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, 2005

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) (Zip Code)

(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 July 27, 2005, Union Bankshares Corporation had 8,769,086 shares of Common Stock outstanding.

UNION BANKSHARES CORPORATION

FORM 10-Q

June 30, 2005

INDEX


		Page
PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

Condensed Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004		3

Condensed Consolidated Statements of Income for the three and six months ended June 30, 2005 and 2004		4

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2005 and 2004		5

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004		6

Notes to Condensed Consolidated Financial Statements		7-14

Independent Accountants’ Review Report		15

Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		16-28

Item 3 - Quantitative and Qualitative Disclosures about Market Risk		29-30

Item 4 - Controls and Procedures		31

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings		32

Item 4 - Submission of Matters to a Vote of Security Holders		32

Item 6 - Exhibits		32

Signatures		33

Part I - FINANCIAL INFORMATION

Item 1 - Financial Statements

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share information)


	June 30, 2005		December 31, 2004
	(Unaudited)		(Audited)
ASSETS
Cash and cash equivalents:
Cash and due from banks	$	42,648	$	29,920
Interest-bearing deposits in other banks		5,576		523
Money market investments		102		130
Other interest-bearing deposits		2,598		2,598
Federal funds sold		1,027		73

Total cash and cash equivalents		51,951		33,244

Securities available for sale, at fair value		224,587		233,467

Loans held for sale		49,280		42,668

Loans, net of unearned income		1,313,818		1,264,841
Less allowance for loan losses		16,654		16,384

Net loans		1,297,164		1,248,457

Bank premises and equipment, net		42,363		40,945
Other real estate owned		—		14
Core deposit intangibles, net		9,112		9,721
Goodwill		31,297		30,992
Other assets		35,172		32,702

Total assets	$	1,740,926	$	1,672,210

LIABILITIES AND STOCKHOLDERS’ EQUITY

Noninterest-bearing demand deposits	$	261,181	$	230,055
Interest-bearing deposits:
NOW accounts		203,139		195,309
Money market accounts		180,535		197,617
Savings accounts		120,333		117,851
Time deposits of $100,000 and over		252,564		209,929
Other time deposits		365,112		363,556

Total interest-bearing deposits		1,121,683		1,084,262


Total deposits		1,382,864		1,314,317

Securities sold under agreements to repurchase		54,034		45,024
Other short-term borrowings		7,610		24,514
Trust preferred capital notes		23,196		23,196
Long-term borrowings		89,700		90,271
Other liabilities		12,416		12,130

Total liabilities		1,569,820		1,509,452

Commitments and contingencies

Stockholders’ equity:
Common stock, $2 par value. Authorized 24,000,000 shares; issued and outstanding, 8,767,996 and 8,744,176 shares, respectively		17,536		17,488
Surplus		34,241		33,716
Retained earnings		115,283		106,460
Accumulated other comprehensive income		4,046		5,094

Total stockholders’ equity		171,106		162,758

Total liabilities and stockholders’ equity	$	1,740,926	$	1,672,210

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,
	2005		2004		2005		2004
Interest and dividend income :
Interest and fees on loans	$	22,007	$	16,458	$	42,558	$	30,435
Interest on Federal funds sold		9		14		11		60
Interest on interest-bearing deposits in other banks		17		1		32		5
Interest on other interest-bearing deposits		20		6		35		6
Interest and dividends on securities:
Taxable		1,910		1,880		3,830		3,734
Nontaxable		925		995		1,854		2,004

Total interest and dividend income		24,888		19,354		48,320		36,244

Interest expense:
Interest on deposits		6,058		4,863		11,518		9,591
Interest on Federal funds purchased		87		37		151		37
Interest on short-term borrowings		526		134		743		203
Interest on long-term borrowings		1,195		1,154		2,596		2,131

Total interest expense		7,866		6,188		15,008		11,962

Net interest income		17,022		13,166		33,312		24,282

Provision for loan losses		135		308		467		739

Net interest income after provision
for loan losses		16,887		12,858		32,845		23,543

Noninterest income:
Service charges on deposit accounts		1,802		1,749		3,299		3,296
Other service charges, commissions and fees		1,086		817		2,097		1,571
Gains on securities transactions, net		4		3		4		3
Gains on sales of loans		3,674		3,339		6,259		5,521
Gains on sales of other real estate owned
and bank premises, net		43		64		38		79
Other operating income		408		302		667		487

Total noninterest income		7,017		6,274		12,364		10,957

Noninterest expenses:
Salaries and benefits		8,345		7,288		16,167		13,580
Occupancy expenses		997		813		1,995		1,501
Furniture and equipment expenses		967		861		1,869		1,588
Other operating expenses		4,185		3,793		7,933		6,596

Total noninterest expenses		14,494		12,755		27,964		23,265

Income before income taxes		9,410		6,377		17,245		11,235
Income tax expense		2,798		1,816		5,180		3,064

Net income	$	6,612	$	4,561	$	12,065	$	8,171

Basic net income per share	$	0.76	$	0.53	$	1.38	$	1.01
Diluted net income per share	$	0.75	$	0.53	$	1.37	$	1.00

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, 2005 AND 2004

(dollars in thousands)

Common
Stock

Surplus

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Comprehensive
Income

Total

Balance - December 31, 2003

15,254

2,401

94,102

6,744

118,501

Comprehensive income:

Net income - for the six months ended June 30, 2004

8,171

Unrealized holding gains arising during the period (net of tax, $1,986)

(3,689

)

Other comprehensive loss (net of tax, 1,986)

(3,689

)

(3,689

)

(3,689

)

Total comprehensive income

4,482

Cash dividends - 2004 ($.33 per share)

(2,521

)

(2,521

)

Issuance of common stock under Dividend Reinvestment Plan (8,543 shares)

238

255

Issuance of common stock under Incentive Stock Option Plan (14,886 shares)

230

260

Issuance of common stock for services rendered (1,134 shares)

Issuance of common stock in exchange for net assets in acquisition (1,022,756 shares)

2,046

29,634

31,680

Balance - June 30, 2004 (Unaudited)

17,349

32,537

99,752

3,055

152,693

Balance - December 31, 2004

17,488

33,716

106,460

5,094

162,758

Comprehensive income:

Net income - for the six months ended June 30, 2005

12,065

Unrealized holding losses arising during the period (net of tax, $563)

(1,045

)

Reclassification adjustment for gains included in net income (net of tax, $1)

)

Other comprehensive income (net of tax, $564)

(1,048

)

(1,048

)

(1,048

)

Total comprehensive income

11,017

Cash dividends - 2005 ($.37 per share)

(3,242

)

(3,242

)

Issuance of common stock under Dividend Reinvestment Plan (10,335 shares)

325

346

Tax benefit from exercise of stock awards

Unearned compensation on restricted stock, net of amortization

(175

)

(175

)

Issuance of restricted stock, stock incentive plan (5,330 shares)

181

192

Award of performance stock grants

Issuance of common stock under Incentive Stock Option Plan (8,055 shares)

121

137

Issuance of common stock for services rendered

Balance - June 30, 2005 (Unaudited)

17,536

34,241

115,283

4,046

171,106

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended June 30, 2005 and 2004

(dollars in thousands)


	2005			2004
Operating activities:
Net income	$	12,065		$	8,171
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation of bank premises and equipment		1,855			1,287
Amortization		794			816
Provision for loan losses		467			739
(Gains) on sales of other real estate owned and bank premises, net		(38	)		(79	)
Loans held for sale, net		(6,612	)		(8,607	)
Stock-based compensation		40			—
(Increase) in other assets		(2,216	)		(1,868	)
Increase in other liabilities		286			56

