Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2003

Commission File No. 0-20293

UNION BANKSHARES CORPORATION

(Exact name of registrant as specified in its charter)

Virginia

54-1598552

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer Identification No.)

212 North Main Street

P.O. Box 446

Bowling Green, Virginia 22427

(Address of principal executive offices) (zipcode)

(804) 633-5031

(Registrant’s telephone number, including area code)

Indicate by checkmark 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 is an accelerated filer (as defined in Rule 12b–2 of the Exchange Act). YES x NO ¨

As of August 11, 2003, Union Bankshares Corporation had 7,606,887 shares of Common Stock outstanding.

UNION BANKSHARES CORPORATION

FORM 10-Q

June 30, 2003

INDEX

		Page
PART 1 - FINANCIAL INFORMATION

Item 1 – Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2003 (Unaudited) and December 31, 2002 (Audited)		1

Condensed Consolidated Statements of Income (Unaudited) For the three months and six months ended June 30, 2003 and 2002		2

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) For the six months ended June 30, 2003 and 2002		3

Condensed Consolidated Statements of Cash Flows (Unaudited) For the six months ended June 30, 2003 and 2002		4

Notes to Condensed Consolidated Financial Statements (Unaudited)		5-10

Independent Accountants’ Review Report		11

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		12-21

Item 3 – Quantitative and Qualitative Disclosures about Market Risk		22-23

Item 4 – Controls and Procedures		24

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings		25-26

Item 2 – Changes in Securities and Use of Proceeds		25-26

Item 3 – Defaults Upon Senior Securities		25-26

Item 4 – Submission of Matters to a Vote of Security Holders		25-26

Item 5 – Other Information		25-26

Item 6 – Exhibits and Reports on Form 8-K		25-26

Signatures		27

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share information)

	June 30, 2003		December 31, 2002
	(Unaudited)
ASSETS

Cash and cash equivalents:
Cash and due from banks	$	28,966	$	29,104
Interest-bearing deposits in other banks		1,773		909
Money market investments		199		15,142
Federal funds sold		7,150		1,247

Total cash and cash equivalents		38,088		46,402

Securities available for sale, at fair value		255,525		272,755

Loans held for sale		60,751		39,771

Loans, net of unearned income		788,792		714,764
Less allowance for loan losses		10,252		9,179

Net loans		778,540		705,585

Bank premises and equipment, net		24,766		21,577
Other real estate owned		464		774
Other assets		29,883		28,861

Total assets	$	1,188,017	$	1,115,725

LIABILITIES AND STOCKHOLDERS’ EQUITY

Noninterest-bearing demand deposits	$	152,443	$	134,172
Interest-bearing deposits:
NOW accounts		136,018		128,764
Money market accounts		94,558		88,440
Savings accounts		89,172		84,983
Time deposits of $100,000 and over		162,400		152,968
Other time deposits		323,516		308,315

Total interest-bearing deposits		805,664		763,470

Total deposits		958,107		897,642

Securities sold under agreements to repurchase		37,393		43,227
Other short-term borrowings		—		1,550
Long-term borrowings		61,764		62,219
Other liabilities		16,371		5,595

Total liabilities		1,073,635		1,010,233

Commitments and contingencies

Stockholders’ equity:
Common stock, $2 par value. Authorized 24,000,000 shares; issued and outstanding, 7,605,583 , and 7,579,707 shares, respectively		15,211		15,159
Surplus		1,795		1,442
Retained earnings		88,077		81,997
Accumulated other comprehensive income		9,299		6,894

Total stockholders’ equity		114,382		105,492

Total liabilities and stockholders’ equity	$	1,188,017	$	1,115,725

See accompanying notes to condensed consolidated financial statements.

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(dollars in thousands, except per share amounts)

	Three Months Ended June 30,					Six Months Ended June 30,
	2003		2002			2003			2002
Interest and dividend income :
Interest and fees on loans	$	13,456	$	12,472		$	26,562		$	24,669
Interest on Federal funds sold		21		37			65			93
Interest on interest-bearing deposits in other banks		8		4			12			7
Interest on money market investments		4		6			22			12
Interest and dividends on securities:
Taxable		2,123		2,432			4,346			4,873
Nontaxable		1,139		1,168			2,270			2,332

Total interest and dividend income		16,751		16,119			33,277			31,986

Interest expense:
Interest on deposits		5,035		5,034			10,122			10,249
Interest on Federal funds		7		—			8
Interest on short-term borrowings		66		116			136			223
Interest on long-term borrowings		912		922			1,818			1,835

Total interest expense		6,020		6,072			12,084			12,307

Net interest income		10,731		10,047			21,193			19,679

Provision for loan losses		645		739			1,032			1,569

Net interest income after provision for loan losses		10,086		9,308			20,161			18,110

Noninterest income:
Service charges on deposit accounts		1,238		1,015			2,283			1,860
Other service charges, commissions and fees		667		650			1,256			1,305
Gains (losses) on securities transactions, net		1		(162	)		(14	)		(161	)
Gains on sales of loans		3,963		2,071			6,748			4,214
Gains on sales of other real estate owned and bank premises, net		10		67			17			82
Other operating income		332		191			597			360

Total noninterest income		6,211		3,832			10,887			7,660

Noninterest expenses:
Salaries and benefits		6,495		5,082			12,345			10,145
Occupancy expenses		635		554			1,298			1,108
Furniture and equipment expenses		601		653			1,192			1,354
Other operating expenses		2,533		2,360			4,709			4,691

Total noninterest expenses		10,264		8,649			19,544			17,298

Income before income taxes		6,033		4,491			11,504			8,472
Income tax expense		1,697		1,038			3,224			1,961

Net income	$	4,336	$	3,453		$	8,280		$	6,511

Basic net income per share	$	0.57	$	0.46		$	1.09		$	0.86
Diluted net income per share	$	0.57	$	0.45		$	1.08		$	0.86

See accompanying notes to condensed consolidated financial statements.

