Management's discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Union Bankshares Corporation and its subsidiaries (collectively the "Company"). This discussion and analysis should be read with the consolidated financial statements, the footnotes thereto, and the other financial data included in this report, as well as the Company's Annual Report on Form 10-K and management's discussion and analysis for the year ended December 31, 2008. 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 nine month periods ended September 30, 2009 and 2008 are not necessarily indicative of results that may be attained for any other period. Amounts are rounded for presentation purposes while some of the percentages presented are computed based on unrounded amounts.

FORWARD-LOOKING STATEMENTS

Certain statements in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are statements that include projections, predictions, expectations or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often characterized by the use of qualified words (and their derivatives) such as "expect," "believe," "estimate," "plan," "project," "anticipate" or other statements concerning opinions or judgments of the Company and its management about future events. Although the Company believes that its expectations with respect to forward-looking statements are based upon reasonable assumptions within the bounds of its existing knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any 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, mergers and acquisitions, 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

General

The accounting and reporting policies of the Company and its subsidiaries are in accordance with accounting principles generally accepted in the United States of America ("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 the Company's accounting for the allowance for loan losses and for mergers and acquisitions. The Company's accounting policies are fundamental to understanding the Company's consolidated financial position and consolidated results of operations. Accordingly, the Company's significant accounting policies are discussed in detail in Note 1 "Summary of Significant Accounting Policies" in the "Notes to the Consolidated Financial Statements" in the Company's Annual Report on Form 10-K for the year ended December 31, 2008.

The following is a summary of the Company's critical 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) ASC 450 (formerly SFAS No. 5), Contingencies, which requires that losses be accrued when occurrence is probable and can be reasonably estimated, and (ii) ASC 310-40 (formerly SFAS No. 114), Receivables, 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 applicable GAAP. Management's estimate of each homogenous pool 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.

Applicable GAAP requires that the impairment of loans that have been separately identified for evaluation are measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral. This statement also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest income recognized on impaired loans.

Reserves for commercial loans are determined by applying estimated loss factors to the portfolio based on historical loss experience and management's evaluation and "risk grading" of the commercial loan portfolio. Reserves are provided for noncommercial loan categories using historical loss factors applied to the total outstanding loan balance of each loan category. Additionally, environmental factors based on national and local economic conditions, as well as portfolio-specific attributes, are considered in estimating the allowance for loan losses.

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 future economic 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.

Mergers and Acquisitions

The Company's merger and acquisition strategy focuses on high-growth areas with strong market demographics and targets organizations that have a comparable corporate culture, strong performance and good asset quality, among other factors.

Beginning January 1, 2009, business combinations must be accounted for under ASC
805 (formerly SFAS 141(R)), Business Combinations, using the acquisition method of accounting. The Company has accounted for its previous business combinations under the purchase method of accounting, a cost allocation process which required the cost of an acquisition to be allocated to the individual assets acquired and liabilities assumed based on their estimated fair values. The acquisition method of accounting requires an acquirer to recognize the assets acquired and the liabilities assumed at the acquisition date measured at their fair values as of that date. To determine the fair values, the Company will continue to rely on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses or other valuation

techniques. Under the acquisition method of accounting, the Company will identify the acquirer and the closing date and apply applicable recognition principles and conditions. Costs that the Company expects, but is not obligated to incur in the future, to effect its plan to exit an activity of an acquiree or to terminate the employment of or relocate an acquiree's employees are not liabilities at the acquisition date. The Company will not recognize these costs as part of applying the acquisition method. Instead, the Company will recognize these costs in its post-combination financial statements in accordance with other applicable GAAP.

Acquisition-related costs are costs the Company incurs to effect a business combination. Those costs include advisory, legal, accounting, valuation, and other professional or consulting fees. Some other examples for the Company include systems conversions, integration planning consultants and advertising costs. The Company will account for acquisition-related costs as expenses in the periods in which the costs are incurred and the services are received, with one exception. The costs to issue debt or equity securities will be recognized in accordance with other applicable GAAP. These acquisition-related costs are included within the Consolidated Statements of Income classified within the noninterest expense caption.

