The following discussion and analysis by management focuses on those factors that had a material effect on Union Bankshares, Inc.'s (Company) financial position as of September 30, 2008, and as of December 31, 2007, and its results of operations for the three and nine months ended September 30, 2008 and 2007. This discussion is being presented to provide a narrative explanation of the financial statements and should be read in conjunction with the consolidated financial statements and related notes and with other financial data appearing elsewhere in this filing and with the Company's Annual Report on Form 10-K for the year ended December 31, 2007. In the opinion of the Company's management, the interim unaudited data reflects all adjustments, consisting only of normal recurring adjustments, and disclosures necessary to fairly present the Company's consolidated financial position and results of operations for the interim period. Management is not aware of the occurrence of any events between September 30, 2008 and November 7, 2008, which would materially affect the information presented.

The Company may from time to time make written or oral statements that are considered "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance and assumptions relating thereto. The Company may include forward-looking statements in its filings with the Securities and Exchange Commission (SEC), in its reports to stockholders, including this Quarterly Report, in press releases, other written materials, and in

statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others.

Forward-looking statements reflect management's current expectations and are subject to uncertainties, both general and specific, and risk exists that those predictions, forecasts, projections and other estimates contained in forward-looking statements will not be achieved. When management uses any of the words "believes," "expects," "anticipates," "intends," "plans," "seeks," "estimates", or similar expressions, they are making forward-looking statements. Many possible events or factors, including those beyond the control of management, could affect the future financial results and performance of the Company. This could cause results or performance to differ materially from those expressed in forward-looking statements. The possible events or factors that might affect forward-looking statements include, but are not limited to, the following:

o uses of monetary, fiscal, and tax policy by various governments;
o political, legislative, or regulatory developments in Vermont, New Hampshire, or the United States including changes in laws concerning accounting, taxes, financial reporting, banking, and other aspects of the financial services industry;
o recent disruptions in U.S. and global financial and credit markets;
o developments in general economic or business conditions, globally, nationally, in Vermont, or in northern New Hampshire, including interest rate fluctuations, market fluctuations and perceptions, job creation and unemployment rates, ability to attract new business, and inflation and the effects of such changes on the Company or its customers;
o changes in the competitive environment for financial services organizations, including increased competition from tax-advantaged credit unions, mutual banks and out-of-market competitors offering financial services over the internet;
o the implementation of international financial reporting standards (IFRS) for United States companies;
o impact of governmental interposition in the financial services or other industries;
o the Company's ability to attract and retain key personnel;
o adverse changes in the local real estate market, which negatively impacts collateral values and the Company's ability to recoup loan losses through disposition of real estate collateral;
o changes in technology, including demands for greater automation which could present operational issues or significant capital outlays;
o acts or threats of terrorism or war, and actions taken by the United States or other governments that might adversely affect business or economic conditions for the Company or its customers;
o adverse changes in the securities market generally or in the market for financial institution securities which could adversely affect the value of the Company's stock;
o any actual or alleged conduct which could harm the Company's reputation;
o natural or other disasters which could affect the ability of the Company to operate under normal conditions;
o the Company's ability to retain and attract deposits and loans;
o illegal acts of theft or fraud perpetuated against the Company's subsidiary bank or its customers;
o unanticipated lower revenues or increased cost of funds, loss of customers or business, or higher operating expenses;
o the failure of assumptions underlying the establishment of the allowance for loan losses and estimations of values of collateral and various financial assets and liabilities;
o the amount invested in new business opportunities and the timing of these investments;
o the failure of actuarial, investment, work force, salary, and other assumptions underlying the establishment of reserves for future pension costs or changes in legislative or regulatory requirements;
o future cash requirements might be higher than anticipated due to loan commitments or unused lines of credit being drawn upon or depositors withdrawing their funds;
o assumptions made regarding interest rate movement and sensitivity could vary substantially if actual experience differs from historical experience which could adversely affect the Company's results of operations; and
o the creditworthiness of current loan customers is different from management's understanding or changes dramatically and therefore the allowance for loan losses becomes inadequate.

When evaluating forward-looking statements to make decisions with respect to the Company, investors and others are cautioned to consider these and other risks and uncertainties, including the events and circumstances discussed under "Recent Developments" below, and are reminded not to place undue reliance on such statements. Forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to update them to reflect new or changed information or events, except as may be required by federal securities laws.

The U.S. and global economies have experienced and are experiencing significant stress and disruptions in the financial sector. Dramatic slowdowns in the housing industry with falling home prices and increasing foreclosures and unemployment have resulted in major issues for some financial institutions, including government-sponsored entities and investment banks. These issues have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions and, in some cases, to fail.