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED JUNE 30, 2003 AND 2002

(dollars in thousands)

Common

Stock

Surplus

Retained

Earnings

Accumulated

Other

Comprehensive

Income (Loss)

Comprehensive

Income

Total

Balance - December 31, 2001

15,052

446

71,419

2,062

88,979

Comprehensive income:

Net income - for the six months ended June 30, 2002

6,511

Unrealized holding gains arising during the period (net of tax, $1,758)

3,413

Reclassification adjustment for losses included in net income (net of tax, $55)

106

Other comprehensive income (net of tax, $1,813)

3,519

Total comprehensive income

10,030

Cash dividends - 2002 ($.25 per share)

(1,884

)

(1,884

)

Issuance of common stock under Dividend Reinvestment Plan (9,549 shares)

196

—

215

Issuance of common stock under Incentive Stock Option Plan (6,950 shares)

Issuance of common stock in exchange for net assets in acquisition (17,156 shares)

299

333

Balance - June 30, 2002 (Unaudited)

15,119

1,011

76,046

5,581

97,757

Balance - December 31, 2002

15,159

1,442

81,997

6,894

105,492

Comprehensive income:

Net income - for the six months ended June 30, 2003

8,280

Unrealized holding gains arising during the period (net of tax, $1,234)

2,396

Reclassification adjustment for losses included in net income (net of tax, $5)

Other comprehensive income (net of tax, $1,239)

2,405

Total comprehensive income

10,685

Cash dividends - 2003 ($.29 per share)

(2,200

)

(2,200

)

Issuance of common stock under Dividend Reinvestment Plan (8,600 shares)

205

—

222

Stock repurchased under Stock Repurchase Plan (1,000 shares)

)

(22

)

(24

)

Issuance of common stock under Incentive Stock Option Plan (18,276 shares)

170

207

Balance - June 30, 2003 (Unaudited)

15,211

1,795

88,077

9,299

114,382

See accompanying notes to condensed consolidated financial statements.

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30, 2003 and 2002

(dollars in thousands)

	2003			2002
Operating activities:
Net income	$	8,280		$	6,511
Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:
Depreciation of bank premises and equipment		957			988
Amortization		813			991
Provision for loan losses		1,032			1,569
Losses on sales of securities available for sale		14			161
Gains on sales of other real estate owned and bank premises, net		(17	)		(82	)
(Increase) decrease in loans held for sale		(20,980	)		24,062
Increase (decrease) in other assets		(2,296	)		232
Increase in other liabilities		10,776			4,240

Net cash and cash equivalents provided by (used in) operating activities		(1,421	)		38,672

Investing activities:
Purchase of securities available for sale		(35,479	)		(24,364	)
Proceeds from sale of securities available for sale		4,433			5,250
Proceeds from maturities of securities available for sale		51,377			20,643
Net increase in loans		(73,987	)		(70,946	)
Purchases of bank premises and equipment		(4,400	)		(2,037	)
Proceeds from sales of bank premises and equipment		15			218
Proceeds from sales of other real estate owned		317			195

Net cash and cash equivalents used in investing activities		(57,724	)		(71,041	)

Financing activities:
Net increase in noninterest-bearing deposits		18,271			8,141
Net increase in interest-bearing deposits		42,194			21,447
Net decrease in short-term borrowings		(7,384	)		(3,492	)
Net decrease in long-term borrowings		(455	)		(456	)
Issuance of common stock		429			299
Purchase of common stock		(24	)		—
Cash dividends paid		(2,200	)		(1,884	)

Net cash and cash equivalents provided by financing activities		50,831			24,055

Decrease in cash and cash equivalents		(8,314	)		(8,314	)
Cash and cash equivalents at beginning of period		46,402			38,915

Cash and cash equivalents at end of period	$	38,088		$	30,601

Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	12,074		$	12,552
Income taxes	$	3,408		$	2,017

See accompanying notes to condensed consolidated financial statements.

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2003

ACCOUNTING POLICIES

The consolidated financial statements include the accounts of Union Bankshares Corporation and its subsidiaries (the “Company”). Significant intercompany accounts and transactions have been eliminated in consolidation.

The information contained in the financial statements is unaudited and does not include all of the information and footnotes required by auditing standards generally accepted in the United States of America 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 2002 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

STOCK COMPENSATION

The Company has a stock option plan (the “Plan”) adopted in 1993 that authorizes the reservation of up to 400,000 shares of common stock and provides for the granting of incentive options to certain employees. Under the Plan, the option price cannot be less than the fair market value of the stock on the date granted. An option’s maximum term is ten years from the date of grant. Options granted under the Plan may be subject to a graded vesting schedule.

The Company accounts for the Plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, as all options granted under the Plan have an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(dollars in thousands, except per share amounts)

Net income, as reported	$	4,336		$	3,453		$	8,280		$	6,511

Total stock-based compensation expense determined under fair value based method for all awards		(85	)		(50	)		(169	)		(101	)

Pro forma net income	$	4,251		$	3,403		$	8,111		$	6,410

Earning per share:
Basic - as reported	$	0.57		$	0.46		$	1.09		$	0.86

Basic - pro forma	$	0.56		$	0.45		$	1.07		$	0.85

Diluted - as reported	$	0.57		$	0.45		$	1.08		$	0.86

Diluted - pro forma	$	0.55		$	0.45		$	1.06		$	0.84

ALLOWANCE FOR LOAN LOSSES

The following summarizes activity in the allowance for loan losses for the six months ended June 30, (in thousands):

	2003			2002
Balance, January 1	$	9,179		$	7,336
Provisions charged to operations		1,032			1,569
Recoveries credited to allowance		494			231
Loans charged off		(453	)		(702	)

Balance, June 30	$	10,252		$	8,434

EARNINGS PER SHARE

Basic earnings per share (EPS) is computed by dividing net income by the weighted average number of 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 options. At June 30, 2003 there were 64,950 stock options that were anti-dilutive, while no options were anti-dilutive at June 30, 2002. The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three and six months ended June 30, 2003 and 2002.

