.0	%
NOW accounts	1,563,297		25.7	%	1,521,906		25.5	%
Money market accounts	1,366,451		22.4	%	1,312,612		22.0	%
Savings accounts	598,622		9.8	%	572,800		9.6	%
Time deposits of $100,000 and over	521,138		8.6	%	514,286		8.7	%
Other time deposits	653,584		10.7	%	669,395		11.2	%
Total Deposits	$	6,095,826	100.0	%	$	5,963,936	100.0	%

The Company may also borrow additional funds by purchasing certificates of deposit through a nationally recognized network of financial institutions. The Company utilizes this funding source when rates are more favorable than other funding sources. As of June 30, 2016 and December 31, 2015, the Company did not have purchased certificates of deposit included in certificates of deposit on the Company’s Consolidated Balance Sheets. Maturities of time deposits as of June 30, 2016 are as follows (dollars in thousands):



	Within 3 Months		3 - 12 Months		Over 12 Months		Total
Maturities of time deposits of $100,000 and over	$	79,727	$	157,428	$	283,983	$	521,138
Maturities of other time deposits	102,757		250,486		300,341		653,584
Total time deposits	$	182,484	$	407,914	$	584,324	$	1,174,722

Capital Resources

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

In July 2013, the Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. Effective January 1, 2015, the final rules require the Company and the Bank to comply with the following minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets (increased from the prior requirement of 4.0%); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.0% of total assets (unchanged from the prior requirement). These are the initial capital requirements, which will be phased in over a four-year period. When fully phased in on January 1, 2019, the rules will require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

Beginning January 1, 2016, the capital conservation buffer requirement is being phased in at 0.625% of risk-weighted assets, and will increase by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall. The table summarizes the Company’s regulatory capital and related ratios for the periods presented (dollars in thousands):



	June 30, 2016			December 31, 2015			June 30, 2015
Common equity Tier 1 capital	$	674,608		$	691,195		$	679,743
Tier 1 capital	765,108			781,695			$	775,286
Tier 2 capital	35,496			34,346			32,624
Total risk-based capital	800,604			816,041			807,910
Risk-weighted assets	6,789,054			6,551,028			6,298,404

Capital ratios:
Common equity Tier 1 capital ratio	9.94		%	10.55		%	10.87		%
Tier 1 capital ratio	11.27		%	11.93		%	12.31		%
Total capital ratio	11.79		%	12.46		%	12.83		%
Leverage ratio (Tier 1 capital to average assets)	10.01		%	10.68		%	10.82		%
Capital conservation buffer ratio ⁽¹⁾	3.49		%	N/A			N/A
Common equity to total assets	12.21		%	12.94		%	13.18		%
Tangible common equity to tangible assets	8.59		%	9.20		%	9.30		%

(1) Calculated by subtracting the regulatory minimum capital ratio requirements from the Company's actual ratio results for Common equity, Tier 1, and Total risk based capital. The lowest of the three measures represents the Company's capital conservation buffer ratio.

NON-GAAP MEASURES

In reporting the Company’s results as of and for the periods ended June 30, 2016 and 2015, the Company has provided supplemental performance measures on a tangible basis. Tangible common equity is used in the calculation of certain capital and per share ratios. The Company believes tangible common equity and the related ratios are meaningful measures of capital adequacy because they provide a meaningful base for period-to-period and company-to-company comparisons, which the Company believes will assist investors in assessing the capital of the Company and its ability to absorb potential losses.

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

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Tangible Common Equity
Ending equity	$	989,201	$	988,134	$	989,201	$	988,134
Less: Ending goodwill	297,659		293,522		297,659		293,522
Less: Ending core deposit intangibles	19,685		27,394		19,685		27,394
Less: Ending other amortizable intangibles	3,764		—		3,764		—
Ending tangible common equity (non-GAAP)	$	668,093	$	667,218	$	668,093	$	667,218
Average equity	$	987,147	$	991,093	$	988,281	$	986,844
Less: Average goodwill	294,886		293,522		294,204		293,522
Less: Average core deposit intangibles	20,517		28,432		21,424		29,508
Less: Average other amortizable intangibles	1,241		—		620		—
Average tangible common equity (non-GAAP)	$	670,503	$	669,139	$	672,033	$	663,814

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



	June 30, 2016			December 31, 2015			June 30, 2015
Allowance for loan losses	$	35,074		$	34,047		$	32,344
Remaining fair value mark on acquired performing loans	19,092			20,819			23,010
Adjusted allowance for loan losses	$	54,166		$	54,866		$	55,354
Loans, net of deferred fees	$	5,941,098		$	5,671,462		$	5,510,385
Remaining fair value mark on acquired performing loans	19,092			20,819			23,010
Less: PCI loans, net of fair value mark	67,170			73,737			87,841
Adjusted loans, net of deferred fees	$	5,893,020		$	5,618,544		$	5,445,554
Allowance for loan losses ratio	0.59		%	0.60		%	0.59		%
Allowance for loan losses ratio, adjusted for acquisition accounting	0.92		%	0.98		%	1.02		%

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

EARNINGS SIMULATION ANALYSIS

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

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

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

The following table represents the interest rate sensitivity on net interest income for the Company across the rate paths modeled for balances as of June 30, 2016 and 2015 (dollars in thousands):



