UNION BANKSHARES CORP - 10-Q Quarterly Report

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 September 30, 2002

Commission File No. 0-20293

UNION BANKSHARES CORPORATION
(Exact name of registrant as specified in its charter)

Virginia		54-1598552
(State of Incorporation)		(I.R.S. Employer Identification No.)

212 North Main Street
P.O. Box 446
Bowling Green, Virginia 22427
(Address of principal executive offices)

(804) 633-5031
(Registrant’s telephone number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $2 PAR VALUE

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

As of October 28, 2002, Union Bankshares Corporation had 7,600,817 shares of Common Stock outstanding.

UNION BANKSHARES CORPORATION
FORM 10-Q
September 30, 2002

INDEX

		Page

PART 1 - FINANCIAL INFORMATION

Item 1 - Financial Statements

	Consolidated Balance Sheets as of September 30, 2002 (Unaudited) and December 31, 2001 (Audited)	1

	Consolidated Statements of Income (Unaudited) For the three months and nine months ended September 30, 2002 and 2001	2

	Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) For the nine months ended September 30, 2002 and 2001	3

	Consolidated Statements of Cash Flows (Unaudited) For the nine months ended September 30, 2002 and 2001	4

	Notes to Consolidated Financial Statements (Unaudited)	5 - 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

Item 2 – Changes in Securities and Use of Proceeds		25

Item 3 – Defaults Upon Senior Securities		25

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

Item 5 – Other Information		25

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

Signatures		26

Index to Exhibits		27

PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share information)

					September 30, 2002		December 31, 2001

					(Unaudited)
ASSETS
Cash and cash equivalents:
	Cash and due from banks				$	27,621	$	28,769
	Interest-bearing deposits in other banks					4,618		462
	Money market investments					199		2,023
	Federal funds sold					4,964		7,661

		Total cash and cash equivalents				37,402		38,915

Securities available for sale, at fair value						265,601		257,062

Loans held for sale						39,744		43,485

Loans, net of unearned income						686,405		600,164
	Less allowance for loan losses					8,946		7,336

		Net loans				677,459		592,828

Bank premises and equipment, net						21,587		19,191
Other real estate owned						781		768
Other assets						27,797		30,848

		Total assets			$	1,070,371	$	983,097

LIABILITIES AND STOCKHOLDERS’ EQUITY
Noninterest-bearing demand deposits					$	131,018	$	110,913
Interest-bearing deposits:
	NOW accounts					120,887		112,940
	Money market accounts					83,607		79,176
	Savings accounts					81,453		72,897
	Time deposits of $100,000 and over					137,675		133,629
	Other time deposits					297,483		274,529

			Total interest-bearing deposits			721,105		673,171

			Total deposits			852,123		784,084

Securities sold under agreements to repurchase						39,919		41,083
Long-term borrowings						62,010		62,731
Other liabilities						11,997		6,220

			Total liabilities			966,049		894,118

Commitments and contingencies
Stockholders’ equity:
	Common stock, $2 par value. Authorized 24,000,000 shares; issued and outstanding, 7,560,817, and 7,525,912 shares, respectively					15,122		15,052
	Surplus					1,024		446
	Retained earnings					80,057		71,419
	Accumulated other comprehensive income					8,119		2,062

				Total stockholders’ equity		104,322		88,979

				Total liabilities and stockholders’ equity	$	1,070,371	$	983,097

See accompanying notes to consolidated financial statements.

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(dollars in thousands, except per share amounts)

				Three Months Ended September 30,					Nine Months Ended September 30,

				2002		2001			2002			2001

Interest and dividend income:
	Interest and fees on loans			$	12,827	$	12,831		$	37,496		$	39,001
	Interest on Federal funds sold				58		196			151			323
	Interest on interest-bearing deposits in other banks				5		10			12			28
	Interest on money market investments				1		—			12
	Interest and dividends on securities:
		Taxable			2,396		2,296			7,270			6,715
		Nontaxable			1,154		1,144			3,486			3,502

			Total interest and dividend income		16,441		16,477			48,427			49,569

Interest expense:
	Interest on deposits				5,048		6,786			15,297			21,051
	Interest on short-term borrowings				136		306			359			1,037
	Interest on long-term borrowings				930		991			2,765			3,192

			Total interest expense		6,114		8,083			18,421			25,280

			Net interest income		10,327		8,394			30,006			24,289
Provision for loan losses					650		445			2,219			1,270

			Net interest income after provision for loan losses		9,677		7,949			27,787			23,019

Noninterest income:
	Service charges on deposit accounts				1,079		881			2,939			2,753
	Other service charges, commissions and fees				657		636			1,962			1,867
	Gains (losses) on securities transactions, net				1		95			(160	)		125
	Gains on sales of loans				2,722		2,360			6,936			6,291
	Gains (losses) on sales of other real estate owned and bank premises, net				77		(15	)		159			69
	Other operating income				188		110			548			664