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003	2002
	(In thousands except per share data)
Earnings per common share computation:
Numerator: Net Income	$	4,336	$	3,453	8,280	$	6,511
Denominator: Average common shares outstanding		7,600		7,552	7,595		7,544
Earnings per common share		0.57		0.46	1.09		0.86

Diluted earnings per common share computation:
Numerator: Net Income		4,336		3,453	8,280		6,511
Denominator: Average common shares outstanding		7,600		7,552	7,595		7,544
Effect of dilutive stock options		68		72	65		59

Average diluted common shares outstanding		7,668		7,624	7,660		7,603
Diluted earnings per common share		0.57		0.45	1.08		0.86

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

In addition to commitments to extend credit and issue standby letters of credit, the Company’s subsidiary, the Bank of Williamsburg is a guarantor on the warehousing line used for short term funding of loans held for sale by Johnson Mortgage Company. The total amount of potential liability is $2.4 million. This is a requirement of the lender and generates only de minimis risk for the Company since the collateral loans have commitments from investors before they are made.

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial Accounting Standards Board issued Statement No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement is effective for contracts entered into or modified after June 30, 2003 and is not expected to have an impact on the Corporation’s consolidated financial statements.

In May 2003, the Financial Accounting Standards Board issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities. Adoption of the Statement did not result in an impact on the Corporation’s consolidated financial statements.

SEGMENT REPORTING DISCLOSURES

Union Bankshares Corporation has two reportable segments: traditional full service community banking and mortgage loan origination. The community bank segment includes four banks which provide loan, deposit, investment and trust services to retail and commercial customers throughout their locations in Virginia. The mortgage segment provides a variety of mortgage loan products principally in Virginia and Maryland. These loans are originated and sold primarily in the secondary market through purchase commitments from investors, which subject the Company to only de minimis 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 of the Company. Intersegment transactions are recorded at cost and eliminated as part of the consolidation process.

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

The community bank segment provides the mortgage segment with the short-term funds needed to originate mortgage loans through a warehouse line of credit and charges the mortgage banking segment interest. These transactions are eliminated in the consolidation process. A management fee for support services (including data processing, item processing, accounting, human resources and other services) is charged to all subsidiaries and eliminated in the consolidation totals.

Information about reportable segments and reconciliation of such information to the consolidated financial statements for the three and six months ended June 30, 2003 and 2002 follows:

Union Bankshares Corporation

Segment Report

	Community Banks		Mortgage		Elimination			Consolidated Totals
	(in thousands)
Three Months ended June 30, 2003
Net interest income	$	10,302	$	429	$	—		$	10,731
Provision for loan losses		645		—		—		$	645

Net interest income after provision for loan losses		9,657		429		—		$	10,086
Noninterest income		2,298		3,963		(50	)	$	6,211
Noninterest expenses		7,438		2,876		(50	)	$	10,264

Income before income taxes		4,517		1,516		—		$	6,033
Income tax expense		1,098		599		—		$	1,697

Net income	$	3,419	$	917	$	—		$	4,336

Assets	$	1,178,109	$	64,930	$	(55,022	)	$	1,188,017

Three Months ended June 30, 2002
Net interest income	$	9,887	$	160	$	—		$	10,047
Provision for loan losses		739		—		—			739

Net interest income after provision for loan losses		9,148		160		—			9,308
Noninterest income		1,806		2,070		(44	)		3,832
Noninterest expenses		6,774		1,919		(44	)		8,649

Income before income taxes		4,180		311		—			4,491
Income tax expense		932		106		—			1,038

Net income	$	3,248	$	205	$	—		$	3,453

Assets	$	1,018,509	$	21,520	$	(18,274	)	$	1,021,755

Six Months ended June 30, 2003
Net interest income	$	20,354	$	839	$	—		$	21,193
Provision for loan losses		1,032		—		—			1,032

Net interest income after provision for loan losses		19,322		839		—			20,161
Noninterest income		4,236		6,749		(98	)		10,887
Noninterest expenses		14,440		5,202		(98	)		19,544

Income before income taxes		9,118		2,386		—			11,504
Income tax expense		2,302		922		—			3,224

Net income	$	6,816	$	1,464	$	—		$	8,280

Assets	$	1,178,109	$	64,930	$	(55,022	)	$	1,188,017

Six Months ended June 30, 2002
Net interest income	$	19,159	$	520	$	—		$	19,679
Provision for loan losses		1,569		—		—			1,569

Net interest income after provision for loan losses		17,590		520		—			18,110
Noninterest income		3,534		4,213		(87	)		7,660
Noninterest expenses		13,453		3,932		(87	)		17,298

Income before income taxes		7,671		801		—			8,472
Income tax expense		1,689		272		—			1,961

Net income	$	5,982	$	529	$	—		$	6,511

Assets	$	1,018,509	$	21,520	$	(18,274	)	$	1,021,755

STOCK REPURCHASE

The Company received authorization from the Board of Directors of Union Bankshares in November 2002 to buy up to 100,000 shares of the Company’s outstanding common stock in the open market at prices that management and the Board of Directors determine are prudent. The Company considers current market conditions and the Company’s current capital level, in addition to other factors, when deciding whether to repurchase stock. It is anticipated that any repurchased shares will be used primarily for general corporate purposes, including the dividend reinvestment plan, incentive stock option plan and other employee benefit plans.

During the first six months of 2003 the Company repurchased 1,000 shares of its common stock in the open market at an average cost of $24.07. In 2002, for the same time period, the Company repurchased no shares of its common stock.