Despite the volatile economy, Vermont has the lowest residential foreclosure rate in the country. Also, as northern New England had not experienced the dramatic run up in housing prices, likewise, we have not seen the values drop as far as other parts of the country.

In response to the financial crisis affecting the banking and financial markets, in October 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law. Pursuant to the EESA, the Federal Deposit Insurance Corporation temporarily increased the deposit insurance coverage limits to $250,000 per ownership category at each insured financial institution until December 31, 2009. Also, the U.S. Treasury ("the Treasury") will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets under the Troubled Asset Purchase Program (the "TARP").

In addition, the Treasury announced that it has been authorized to purchase equity stakes in U.S. financial institutions. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program"), from the $700 billion authorized by the EESA, the Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock. The purchase of preferred stock investments will be accompanied by the issuance to the Treasury of warrants to purchase common stock with an aggregate market price equal to 15% of the total amount of the preferred stock. Participating financial institutions will be required to adopt the Treasury's standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program and be restricted from increasing dividends to common shareholders or repurchasing common stock for three years without the consent of the Treasury.

Further, after receiving a recommendation from the boards of the Federal Deposit Insurance Corporation ("the FDIC") and the Federal Reserve System (the "Federal Reserve"), the Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to temporarily provide a 100% guarantee of the senior unsecured debt of all FDIC-insured institutions and their holding companies, as well as 100% of deposits in noninterest bearing transaction deposit accounts under a Temporary Liquidity Guarantee Program. Coverage under the Temporary Liquidity Guarantee Program is available for 30 days without charge and thereafter at a cost of 75 basis points per annum for senior unsecured debt and 10 basis points per annum for noninterest bearing transaction deposits in excess of the $250,000 insured deposit limit.

The Company has made a decision to participate in the Temporary Liquidity Guarantee Program regarding the Noninterest Bearing Deposit Account Guarantee but to opt out of the Senior Unsecured Debt Guaranty portion of that program. The Company has also decided it is not in the best interest of the Company or its shareholders to participate in either the Troubled Asset Purchase Program or the Capital Purchase Program available under TARP given the strength of the Company's capital position, government restrictions and the fact that the Company did not target sub-prime borrowers. Please see the Capital Resources section on page 39 of this Form 10-Q.

It is not clear at this time what impact the EESA, the TARP Capital Purchase Program, the Temporary Liquidity Guarantee Program, other liquidity and funding initiatives of the Federal Reserve and other agencies that have been previously announced, and any additional programs that may be initiated in the future will have on the Company and the U.S. and global financial markets.

The Company has established various accounting policies which govern the application of accounting principles generally accepted in the United States of America in the preparation of the Company's financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the reported amount of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company has identified the accounting policies and judgments most critical to the Company. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from estimates and have a material impact on the carrying value of assets, liabilities, or the results of operations of the Company.

The Company believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in the preparation of its consolidated financial statements. In estimating the allowance for loan losses, management utilizes historical experience as well as other factors including the effect of changes in the local real estate market on collateral values, the effect on the loan portfolio of current economic indicators and their probable impact on borrowers and changes in delinquent, nonperforming or impaired loans. Changes in these factors may cause management's estimate of the allowance for loan losses to increase or decrease and result in adjustments to the Company's provision for loan losses in future periods. For additional information see, FINANCIAL CONDITION - Allowance for Loan Losses below.

The Company's pension benefit obligations and net periodic benefit cost are actuarially determined based on the following assumptions: discount rate, estimated future return on plan assets, wage base rate, anticipated mortality rates, Consumer Price Index rate, and rate of increase in compensation levels. The annual determination of the pension benefit obligations and net periodic benefit cost is a critical accounting estimate as it requires the use of estimates and judgment related to the amount and timing of expected future cash out flows for benefit payments and cash in flows for maturities and returns on plan assets. Changes in estimates and assumptions could have a material impact to the Company's financial condition or results of operations.

The Company also has other key accounting policies, which involve the use of estimates, judgments and assumptions that are significant to understanding the results including the valuation of deferred tax assets, investment securities and other real estate owned. Given the market volatility and the number and volume of corporate failures and bailouts over the last couple of months, the determination of fair value and other than temporary impairment for investment securities has been especially challenging. See FINANCIAL CONDITION - Investment Activities below. Although management believes that its estimates, assumptions and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

The Company's net income was $1.2 million for the quarter ended September 30, 2008, compared with net income of $1.4 million for the same period in 2007, or a $257 thousand or 18.1% decrease between years. The decrease was the cumulative result of a drop in net interest income of $197 thousand and increases in all categories of noninterest expense except pension and employee benefits totaling a net $782 thousand. The largest component of the decrease in taxable income for the third quarter ending