			Total noninterest income		4,724		4,067			12,384			11,769

Noninterest expenses:
	Salaries and benefits				5,510		4,974			15,655			14,247
	Occupancy expenses				589		553			1,697			1,614
	Furniture and equipment expenses				639		700			1,993			2,128
	Other operating expenses				2,329		1,875			7,020			5,842

			Total noninterest expenses		9,067		8,102			26,365			23,831

Income before income taxes					5,334		3,914			13,806			10,957
Income tax expense					1,323		877			3,284			2,363

			Net income	$	4,011	$	3,037		$	10,522		$	8,594

Basic net income per share				$	0.53	$	0.40		$	1.39		$	1.14
Diluted net income per share				$	0.52	$	0.40		$	1.38		$	1.14

See accompanying notes to consolidated financial statements.

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(dollars in thousands)

Common
Stock

Surplus

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Comprehensive
Income

Total

Balance - December 31, 2000

15,033

403

63,201

(285

)

78,352

Comprehensive income:

Net income - for nine months ended September 30, 2001

8,594

Unrealized holding gains arising during the period (net of tax, $2,361)

4,418

Reclassification adjustment for gains included in net income (net of tax, $43)

(82

)

Other comprehensive income (net of tax, $2,318)

4,500

Total comprehensive income

13,094

Cash dividends - 2001 ($.44 per share semi annually)

(1,658

)

(1,658

)

Issuance of common stock under Dividend Reinvestment Plan (12,930 shares)

168

—

194

Stock repurchased under Stock Repurchase Plan (31,250 shares)

(62

)

(427

)

(489

)

Issuance of common stock in exchange for net assets in acquisition (19,606 shares)

192

231

Balance - September 30, 2001 (Unaudited)

15,036

336

70,137

4,215

89,724

Balance - December 31, 2001

15,052

446

71,419

2,062

88,979

Comprehensive income:

Net income - for nine months ended September 30, 2002

10,522

Unrealized holding gains arising during the period (net of tax, $3,066)

5,951

Reclassification adjustment for loss included in net income (net of tax, $54)

106

Other comprehensive income (net of tax, $3,120)

6,057

Total comprehensive income

16,579

Cash dividends - 2002 ($.50 per share semi annually)

(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 (8,200 shares)

100

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

299

333

Balance - September 30, 2002 (Unaudited)

15,122

1,024

80,057

8,119

104,322

See accompanying notes to consolidated financial statements.

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2002 and 2001
(dollars in thousands)

				2002			2001

Operating activities:
	Net income			$	10,522		$	8,594
	Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:
		Depreciation of bank premises and equipment			1,462			1,438
		Amortization			1,416			996
		Provision for loan losses			2,219			1,280
		(Gains) losses on sales of securities available for sale			160			(125	)
		Gains on sales of other real estate owned and fixed assets, net			(159	)		(69	)
		(Increase) decrease in loans held for sale			3,741			(10,912	)
		(Increase) decrease in other assets			(380	)		480
		Increase (decrease) in other liabilities			5,776			(192	)

			Net cash and cash equivalents provided by operating activities		24,757			1,490

Investing activities:
	Purchase of securities available for sale				(36,438	)		(45,907	)
	Proceeds from sale of securities available for sale				6,280			1,556
	Proceeds from maturities of securities available for sale				30,165			35,047
	Net increase in loans				(87,329	)		(16,449	)
	Purchases of bank premises and equipment				(4,254	)		(519	)
	Proceeds from sales of bank premises and equipment				220			22
	Proceeds from sales of other real estate owned				501			879

			Net cash and cash equivalents used in investing activities		(90,855	)		(25,371	)

Financing activities:
	Net increase in noninterest-bearing deposits				20,105			8,487
	Net increase in interest-bearing deposits				47,934			36,420
	Net increase (decrease) in short-term borrowings				(1,164	)		6,439
	Net decrease in long-term borrowings				(721	)		(10,843	)
	Issuance of common stock				315			194
	Purchase of common stock				—			(489	)
	Cash dividends paid				(1,884	)		(1,658	)

			Net cash and cash equivalents provided by financing activities		64,585			38,550

Increase (decrease) in cash and cash equivalents					(1,513	)		14,669
Cash and cash equivalents at beginning of period					38,915			22,869

Cash and cash equivalents at end of period				$	37,402		$	37,538

Supplemental Disclosure of Cash Flow Information
	Cash payments for:
		Interest		$	18,657		$	25,540
		Income taxes		$	3,292		$	1,942

See accompanying notes to consolidated financial statements.

UNION BANKSHARES CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
September 30, 2002

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.

	Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission. However, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the results of operations for each of the periods presented have been made. Operating results for the three and nine month periods ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

	These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2001. Certain previously reported amounts have been reclassified to conform to current period presentation. These reclassifications are immaterial and had no effect on net income or stockholders’ equity.