INDEPENDENT ACCOUNTANT’S REVIEW REPORT

To the Board of Directors

Union Bankshares Corporation

Bowling Green, Virginia

We have reviewed the condensed consolidated balance sheet of Union Bankshares Corporation and Subsidiaries as of June 30, 2003 and the related condensed consolidated statements of income, stockholders’ equity and cash flows for the three and six month periods ended June 30, 2003 and 2002. These condensed financial statements are the responsibility of the Company’s management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the condensed consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Union Bankshares Corporation as of December 31, 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for the year ended (not presented herein); and in our report dated January 15, 2003, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2002 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

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

Winchester, Virginia

August 13, 2003

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 the Company. The analysis focuses on the consolidated financial statements, the footnotes thereto, and the other financial data herein. Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting the Company. Amounts are rounded for presentation purposes, while the percentages presented may be computed based on unrounded amounts.

Critical Accounting Policies

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The financial information contained within the statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, the Company uses historical loss factors as one factor in determining the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from the historical factors that are used. The fair value of the investment portfolio is based on period end valuations but changes daily with the market. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of these transactions would be the same, the timing of events that would impact these transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standard (“SFAS”) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

The Company’s allowance for loan losses model has three basic components: the formula allowance, the specific allowance and a calculation for unfunded loans. Each of these components is determined based upon estimates that can and do change when actual events occur. These estimates are reevaluated at least quarterly as part of a review of the adequacy of the allowance for loan loss. The allowance formula uses historical losses and current economic and business conditions in developing estimated loss factors as an indicator of future losses for various loan classifications; as a result, the estimated losses could differ from the losses incurred in the future. The specific allowance uses various techniques such as historical loss information, expected cash flows and fair market value of collateral to arrive at an estimate of losses. The use of these values is inherently subjective and actual losses could be greater or less than the estimates. The allowance calculation for unfunded loans uses historical factors to determine the losses that are attributable to these loans. Management periodically reassesses the approach taken in these estimates in order to enhance the process.

Goodwill and Intangibles

In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Additionally, it further clarifies the criteria for the initial recognition and measurement of intangible assets separate from goodwill. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 and prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives. Instead, these assets will be subject to at least an annual impairment review and more frequently if certain impairment indicators are in evidence. SFAS No. 142 also requires that reporting units be identified for the purpose of assessing potential future impairments of goodwill.

Results of Operations

Net income for the second quarter of 2003 was $4.3 million, up 25.6% from $3.5 million for the same period in 2002. This increase was the result of continued strong volumes in the mortgage segment and steady growth in the community bank segment. The mortgage segment’s earnings improved by $712,000 or 347.3% with net income totaling $917,000 for the quarter ended June 30, 2003 compared to $205,000 in the comparable quarter of last year. The community banking segment earnings increased by $171,000 or 5.3% over the prior year’s second quarter and was driven primarily by growth in loans. Second quarter 2003 diluted earnings per share for the Company amounted to $.57, as compared to $.45 in the same quarter of 2002. The Company’s annualized return on average assets for the three months ended June 30, 2003 was 1.50% as compared to 1.38% a year ago. The Company’s annualized return on average equity was 15.60% and 14.80% for the three months ended June 30, 2003 and 2002, respectively.

The mortgage segment reported net income reflecting high levels of mortgage originations in a historically low mortgage rate environment. These low interest rates have created a favorable environment for mortgage refinancings while continuing to support strong home sales for new and resale home purchases. During the second quarter of 2003 mortgage refinancings represented 55% of total originations, down from 59% for the first quarter of 2003, but up significantly from 26% for the same quarter a year ago. Despite the higher refinancing levels within the mortgage segment in 2003, management believes they are lower than current industry levels. In a more stable interest rate environment, management expects refinance activity to represent 15-20% of origination volumes. MCI’s strategy continues to focus its efforts toward the home purchase market, working with home buyers, builders, realtors and other referral sources to provide a more stable loan production platform. This strategy should generate a steady flow of business in a more normal rate environment. It is anticipated that rising mortgage rates will significantly reduce mortgage refinancing activity and, to a lesser extent, new and resale home financings. The Company will continue to closely monitor production volumes so adjustments in staffing and other areas can be made in an appropriate and timely manner.

Net income from the Company’s community bank segment increased from $3.2 million in the second quarter of 2002 to $3.4 million in the second quarter of 2003. This increase was attributable to improvements in net interest income and higher noninterest income. The improvement in net interest income was driven by continued increases in loans and flat deposit interest expense on higher deposit balances. Loan growth between year end 2002 and June 30, 2003 amounted to $74.0 million while deposits grew $60.5 million over the same period. This

growth in loans continued to help offset the impact of declining rates on interest earning assets. In addition, interest expense continued to decline in a low interest rate environment with other borrowings expense declining while deposit interest was flat when comparing second quarter 2003 to 2002. Noninterest-bearing deposits grew more than any other deposit category while 40.7% or $24.6 million of the growth was time deposits, primarily certificates of deposit, which locked in lower rates over a longer period of time.

Total assets as of June 30, 2003 were $1.188 billion, an increase of 6.5% from $1.116 billion at December 31, 2002. Loans totaled $788.8 million at June 30, 2003, an increase of $74.0 million or 10.4% from $714.8 million at December 31, 2002. The securities portfolio decreased to $255.5 million at the end of the second quarter of 2003 versus $272.8 at year end 2002 as a result of calls, maturities and prepayments of mortgage backed securities. Loans held for sale, driven by mortgage originations, increased $21.0 million to $60.8 million compared to the December 31, 2002 balance of $39.8 million. Stockholders’ equity totaled $114.4 million at June 30, 2003, which represents a book value of $15.04 per share.

Total deposits at June 30, 2003 were $958.1 million, up 6.7% from $897.6 million at December 31, 2002. Other borrowings totaled $99.2 million at June 30, 2003, a 7.3% decrease from $107.0 million at year end 2002. The other borrowings change is the result of a $5.8 million decrease in securities sold under agreements to repurchase (principally with customers) and a $1.5 million decrease in other short term borrowings (Federal funds purchased). These changes continue to reflect the lower interest rates for overnight funds.