	Change In Net Interest Income June 30,
	2016				2015
	%		$		%		$
Change in Yield Curve:
+300 basis points	9.81		27,312		5.38		14,441
+200 basis points	6.73		18,723		3.61		9,699
+100 basis points	3.59		9,997		1.50		4,014
Most likely rate scenario	—		—		—		—
-100 basis points	(2.40	)	(6,690	)	(1.50	)	(4,019	)
-200 basis points	(3.22	)	(8,977	)	(4.34	)	(11,646	)
-300 basis points	(3.32	)	(9,244	)	(4.82	)	(12,949	)

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Asset sensitivity indicates that in a rising interest rate environment the Company’s net interest income would increase and in a decreasing interest rate environment the Company’s net interest income would decrease. Liability sensitivity indicates that in a rising interest rate environment the Company’s net interest income would decrease and in a decreasing interest rate environment the Company’s net interest income would increase.

As of June 30, 2016, the Company became more asset sensitive in a rising interest rate environment scenario when compared to June 30, 2015 in part due to the composition of the balance sheet and in part due to the market characteristics of certain deposit products. The Company would expect net interest income to increase with an immediate increase or shock in market rates. In the decreasing interest rate environments, the Company would expect a decline in net interest income as interest-earning assets re-price at lower rates and interest-bearing deposits remain at or near their floors. It should be noted that although net interest income simulation results are presented through the down 300 basis points interest rate environments, the Company does not believe the down 200 and 300 basis point scenarios are plausible given the current level of interest rates.

ECONOMIC VALUE SIMULATION

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

The following chart reflects the estimated change in net economic value over different rate environments using economic value simulation for the balances at the quarterly periods ended June 30, 2016 and 2015 (dollars in thousands):



	Change In Economic Value of Equity June 30,
	2016				2015
	%		$		%		$
Change in Yield Curve:
+300 basis points	1.73		22,167		(1.25	)	(16,699	)
+200 basis points	2.12		27,155		(0.10	)	(1,293	)
+100 basis points	1.53		19,570		0.54		7,171
Most likely rate scenario	—		—		—		—
-100 basis points	(4.69	)	(59,963	)	(3.31	)	(44,315	)
-200 basis points	(7.11	)	(90,938	)	(9.15	)	(122,595	)
-300 basis points	(3.74	)	(47,765	)	(10.45	)	(140,095	)

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

Compared to June 30, 2015, the Company’s economic value of equity model as of June 30, 2016 projects that an instantaneous change in market interest rates would result in more overall variation in the Company’s estimated economic value of equity in the shock up 100, 200 or 300 basis point and shock down 100 basis point interest rate scenarios, while the Company is less sensitive to market interest rates in a shock down 200 and 300 basis point scenario. The Company believes the down 200 and 300 basis point scenarios are not plausible given the current low level of interest rates.

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ITEM 4 – CONTROLS AND PROCEDURES

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

Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective at the reasonable assurance level. There was no change in the internal control over financial reporting that occurred during the quarter ended June 30, 2016 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1 – LEGAL PROCEEDINGS

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

ITEM 1A – RISK FACTORS

There have been no material changes with respect to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015.

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

(a) Sales of Unregistered Securities – None.

(b) Use of Proceeds – Not Applicable.

Stock Repurchase Program

The following information describes the Company’s common stock repurchases for the six months ended June 30, 2016:



Period	Total number of shares purchased ⁽¹⁾	Average price paid per share ($)	Approximate value of shares that may be purchased under the plan ($)
December 31, 2015			21,139,000
January 1 - January 31, 2016	380,882	23.70	12,114,000
February 1 - February 29, 2016	553,566	21.99	24,942,000
March 1 - March 31, 2016	106,164	23.55	22,442,000
April 1 - April 30, 2016	102,144	24.48	19,942,000
May 1 - May 31, 2016	82,800	26.24	17,769,000
June 1 - June 30, 2016	87,000	26.21	15,489,000
Total	1,312,556	23.35

(1) On October 29, 2015, the Company’s Board of Directors authorized a share repurchase program to purchase up to $25.0 million worth of the Company’s common stock on the open market or in privately negotiated transactions. The repurchase program was authorized through December 31, 2016, and completed in February 2016. On February 25, 2016, the Company’s Board of Directors authorized a new share repurchase program to purchase up to $25.0 million worth of the Company’s common stock on the open market or in privately negotiated transactions. The repurchase program is authorized through December 31, 2016.

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ITEM 6 – EXHIBITS

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



Exhibit No.		Description
15.01		Letter regarding unaudited interim financial information.

31.01		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

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

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

101.00		Interactive data files formatted in eXtensible Business Reporting Language for the quarter ended June 30, 2016 pursuant to Rule 405 of Regulation S-T (1): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

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SIGNATURES

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



	Union Bankshares Corporation

	(Registrant)

Date: August 4, 2016	By:	/s/ G. William Beale
		G. William Beale,
		President and Chief Executive Officer
		(principal executive officer)

Date: August 4, 2016	By:	/s/ Robert M. Gorman
		Robert M. Gorman,
		Executive Vice President and Chief Financial Officer
		(principal financial and accounting officer)

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