2.	ALLOWANCE FOR LOAN LOSSES

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

	2002			2001

Balance, January 1	$	7,336		$	7,389
Provisions charged to operations		2,219			1,270
Recoveries credited to allowance		384			296
Loans charged off		(993	)		(1,492	)

Balance, September 30	$	8,946		$	7,463

3.	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 September 30, 2002 there were no stock options that were anti-dilutive. The following is a reconcilement of the components of the basic and diluted EPS computations for the three and the nine months ended September 30, 2002 and 2001.

	Three Months Ended September 30,				Nine Months Ended September 30,

	2002		2001		2002		2001

	(In thousands except per share data)
Earnings per common share computation:
Net Income	$	4,011	$	3,037	$	10,522	$	8,594
Average common shares outstanding		7,560		7,524		7,550		7,526
Earnings per common share		0.53		0.40		1.39		1.14
Diluted earnings per common share computation:
Net Income		4,011		3,037		10,522		8,594
Average common shares outstanding		7,560		7,524		7,550		7,526
Dilutive shares contingently issuable		74		20		64		17
Average diluted common shares outstanding		7,634		7,544		7,614		7,543
Diluted earnings per common share		0.52		0.40		1.38		1.14

4.	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 31 retail 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 back room support 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 nine months ended September 30, 2002 and 2001 follows:

Union Bankshares Corporation
Segment Report

	Community Banks		Mortgage		Elimination			Consolidated Totals

	(in thousands)
Three Months ended September 30, 2002
Net interest income	$	10,082	$	245	$	—		$	10,327
Provision for loan losses		650		—		—			650

Net interest income after provision for loan losses		9,432		245		—			9,677
Noninterest income		2,046		2,722		(44	)		4,724
Noninterest expenses		6,834		2,277		(44	)		9,067

Income before income taxes		4,644		690		—			5,334
Income tax expense		1,088		235		—			1,323

Net income	$	3,556	$	455	$	—		$	4,011

Assets	$	1,065,167	$	42,723	$	(36,519	)	$	1,071,371

Three Months ended September 30, 2001
Net interest income	$	8,196	$	198	$	—		$	8,394
Provision for loan losses		445		—		—			445

Net interest income after provision for loan losses		7,751		198		—			7,949
Noninterest income		1,744		2,363		(40	)		4,067
Noninterest expenses		6,099		2,043		(40	)		8,102

Income before income taxes		3,396		518		—			3,914
Income tax expense		701		176		—			877

Net income	$	2,695	$	342	$	—		$	3,037

Assets	$	935,361	$	29,004	$	(30,721	)	$	933,644

Nine Months ended September 30, 2002
Net interest income	$	29,241	$	765	$	—		$	30,006
Provision for loan losses		2,219		—		—			2,219

Net interest income after provision for loan losses		27,022		765		—			27,787
Noninterest income		5,580		6,935		(131	)		12,384
Noninterest expenses		20,287		6,209		(131	)		26,365

Income before income taxes		12,315		1,491		—			13,806
Income tax expense		2,777		507		—			3,284

Net income	$	9,538	$	984	$	—		$	10,522

Assets	$	1,065,167	$	42,723	$	(36,519	)	$	1,071,371

Nine Months ended September 30, 2001
Net interest income	$	23,828	$	461	$	—		$	24,289
Provision for loan losses		1,270		—		—			1,270

Net interest income after provision for loan losses		22,558		461		—			23,019
Noninterest income		5,596		6,294		(121	)		11,769
Noninterest expenses		18,347		5,605		(121	)		23,831

Income before income taxes		9,807		1,150		—			10,957
Income tax expense		1,972		391		—			2,363

Net income	$	7,835	$	759	$	—		$	8,594

Assets	$	935,361	$	29,004	$	(30,721	)	$	933,644

5.	RECENT ACCOUNTING STATEMENTS

	In April 2002, the Financial Accounting Standards Board issued Statement 145, Rescission of FASB No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This Statement also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of this Statement related to the rescission of Statement 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of this Statement related to Statement 13 are effective for transactions occurring after May 15, 2002, with early application encouraged.

	In June 2002, the Financial Accounting Standards Board issued Statement 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31 2002, with early application encouraged.

	The Financial Accounting Standards Board issued Statement No. 147, Acquisitions of Certain Financial Institutions, an Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9 in October 2002. FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, and FASB Interpretation No. 9, Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method, provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Except for transactions between two or more mutual enterprises, this Statement removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions with the scope of this Statement. In addition, this Statement amends FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and

	measurement provisions that Statement 144 requires for other long-lived assets that are held and used.

	Paragraph 5 of FASB Statement 147, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted.

	This Statement clarifies that a branch acquisition that meets the definition of a business should be accounted for as a business combination, otherwise the transaction should be accounted for as an acquisition of net assets that does not result in the recognition of goodwill.