Competition for deposits, particularly as it impacts certificate of deposit (CD) rates, is rate sensitive. Management continues to focus on increasing and retaining lower cost deposit products (including noninterest-bearing demand deposits and savings accounts) and locking in current lower rates with longer term (3-5 year) CD rates in an effort to maintain a lower cost of funds and a stable interest margin. Increased competition for both loans and deposits has contributed to some narrowing of the net interest margin and this narrowing is expected to continue until rates start to rise.

On a year-to-year basis, deposits at June 30, 2003 are up 17.8% at $958.1 million compared to $813.7 million at the end of June 2002. Loans are up 17.7% at $788.8 million compared to $670.2 million in June 2002. Of the $144.4 million growth in deposits, $75.0 million or 51.9% was in longer term certificates of deposits providing protection for the net interest margin in a rising rate environment. While the growth in loans has allowed the Company to maintain a good earnings margin in spite of the lower yield on loans, the prolonged low interest rate environment is expected to further narrow the margin since earning asset yields typically drop faster than deposit rates. As investors gain confidence, some of the lower cost deposits, such as demand and NOW accounts, may move back into the stock market and cause further compression in the net interest margin.

Net income for the six months ended June 30, 2003 was $8.3 million, up from $6.5 million for the same period in 2002. The increase was the result of exceptionally strong earnings from the mortgage segment and steady growth in the community bank segment. The mortgage segment’s net income of $1.464 million for the six months ended June 30, 2003 compared to $529,000 for the same period last year. The community banking segment increased earnings by $834,000, or 13.9% to $6.8 million at June 30, 2003 compared to $6.0 million at June 30, 2002. Diluted earnings per share increased 25.5% and amounted to $1.08 at June 30, 2003, as compared to $.86 at June 30, 2002. The Company’s annualized return on average assets for the six months ended

June 30, 2003 was 1.47% as compared to 1.33% a year ago while the annualized return on average equity totaled 15.29% and 14.25% for the same period, respectively.

Net Interest Income

Net interest income on a tax-equivalent basis for the second quarter of 2003 increased by 6.0% to $11.4 million from $10.8 million for the same period a year ago. Over that time, average interest earning assets grew by $150.8 million or 16.1% and average interest-bearing deposits increased by $109.5 million or 15.9%. Of the $109.5 million increase in average interest bearing deposits, 67.5%, or $73.9 million was in certificate of deposits. Total interest-bearing liabilities on a year to year basis were up 13.4% which reflects the Company’s ability to fund growth through deposits. The net interest margin was 4.20% for the three months ended June 30, 2003, down 40 basis points from 4.60% the same period in 2002. For this period, the yield on earning assets was 6.42%, down 78 basis points from 7.20% in June of 2002 and the yield on interest-bearing liabilities was 2.70% down 39 basis points from 3.09% for the same period. The net interest margin of 4.20% at June 30, 2003 is down slightly from 4.26% at the end of the first quarter 2003. This decline in the net interest margin was principally the result of loans repricing faster than deposits over this time period. This trend is expected to continue to produce compression of the margin until interest rates rise.

In addition, the subsidiary banks have periodically engaged in wholesale leverage transactions to better leverage their capital position by borrowing funds to invest in securities at margins of 150 to 200 basis points. Although such transactions increase net income and return on equity, they negatively impact the net interest margin. As of June 30, 2003 such transactions accounted for $10 million of the Company’s total borrowings.

Included in the average earning assets is $49.1 million in loans held for sale. These loans are mortgage loans originated by the mortgage segment and held for the short period between closing with the customer and funding by the investor. The loans have their final rates locked and are presold to an investor. A subsidiary bank funds these presold mortgages in a warehouse line of credit with a short term funding rate since the life expectancy is usually ninety days or less. The spread between the mortgage laons rates and the warehouse line rates provides a positive contribution to interest income and net income. It positively impacts the net interest margin in a declining rate environment and negatively impacts the net interest margin in a rising rate environment since the short term funding rates are changing more rapidly. Upon funding by the investor, these loans generate earnings in the noninterest income category through gains on sales of loans.

Union Bankshares Corporation

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

	For the three months ended June 30,
	2003							2002							2001
	Average Balance			Interest Income/ Expense		Yield/ Rate		Average Balance			Interest Income/ Expense		Yield/ Rate		Average Balance			Interest Income/ Expense		Yield/ Rate
	(Dollars in thousands)
Assets:
Securities:
Taxable	$	176,230		$	2,124	4.83	%	$	165,835		$	2,432	5.88	%	$	128,943		$	2,223	6.92	%
Tax-exempt(1)		86,261			1,726	8.03	%		93,143			1,771	7.63	%		92,092			1,783	7.77	%

Total securities		262,491			3,850	5.88	%		258,978			4,203	6.51	%		221,035			4,006	7.27	%
Loans, net		760,843			12,923	6.81	%		652,687			12,418	7.63	%		588,163			12,927	8.82	%
Loans held for sale		49,122			612	5.00	%		15,079			160	4.26	%		31,609			173	2.20	%
Federal funds sold		11,451			20	0.70	%		8,736			37	1.70	%		6,941			55	3.18	%
Money market investments		1,374			4	1.17	%		583			5	3.44	%		—			—
Interest-bearing deposits in other banks		2,641			8	1.21	%		1,010			4	1.59	%		870			10	4.61	%

Total earning assets		1,087,922			17,417	6.42	%		937,073			16,827	7.20	%		848,618			17,171	8.12	%
Allowance for loan losses		(9,743	)						(8,089	)						(7,900	)
Total non-earning assets		77,489							71,736							69,549