Net cash and cash equivalents provided by operating activities		6,641			515

Investing activities:
Purchase of securities available for sale		(10,870	)		(45,110	)
Proceeds from sale of securities available for sale		—			1,989
Proceeds from maturities of securities available for sale		18,008			52,562
Net increase in loans		(49,174	)		(129,537	)
Purchases of bank premises and equipment		(3,282	)		(6,090	)
Cash paid in bank acquisition		—			(23,235	)
Cash acquired in bank acquisition		—			16,701
Proceeds from sales of other real estate owned		61			494

Net cash and cash equivalents used in investing activities		(45,257	)		(132,226	)

Financing activities:
Net increase in noninterest-bearing deposits		31,126			74,643
Net increase in interest-bearing deposits		37,421			13,355
Net increase (decrease) in short-term borrowings		(7,894	)		36,717
Net increase in trust preferred capital notes		—			22,500
Net decrease in long-term borrowings		(571	)		(456	)
Issuance of common stock		483			551
Cash dividends paid		(3,242	)		(2,521	)

Net cash and cash equivalents provided by financing activities		57,323			144,789

Increase in cash and cash equivalents		18,707			13,078
Cash and cash equivalents at beginning of period		33,244			40,972

Cash and cash equivalents at end of period	$	51,951		$	54,050

Supplemental Disclosure of Cash Flow Information
Cash payments for:
Interest	$	14,771		$	11,703
Income taxes		5,281			3,340
Supplemental schedule of noncash investing and financing activities:
Unrealized gain (loss) on securities available for sale		(1,612	)		(5,675	)
Issuance of common stock for services rendered		3			—
Issuance of common stock pursuant to restricted stock awards		192			—
Transactions related to the acquisition of subsidiary:
Increase in assets and lliabilities
Loans		—		$	165,062
Securities		—			19,931
Other assets		—			39,220
Non-interest bearing deposits		—			38,503
Interest bearing deposits		—			145,981
Borrowings		—			7,000
Other liabilities		—			2,130
Issuance of common stock		—			31,680

See accompanying notes to consolidated financial statements.

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2005

1.	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 of the Public Company Accounting Oversight Board (United States) 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 2004 Annual Report on Form 10-K. If needed, certain previously reported amounts have been reclassified to conform to current period presentation.

2.	MERGERS AND ACQUISITIONS

On May 1, 2004, Union Bankshares completed its acquisition of Guaranty Financial Corporation (“Guaranty”) headquartered in Charlottesville, Virginia. This acquisition was accounted for using the purchase method of accounting. The total consideration paid to Guaranty stockholders in connection with the acquisition was approximately $54.9 million with approximately $23.2 million in cash and 1,023,000 shares of the Company’s common stock. Guaranty transactions have been included in the financial results since May 1, 2004. Included in the acquisition on May 1, 2004 were $248 million in assets, including $165 million in loans. Additionally, $184 million in deposits were acquired. As part of the purchase price allocation at May 1, 2004, the Company recorded $5.8 million in core deposit intangible, and goodwill of approximately $30.1 million.

3.	STOCK-BASED COMPENSATION

The shareholders approved at the 2003 Annual Meeting the adoption of the Union Bankshares Corporation 2003 Incentive Stock Plan (the “Plan”). The Plan authorizes the issuance of 350,000 shares of common stock to be used in the awarding of incentive stock-based compensation to employees by the Compensation Committee of the Board of Directors. The Plan replaced a similar plan adopted by the shareholders in 1993 which terminated under its provisions in 2003. Options awarded under the previous plan are still exercisable, in some instances as late as 2013. Under both Plans, 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 Accounting Principals Board Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based compensation cost is reflected in net income, relating to options awarded under this plan, 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.

During the first six months of 2005, the Company granted 5,330 performance stock grants and 5,330 restricted stock grants to certain members of senior management pursuant to the 2003 Plan. Compensation expense for performance stock and restricted stock grants is estimated and accrued over a four and five year service period, respectively. This compensation expense is based on the market price of Union Bankshares stock on the date of the grant and amortized on a straight-line basis over the requisite service period.

For the six months ending June 30, 2005, under APB Opinion No. 25, the Company recorded $40 thousand related to stock-based compensation. There were no stock grants or associated expense prior to 2005. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement No. 123, Accounting for Stock-Based Compensation, to stock-based compensation.


	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
	(dollars in thousands, except per share amounts)
Net income, as reported	$	6,612		$	4,561		$	12,065		$	8,171
Total stock-based compensation expense determined under fair value based method for all awards		(101	)		(98	)		(201	)		(196	)

Pro forma net income	$	6,511		$	4,463		$	11,864		$	7,975

Earning per share:
Basic - as reported	$	0.76		$	0.53		$	1.38		$	1.01

Basic - pro forma	$	0.74		$	0.52		$	1.36		$	0.98

Diluted - as reported	$	0.75		$	0.53		$	1.37		$	1.00

Diluted - pro forma	$	0.74		$	0.52		$	1.34		$	0.97

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:


	Three Months Ended June 30,
	2005		2004
Dividend yield	2.30	%	2.39	%
Expected life	10 years		10 years
Expected volatility	32.93	%	34.54	%
Risk-free interest rate	4.22	%	4.22	%

4.	ALLOWANCE FOR LOAN LOSSES

The following summarizes activity in the allowance for loan losses for the six months ended June 30, 2005 and 2004 (in thousands):


	2005			2004
Balance, January 1	$	16,384		$	11,519
Allowance of acquired bank		—			2,040
Provisions charged to operations		467			739
Recoveries credited to allowance		249			1,046
Loans charged off		(446	)		(534	)

Balance, June 30	$	16,654		$	14,810

5.	EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing net icome 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. There were no anti-dilutive options as of June 30, 2005. There were 52,300 anti-dilutive options as of June 30, 2004. The following is a reconcilement of the denominators of the basic and diluted EPS computations for the three and six months ended June 30, 2005 and 2004.


	Income (Numerator)		Weighted Average Shares (Denominator)	Per Share Amount
For the three months Ended June 30, 2005
Basic EPS	$	6,612	8,762	$	0.76
Effect of dilutive stock options		—	75		(0.01	)

Diluted EPS	$	6,612	8,837		0.75

For the three months ended June 30, 2004
Basic EPS	$	4,561	8,568	$	0.53
Effect of dilutive stock options		—	88		—

Diluted EPS	$	4,561	8,656	$	0.53

For the six months Ended June 30, 2005
Basic EPS	$	12,065	8,754	$	1.38
Effect of dilutive stock options		—	73		(0.01	)

Diluted EPS	$	12,065	8,827	$	1.37

For the six months ended June 30, 2004
Basic EPS	$	8,171	8,099	$	1.01
Effect of dilutive stock options		—	86		(0.01	)

Diluted EPS	$	8,171	8,185	$	1.00

6.	TRUST PREFERRED CAPITAL NOTES

During the first quarter of 2004, Union Bankshares Corporation Statutory Trust I (the “Trust”), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On March 18, 2004, $22.5 million of Trust Preferred Capital Notes were issued through a pooled underwriting totaling approximately $858.8 million. The securities have a LIBOR-indexed floating rate of interest (three-month LIBOR plus 2.75%) which adjusts, and is payable quarterly. The interest rate at June 30, 2005 was 6.17%. The securities may be redeemed at par beginning on June 17, 2009 and each quarterly anniversary of such date until the securities mature on June 17, 2034. The principal asset of the Trust is $22.5 million of the Union Bankshares Corporation’s junior subordinated

debt securities with like maturities and like interest rates to the capital securities.