	The transition provisions state that if the transaction that gave rise to the unidentifiable intangible asset was a business combination, the carrying amount of that asset shall be reclassified to goodwill as of the later of the date of acquisition or the date Statement 142 was first applied (fiscal years beginning after December 15, 2001). Any previously issued interim statements that reflect amortization of the unidentifiable intangible asset subsequent to the Statement 142 application date shall be restated to remove that amortization expense. The carrying amounts of any recognized intangible assets that meet the recognition criteria of Statement 141 that have been included in the amount reported as an unidentifiable intangible asset and for which separate accounting records have been maintained shall be reclassified and accounted for as assets apart from the unidentifiable intangible asset and shall not be reclassified to goodwill.

	The Corporation is currently in the process of evaluating the impact, if any, arising from the adoption of Statement 147.

6.	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. We do not update any forward-looking statements that may be made from time to time by or on behalf of the Company.

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

Union Bankshares Corporation (the “Company”) is a multi-bank holding company organized under Virginia law which provides financial services through its wholly-owned bank subsidiaries, Union Bank & Trust Company, Northern Neck State Bank, Rappahannock National Bank, Bank of Williamsburg, as well as Union Investment Services, Inc., and Mortgage Capital Investors, Inc. The four subsidiary banks are full service retail commercial banks offering a wide range of banking and related financial services, including demand and time deposits, as well as commercial, industrial, residential construction, residential mortgage and consumer loans. Union Investment Services Inc., is a full service discount brokerage company, which offers a full range of investment services and sells mutual funds, stocks and bonds. Mortgage Capital Investors, Inc., a subsidiary of Union Bank & Trust Company, provides a wide array of mortgage products. Many of the services offered by the banks and the mortgage company can be accessed through Internet sites.

The Company’s primary trade area stretches from Rappahannock County to Fredericksburg, south to Hanover County, east to Newport News and throughout the Northern Neck region of Virginia. The corporate headquarters is located in Bowling Green, Virginia. Through its banking subsidiaries, the Company operates 31 retail locations in its primary trade area. In addition to the primary banking trade area, Mortgage Capital Investors, Inc. expands the Company’s mortgage origination business to other strong housing markets in Virginia, Maryland and South Carolina.

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. 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) SFAS 5, Accounting for Contingencies, which requires that losses be accrued when they are likely to occur and the amount of loss can be reasonably estimated and (ii) SFAS 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 conducts an analysis of its loan portfolio on at least a quarterly basis to assess the adequacy of the allowance for loan losses. The review process considers specifically identified loans, as well as homogeneous pools of loans which are of similar size and risk. The Company specifically identifies and groups commercial and related loans utilizing an eight category internal risk rating system. The loan loss analysis model uses various information including historical losses, expected cash flows and fair market value of collateral, as well as current economic and business conditions, to develop estimated loss factors for these risk rated loans.

In addition, groups of loans which are similar in size and risk characteristics (e.g. residential mortgages, credit cards, installment loans, etc.) are classified as homogeneous loan pools. Historical losses and current economic and business conditions are used to develop estimated loss factors to be applied to these homogeneous pools in the loan loss analysis model. The total of estimated reserves for the risk rated loans and the homogeneous loan pools is then compared to the recorded allowance for loan losses.

The use of the various information above to develop estimated loss factors is inherently subjective and actual losses could be greater or less than the estimates. Management periodically reassesses the approach taken in these estimates in order to enhance the estimation process.

Overview

Net income for the third quarter of 2002 was $4.0 million, up 32.1% from $3.0 million for the same period in 2001. This increase was the result of significant improvement in both business segments. The community banking segment earnings increased by $861,000 or 31.9% over the prior year’s third quarter due to improvement in the net interest margin and increases in earning assets. The mortgage segment’s performance improved with net income of $455,000 for the quarter ended September 30, 2002 compared to $342,000 in the third quarter of 2001. Diluted earnings per share amounted to $.52 in the third quarter of 2002, as compared to $.40 in the same quarter of 2001. The Company’s annualized return on average assets for the three months ended September 30, 2002 was 1.53% as compared to 1.30% a year ago. The Company’s annualized return on average equity totaled 15.72% and 13.88% for the three months ended September 30, 2002 and 2001, respectively.

Net income from the Company’s community bank segment increased from $2.7 million in the third quarter of 2001 to over $3.5 million in the third quarter of 2002. Much of this increase is attributable to improvements in net interest income and was driven largely by increases in earning assets and reductions in interest expense. Loan growth between year end 2001 and September 30, 2002 amounted to $86.2 million while deposits grew $68.0 million over the same period. This growth in earning assets helped to offset the impact of declining rates on interest income. In addition, interest expense declined significantly in a low interest rate environment as higher rate certificates of deposit repriced at lower rates over this nine month period. In addition,

29.5%, or $20.1 million of the growth was in noninterest bearing deposits while 33.7% or $23.0 million of the increase was in other time deposits, primarily certificates of deposit, which also locked in at lower rates.