BUSINESS OVERVIEW

Union Bankshares Corporation is one of the largest community banking organizations based in Virginia, providing full service banking to the Northern, Central, Rappahannock, Tidewater and Northern Neck regions of Virginia through its bank subsidiaries, Union Bank and Trust Company (42 locations in the counties of Albemarle, Caroline, Chesterfield, Fairfax, Fluvanna, Hanover, Henrico, King George, King William, Nelson, Spotsylvania, Stafford, Westmoreland, and the cities of Fredericksburg, Williamsburg, Newport News, Grafton and Charlottesville); Northern Neck State Bank (9 locations in the counties of Richmond, Westmoreland, Essex, Northumberland and Lancaster); and Rappahannock National Bank (7 locations in Washington, Front Royal, Middleburg, Warrenton and Winchester). Union Bank and Trust Company's loan production office in Manassas was closed in early April 2009. Union Investment Services, Inc. provides full brokerage services; Union Mortgage Group, Inc. provides a full line of mortgage products; and Union Insurance Group, LLC offers various lines of insurance products. Union Bank and Trust Company also owns a non-controlling interest in Johnson Mortgage Company, LLC.

On March 30, 2009, the Company and First Market Bank announced the signing of an agreement, as amended on June 19, 2009, pursuant to which the Company will acquire First Market Bank in an all stock transaction valued at approximately $105.4 million (based on the pre-announcement stock price of $14.23 as of March 27, 2009 for the Company's common stock). First Market Bank, a privately held federally chartered savings bank with more than $1.3 billion in assets, operates 39 branches throughout central Virginia with 31 locations in the greater Richmond metropolitan area. Upon completion of the transaction, expected to occur before year end, the Company will become the largest Virginia-based community banking organization with approximately 97 branch locations and total assets of more than $4.0 billion.

The Company has submitted all required applications for approval and is awaiting regulatory approvals. In addition, a special meeting of shareholders was held October 26, 2009 when shareholders approved the acquisition and the new corporate name of the Company. The Company name will change to Union First Market Bankshares Corporation from Union Bankshares Corporation and the combined bank of First Market Bank and Union Bank and Trust Company ("Union Bank") will change to Union First Market Bank. The transaction is expected to be completed as soon as reasonably practicable after regulatory approval is received, with closing likely early in the first quarter of 2010.

On October 31, 2008, the Company completed the previously announced merger of its affiliate Bay Community Bank into Union Bank.

On March 14, 2008, the Company completed the previously announced merger of its affiliate Prosperity Bank & Trust Company into Union Bank.

Additional information is available on the Company's website at www.ubsh.com. The shares of the Company are traded on the NASDAQ Global Select Market under the symbol "UBSH."

RESULTS OF OPERATIONS

Net Income

The Company reported net income of $2.8 million for the quarter ended September 30, 2009, representing an increase of $1.9 million from $953 thousand for the second quarter ended June 30, 2009. Net income available to common shareholders, which deducts from net income the dividends and discount accretion on preferred stock, was $1.9 million for the third quarter compared to $91 thousand in the second quarter. This represents an increase in earnings per share, on a diluted basis, of $0.12, from $0.01 to $0.13. The improvement in the third quarter results was largely attributable to strong net interest income, and the absence of the FDIC special assessment, which occurred in the second quarter, partially offset by lower mortgage segment revenue.

Return on average common equity for the three months ended September 30, 2009 was 3.88%, while return on average assets was 0.43%, compared to 7.87% and 0.71%, respectively, for the same period in 2008.

The Company reported net income for the third quarter ended September 30, 2009 of $2.8 million, down $1.5 million from $4.3 million for the same period a year ago. The decrease was mainly driven by a prior year third quarter gain absent in the third quarter of 2009. During the third quarter of 2008 the Company sold bank property for a gain of $1.8 million. Other factors contributing to the third quarter 2009 performance were improvements in mortgage segment income and net interest income that have been offset by increased credit costs, FDIC premiums, and acquisition costs. Excluding nonrecurring prior year gains and third quarter acquisition costs, net income declined approximately $86 thousand from the third quarter of 2008.

The Company continues to incur acquisition costs related to the proposed acquisition of First Market Bank. Current quarter and year-to-date costs are $307 thousand and $948 thousand, respectively. Total acquisition costs are estimated to be approximately $10.8 million with the remainder to be expensed over the fourth quarter of 2009 and the first quarter of 2010. Such costs, which will be expensed as incurred, will include legal and accounting fees, lease and contract termination expenses, and employee severance.