The Trust Preferred Capital Notes may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier I capital after its inclusion. The portion of the Trust Preferred not considered as Tier I capital may be included in Tier II capital. The Trust Preferred Capital Notes represented 15% of Tier I capital at June 30, 2005.

The obligations of the Company with respect to the issuance of the Capital Securities constitute a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the capital securities. Subject to certain exceptions and limitations, the Company may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related capital securities and require a deferral of common dividends. The Company has not elected to defer interest payments on its junior subordinated debt securities.

7.	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 and investment 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 on a servicing released basis through purchase commitments from investors, which subject the Company to only de minimis risk.

Profitability 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 interest to the mortgage banking segment. 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 at cost 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, 2005 and 2004 follows:

Union Bankshares Corporation

Segment Report


	Community Banks		Mortgage		Elimination			Consolidated Totals
	(in thousands)
Three Months ended June 30, 2005
Net interest income	$	16,763	$	259	$	—		$	17,022
Provision for loan losses		135		—		—			135

Net interest income after provision for loan losses		16,628		259		—			16,887
Noninterest income		3,392		3,673		(48	)		7,017
Noninterest expenses		11,348		3,194		(48	)		14,494

Income before income taxes		8,672		738		—			9,410
Income tax expense		2,506		292		—			2,798

Net income	$	6,166	$	446	$	—		$	6,612

Assets	$	1,738,112	$	54,151	$	(51,337	)	$	1,740,926

Three Months ended June 30, 2004
Net interest income	$	12,793	$	373	$	—		$	13,166
Provision for loan losses		308		—		—			308

Net interest income after provision for loan losses		12,485		373		—			12,858
Noninterest income		3,004		3,314		(44	)		6,274
Noninterest expenses		9,990		2,809		(44	)		12,755

Income before income taxes		5,499		878		—			6,377
Income tax expense		1,475		341		—			1,816

Net income	$	4,024	$	537	$	—		$	4,561

Assets	$	1,607,490	$	41,666	$	(40,326	)	$	1,608,830

Six Months ended June 30, 2005
Net interest income	$	32,821	$	491	$	—		$	33,312
Provision for loan losses		467		—		—			467

Net interest income after provision for loan losses		32,354		491		—			32,845
Noninterest income		6,201		6,259		(96	)		12,364
Noninterest expenses		22,231		5,829		(96	)		27,964

Income before income taxes		16,324		921		—			17,245
Income tax expense		4,814		366		—			5,180

Net income	$	11,510	$	555	$	—		$	12,065

Assets	$	1,738,112	$	54,151	$	(51,337	)	$	1,740,926

Six Months ended June 30, 2004
Net interest income	$	23,642	$	640	$	—		$	24,282
Provision for loan losses		739		—		—			739

Net interest income after provision for loan losses		22,903		640		—			23,543
Noninterest income		5,551		5,495		(89	)		10,957
Noninterest expenses		18,278		5,076		(89	)		23,265

Income before income taxes		10,176		1,059		—			11,235
Income tax expense		2,667		397		—			3,064

Net income	$	7,509	$	662	$	—		$	8,171

Assets	$	1,607,490	$	41,666	$	(40,326	)	$	1,608,830

8.	STOCK REPURCHASE

The Board of Directors renewed authorization for the Company to buy up to 150,000 shares of the Company’s outstanding common stock in the open market at prices that management and the Board of Directors determine to be prudent. This authorization expires May 31, 2006. 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. No shares have been purchased under this authorization to date.

9.	RECENT ACCOUNTING PRONOUNCEMENTS

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement No. 154, (“FAS No. 154”) “Accounting Changes and Error Corrections—A Replacement of APB Opinion No. 20 and FASB Statement No. 3.” The new standard changes the requirements for the accounting for and reporting of a change in accounting principle. Among other changes, FAS No. 154 requires that a voluntary change in accounting principle be applied retrospectively with all prior period financial statements presented on the new accounting principle, unless it is impracticable to do so. FAS No. 154 also provides that (1) a change in method of depreciating or amortizing a long-lived nonfinancial asset be accounted for as a change in estimate (prospectively) that was effected by a change in accounting principle, and (2) correction of errors in previously issued financial statements should be termed a “restatement. “ The new standard is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not anticipate this revision will have a material effect on its financial statements.

In December 2004, the FASB issued FAS No. 123(R) – Share-Based Payment, which replaces FAS No. 123 – Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25 – Accounting for Stock Issued to Employees. In March 2005, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 107 – Share-Based Payment, which provides interpretive guidance related to FAS No. 123(R). FAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic method and requires that such transactions be accounted for using a fair-value-based method and recognized as expense in the condensed consolidated statement of income. With limited exceptions, the amount of compensation cost is measured based on the grant-date fair value of the equity or liability instruments issued. FAS No. 123(R) requires liability awards to be remeasured each reporting period and compensation costs to be recognized over the period that an employee provides service in exchange for the award. In April 2005, the SEC delayed the effective date of FAS No. 123(R) to the beginning of the annual reporting period that begins after June 15, 2005. Management does not anticipate the adoption of this statement will have a significant effect on the Company’s consolidated financial position and results of operation. The Company currently measures compensation costs related to share-based payments under APB Opinion No. 25, as allowed by FAS No. 123, and provides disclosures in the notes to the consolidated financial statements as required under FAS No. 123.

In November 2004, the Emerging Issues Task Force (“EITF”) published Issue 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” The Task Force discussed the meaning of other-than-temporary impairment and its application to certain investments carried at cost. The Task Force requested that the FASB staff consider other impairment models within U.S. Generally Accepted Accounting Principles (“GAAP”) when developing its views. The Task Force also requested that the scope of the impairment issue be expanded to include equity investments and investments subject to FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and that the issue be addressed by the Task Force as a separate EITF issue. At the EITF meeting, the Task Force reached a consensus on one issue that certain quantitative and qualitative disclosures should be required for securities accounted for under Statement 115 that are impaired at the balance sheet date but for which an

other-than-temporary impairment has not been recognized. The Board ratified the consensus on that one issue at its November 25, 2004 meeting. In September 2004, the Financial Accounting Standards Board (“FASB”) directed the FASB staff to issue two proposed FASB Staff Positions (“FSP”): Proposed FSP EITF Issue 03-1-a, which provides guidance for the application of paragraph 16 of EITF Issue 03-1 to debt securities that are impaired because of interest rate and/or sector spread increases, and Proposed FSP EITF Issue 03-1-b, which delays the effective date of Issue 03-1 for debt securities that are impaired because of interest rate and/or sector spread increases. In June 2005, the FASB reached a decision whereby they declined to provide additional guidance on the meaning of other-than-temporary impairment. The Board directed the FASB staff to issue EITF 03-1a as final and to draft a new FSP that will replace EITF 03-01. The final FSP (retitled FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and it Application to Certain Investments”) would be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Company does not anticipate this revision will have a material effect on its financial statements

10.