Total assets	$	1,155,668						$	1,000,720						$	910,267

Liabilities & Stockholders’ Equity:
Interest-bearing deposits:
Checking	$	133,009			160	0.48	%	$	120,243			292	0.97	%	$	98,444			438	1.78	%
Money market savings		95,341			250	1.05	%		84,788			309	1.46	%		64,322			475	2.96	%
Regular savings		88,902			197	0.89	%		76,672			256	1.34	%		58,911			417	2.84	%
Certificates of deposit:
$100,000 and over		161,719			1,567	3.89	%		131,709			1,392	4.24	%		127,217			1,905	6.01	%
Under $100,000		320,366			2,862	3.58	%		276,457			2,785	4.04	%		270,601			3,893	5.77	%

Total interest-bearing deposits		799,337			5,036	2.53	%		689,869			5,034	2.93	%		619,495			7,128	4.62	%
Other borrowings		94,838			982	4.15	%		98,485			1,038	4.23	%		108,646			1,403	5.18	%

Total interest-bearing liabilities		894,175			6,018	2.70	%		788,354			6,072	3.09	%		728,141			8,531	4.70	%

Noninterest bearing liabilities:
Demand deposits		137,171							111,971							92,202
Other liabilities		12,825							6,798							5,613

Total liabilities		1,044,171							907,123							825,956
Stockholders’ equity		111,497							93,597							84,311

Total liabilities and stockholders’ equity	$	1,155,668						$	1,000,720						$	910,267

Net interest income				$	11,399						$	10,755						$	8,640

Interest rate spread						3.72	%						4.11	%						3.42	%
Interest expense as a percent of average earning assets						2.22	%						2.60	%						4.03	%
Net interest margin						4.20	%						4.60	%						4.09	%

(1)

Income and yields are reported on a taxable equivalent basis.

Union Bankshares Corporation

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

	For the six months ended June 30,
	2003							2002							2001
	Average Balance			Interest Income/ Expense		Yield/ Rate		Average Balance			Interest Income/ Expense		Yield/ Rate		Average Balance			Interest Income/ Expense		Yield/ Rate
	(Dollars in thousands)
Assets:
Securities:
Taxable	$	177,034		$	4,347	4.95	%	$	166,060		$	4,873	5.92	%	$	127,034		$	4,419	7.01	%
Tax-exempt(1)		87,880			3,439	7.89	%		92,096			3,534	7.74	%		92,808			3,573	7.76	%

Total securities		264,914			7,786	5.93	%		258,156			8,407	6.57	%		219,842			7,992	7.33	%
Loans, net		744,500			25,586	6.93	%		632,563			24,355	7.76	%		585,518			26,088	8.98	%
Loans held for sale		42,976			1,133	5.32	%		21,019			520	4.99	%		24,633			263	2.15	%
Federal funds sold		14,970			64	0.86	%		12,162			93	1.54	%		6,199			127	4.13	%
Money market investments		3,731			22	1.19	%		1,223			12	1.98	%		—			—
Interest-bearing deposits in other banks		2,099			13	1.25	%		878			7	1.61	%		803			18	4.52	%

Total earning assets		1,073,190			34,604	6.50	%		926,001			33,394	7.27	%		836,995			34,488	8.31	%
Allowance for loan losses		(9,609	)						(7,825	)						(7,747	)
Total non-earning assets		74,898							70,698							69,382

Total assets	$	1,138,479						$	988,874						$	898,630

Liabilities & Stockholders’ Equity:
Interest-bearing deposits:
Checking	$	131,026			333	0.51	%	$	117,037			569	0.98	%	$	97,170			890	1.85	%
Money market savings		95,629			519	1.09	%		83,165			610	1.48	%		63,179			949	3.03	%
Regular savings		88,059			414	0.95	%		75,225			502	1.35	%		57,784			728	2.54	%
Certificates of deposit:
$100,000 and over		159,133			3,111	3.94	%		131,868			2,813	4.30	%		127,072			3,796	6.02	%
Under $100,000		316,661			5,745	3.66	%		275,965			5,755	4.21	%		268,543			7,902	5.93	%

Total interest-bearing deposits		790,508			10,122	2.58	%		683,260			10,249	3.02	%		613,748			14,265	4.69	%
Other borrowings		96,093			1,956	4.10	%		97,904			2,058	4.24	%		107,016			2,932	5.52	%

Total interest-bearing liabilities		886,601			12,078	2.75	%		781,164			12,307	3.18	%		720,764			17,197	4.81	%

Noninterest bearing liabilities:
Demand deposits		131,038							108,426							90,021
Other liabilities		11,662							7,171							5,806

Total liabilities		1,029,301							896,761							816,591
Stockholders’ equity		109,178							92,113							82,039

Total liabilities and stockholders’ equity	$	1,138,479						$	988,874						$	898,630

Net interest income				$	22,526						$	21,087						$	17,291

Interest rate spread						3.76	%						4.10	%						3.50	%
Interest expense as a percent of average earning assets						2.27	%						2.68	%						4.14	%
Net interest margin						4.23	%						4.59	%						4.17	%

(1)

Income and yields are reported on a taxable equivalent basis.

Provision for Loan Losses

The provision for loan losses totaled $645,000 for the second quarter of 2003, down from $739,000 for the second quarter of 2002. For the six months ended June 30, 2003, the provision was $1,032,000 versus $1,569,000 for the same period in 2002. This lower expense was the result of several classified loans being paid out or upgraded and recoveries exceeding charge-offs in the both the first and second quarters of 2003. These improvements were partially offset by reserves related to two large loans placed on nonaccrual status at the end of the second quarter 2003. Management feels the overall credit quality of the portfolio is good based on the analysis of the portfolio. (See Asset Quality)

Noninterest Income

Noninterest income for the three months ended June 30, 2003 totaled $6.2 million, up $2.4 from $3.8 million for the same period a year ago. Over 79% of this increase came in gains on sales of loans in the mortgage banking segment which increased $1.9 million compared to the same quarter last year. Service charges on deposit accounts increased $223,000 reflecting increases in overdraft and return check charges and DDA activity service charges. This is partially attributable to an overdraft protection product which the Company introduced in June 2003. Other service charges and fees increased $17,000, reflecting flat earnings in brokerage commissions, an increase of $14,000 in letter of credit fees and an increase of $38,000 in debit card income. Other operating income increased $141,000 over the prior year’s second quarter, reflecting $19,000 of rental income and $114,000 in income from the Company’s investment in Johnson Mortgage Company by the Bank of Williamsburg subsidiary. Management continues to seek additional sources of noninterest income, including increased emphasis on cross-selling services and better leveraging the financial services available throughout the organization.