As a supplement to U. S. GAAP, the Company also uses certain alternate financial measures to review its operating performance. Diluted earnings per share on a cash basis for the quarter ended September 30, 2009 were $0.21 as compared to $0.34 for the same quarter a year ago and $0.09 for the quarter ended June 30, 2009. Additionally, cash basis return on average tangible common equity for the quarter ended September 30, 2009 was 7.47% as compared to 12.26% in the prior year's same quarter and 3.29% for the quarter ended June 30, 2009.

Net Interest Income

For the nine months ended September 30, 2009, the Federal Open Market Committee ("FOMC") maintained the target range for the Federal funds rate at 0% to 0.25% and expects that the Federal funds rate will likely remain exceptionally low for an extended period. Additionally, the FOMC agreed to continue using liquidity and asset-purchase programs to support the financial markets and to stimulate the economy.

The decline in the target Federal funds rate since last year (from 2.00% to a range of 0% to 0.25%) has continued to put significant pressure on the Company's net interest margin and related net interest income during the first nine months of 2009. During the third quarter, however, repricing of money market accounts and certificates of deposit provided some relief from this trend. While the benefit of the repricing of money market accounts was fully realized in the third quarter, we expect continued improvement in the net interest margin as higher rate certificates of deposit will continue to mature and reprice at lower rates over the next two quarters. The asset sensitive positioning of the Company's balance sheet combined with the previously mentioned interest rate declines, had caused interest-earning assets to reprice faster than the Company's interest-bearing deposits. This positioning is also expected to benefit the Company's net interest margin when interest rates (e.g., Prime rate, Federal funds rate) begin to rise.

On a linked quarter basis, tax-equivalent net interest income increased $2.1 million, or 10.6%, to $21.7 million. The tax-equivalent net interest margin increased 39 basis points to 3.69% from 3.30% for the second quarter. The net interest margin increase was principally attributable to a decline in costs of interest-bearing liabilities aided by an increase in the yields on interest-earning assets. Costs of interest-bearing liabilities declined 26 basis points to 2.37% while yields on interest-earning assets increased 15 basis points to 5.68%. Improvements in the cost of funds were principally a result of declining costs on certificates of deposit and money market accounts as well as lower Federal Home Loan Bank of Atlanta ("FHLB") borrowings. Interest-earning asset yields increased principally as a result of redeploying excess liquidity from the Federal Reserve Bank investments into higher yielding investment securities and de-leveraging the balance sheet (i.e., reducing FHLB borrowings).

Average money market volumes increased $169 million from the same time last year, principally related to the Company's money market promotion. The money market promotion provided customers who opened these accounts a 3% yield through June 30, 2009. Following expiration of the offer, yields for these money market deposits adjusted to the Company's regular money market rates, which at the time were 1.60% or lower. Liquidity generated by this promotion allowed the Company to reduce reliance on other borrowings and not to reissue any brokered certificates of deposit. The repricing of the promotion money market accounts positively impacted the net interest margin beginning in the third quarter, as compared to the most second quarter, by adding approximately 18 basis points to net interest margin.

For the three months ended September 30, 2009, net interest income, on a tax-equivalent basis, increased $598 thousand, or 2.8%, to $21.7 million compared to the same period last year. This increase was attributable to lower deposit costs and lower wholesale funding volumes as compared to the decline in earning asset yields. The net interest margin declined 20 basis points, from 3.89% at September 30, 2008, to 3.69% at September 30, 2009. Yields on interest-earning assets declined 74 basis points over the past year, driven primarily by lower loan and investment security yields. Costs of interest-bearing liabilities declined 54 basis points over the same time, principally as a result of lower costs on money market accounts and certificates of deposit as well as lower FHLB advances.

For the nine months ended September 30, 2009, tax-equivalent net interest income decreased $1.7 million, or 2.7%, to $60.0 million. The tax-equivalent net interest margin decreased 48 basis points to 3.41% from 3.89% compared to the same nine-month period a year ago. The net interest margin decrease was partially attributable to a steeper decline in yields on interest-earning assets as compared to the costs of interest-bearing liabilities. Yields on interest-earning assets declined 100 basis points to 5.60% while the costs of interest-bearing liabilities declined only 53 basis points to 2.59% for the same nine-month period. The decline in interest-earning asset yields was attributable to lower yields in a declining rate environment, and to a lesser extent, an increase in nonaccrual loans. The decline in the cost of interest-bearing liabilities was attributable to declines in the cost of certificates of deposit and lower volumes and costs of FHLB advances, partially offset by increased volumes in promotional money market accounts.