GOODWILL AND INTANGIBLE ASSETS

Effective January 1, 2001, the Company adopted FAS No. 142, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of FAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives but require at least an annual impairment review, and more frequently if certain impairment indicators are in evidence. Accumulated amortization shown below for goodwill is for amounts amortized prior to the adoption of FAS No. 142. Based on management’s annual impairment review of goodwill and intangible assets there have been no impairment charges to date. Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 8 to 15 years. As part of the purchase price allocation for the acquisition of Guaranty, the Company recorded approximately $5.8 million in core deposit intangible assets and $30.1 million in goodwill. The core deposit intangible assets recorded in the Guaranty acquisition are being amortized over an average of 8.74 years. Information concerning goodwill and intangible assets is presented in the following table:


	Gross Carrying		Accumulated		Net Carrying
	Value		Amortization		Value
June 30, 2005
Amortizable core deposit intangibles	$	13,623	$	4,511	$	9,112
Unamortizable goodwill		31,639		342		31,297

December 31, 2004
Amortizable core deposit intangibles	$	13,623	$	3,902	$	9,721
Unamortizable goodwill		31,334		342		30,992

11.

COMMITMENTS AND CONTINGENCIES

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. At June 30, 2005

and 2004, the Company had outstanding loan commitments approximating $619.6 million and $434.8 million, respectively.

Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The amount of standby letters of credit whose contract amounts represent credit risk totaled approximately $25.5 million and $20.7 million at June 30, 2005 and 2004, respectively.

At June 30, 2005, the mortgage company had rate lock commitments to originate mortgage loans amounting to approximately $36.1 million and loans held for sale of $49.3 million. The mortgage company has entered into corresponding mandatory commitments, on a best-efforts basis, to sell loans servicing released totaling approximately $85.4 million. These commitments to sell loans are designed to eliminate the mortgage company’s exposure to fluctuations in interest rates in connection with rate lock commitments and loans held for sale.

LOGO

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Union Bankshares Corporation

Bowling Green, Virginia

We have reviewed the accompanying consolidated balance sheet of Union Bankshares Corporation. As of June 30, 2005, and the related consolidated statements of income for the three and six month period ended June 30, 2005 and 2004 and the statements of changes in stockholders’ equity and cash flows for the six month periods ended June 30, 2005 and 2004. These consolidated financial statements are the responsibility of the Company’s management.

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

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

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board, the balance sheet of Union Bankshares Corporation and subsidiaries, as of December 31, 2004 and the related statements of income, stockholders’ equity and cash flows for the year then ended (not presented herein); and in our report dated February 18, 2005, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of December 31, 2004 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

LOGO

Winchester, Virginia

August 2, 2005

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 (the “Company”). This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report, as well as the Annual Report of UBSH on Form 10-K for the year ended December 31, 2004. 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 month period ended June 30, 2005 and June 30, 2004 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes, while 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,” 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 by or on behalf of the Company.

Critical Accounting Policies

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

The more critical accounting and reporting policies include accounting for the allowance for loan losses, business combinations and income taxes. 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 in the “Notes to Consolidated Financial Statements” in the Company’s Annual Report of Form 10-K for the year ended December 31, 2004.

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

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 (“FAS”) No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimatable and (ii) FAS 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 is the accumulation of various components that are calculated based on independent methodologies. All components of the allowance represent an estimation performed pursuant to either FAS No. 5 or FAS No. 114. Management’s estimate of each FAS No. 5 component is based on certain observable data that management believes are most reflective of the underlying credit losses being estimated. This evaluation includes credit quality trends; collateral values; loan volumes; geographic, borrower and industry concentrations; seasoning of the loan portfolio; the findings of internal credit quality assessments and results from external bank regulatory examinations. These factors, as well as historical losses and current economic and business conditions, are used in developing estimated loss factors used in the calculations.

Reserves for commercial loans are determined by applying estimated loss factors to the portfolio based on management’s evaluation and “risk grading” of the commercial loan portfolio. Reserves are provided for noncommercial loan categories using estimated loss factors applied to the total outstanding loan balance of each loan category. Specific reserves are typically provided on all impaired commercial loans. The specific reserves are determined on a loan-by-loan basis based on management’s evaluation of the Company’s exposure for each credit, given the current payment status of the loan and the value of any underlying collateral.

While management uses the best information available to establish the allowance for loan and lease losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the valuations or, if required by regulators, based upon information available to them at the time of their examinations. Such adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.

Business Combinations

Statement of Financial Accounting Standards (“FAS”) No. 141, Business Combinations, requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. For purchase acquisitions, the Company is required to record assets acquired, including identifiable intangible assets, and liabilities assumed at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Effective January 1, 2001, the Company adopted FAS No. 142, Goodwill and Other Intangible Assets, which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of FAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives but require at least an annual impairment review and more frequently if certain impairment indicators are in evidence. The Company adopted FAS 147, Acquisitions of Certain Financial Institutions, on January 1, 2002 and determined that core deposit intangibles will continue to be amortized over their estimated useful life.

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.

The Company must also evaluate the likelihood that deferred tax assets will be recovered from future taxable income. If any such assets are not likely to be recovered, a valuation allowance must be recognized. The Company has determined that a valuation allowance is not required for deferred tax assets as of June 30, 2005. The assessment of the carrying value of deferred tax assets is based on certain assumptions, changes in which could have a material impact on the Company’s financial statements.

The effective tax rates for the three and six months ending June 30, 2005 and 2004 were 29.7%, 30%, and 28.5% and 27.3%, respectively.

Overview

The Company is a multi-bank holding company which uses a super-community bank strategy to serve small and middle market business and retail consumers throughout the high-growth Central Virginia region. The Company offers a broad range of financial services through 45 branches of its four community banks and through its investment and mortgage companies. The four banks are well established with a long history of serving their communities: Union Bank & Trust Company (founded in 1902), Rappahannock National Bank (1902), Northern Neck State Bank (1907), and the Bank of Williamsburg (1999). Union Investment Services (1993) operates out of four locations and Mortgage Capital Investors (1986) serves customers through nine mortgage company locations in Virginia, Maryland and South Carolina. Additionally, the Bank of Williamsburg has a non-controlling interest in Johnson Mortgage Company (“JMC”). Virtually all non-retail, or backoffice, operations are consolidated within the holding company to create economies of scale, achieve efficiencies and allow the financial service subsidiaries to focus on customer service and delivery. At June 30, 2005, the Company had $1.7 billion in total assets.

For the quarter ended June 30, 2005, the Company’s net income was $6.6 million, a 45% increase over the same quarter a year earlier. Contributing to this expansion, year over year, was primarily improvement in the net interest margin followed by lower provision for loan losses and higher mortgage segment contributions. The purchase date of Guaranty on May 1, 2004 reflects two months of Guaranty earnings for the second quarter 2004. Compared to the three months ending June 30, 2004, quarterly margin expansion increased 41 basis points, to 4.44% from 4.03% on a fully taxable equivalent basis (“FTE”) for the same period ending June 2005. This is marked by increased loan yields, up 55 basis points, on a lagging cost of funds base increasing 25 basis points. The Federal funds target hikes, since June 2004, have helped fuel earnings growth given the Company’s asset sensitive balance sheet. This growth is a function of earning asset yields outpacing the cost of funds. Coupled with disciplined asset/liability management practice, this favorably impacts pricing and allows the Company to remain competitive in all of its markets.

Results of Operations

Net Income

Net income for the second quarter ended June 30, 2005 was $6.6 million, up 45% from the same quarter in 2004. Earnings per share, on a diluted basis, increased from $.53 to $.75 over the same time period. Return on average equity for the quarter ended June 30, 2005 was 15.85%, while return on average assets for the same period was 1.54%, compared to 12.13% and 1.23 %, respectively, for the quarter a year earlier. Results for the first four months of 2004 do not reflect the May 1, 2004 acquisition of Guaranty Financial Corporation (“Guaranty”).