The mortgage segment reported net income of $455,000, an increase of $113,000 or 33.0% in the third quarter of 2002 driven by refinancings in a record low mortgage rate environment. While purchased loan closings increased moderately, refinanced loans moved from 25% of the total number of closed loans in the second quarter of 2002 to almost 36% in the third quarter which resulted in the increased earnings. Refinancings comprise approximately 33% of MCII’s closings for the nine months ended September 30, 2002. MCII continues to focus its efforts toward the home purchase market, working with home buyers, builders, realtors and other referral sources for a stable loan production platform. The Company continues to monitor production volumes so adjustments in staffing and other areas can be made promptly. The volatility of mortgage rates, the slowly recovering economy and general uncertainty felt by consumers could adversely influence production over the next several quarters.

Total assets as of September 30, 2002 were $1.070 billion, an increase of 8.9% from $983.1 million at December 31, 2001. Loans totaled $686.4 million at September 30, 2002, an increase of $86.2 million or 14.4% from $600.2 million at December 31, 2001. Approximately $26.2 million of this growth has been generated by the Bank of Williamsburg (BOW) subsidiary due largely to the establishment of a new location in Newport News, Virginia. Many of these loans resulted from relationships the loan officers had established with these borrowers prior to joining BOW. The remaining growth in loans is attributable to increases in both the consumer and the commercial areas. The securities portfolio increased to $265.6 million at the end of the third quarter of 2002, up from $257.1 million at year end 2001. Loans held for sale at September 30, 2002 decreased $3.7 million to $39.7 million compared to the December 31, 2001 balance of $43.5 million.

Total deposits at September 30, 2002 were $852.1 million, up 8.7% from $784.1 million at December 31, 2001. 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 (3-5 year) CD rates in an effort to maintain a lower cost of funds and a strong interest margin.

Net income for the nine months ended September 30, 2002 was $10.5 million, up from $8.6 million for the same period in 2001. This increase was the result of significant improvement in the community banking segment with increased earnings of $1.7 million or 21.7% over the same period in 2001 due to improved net interest margin and increases in earning assets. The mortgage segment’s performance improved with net income of $984,000 for the nine months ended September 30, 2002 compared to $759,000 at the same point last year. Diluted earnings per share amounted to $1.38 for the nine months ended September 30, 2002, as compared to $1.14 for the same period in 2001. The Company’s annualized return on average assets for the nine months ended September 30, 2002 was 1.40% as compared to 1.27% a year ago while the annualized return on average equity totaled 14.78% and 13.73% for the same period, respectively.

Net Interest Income

Net interest income on a tax-equivalent basis for the third quarter of 2002 increased by 21.3% to $11.0 million from $9.1 million for the same period a year ago. The net interest income increase is largely attributable to a decline of $1.9 million in interest-bearing liability

costs compared to the prior year’s third quarter. Most of this decrease was in the cost of interest-bearing deposits reflecting the impact of the rate cuts by the Federal Reserve in 2001 and 2002 and an increase in lower cost deposits in the deposit mix. Average interest-bearing deposits were up $77.7 million for the quarter end September 30, 2002 from a year earlier, with 50.0% of this increase coming in lower cost NOW and money market accounts. Over that time, average interest earning assets grew by $112.8 million or 13.0% and average interest-bearing liabilities increased by 10.7%.

The Company’s yield on average earning assets was 6.94%, down 92 basis points from 7.86% a year ago, while its cost of average interest-bearing liabilities decreased 139 basis points from 4.37% in the third quarter 2001 to 2.98% in the comparable quarter of 2002. This reflects a faster decline in the cost of liabilities versus the income from earning assets. The favorable margin that we have experienced through 2002 decreased by 14 basis points from the second quarter of 2002 when it was 4.60% compared to 4.46% for the third quarter of 2002. As interest rates start to rise, we expect the margin to improve due to the asset-sensitive nature of our balance sheet. As investors sense a positive change in the economy and the stock market, some of those deposits may move back into the stock market and may cause the net interest margin to compress depending on the Company’s liquidity levels.

Included in the average earning assets is $25.4 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. While the spread on these short term loans provides a positive contribution to interest income and net income, it negatively impacts the net interest margin as these loans are funded at more narrow, short-term spreads. These loans ultimately generate most of their earnings in the noninterest income category through gains on sales of loans.

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 September 30, 2002 such transactions accounted for $10 million of the Company’s total borrowings.