Noninterest income for the six months ended June 30, 2003 totaled $10.9 million, up $3.2 million from $7.7 million for the six months ended June 30, 2002. Most of this increase is attributed to the gain on sales of loans in the mortgage segment which was $6.7 million or $2.5 million over the same period last year. Service charges on deposits are up $423,000 as a result of increases in overdraft and return check charges and service charges. Other service charges are down through the first six months by $49,000 as a result of an $87,000 decline in brokerage commissions. Other operating income is up $237,000 as a result of the addition of Johnson Mortgage Company and rental income.

Noninterest Expense

Noninterest expense for the second quarter of 2003 totaled $10.3 million, an increase of $1.6 million over the same period in 2002. Personnel costs were up $1.4 million or 27.8% over last year’s second quarter, with salaries and other benefits categories reflecting normal increases, the addition of the Thornburg branch and the Manassas and Richmond loan production offices (LPO), increased group insurance expense and an increase of $771,000 in commission costs as a result of higher mortgage loan production. Occupancy expense was up $81,000 largely as a result of increases in rental costs for the LPO office in Manassas and in depreciation expense for the new branch in Thornburg and the LPO in Richmond and transitioning costs related to the move of the Newport News office to a nearby full-service facility. Furniture & equipment expense was down $52,000 largely from a decline in depreciation expense, amortization of software and equipment maintenance. These decreases were the result of software and equipment purchased for the back office consolidation in prior periods becoming fully depreciated.

Other operating expenses were up $173,000 over last year’s second quarter. While operating expenses and franchise taxes increased from the expansion and growth, professional fees for consulting and legal services were down $22,000. Marketing expenses were up $127,000 as a result of advertising for our new overdraft protection product and the opening of the relocated Newport News branch of Bank of Williamsburg. The broadest expense category, other expenses, was down $42,000 from the previous year’s second quarter as a result of lower other losses in the quarter. Management continues to monitor expenses closely to ensure the increases are in line with the Company’s expectations.

Noninterest expense for the six months ended June 30, 2003 was up $2.2 million at $19.5 compared to $17.3 million for the six months ended June 30, 2002. Most of the increase is the result of a $2.2 million increase in salaries and benefits, which is the result of new locations in Manassas, Richmond, Newport News and Thornburg as well as a $1.1 million increase in commissions. The commissions are up due to the high mortgage loan origination volume. Occupancy was up $190,000 while furniture and equipment expense was down $162,000. Other operating expense for the six months ended June 30, 2003 was up only $18,000.

Asset Quality

The allowance for loan losses represents management’s estimate of the amount adequate to provide for potential losses inherent in the loan portfolio. Among other factors, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, the value and adequacy of collateral and guarantors, non-performing credits and current and anticipated economic conditions. There are additional risks of future loan losses, which cannot be precisely quantified nor attributed to particular loans or classes of loans. Because those risks include general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses is an estimate. The allowance is also subject to regulatory examinations and determination as to adequacy, which may take into account such factors as the methodology used to calculate the allowance and size of the allowance in comparison to peer companies identified by regulatory agencies.

Management maintains a list of loans which have a potential weakness that may need special attention. This list is used to monitor such loans and is used in the determination of the sufficiency of the Company’s allowance for loan losses. At the end of the second quarter 2003, two commercial real estate loans to the same borrower totaling $8.1 million were placed on nonaccrual status. These loans are secured by real estate, but based on the information currently available, a reserve of $550,000 has been allocated for possible losses on these loans. As the Company monitors this situation, further reserves may be allocated if warranted. The allowance for loan losses totaled $10.2 million at June 30, 2003 or 1.30% of total loans, as compared to 1.28% at December 31, 2002 and 1.26% at June 30, 2002.

	June 30, 2003		December 31, 2002		June 30, 2002
	(dollars in thousands)
Nonaccrual loans	$	8,793	$	136	$	636
Foreclosed properties		464		774		1,087

Nonperforming assets	$	9,257	$	910	$	1,723

	June 30, 2003			December 31, 2002			June 30, 2002
Allowance for loan losses	$	10,252		$	9,179		$	8,434
Allowance as % of total loans		1.30	%		1.28	%		1.26	%
Allowance as % of nonperforming assets		111	%		1009	%		489	%
Nonperforming assets to loans and foreclosed properties		1.17	%		.13	%		.26	%
Net charge-offs (annualized) to average loans outstanding		-.01	%		.16	%		.15	%

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 the 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 absorb potential losses.

Since December 31, 2002 stockholders’ equity has increased by $8.9 million, principally as a result of net income of $8.3 million for the first six months of 2003, less $2.2 million in dividends paid to stockholders. The increase in the unrealized gain on the Company’s securities portfolio added $2.4 million, while the balance of $400,000 came from the issuance of stock through the Company’s Dividend Reinvestment Plan and the exercise of options under the Incentive Stock Option Plan.

The Federal Reserve, along with the Comptroller of the Currency and the Federal Deposit Insurance Corporation, has adopted capital guidelines to supplement the existing definitions of capital for regulatory purposes and to establish minimum capital standards. Specifically, the guidelines categorize assets and off-balance sheet items into four risk-weighted categories. The minimum ratio of qualifying total assets is 8.0%, of which 4.0% must be Tier 1 capital, consisting of common equity and retained earnings, less certain goodwill items.