For the six months ended June 30, 2005, net income increased to $12.1 million from $8.2 million for the same period a year ago. Over this same period, earnings per share on a diluted basis increased 37% from $1.00 to $1.37. Return on average equity for the six months ended June 30, 2005 was 14.61%, while return on average assets for the same period was 1.43%, compared to 12.05% and 1.20% respectively, for the six months ended June 30, 2004.

On a linked quarter basis (current quarter to most recent quarter) net income improved 21.3% from $5.45 million to $6.61 million for the quarter ending June 2005. This represents an increase in earnings per share, on a diluted basis, of $.13, or 21%, for the quarter.

Non-GAAP Measures

Statement of Financial Accounting Standards (“FAS”) No. 141, Business Combinations, requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Prior to the issuance of SFAS No. 141, the Company accounted for most of its acquisition activity using the pooling method of accounting. The May 2004 acquisition of Guaranty Financial Corporation was the Company’s most significant business combination to be accounted for using the purchase method of accounting. This method introduces certain intangibles, such as goodwill and core deposit intangibles. At June 30, 2005, core deposit intangibles totaled $9.1 million, down from $10.3 million a year earlier and goodwill totaled $31.3 million, up $305 thousand from June 30, 2004. Amortization of core deposit intangibles has increased during 2005 as a result of the core deposit intangibles recorded in the Guaranty transaction.

In reporting its results, the Company has provided supplemental performance measures on an operating or tangible basis. Such measures exclude amortization expense related to intangible assets, such as core deposit intangibles. The Company believes these measures are useful to investors as they exclude non-operating adjustments resulting from acquisition activity and allow investors to see the combined economic results of the organization. Cash basis operating earnings per share was $.77 per share for the quarter ended June 30, 2005 as compared to $.55 per share a year earlier, an increase of 40%. Cash basis return on tangible equity for the second quarter of 2005 was 21.54% as compared to 15.61% a year earlier, and cash basis return on average tangible assets was 1.63% as compared to 1.30% a year earlier.

These measures are a supplement to GAAP used to prepare the Company’s financial statements and should not be viewed as a substitute for GAAP measures. In addition, the Company’s non-GAAP measures may not be comparable to non-GAAP measures of other companies. A reconciliation of these non-GAAP measures from their respective GAAP basis measures can be found below.

ALTERNATIVE PERFORMANCE MEASURES


	For three months ended June 30,						For six months ended June 30,
	2005			2004			2005			2004
	(dollars in thousand, except per share amounts)
Net income	$	6,612		$	4,561		$	12,065		$	8,171
Plus amortization of core deposit intangibles		198			164			395			257

Cash basis operating earnings		6,810			4,429			12,460			8,428

Weighted average shares outstanding		8,836,488			8,656,013			8,826,875			8,184,894

Average equity		167,350			151,196			166,576			136,323
Less goodwill (average)		(31,297	)		(21,210	)		(31,155	)		(11,037	)
Less core deposit intangibles (average)		(9,267	)		(8,607	)		(9,419	)		(6,733	)

Average tangible equity		126,786			121,379			126,002			118,553

Average assets		1,719,346			1,488,835			1,696,340			1,367,972
Less goodwill (average)		(31,297	)		(21,210	)		(31,155	)		(11,037	)
Less core deposit intangibles (average)		(9,267	)		(8,607	)		(9,419	)		(6,733	)

Average tangible assets		1,678,782			1,459,018			1,655,766			1,350,202

Cash basis EPS fully diluted	$	0.77		$	0.55		$	1.41		$	1.03
Cash basis return on average tangible assets		1.63	%		1.30	%		1.52	%		1.25	%
Cash basis return on average tangible equity		21.54	%		15.61	%		19.94	%		14.26	%

(1) As a supplment to Generally Accepted Accounting Principles (“GAAP”), management also reviews operating performance based on its “cash basis earnings” to fully analyze its core business. Cash basis earnings exclude amortization expense attributable to intangibles (goodwill and core deposit intangibles) that do not qualify as regulatory capital. Financial ratios based on cash basis earnings exclude the amortization of nonqualifying intangible assets from earnings and the unamortized balance of nonqualifying intangibles from assets and equity.

In management’s opinion, cash basis earnings are useful to investors because by excluding non-operating adjustments stemming from the consolidation of our organization, they allow investors to see clearly the combined economic results of our multi-bank company. These non-GAAP disclosures should not, however, be viewed in direct comparison with non-GAAP measures of other companies.

Net Interest Income

Net interest income on a fully tax equivalent (FTE) basis increased $3.8 million, or 27% to $17.5 million for the quarter as compared to the same quarter in 2004. Average earning assets increased $210.9 million, or $15.4%, funded by interest-bearing liabilities growth of $156.3 million, or 13.7%. Average demand deposits contributed $53.5 million to fund loan demand and represent a 28.4% increase since June of 2004. For the second quarter of 2005, these factors coupled with increased yields on loans of 6.55%, from 6.00%, offset by an increased cost of funds of 2.43%, from 2.18%, moved the net interest margin 41 basis points from a year ago to 4.44%. Of the $210.9 million in average earning assets growth (primarily in the commercial and construction portfolios), approximately 22% was funded by noninterest bearing deposits, contributing positively to the increased margin. Since June 2004 we have experienced an increase in the Federal funds target at each Federal Reserve Board Open Market Committee (“FOMC”) meeting, benefiting the Company due to its asset sensitivity. The Company continues to be asset sensitive and would benefit from continued increases in interest rates, albeit at a slower pace than that experienced during the first six months of 2005. In an effort to protect its improved net interest margin, management will continue to monitor its interest rate risk as the FOMC nears the anticipated end of the current tightening cycle.

On a linked quarter basis the Company’s net interest margin (FTE) grew by $732 thousand, or 4.4% for the quarter ending June 30, 2005. This translates into a three basis point addition to the net interest margin

during the quarter, from 4.41% to 4.44%. Increases in demand deposits helped reduce the overall cost of funds. Loan yields increased by 17 basis points to 6.55% while cost of funds increased by 15 basis points to 2.43%. Large certificate of deposits (those greater than $100 thousand), on average, continued to experience growth of approximately 10%, same as the prior quarter, and added to the interest bearing funding base of $1.3 billion.

Provision for Loan Losses

The Company’s asset quality remains strong and is reflected in the $173 thousand decrease in provision for loans losses from $308 thousand for the quarter ended June 30, 2004 to $135 thousand for the quarter ended June 30, 2005. Contributing to the overall decline in the provision for loan losses has been improved credit quality and the payout of low credit quality loans. At June 30, 2005, nonperforming assets totaled $11.3 million, including a single credit relationship totaling $11 million. The loans in this relationship are secured by real estate, but based on the information currently available management has allocated $1.1 million in reserves. (See Asset Quality)

Noninterest Income

Noninterest income for the three months ended June 30, 2005 increased by $743 thousand to $7 million, or 11.8%, compared to the same quarter in 2004.

For the same period, other service charges, commissions and fees increased $269 thousand or 33%. The increase in other service charges was driven primarily by a $125 thousand increase in income related to debit card and ATM transactions. The volume of transactions processed has increased over the last year due to increased acceptance and usage by customers. Letter of credit and exchange fees contributed an additional $79 thousand in other service charges.