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

			For the three months ended September 30,

			2002								2001								2000

			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		$	169,358		$	2,396		5.61	%	$	140,590		$	2,296		6.48	%	$	125,953		$	2,315		7.31	%
	Tax-exempt(1)			92,031			1,747		7.53	%		90,119			1,733		7.63	%		97,649			1,623		6.61	%

		Total securities		261,389			4,143		6.29	%		230,709			4,029		6.93	%		223,602			3,938		7.01	%
Loans, net				675,039			12,554		7.38	%		589,118			12,722		8.57	%		576,811			13,116		9.05	%
Loans held for sale				25,390			357		5.58	%		23,102			198		3.40	%		13,747			70		2.03	%
Federal funds sold				16,013			58		1.44	%		22,079			196		3.52	%		1,075			37		13.69	%
Money market investments				120			1		3.31	%		—			—					—			—
Interest-bearing deposits in other banks				1,280			5		1.55	%		1,455			11		3.00	%		1,042			16		6.11	%

		Total earning assets		979,231			17,118		6.94	%		866,463			17,156		7.86	%		816,277			17,177		8.37	%
Allowance for loan losses				(8,614	)							(7,884	)							(7,811	)
Total non-earning assets				71,621								66,920								65,521

Total assets			$	1,042,238							$	925,499							$	873,987

Liabilities & Stockholders’ Equity:
Interest-bearing deposits:
	Checking		$	122,684			259		0.84	%	$	99,502			399		1.59	%	$	99,000			545		2.19	%
	Money market savings			84,763			309		1.45	%		69,103			496		2.85	%		61,714			513		3.31	%
	Regular savings			79,604			265		1.32	%		69,653			400		2.28	%		56,178			339		2.40	%
Certificates of deposit:
	$100,000 and over			133,987			1,392		4.12	%		127,855			1,807		5.61	%		109,390			1,615		5.87	%
	Under $100,000			287,718			2,823		3.89	%		264,957			3,684		5.52	%		262,762			3,868		5.86	%

		Total interest-bearing deposits		708,756			5,048		2.83	%		631,070			6,786		4.27	%		589,044			6,880		4.65	%
Other borrowings				103,999			1,066		4.07	%		102,976			1,297		5.00	%		116,648			1,823		6.22	%

		Total interest-bearing liabilities		812,755			6,114		2.98	%		734,046			8,083		4.37	%		705,692			8,703		4.91	%
Noninterest-bearing liabilities:
	Demand deposits			118,288								98,897								88,437
	Other liabilities			9,986								5,737								7,457

		Total liabilities		941,029								838,680								801,586
Stockholders’ equity				101,209								86,819								72,401

Total liabilities and stockholders’ equity			$	1,042,238							$	925,499							$	873,987

Net interest income						$	11,004							$	9,073							$	8,474

Interest rate spread									3.95	%							3.49	%							3.47	%
Interest expense as a percent of average earning assets									2.48	%							3.70	%							4.24	%
Net interest margin									4.46	%							4.15	%							4.13	%

(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 nine months ended September 30,

			2002								2001									2000

			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		$	167,172		$	7,270		5.81	%		$	131,602		$	6,716		6.82	%		$	123,179		$	6,805		7.38	%
	Tax-exempt(1)			92,074			5,281		7.67	%			91,902			5,306		7.72	%			98,116			5,376		7.32	%

		Total securities		259,246			12,551		6.47	%			223,504			12,022		7.19	%			221,295			12,181		7.35	%
Loans, net				646,877			36,716		7.59	%			586,731			38,810		8.84	%			571,543			37,579		8.78	%
Loans held for sale				22,492			1,070		6.36	%			24,117			461		2.56	%			9,633			304		4.22	%
Federal funds sold				13,460			151		1.50	%			11,551			322		3.73	%			642			57		11.86	%
Money market investments				851			12		1.89	%			—			—						—			—
Interest-bearing deposits in other banks				1,014			12		1.58	%			1,023			28		3.66	%			995			48		6.44	%

		Total earning assets		943,940			50,512		7.15	%			846,926			51,643		8.15	%			804,108			50,169		8.33	%
Allowance for loan losses				(8,091	)								(7,793	)								(7,333	)
Total non-earning assets				71,009									68,596									60,459

Total assets			$	1,006,858								$	907,729								$	857,234

Liabilities & Stockholders’ Equity:
Interest-bearing deposits:
	Checking		$	118,940			827		0.93	%		$	97,956			1,289		1.76	%		$	99,715			1,601		2.14	%
	Money market savings			83,704			919		1.47	%			65,176			1,445		2.96	%			62,280			1,528		3.28	%
	Regular savings			76,701			767		1.34	%			62,811			1,151		2.45	%			57,309			1,027		2.39	%
Certificates of deposit:
	$100,000 and over			132,582			4,206		4.24	%			127,336			5,603		5.88	%			106,788			4,468		5.59	%
	Under $100,000			279,925			8,578		4.10	%			266,365			11,563		5.80	%			257,170			10,806		5.61	%

		Total interest-bearing deposits		691,852			15,297		2.96	%			619,644			21,051		4.54	%			583,262			19,430		4.45	%
Other borrowings				99,958			3,124		4.18	%			105,655			4,229		5.35	%			114,588			5,335		6.22	%