At June 30, 2003, the Company’s ratio of total capital to risk-weighted assets was 12.08% and its ratio of Tier 1 capital to risk-weighted assets was 10.95%. Both ratios exceed the minimum capital requirements. The following summarizes the Company’s regulatory capital and related ratios at June 30, 2003 (dollars in thousands):

Tier 1 capital	$	99,024
Tier 2 capital		10,252
Total risk-based capital		109,276
Total risk-weighted assets		904,741

Capital Ratios:
Tier 1 risk-based capital ratio	10.95	%
Total risk-based capital ratio	12.08	%
Leverage ratio (Tier 1 capital to average adjusted total assets)	8.61	%
Equity to assets ratio	9.63	%

The Company’s book value per share at June 30, 2003 was $15.04. Dividends to stockholders are typically paid semi-annually in May and November. The last dividend was paid May 1, 2003.

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 and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liability liquidity. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary through Federal funds lines with several regional banks and a line of credit with the Federal Home Loan Bank (FHLB). Management considers the Company’s overall liquidity to be sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.

At June 30, 2003 cash, interest-bearing deposits in other banks, money market investments, Federal funds sold, securities available for sale, loans available for sale and loans that mature or reprice in one year were 47.8% of total earning assets. At June 30, 2003 approximately $401.6 million or 48.0% of total loans are scheduled to mature or reprice within the next year. In addition to deposits, the Company utilizes Federal funds purchased, FHLB advances, securities sold under agreements to repurchase and customer repurchase agreements, to fund the growth in its loan portfolio, securities purchases, and periodically, wholesale leverage transactions.

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,” 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 certain forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual future results and trends may differ materially from historical results or those anticipated depending on a variety of factors, including, but not limited to, the effects of and changes in: general economic conditions, the interest rate environment, legislative and regulatory requirements, competitive pressures, new products and delivery systems, inflation, changes in the stock and bond markets, technology, and consumer spending and savings habits. The Company does not update any forward-looking statements that may be made from time to time.

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 Company’s Asset and Liability Management Committee (ALCO) is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposure to this risk. The Board of Directors reviews and approves the guidelines established by ALCO.

Interest rate risk is monitored through the use of three complimentary modeling tools: static gap analysis, earnings simulation modeling and economic value simulation (net present value estimation). Each of these models measure changes in a variety of interest rate scenarios. While each of the interest rate risk measures 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 repricing values is less utilized since it does not effectively measure the earnings impact on the Company and is not addressed here. But earnings simulation and economic value models which more effectively measure the earnings impact are utilized by management on a regular basis and are explained below.

Earnings Simulation Analysis

Management uses simulation analysis to measure the sensitivity of net 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 analysis such as the static gap analysis.

Assumptions used in the model, including loan and deposit growth rates, are derived from seasonal trends and management’s outlook, as are the assumptions used to project yields and rates for new loans and deposits. 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 accounted for in the different rate scenarios.

The most likely scenario represents the rate environment as management forecasts it to occur. From this base, rate shocks in 100 basis point increments are applied to see the impact on the Company’s earnings. The following table represents the interest rate sensitivity on net income (fully tax equivalent basis) for the Company using different rate scenarios as of June 30, 2003:

Change in Prime Rate	% Change in Net Income
+200 basis points	+32	%
+100 basis points	+16	%
Most likely	0
-100 basis points	-15	%
-200 basis points	-20	%

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 economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in economic value of equity over different rate environments is an indication of the longer term repricing risk in the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation.

The following chart reflects the change in net market value over different rate environments as of June 30, 2003:

Change in Prime Rate		Change in Economic Value of Equity (dollars in thousands)
+200 basis points		$ 12,681
+100 basis points		6,982
Most likely		0
-100 basis points		- 6,891
-200 basis points		- 20,916

ITEM 4 – CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s management, including our chief executive officer and chief financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this Quarterly Report on Form 10-Q. Based on that evaluation, our chief executive officer and chief financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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 2 – Changes in Securities and Use of Proceeds

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on April 15, 2003 at which time stockholders were asked to consider three proposals, as follows:

1. Election of three Class I directors to serve for a term of three years.

2. Approval of the Company’s 2003 Incentive stock Option Plan.

3. Ratification of the Board of Directors’ appointment of Yount, Hyde & Barbour, P. C. as independent auditors of the Company for 2003.

The vote tabulation was as follows:

1. Election of three Class I directors to serve for a term of three years:

Director	Votes For	Votes Withheld
Frank B. Bradley, III	5,574,738	61,588
M. Raymond Piland, III	5,575,289	61,038
William M. Wright	5,567,581	68,746

The following directors’ terms of office continued after the meeting:

G. William Beale

Ronald L. Hicks

B. Walton Mahon

W. Tayloe Murphy, Jr.

A. D. Whittaker

2. Approval of the Company’s 2003 Incentive stock Option Plan:

Votes For		Votes Against		Abstentions		Broker Non-Votes
5,143,703		357,886		134,737		0

3. Ratification of the Board of Directors’ appointment of Yount, Hyde & Barbour, P. C. as independent auditors of the Company for 2003

Votes For		Votes Against		Abstentions
5,577,394		31,341		27,591

Item 5 – Other Information

None.

Item 6 – Exhibits and Reports on Form 8-K

(a) Exhibits.

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

Exhibit No.		Description

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K.

In a report on Form 8-K filed April 15, 2003, Union Bankshares Corporation issued a press release announcing first quarter results for the quarter ending March 31, 2003. The press release, with summary financial information, was filed pursuant to Item 7 and Item 9.

In a report on Form 8-K filed April 16, 2003 Union Bankshares Corporation issued a press release announcing the appointment of Mr. Ronald L. Tillett to the Company’s board of directors. The press release was filed pursuant to Item 7 and Item 9.

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)

August 14, 2003				/s/ G. William Beale
(Date)				G. William Beale,
				President, Chief Executive Officer and Director

August 14, 2003				/s/ D. Anthony Peay
(Date)				D. Anthony Peay,
				Senior Vice President and Chief Financial Officer

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