Gains on sales of loans increased $335 thousand over the same period a year ago. Mortgage loan production for the second quarter of 2005 totaled $153.9 million as compared to $148.7 million in the second quarter of 2004. Additionally, a slight shift in our mix from brokered loans to more profitable correspondent loans also contributed to this increase. (See Segment Information)

Other operating income increased by $106 thousand to $408 thousand during the second quarter of 2005. This increase is due primarily to an increase in income from our investment in Bankers Insurance Group ($54 thousand), incentive rewards from our credit card processor ($38 thousand).

Compared to quarter ended March 31, 2005, noninterest income increased $1.7 million or 31% from $5.3 million to $7.0 million. This change includes an increase of $1.1 million, or 42%, in gains on sales of mortgage loans, $304 thousand in service charges on deposit accounts and $151 thousand in other operating income. Mortgage loan production increased $38 million, or 33%, from the prior quarter representing most of the increase in the gain on sale of mortgages. The increase in service charges on deposit accounts was driven primarily by an increase in overdraft and return check charges. This improvement was primarily a result of the extension of the overdraft protection service to the Charlottesville market and additional marketing efforts to current customers. The increase in other operating income was due largely to an increase in income from our investment in JMC. Additional sources of increased income were incentive rewards from our credit card processor as well as our investment in Bankers Insurance Group.

Noninterest Expense

Noninterest expense during the second quarter of 2005 increased $1.7 million from the same quarter in the prior year. Management continuously monitors expenses closely to ensure any increases are in line with the Company’s expectations, but sufficient to maintain the appropriate operating foundation for future growth. Additionally, management has achieved the cost savings as modeled in the Guaranty acquisition.

Salaries and benefits increased $1.1 million from the same period a year ago. This increase is due to the opening of additional branches, increased commissions in the mortgage segment due to increased loan production, additional profit sharing expense and normal compensation adjustments.

Occupancy expense increased $184 thousand from $813 thousand for the same period a year ago. Furniture and equipment expenses increased $106 from $861 thousand for the three months ended June 30, 2004. These increases were primarily due to the opening of additional branches. Other contributing components include increased custodial fees, electricity, and repairs and maintenance.

Other operating expense increased $392 thousand from $3.7 million from the same period a year ago. This includes an increase of $305 thousand in telephone and internet, courier and armored car, stationary and supplies. Other increases include marketing, franchise tax, training, directors’ fees, and ATM expenses. Lastly, the conversion of Guaranty’s data processing to the Company’s data processing platform represents an approximate cost savings of $174 thousand when compared to last year’s same quarter.

On a linked quarter basis noninterest expense increased $1 million or 7.6%. This change includes an increase of $523 thousand in salaries representing increased commissions paid as a result of increased mortgage loan production in the mortgage segment. Other operating expenses increased $437 thousand. Professional services increased $81 thousand largely as a result of additional Sarbanes Oxley audit and accounting fees. Marketing and advertising increased $69 thousand. The remaining increase included training, employee travel and meals, directors’ education, charged off overdrafts and other loan processing related expenses, software and courier expense.

Segment Information

Second quarter net income for the community banking segment was $6.2 million, an increase of $2.1 million or 55% from $4.0 million in the second quarter of 2004. Net income for the mortgage banking segment was $446 thousand, a decline of $91 thousand or 17% from $537 thousand in the same quarter of 2004. For the six months ended June 30, 2005, net income for the community bank segment increased to $11.5 million from $7.5 million at June 30, 2004, while the mortgage segment decreased to $555 thousand from $662 thousand for the same period of 2004.

The community banking segment net income, on a linked quarter basis, increased $822 thousand or 15.4% to $6.2 million. Margin expansion of $704 thousand, in addition to $197 thousand improvement in the provision for loan losses, drove the quarterly profit increase. Mortgage segment net income increased $337 thousand to $446 thousand from the prior quarter, primarily as a result of loan production increases and product mix in a low mortgage rate environment.

The mortgage banking segment was driven by a strong purchase market during the quarter as refinances fell to 27.6% of production from 30.7% in the prior quarter and 32.6% the same quarter last year. The emphasis on purchases led to more profitable loan originations compared to the previous quarter. Year over year, market demand has led to increasing competitive pricing and the introduction of additional conventional loan products that have resulted in lower income per loan than more traditional conventional and governmental loans. The introduction of new products has also resulted in increased internal production as 20% of loans were closed by third parties during the quarter compared to 22.5% in the prior quarter and 24.6% in the same quarter last year.

Balance Sheet Review

Net loans were $1.3 billion and $1.2 billion at June 30, 2005 and 2004, respectively. Sequential quarter growth represents approximately $15.8 million or an increase of 1.23% predominately within the construction and equity line portfolios. The rising interest rate environment has improved the Company’s yield on earning assets. In particular, the 225 basis point increase in the Federal funds target rate since the

FOMC began raising rates in June 2004 from 1%, has helped with improving yields (FTE) on loans, and for the quarter represents an increase from 6.38% to 6.55%. During that same period the Company’s cost of funds increased from 2.28% to 2.43%. Total deposits increased $38.9 million during the second quarter of 2005 to $1.4 billion. Growth of $20.3 million and $19.0 million was experienced in large certificates of deposits (those greater than $100 thousand) and demand deposits, respectively, offset by a decline in money market accounts of $8.1 million. Moreover, the rate and volume of deposit growth to loan growth for the quarter has allowed for less reliance on purchased funds as evidenced by the decline in short term borrowings from $14.1 million to $7.6 million.

At June 30, 2005 total assets were $1.74 billion, up 8%, or $132 million from $1.60 billion a year earlier. Securities decreased to $224.6 million compared to $244.9 million for the same period. Total assets have increased $41.0 million from $1.70 billion at March 2005 to $1.74 billion at June 2005. Securities increased $1.8 million from $222.8 million to $224.6 million. The Company’s capital position remains strong with an equity-to-assets ratio of 9.83 %.


	Union Bankshares Corporation
	AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
	For the three months ended June 30
	2005							2004							2003
	Average Balance			Interest Income/ Expense		Yield/ Rate(3)		Average Balance			Interest Income/ Expense		Yield/ Rate (3)		Average Balance			Interest Income/ Expense		Yield/ Rate (3)
	(Dollars in thousands)
Assets:
Securities:
Taxable .	$	150,968		$	1,910	5.07	%	$	163,682		$	1,880	4.62	%	$	176,230		$	2,124	4.83	%
Tax-exempt(1)		75,046			1,422	7.60	%		84,557			1,507	7.17	%		86,261			1,726	8.03	%

Total securities		226,014			3,332	5.91	%		248,239			3,387	5.49	%		262,491			3,850	5.88	%
Loans, net (1) (2)		1,309,827			21,401	6.55	%		1,071,260			15,981	6.00	%		760,843			12,923	6.81	%
Loans held for sale		38,400			609	6.36	%		40,561			553	5.48	%		49,122			612	5.00	%
Federal funds sold		4,205			9	0.89	%		7,520			14	0.75	%		11,451			20	0.70	%
Money market investments		84			—	2.61	%		82			0	0.69	%		1,374			4	1.17	%
Interest-bearing deposits in other banks		2,326			17	2.87	%		2,624			1	0.21	%		2,641			8	1.21	%
Other interest-bearing deposits		2,598			19	2.92	%		2,306			6	1.08	%		—			—

