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 March 31, 2009, and as of December 31, 2008, and its results of operations for the three months ended March 31, 2009 and 2008. 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, 2008. 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 March 31, 2009 and May 8, 2009 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 the forward-looking statements include, but are not limited to, the following:

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uses of monetary, fiscal, and tax policy by various governments including measures taken by the Federal government to stimulate the economy;

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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;

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disruptions in U.S. and global financial and credit markets;

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developments in general economic or business conditions, globally, nationally, in Vermont, or in northwestern New Hampshire, including interest rate fluctuations, market fluctuations and perceptions, job creation and unemployment rates, ability to attract new business, and inflation and their effects on the Company or its customers;

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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;

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the implementation of international financial reporting standards (IFRS) for United States companies;

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impact of governmental interposition in financial services or other industries;

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the Company's ability to attract and retain key personnel;

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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;

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changes in technology, including demands for greater automation which could present operational issues or significant capital outlays;

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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;

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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;

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any actual or alleged conduct which could harm the Company's reputation;

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natural or other disasters which could affect the ability of the Company to operate under normal conditions;

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the Company's ability to attract and retain deposits and loans;

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illegal acts of theft or fraud perpetuated against the Company's subsidiary bank or its customers;

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unanticipated lower revenues or increased cost of funds, loss of customers or business, or higher operating expenses;

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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;

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the amount invested in new business opportunities and the timing of these investments;

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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 affecting such costs;

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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;

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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;

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the creditworthiness of current loan customers is different from management's understanding or changes dramatically and therefore the allowance for loan losses becomes inadequate; and

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uncontrollable increase in the cost of doing business such as increased costs of FDIC insurance on deposits, higher taxes or assessments by regulatory bodies.

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 for the last seven months and there doesn't appear to be much confidence in a short term stabilization. Interest rates remain at historic lows, bank failures are higher than they have been in over 20 years and the amount of U.S. Government dollars pumped into the system is unprecedented. Dramatic slowdowns in the housing industry with falling home prices, continuing foreclosures and increasing 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. The economic instability has progressed to many other business sectors and appears to be affecting the majority of consumers as well.

Despite the volatile economy, Vermont continues to have one of the lowest residential foreclosure rates in the country. Also, as northern New England did not experience the dramatic run up in housing prices that preceded the current economic downturn, 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, many new laws and regulations have been promulgated. We will not attempt to discuss them all within this Form 10-Q but will mention the ones that have a known financial impact on the Company.

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") was granted 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, under a 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 is authorized to invest up to $250 billion in U.S. financial institutions in the form of purchases of preferred stock and common stock warrants. Participating publicly-held financial institutions are 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 are 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 was 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 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 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, the nature of the government restrictions with the possibility of additional restrictions in the future, the fact that the Company did not target sub-prime borrowers and the fact that the Company is able to meet the lending needs of our customers with our available funding sources. Please see the Capital Resources section on page 38 of this Form 10-Q.

In addition, as a result of the weakness of certain financial institutions, the FDIC has taken action that will result in increased FDIC insurance assessments for United States FDIC-insured financial institutions, including Union. Under the deposit insurance restoration plan approved by the FDIC in October 2008, the FDIC Board set a rate schedule to raise the insurance reserve ratio to 1.15 percent within five years. On February 27, 2009, the FDIC announced that the restoration plan horizon has been extended to seven years in light of the current significant strains on banks and the financial system and the likelihood of a severe recession. In addition, the FDIC announced a special assessment of up to 20 basis points to be assessed on deposits at June 30, 2009 and collected on September 30, 2009. The FDIC may also impose an emergency special assessment after June 30, 2009 of up to 10 basis points if the FDIC deems that an additional special assessment is necessary to maintain public confidence in federal deposit insurance. Based on the FDIC insurance premium schedule for 2009, we anticipate our premium, exclusive of the special assessment of up to 20 basis points, to be $552 thousand for 2009 compared to $87 thousand for 2008. The special assessment at the maximum 20 basis points based on our estimated deposit base at June 30, 2009 would be approximately $718 thousand. This special assessment amount is still under review and has not yet been finalized as the Senate has agreed to increase the FDIC's Treasury borrowing authority, but if it was to occur as proposed, the total FDIC assessment for 2009 would be approximately $1.27 million.