		Total interest-bearing liabilities		791,810			18,421		3.11	%			725,299			25,280		4.66	%			697,850			24,765		4.74	%
Noninterest-bearing liabilities:
	Demand deposits			111,749									93,012									85,025
	Other liabilities			8,121									5,723									4,416

		Total liabilities		911,680									824,034									787,291
Stockholders’ equity				95,178									83,695									69,943

Total liabilities and stockholders’ equity			$	1,006,858								$	907,729								$	857,234

Net interest income						$	32,091								$	26,363								$	25,404

Interest rate spread									4.04	%								3.49	%								3.59	%
Interest expense as a percent of average earning assets									2.61	%								3.99	%								4.11	%
Net interest margin									4.55	%								4.16	%								4.22	%

(1) Income and yields are reported on a taxable equivalent basis.

Provision for Loan Losses

The provision for loan losses totaled $650,000 for the third quarter of 2002, up from $445,000 for the third quarter of 2001. For the nine months ended September 30, 2002, the provision was $2,219,000 versus $1,270,000 for the same period in 2001. These provisions reflect the increase in the loan portfolio of 14.4% for the nine months ended September 30, 2002 compared to December 31, 2001 and management’s assessment of the credit risk in the portfolio. (See Asset Quality)

Noninterest Income

Noninterest income for the three months ended September 30, 2002 totaled $4.7 million, up $657,000 from $4.1 million for the same period a year ago. Over half of the increase came in gains on sales of loans in the mortgage banking segment which increased $362,000 compared to the same quarter last year. Service charges on deposit accounts increased $198,000 reflecting increases in overdraft and return check charges and DDA activity service charges. Other service charges and fees increased $21,000, reflecting increases of $38,000 in debit card income and $4,000 in letter of credit fee income which more than offset a $20,000 decline in brokerage commissions.

For the nine month period, noninterest income is up $615,000 at $12.4 million compared to $11.8 million at September 30, 2001. This increase was largely the result of increases in the service charge income of $186,000 and the gain on sale of loans of $645,000 which were offset by a $255,000 decline in the gains on securities transactions.

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 Expense

Noninterest expense in the third quarter of 2002 totaled $9.1 million, an increase of $965,000 over the same period in 2001. Personnel costs were up $536,000 over last year’s third quarter, with salaries and other benefits categories reflecting a rise in commission costs as a result of higher mortgage loan production normal increases, the addition of the Newport News branch and the Manassas LPO and higher group insurance expense. Occupancy expense was up $36,000 largely as a result of rental costs for the offices in Newport News and Manassas and depreciation expense for the new branches in Tappahannock and Newport News. Furniture & equipment expense was down $61,000 largely from a decline in depreciation expense and amortization of software. These decreases were the result of software and equipment, from the expansion in 1998 and the upgrades in 1999 to facilitate the back office consolidation, becoming fully depreciated.

Other operating expenses were up $454,000 over last year’s third quarter. The increases are primarily the result of: operating expenses up $96,000 from software, postage, internet, telephone and courier and armored car costs; professional services down $30,000; marketing up $83,000 which includes the introduction of internet banking and preparation for centennial celebrations at Union Bank and Trust Company and Rappahannock National Bank; franchise tax up $20,000 and other expense up $167,000 due to other losses associated with a fraud issue that is in the process of being resolved and amortization of core deposit premium from the purchase of the

Tappahanock Branch in the fourth quarter of last year. Most of these increases were in the community bank. Management continues to monitor expenses closely to ensure the levels are in line with the Company’s expectations.

Noninterest expense for the nine months is up $2.5 million at $26.4 at September 30, 2002 compared to $23.8 million at September 30, 2001. Most of the increase is the result of a $1.4 million increase in salaries and benefits, which is the result of new locations in Newport News, Manassas, and Thornburg as well as normal salary increases. In addition, higher mortgage loan volume raised the commission expense in this category. Other operating expense is up $1.1 million as a result of higher marketing expenses, higher operating expenses for new locations and new products, and higher other losses as a result of robberies in the first quarter.

Asset Quality

The allowance for loan losses is an estimate of an amount adequate to absorb potential losses inherent in the loan portfolio. General economic trends, as well as conditions affecting individual borrowers, affect the level of credit losses. Management’s determination of the adequacy of the allowance is based on a quarterly evaluation that considers the composition of the loan portfolio, the value and adequacy of the collateral, current economic conditions, historical loan loss experience, and other risk factors. 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 comparison to peer groups. The level of the allowance to net loans outstanding will vary depending on the overall results of the quarterly evaluation. The evaluation is reviewed by the Credit Risk Committee (comprised of members of senior management) and reviewed with the Audit Committee of the Board of Directors. Although general market and economic conditions are somewhat uncertain, management believes the allowance is adequate at this time and will continue to make adjustments as the changing economy and the loan portfolio’s performance warrant.