September 30, 2008 was the $512 thousand of writedowns of two impaired corporate bond investment securities available-for-sale that were deemed other than temporarily impaired. The $74 thousand writedown of four other real estate owned (OREO) properties to their fair market value less costs to sell, the write-off of $25 thousand in furniture and fixtures also repossessed as collateral with an OREO property, and the $70 thousand in carrying costs of the OREO properties for the quarter also added to the decrease in taxable income. These increases were partially offset by a $267 thousand increase in noninterest income, primarily resulting from the receipt of $234 thousand from a nontaxable life insurance benefit, a loan loss provision of $45 thousand for the third quarter of 2008 compared to $190 thousand for the same period in 2007 and a $310 decrease in the provision for income taxes. The decrease in the provision for income taxes was partially a result of the increased nontaxable and reduced taxable income and partially a result of $27 thousand in low income federal tax credits booked during the third quarter of 2008 on a late 2007 investment in a low income housing project.

The Company faced a challenging interest rate environment as the prime rate had been reduced seven times since September 18, 2007 from 8.25% to 5.00% on April 30, 2008, where it remained throughout the balance of the reporting period. Total interest income decreased by $530 thousand, or 7.9% to $6.2 million in the third quarter of 2008 versus the $6.7 million in the third quarter of 2007, while the decrease in interest expense from $2.1 million in 2007 to $1.8 million in 2008 was only $333 thousand between periods. The result of the changes in interest income and expense was that net interest income for the third quarter of 2008 was $4.4 million, down $197 thousand or 4.3% from the third quarter of 2007 of $4.6 million. During the third quarter of 2008, the Company's net interest margin decreased 49 basis points to 4.67%, from 5.16% for the third quarter of 2007, reflecting both the decline in net interest income and the growth in the balance sheet. The Company's net interest spread declined 33 basis points to 4.25% for the third quarter of 2008, compared to 4.58% for the same period last year. The decline in the net interest spread was primarily the result of the decline in average interest rates earned on loans as the 325 basis point drop in the prime rate between the third quarter of 2007 and the third quarter of 2008 had an effect on the repricing of adjustable rate loans and the volume of refinancings, as customers took advantage of the lower rates. Further drops in the prime rate and/or increases in competitors deposit rates could be problematic going forward as the individual instruments re-price.

The Company's total assets increased from $393.4 million at December 31, 2007, to $423.1 million at September 30, 2008, an increase of $29.7 million, or 7.5%. Deposits increased from $324.0 million at December 31, 2007 to $348.6 million at September 30, 2008, an increase of $24.6 million, or 7.6%, with most of that increase in interest-bearing time deposits. Total loans, including loans held for sale, increased $25.1 million, or 7.9%, from $318.3 million at December 31, 2007 to $343.4 million at September 30, 2008. This increase reflects strong loan demand due to lower interest rates, a changing competitive environment due to the sale of a number of our competitors, financial market turmoil and the reluctance of some of our larger competitors to issue loans.

There was a $45 thousand provision for loan losses during the third quarter of 2008 versus a $190 thousand provision for the third quarter of 2007. The $45 thousand provision was deemed appropriate for the third quarter of 2008 in light of net charge-offs for the quarter ended September 30, 2008 of $29 thousand compared to net charge-offs of $120 thousand for the quarter ended September 30, 2007. There is continuing strong loan growth, an upward trend in the dollar amount of commercial real estate loans and a softening of the economy, which has resulted in an increase in nonperforming loans. These factors were partially offset by a decline in classified loans between periods as well as the growth in low risk loans to local municipalities and school districts. For further details see, FINANCIAL CONDITION - "Allowance for Loan Losses" and "Asset Quality" sections below.

The following unaudited per share information and key ratios depict several measurements of performance or financial condition for or at the three and nine months ended September 30, 2008 and 2007, respectively:

                                             Three Months Ended    Nine Months Ended
                                             ------------------    -----------------
                                                September 30,        September 30,
                                             ------------------    -----------------
                                               2008       2007       2008      2007
                                               ----       ----       ----      ----
Return on average assets (ROA) (1)             1.12%      1.46%      1.25%     1.45%
Return on average equity (ROE) (1)            11.27%     13.71%     12.04%    13.29%
Net interest margin (1)(2)                     4.67%      5.16%      4.80%     5.18%
Efficiency ratio (3)                          68.11%     62.01%     69.05%    64.15%
Net interest spread (4)                        4.25%      4.58%      4.34%     4.60%
Loan to deposit ratio                         98.50%     95.47%     98.50%    97.20%
Net loan charge-offs to average loans
 not held for sale (1)                         0.03%      0.16%      0.05%     0.08%
Allowance for loan losses to loans not
 held for sale                                 1.01%      1.09%      1.01%     1.09%
Non-performing assets to total assets          2.01%      0.96%      2.01%     0.96%
Equity to assets                               9.73%     10.55%      9.73%    10.55%
Total capital to risk weighted assets         15.89%     16.82%     15.89%    16.82%
Book value per share                           $9.19      $9.29      $9.19     $9.29
Earnings per share                             $0.26      $0.32      $0.84     $0.92
Dividends paid per share                       $0.28      $0.28      $0.84     $0.84
Dividend payout ratio (5)                    107.69%     87.50%    100.00%    91.30%