Total earning assets		1,583,454			25,387	6.43	%		1,372,592			19,942	5.84	%		1,087,922			17,417	6.42	%
Allowance for loan losses		(16,572	)						(13,524	)						(9,743	)
Total non-earning assets		152,464							129,767							77,489

Total assets	$	1,719,346						$	1,488,835						$	1,155,668

Liabilities & Stockholders’ Equity:
Interest-bearing deposits:
Checking .	$	200,773			177	0.35	%	$	174,355			119	0.27	%	$	133,009			160	0.48	%
Money market savings		183,643			727	1.59	%		150,711			322	0.86	%		95,341			250	1.05	%
Regular savings		119,952			245	0.82	%		113,242			169	0.60	%		88,902			197	0.89	%
Certificates of deposit:
$100,000 and over		243,826			2,125	3.50	%		189,080			1,630	3.47	%		161,719			1,567	3.89	%
Under $100,000		362,450			2,784	3.08	%		351,406			2,624	3.00	%		320,366			2,862	3.58	%

Tota linterest-bearing deposits		1,110,644			6,058	2.19	%		978,794			4,864	2.00	%		799,337			5,036	2.53	%
Other borrowings		185,589			1,808	3.91	%		161,154			1,324	3.30	%		94,838			985	4.17	%

Total interest-bearing liabilities		1,296,233			7,866	2.43	%		1,139,948			6,188	2.18	%		894,175			6,021	2.70	%
Noninterest bearing liabilities:
Demand deposits		242,183							188,696							137,171
Other liabilities		13,580							8,993							12,825

Total liabilities		1,551,996							1,337,637							1,044,171
Stockholders’ equity		167,350							151,198							111,497

Total liabilities and stockholders’ equity	$	1,719,346						$	1,488,835						$	1,155,668

Net interest income				$	17,521						$	13,754						$	11,396

Interest rate spread						4.00	%						3.66	%						3.72	%
Interest expense as a percent of average earning assets						1.99	%						1.81	%						2.22	%
Net interest margin						4.44	%						4.03	%						4.20	%

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

(2)	Collection of $94 thousand in foregone interest on a previously charged off credit has been excluded. Nonaccrual loans have been included in the balance.

(3)	Annualized.


	Union Bankshares Corporation
	AVERAGE BALANCES(1), INCOME AND EXPENSES, YIELDS AND RATES (TAXABLE EQUIVALENT BASIS)
	For the six months ended June 30,
	2005							2004							2003
	Average Balance			Interest Income/ Expense		Yield/ Rate (3)		Average Balance			Interest Income/ Expense		Yield/ Rate (3)		Average Balance			Interest Income/ Expense		Yield/ Rate (3)
	(Dollars in thousands)
Assets:
Securities:
Taxable	$	153,016		$	3,829	5.05	%	$	160,326		$	3,734	4.68	%	$	177,034		$	4,347	4.95	%
Tax-exempt(2)		74,750			2,853	7.70	%		83,112			3,034	7.34	%		87,880			3,439	7.89	%

Total securities		227,766			6,682	5.92	%		243,438			6,768	5.59	%		264,914			7,786	5.93	%
Loans, net (1) (2)		1,292,630			41,477	6.47	%		982,048			29,692	6.08	%		744,500			25,586	6.93	%
Loans held for sale		35,054			1,081	6.22	%		31,626			884	5.62	%		42,976			1,133	5.32	%
Federal funds sold		2,644			11	0.86	%		13,294			60	0.91	%		14,970			64	0.86	%
Money market investments		77			1	2.28	%		112			0	0.43	%		3,731			22	1.19	%
Interest-bearing deposits in other banks		2,415			32	2.69	%		2,269			5	0.43	%		2,099			13	1.25	%
Other interest-bearing deposits		2,598			34	2.65	%		1,181			6	1.06	%		—			—

Total earning assets		1,563,184			49,318	6.36	%		1,273,968			37,415	5.91	%		1,073,190			34,604	6.50	%
Allowance for loan losses		(16,535	)						(12,605	)						(9,609	)
Total non-earning assets		149,691							106,609							74,898

Total assets	$	1,696,340						$	1,367,972						$	1,138,479

Liabilities & Stockholders’ Equity:
Interest-bearing deposits:
Checking	$	197,706			324	0.33	%	$	161,056			225	0.28	%	$	131,026			333	0.51	%
Money market savings		187,689			1,365	1.47	%		129,590			544	0.84	%		95,629			519	1.09	%
Regular savings		119,453			464	0.78	%		104,416			314	0.60	%		88,059			414	0.95	%
Certificates of deposit:
$100,000 and over		232,836			3,959	3.43	%		183,798			3,211	3.51	%		159,133			3,111	3.94	%
Under $100,000		361,588			5,406	3.01	%		340,311			5,298	3.13	%		316,661			5,745	3.66	%

Total interest-bearing deposits		1,099,272			11,518	2.11	%		919,171			9,592	2.10	%		790,508			10,122	2.58	%
Other borrowings		184,235			3,490	3.82	%		134,670			2,370	3.54	%		96,093			1,962	4.12	%

Total interest-bearing liabilities		1,283,507			15,008	2.36	%		1,053,841			11,962	2.28	%		886,601			12,084	2.75	%
Noninterest bearing liabilities:
Demand deposits		233,309							169,163							131,038
Other liabilities		12,948							8,645							11,662

Total liabilities		1,529,764							1,231,649							1,029,301
Stockholders’ equity		166,576							136,323							109,178

Total liabilities and stockholders’ equity	$	1,696,340						$	1,367,972						$	1,138,479

Net interest income				$	34,310						$	25,453						$	22,520

Interest rate spread						4.00	%						3.62	%						3.75	%
Interest expense as a percent of average earning assets						1.94	%						1.89	%						2.26	%
Net interest margin						4.43	%						4.02	%						4.21	%

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

(2)	Collection of $196 thousand in foregone interest on a previously charged off credit has been excluded. Nonaccrual loans have been included in the balance.

(3)	Annualized.

Loan Portfolio

The following table presents the composition of the Company’s loans (net of unearned income) in dollar amounts and as a percentage of the Company’s total gross loans as of the indicated date:


	June 30, 2005	% of Total		December 31, 2004			% of Total		June 30, 2004			% of Total
Mortgage loans on real estate:
Residential 1-4 family	272,382	20.7	%		270,341		21.4	%		255,510		21.7	%
Commercial	390,522	29.7	%		368,816		29.2	%		335,586		28.6	%
Construction	240,088	18.3	%		221,190		17.5	%		203,589		17.3	%
Second mortgages	20,256	1.5	%		18,017		1.4	%		18,185		1.5	%
Equity lines of credit	97,359	7.4	%		90,042		7.2	%		75,596		6.4	%
Multifamily	9,523	0.7	%		18,287		1.4	%		12,043		1.0	%
Agriculture	9,634	0.7	%		5,530		0.4	%		7,964		0.7	%

Total real estate loans	1,039,764	79.1	%		992,223		78.5	%		908,473		77.3	%

Commercial Loans	125,977	9.6	%		135,907		10.7	%		137,637		11.7	%

Consumer installment loans
Personal	124,612	9.5	%		113,841		9.0	%		112,204		9.5	%
Credit cards	8,590	0.7	%		8,655		0.7	%		7,300		0.6	%

Total consumer installment loans	133,202	10.2	%		122,496		9.7	%		119,504		10.2	%

All other loans and agriculture loans	14,875	1.1	%		14,219		1.1	%		9,817		0.8	%

Gross loans	1,313,818	100.0	%		1,264,845		100.0	%		1,175,431		100.0	%
Less unearned income on loans	—				(4	)				(13	)

Loans, net of unearned income	1,313,818			$	1,264,841				$	1,175,418

The Company’s portfolio is significantly concentrated in real estate, including 1-4 family, commercial and construction loans. The risks attributable to these concentrations are managed by our seasoned bankers focusing their lending to borrowers with proven track records in markets with which we are familiar.