On September 29, 2008, because of significant disruption and uncertainty in the financial markets, the Company borrowed a $50 million FHLB advance at a rate of 3.52% with a maturity of September 28, 2009. At that time, the Company considered the FHLB advance to be a contingency plan against unforeseen and unprecedented market movements. The earnings spread between the advance and the corresponding short-term investment yield was negative and consequently had an unfavorable impact on the Company's net interest margin. The repayment of this advance during the third quarter, net of a prepayment penalty, has favorably impacted the net interest margin.

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



                                                                                     For The Three Months Ended September 30,
                                                         2009                                          2008                                          2007
                                                          Interest                                      Interest                                      Interest
                                          Average         Income /     Yield /          Average         Income /     Yield /          Average         Income /     Yield /
                                          Balance          Expense     Rate (1)         Balance          Expense     Rate (1)         Balance          Expense     Rate (1)
                                                                                              (Dollars in thousands)

Assets:
Securities:
Taxable                                 $   279,394       $   2,794        3.97 %     $   176,959       $   2,220        4.99 %     $   171,600       $   2,230        5.16 %
Tax-exempt                                  119,597           2,140        7.10 %         112,825           2,053        7.24 %         104,937           1,869        7.07 %

Total securities                            398,991           4,934        4.91 %         289,784           4,273        5.87 %         276,537           4,099        5.88 %
Loans, net (2)                            1,872,906          28,054        5.94 %       1,840,979          30,231        6.53 %       1,657,002          32,292        7.73 %
Loans held for sale                          48,126             430        3.54 %          24,682             379        6.10 %          21,350             352        6.53 %
Federal funds sold                              304              -         0.18 %           1,661               5        1.20 %           1,674             221        5.59 %
Money market investments                        151              -         0.00 %             124              -         0.01 %             216               1        2.17 %
Interest-bearing deposits in other
banks                                        10,572               9        0.33 %           1,738               8        1.88 %           1,459              21        5.61 %
Other interest-bearing deposits               2,598              -         0.00 %           2,598               7        1.01 %           2,598              34        5.26 %

Total earning assets                      2,333,648          33,427        5.68 %       2,161,566          34,903        6.42 %       1,960,836          37,020        7.49 %

Allowance for loan losses                   (30,321 )                                     (22,125 )                                     (18,361 )
Total non-earning assets                    263,511                                       251,569                                       247,691

Total assets                            $ 2,566,838                                   $ 2,391,010                                   $ 2,190,166


Liabilities and Stockholders'
Equity:
Interest-bearing deposits:
Checking                                $   199,063              83        0.17 %     $   215,675             341        0.63 %     $   201,803             330        0.65 %
Money market savings                        441,106           1,504        1.35 %         272,513           1,701        2.48 %         157,729             935        2.35 %
Regular savings                             101,923              97        0.38 %         102,181             143        0.56 %         104,899             201        0.76 %
Certificates of deposit:
$100,000 and over                           451,249           3,717        3.27 %         419,448           3,895        3.69 %         443,292           5,537        4.96 %
Under $100,000                              489,091           3,930        3.19 %         495,901           4,605        3.69 %         445,570           5,076        4.52 %

Total interest-bearing deposits           1,682,432           9,331        2.20 %       1,505,718          10,685        2.82 %       1,353,293          12,079        3.54 %
Other borrowings                            275,542           2,354        3.38 %         378,126           3,074        3.23 %         327,515           4,825        5.84 %

Total interest-bearing liabilities        1,957,974          11,685        2.37 %       1,883,844          13,759        2.91 %       1,680,808          16,904        3.99 %


Noninterest-bearing liabilities:
Demand deposits                             302,207                                       273,696                                       284,160
Other liabilities                            19,787                                        18,430                                        19,350

Total liabilities                         2,279,968                                     2,175,970                                     1,984,318
Stockholders' equity                        286,870                                       215,040                                       205,848

Total liabilities and stockholders'
equity                                  $ 2,566,838                                   $ 2,391,010                                   $ 2,190,166


Net interest income                                       $  21,742                                     $  21,144                                     $  20,116


Interest rate spread (3)                                                   3.31 %                                        3.51 %                                        3.50 %
Interest expense as a percent of
average earning assets                                                     1.99 %                                        2.53 %                                        3.42 %
Net interest margin                                                        3.69 %                                        3.89 %                                        4.07 %
. . .