--------------------
(1)   Annualized
(2)   The ratio of tax equivalent net interest income to average earning assets.
(3)   The ratio of noninterest expense to tax equivalent net interest income and
      noninterest income excluding securities gains and losses.
(4)   The difference between the average rate earned on assets minus the average
      rate paid on liabilities.
(5)   Cash dividends declared and paid per share divided by consolidated net income
      per share.

Net Interest Income. The largest component of the Company's operating income is net interest income, which is the difference between interest and dividend income received from interest-earning assets and the interest expense paid on interest-bearing liabilities. The Company's net interest income decreased $197 thousand, or 4.3%, to $4.4 million for the three months ended September 30, 2008, from $4.6 million for the three months ended September 30, 2007. For the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007, net interest income dropped $369 thousand or 2.7% to $13.1 million from $13.4 million. The net interest spread decreased 33 basis points to 4.25% for the three months ended September 30, 2008, from 4.58% for the three months ended September 30, 2007 while it only dropped 26 basis points to 4.34% from 4.60% for the nine months ended September 30, 2008 and September 30, 2007, respectively. The decline in the net interest spread was primarily the result of the drop in average interest rates earned on loans as the 325 basis point drop in the prime rate between September 18, 2007 to April 30, 2008 affected the repricing of adjustable rate loans as well as the volume of new loans and refinancing activity as customers took advantage of the lower rates. The adverse effect of declining rates on the Company's net interest spread was mitigated somewhat by a 64 basis point decline in the average rate paid on deposits and borrowed funds in the third quarter of 2008 versus the same period last year. The net interest margin for the third quarter of 2008 decreased 49 basis points to 4.67% from the 2007 period at 5.16% reflecting both a decline in net income and an increase of $24.0 million in average earning assets. Similarly, the net interest margin for the nine months ended September 30, 2008 was 4.80% or 37 basis points lower than the 5.17% for the nine months ended September 30, 2007 while average interest earning assets rose $17.1 million. Further decrease in the prime rate would not necessarily be beneficial to the Company in the near term, especially if funding rates

did not follow a similar downward trend. See "OTHER FINANCIAL CONSIDERATIONS - Market Risk and Asset and Liability Management."

Yields Earned and Rates Paid. The following table shows, for the periods indicated, the total amount of income recorded from average interest-earning assets and the related average yields, the interest expense associated with average interest-bearing liabilities, the related average rates paid, and the relative net interest spread and net interest margin. Yield and rate information is calculated on an annualized tax equivalent basis. Yield and rate information for a period is average information for the period, and is calculated by dividing the annualized tax equivalent income or expense item for the period by the average balance of the appropriate balance sheet item during the period. Net interest margin is annualized tax equivalent net interest income divided by average interest-earning assets. Nonaccrual loans are included in asset balances for the appropriate periods, but recognition of interest on such loans is discontinued and any remaining accrued interest receivable is reversed in conformity with federal regulations.

                                                                      Three months ended September 30,
                                                  -----------------------------------------------------------------------
                                                                2008                                  2007
                                                  ---------------------------------     ---------------------------------
                                                               Interest     Average                  Interest     Average
                                                  Average      Earned/      Yield/      Average      Earned/      Yield/
                                                  Balance        Paid        Rate       Balance       Paid         Rate
                                                  -------      --------     -------     -------      --------     -------
                                                                          (Dollars in thousands)
Average Assets:
  Federal funds sold and
   overnight deposits                             $ 10,048     $    46       1.83%      $ 10,261     $   131       5.01%
  Interest bearing deposits in banks                 9,590         104       4.31%        10,521         128       4.82%
  Investment securities (1), (2)                    27,483         322       5.16%        29,041         338       5.00%
  Loans, net (1), (3)                              337,271       5,718       6.85%       311,071       6,115       7.89%
  FHLB of Boston stock                               1,922          14       2.87%         1,385          22       6.34%
                                                  --------     -------       ----       --------     -------       ----
    Total interest-earning assets (1)              386,314       6,204       6.51%       362,279       6,734       7.48%

Cash and due from banks                             10,597                                10,468
Premises and equipment                               7,276                                 6,179
Other assets                                        10,685                                 9,727
. . .