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. The Company’s management has established an allowance for loan losses which it believes is adequate for the risk of loss 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 that 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 June 30, 2005, non-performing assets totaled $11.3 million, including a single credit relationship totaling $11 million in loans. These loans are secured by real estate (two assisted living facilities and other real estate), but based on the information currently available, a reserve of $1.1 million has been allocated for possible losses on these loans. Since the end of the first quarter 2004, the Company has entered into a workout agreement with the borrower. Under the terms of the workout, the Company extended further credit of approximately $1.6 million secured by real estate with significant equity. During the second quarter of 2005, the Company extended additional credit of approximately $315 thousand in order to proceed with the workout agreement. Through a related party, the borrower has nearly

completed the process of obtaining local approval to sell lots in a new subdivision. With the proceeds from a development loan secured by the new subdivision, the borrower will payoff the credit extended as part of the workout agreement and make an immediate curtailment of the operating loans to the assisted living facilities. The Company anticipates that this transaction should occur in the third quarter of 2005. The Company anticipates that this workout has and will continue to result in a reduction of overall exposure to the borrower. This situation has had a significant negative impact on the asset quality ratios that follow since the loans were put on nonaccrual in June 2003.

Nonaccrual loans increased $378 thousand from $10.9 million as of March 31, 2005 to $11.3 million as of June 30, 2005. This increase was due primarily to the extension of the additional credit previously mentioned. Net charge-offs were $52 thousand for the quarter compared to $466 thousand in net recoveries the same quarter last year. Recoveries during the quarter were lower than the same quarter last year as the Company completed, in 2004, the recovery of principal on a large loan charged off in prior years. Approximately $196 thousand has been collected in foregone interest on a previously charged off credit and recorded in interest income.

The allowance for loan losses totaled $16.6 million at June 30, 2005 or 1.27% of total loans, as compared to 1.30% at December 31, 2004 and 1.26% at June 30, 2004.


	June 30, 2005			December 31, 2004			June 30, 2004
	( in thousands)
Nonaccrual loans	$	11,290		$	11,169		$	11,077
Foreclosed properties		—			14			14

Nonperforming assets	$	11,290		$	11,183		$	11,091

Allowance for loan losses	$	16,654		$	16,384		$	14,810
Allowance as% of total loans		1.27	%		1.30	%		1.26	%
Allowance as% of nonperforming assets		148	%		147	%		133	%
Nonperforming assets to loans and foreclosed properties		0.86	%		0.88	%		0.94	%
Net charge-offs (recoveries) annualized to year to date average loans outstanding		0.03	%		-0.06	%		0.10	%

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, 2004, stockholders’ equity has increased by $8.3 million. This is the result of net income of $12 million year to date, less $3.2 million in dividends paid to our shareholders. The decrease in the unrealized gain on the Company’s securities portfolio reduced equity by $1 million. The issuance of common stock under the dividend reinvestment plan, stock options, and stock grants represents the remainder of this increase.

In order to facilitate the purchase of Guaranty Financial Corporation, the Company issued $22.5 million in trust preferred capital notes in March 2004. These may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier I capital after its inclusion.

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 total capital to risk-weighted 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, 2005, the Company’s ratio of total capital to risk-weighted assets was 11.96% and its ratio of Tier 1 capital to risk-weighted assets was 10.76%. Both ratios exceed the minimum capital requirements. Each of the banking subsidiaries maintain a risk-based capital ratio in excess of 10% and meet the definition of “well capitalized”. The following summarizes the Company’s regulatory capital and related ratios at June 30, 2005 and June 30, 2004 (dollars in thousands):


	June 30, 2005			June 30, 2004
Tier 1 Capital	$	149,150		$	130,621
Tier 2 Capital		16,654			14,810
Total risk-based capital		165,804			145,431
Total risk-weighted assets		1,386,705			1,294,727

Capital Ratios:
Tier 1 risk-based capital ratio		10.76	%		10.09	%
Total risk-based capital ratio		11.96	%		11.23	%
Leverage ratio (Tier 1 capital to average adjusted total assets)		8.88	%		9.02	%
Equity to assets ratio		9.83	%		9.49	%

The Company’s book value per share at June 30, 2005 was $19.52. Dividends to stockholders are typically paid semi-annually in the first week of May and November. The last dividend of $.37 per share was paid May 2, 2005.

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 repricing 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 of Atlanta (“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, 2005, 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 totaled $1.1 billion or 69% of total earning assets. At June 30, 2005, approximately $779 million, or 59.3% 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.

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 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.

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 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 ramp 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 by applying 12-month ramps versus the implied forward rates in intervals of 50 basis points up to a total of 200 basis points. The following table represents the interest rate sensitivity on net interest income for the Company across the rate paths modeled as of June 30, 2005:


	Change in Net Interest Income
Change in Yield Curve	(Percent)		( $ in thousands)
+200 basis points	6.74	%	$	5,123
+50 basis points	1.65	%		1,256
Most likely rate scenario	0.00	%		—
-50 basis points	-1.69	%		-1,287
-200 basis points	-6.92	%		-5,254

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 sensitivity 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, whereas the earnings simulation uses rate ramps over 12 months. The following chart reflects the estimated change in net economic value over different rate environments using economic value simulation as of June 30, 2005:


	Change in Economic Value of Equity
Change in Yield Curve	(Percent)		( $ in thousands)
+200 basis points	3.43	%	$	10,541
+50 basis points	1.59	%		4,889
Most likely rate scenario	0.00	%		—
-50 basis points	-2.06	%		-6,316
-200 basis points	-10.13	%		-31,090

ITEM 4 – CONTROLS AND PROCEDURES

The Company maintains “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (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 Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the 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, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, management necessarily 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 Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective. There was no change in the internal control over financial reporting that occurred during the quarter ended June 30, 2005 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 4 – Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on April 19, 2005, at which time stockholders were asked to consider two proposals, as follows:

1. To elect three (3) directors to serve as Class III directors for a three-year term and one (1) director to serve as a Class I director for the remaining one-year portion of the Class I directors’ three year term; and

2. To ratify the appointment of Yount, Hyde & Barbour, P.C. as the Company’s independent auditors for the year ended December 31, 2005.

The vote tabulation was as follows:

1. Election of three Class III directors to serve for a term of three years, and Election of one director to serve as Class I director for the remaining one year portion of the Class I directors three year term:


Director	Votes For	Votes Withheld
G. William Beale	7,216,908	34,520
Patrick J. McCann	7,218,249	33,179
Hullihen W. Moore	7,217,874	33,554
Douglas E. Caton	7,204,148	47,280

2. To ratify the appointment of Yount, Hyde, Barbour, P.C. as independent auditors for the Company for 2005.


Votes For	Votes Against	Abstain
7,140,389	71,736	39,303

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
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.

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 5, 2005	By:	/s/ G. William Beale
(Date)		G. William Beale,
		President and Chief Executive Officer

August 5, 2005	By:	/s/ D. Anthony Peay
(Date)		D. Anthony Peay,
		Executive Vice President and Chief Financial Officer

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