The allowance for loan losses totaled $8.9 million at September 30, 2002 or 1.30% of total loans, as compared to 1.22% at December 31, 2001 and 1.25% at September 30, 2001.

		September 30, 2001			December 31, 2001			September 30, 2002

	(dollars in thousands)
Nonaccrual loans	$	530		$	915		$	1,307
Foreclosed properties		781			768			888

Nonperforming assets	$	1,311		$	1,683		$	2,195

Allowance for loan losses	$	8,946		$	7,336		$	7,463
Allowance as% of total loans		1.30	%		1.22	%		1.25	%
Allowance as% of nonperforming assets		682	%		436	%		340	%
Nonperforming assets to loans and foreclosed properties		.19	%		.28	%		.37	%

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, 2001 stockholders’ equity has increased by $15.3 million to $104.3 million at September 30, 2002, principally as a result of net income of $10.5 million for the first nine months of 2002. This increase was partially offset by dividends paid to stockholders of $1.9 million. In addition, stockholders’ equity increased by $6.1 million due to net increases in the value of the Company’s securities portfolio and by $648,000 from stock issued under the dividend reinvestment and incentive stock plans and in connection with a prior acquisition.

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 qualified capital to 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 September 30, 2002, the Company’s ratio of total capital to risk-weighted assets was 12.29% and its ratio of Tier 1 capital to risk-weighted assets was 11.18%. Both ratios exceed the minimum capital requirements. The following summarizes the Company’s regulatory capital and related ratios at September 30, 2002 (dollars in thousands):

Tier 1 capital		$	89,714
Tier 2 capital			8,946
Total risk-based capital			98,660
Total risk-weighted assets			802,683

Capital Ratios:
	Tier 1 risk-based capital ratio		11.18	%
	Total risk-based capital ratio		12.29	%
	Leverage ratio (Tier 1 capital to average adjusted total assets)		8.66
	Equity to assets ratio		9.75

The Company’s book value per share at September 30, 2002 was $13.80. Dividends to stockholders are typically paid semi-annually in May and November.

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. Management considers the Company’s overall liquidity to be sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.

At September 30, 2002 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 48.2% of total earning assets. At September 30, 2002 approximately $350.4 million or 51.1% 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 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. Due to the numerous assumptions used in the computations of interest rate sensitivity, and the fact that the models do not assume any actions ALCO could take in response to changes in interest rates, the model forecasts may not be indicative of actual results.

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. 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 following table represents the interest rate sensitivity on (fully tax equivalent basis) net income for the Company using different rate scenarios as of September 30, 2002:

Change in Prime Rate	% Change in Net Income

+200 basis points	+18.32	%
+100 basis points	+ 9.64	%
Most likely	- 0	-
-100 basis points	- 8.88
-200 basis points	-16.89	%

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 September 30, 2002:

Change in Prime Rate		Change in Economic Value of Equity (dollars in thousands)

+200 basis points	$	4,683
+100 basis points		3,677
Most likely		- 0	-
-100 basis points		- 6,280
-200 basis points		- 13,541

ITEM 4 – CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal 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. Based on that evaluation, our principal executive officer and principal 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 Exchange Act 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

Item 2 – Changes in Securities and Use of Proceeds

Item 3 – Defaults Upon Senior Securities

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

Item 5 – Other Information

Item 6 - Exhibits and Reports on Form 8-K

(a) See attached list of exhibits

(b) Form 8-K - None

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)

November 14, 2002	/s/ G. WILLIAM BEALE
(Date)
	G. William Beale, President, Chief Executive Officer and Director

November 14, 2002	/s/ D. ANTHONY PEAY
(Date)
	D. Anthony Peay, Senior Vice President and Chief Financial Officer

Index to Exhibits
Form 10-Q /September 30, 2002

Exhibit No.	Description

2	Plan of acquisition, reorganization, arrangement, liquidation or succession	Not Applicable

4	Instruments defining the rights of security holders, including indentures	Not Applicable

10	Material contracts	Not Applicable

11	Statement re: computation of per share earnings	Not Applicable

15	Letter re: unaudited interim financial information	Not Applicable

18	Letter re: change in accounting principles	Not Applicable

19	Previously unfiled documents	Not Applicable

20	Report furnished to security holders	Not Applicable

22	Published report re: matters submitted to vote of security holders	None

23	Consents of experts and counsel	Not Applicable

24	Power of Attorney	Not Applicable

99	Certifications pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	99.1

CERTIFICATIONS

I, G. William Beale, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Union Bankshares Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002
	/s/ G. WILLIAM BEALE

	G. William Beale President and Chief Executive Officer

UNION BANKSHARES CORPORATION AND SUBSIDIARIES

CERTIFICATIONS

I, D. Anthony Peay, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Union Bankshares Corporation;

(b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 14, 2002
	/s/ D. ANTHONY PEAY

	D. Anthony Peay Senior Vice President and Chief Financial Officer

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