Union is a member of FHLB of Boston with an investment of $1.9 million in its Class B common stock at March 31, 2009. The FHLB system is a cooperative that provides services to member banking institutions. The primary reason for joining the FHLB is to obtain funding from the FHLB. FHLB stock is an activity based stock that is directly proportional to the volume of funding. FHLB stock is bought and redeemed at par value. In response to adverse financial results primarily related to its write-down of its holdings of private mortgage backed securities, the FHLB of Boston in late 2008 adopted a revised retained earnings target, a repurchase moratorium on their Class B common stock, and a quarterly dividend payout restriction under their capital plan. These decisions will most likely limit the level of funds available under certain FHLB of Boston programs, affect the pricing of other programs and negatively impact the amount of quarterly dividends received by Union on its Class B common stock investment in the future.

It is not completely clear at this time what impact the current or future government sponsored programs 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 (GAAP) 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, capital, 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, capital, 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.

Given the recent disruptions in the financial markets, the decision to recognize other-than-temporary impairment on investments securities available-for-sale has become more difficult as complete information is not always available and market conditions and other relevant factors are subject to rapid changes. The other-than-temporary impairment decision has become a critical accounting policy for the Company and accounting guidance is given under Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," FASB Staff Position (FSP) No. 115-1 "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Benefits," and Staff Accounting Bulletin No. 59, "Noncurrent Marketable Equity Securities." These statements require companies to perform periodic reviews of individual securities in their investment portfolios to determine whether a decline in the value of a security is other than temporary. A review of other-than-temporary impairment requires companies to make certain judgments regarding the materiality of the decline, its effect on the financial statements and the probability, extent and timing of a valuation recovery and the company's intent and ability to continue to hold the security. Pursuant to these requirements, management assesses valuation declines to determine the extent to which such changes are attributable to (1) fundamental factors specific to the issuer, such as the nature of the issuer and its financial

condition, business prospects or other factors or (2) market-related factors, such as interest rates or equity market declines. Declines in the fair value of securities below their costs that are deemed by management to be other-than-temporary are recorded in earnings as realized losses.

The Company's pension benefit obligations and net periodic benefit cost are actuarially determined based on the following assumptions: discount rate, current and 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 outflows for benefit payments and cash inflows for maturities and returns on plan assets as well as Company contributions. Changes in estimates, assumptions and actual results 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, and determination of the fair values of investment securities and other real estate owned. Given the market volatility and the number and volume of corporate failures and bailouts over the last several months, the determination of fair value and other than temporary impairment for investment securities has been especially challenging. See FINANCIAL CONDITION - Allowance for Loan Losses and Investment Activities below. Although management believes that its estimates, assumptions and judgments are reasonable, they are based upon information presently available and can be impacted by events outside the control of the Company. Actual results may differ significantly from these estimates under different assumptions, judgments or conditions.

The Company's net income was $1.267 million for the quarter ended March 31, 2009, compared with net income of $1.406 million for the same period in 2008, representing a $139 thousand, or 9.9%, decrease between years. The decrease was the cumulative result of an increase in other expenses of $126 thousand, of which $123 thousand is due to the increase in the FDIC insurance assessment, the increase in the provision for income taxes as the 2008 provision was low due to the receipt of an $184 thousand rehabilitation tax credit resulting from an affordable housing limited partnership investment, and a higher provision for loan losses for the first quarter of 2009, in the amount of $95 thousand versus $50 thousand for the first quarter of 2008. These increases in expenses were partially offset by an increase in net gains on sales of loans held for sale and the resulting increased income from the recognition of mortgage servicing rights as the Company sold the majority of qualified residential mortgage loans originated during the first quarter of 2009 to mitigate long term interest rate risk and to generate fee income.

The Company faced a challenging interest rate environment as the prime rate had been reduced seven times since January 1, 2008 from 7.25% to 3.25% on March 31, 2009. Total interest income decreased by $414 thousand, or 6.6% to $5.9 million in the first quarter of 2009 versus the $6.3 million in the first quarter of 2008, while the decrease in interest expense from $1.9 million in 2008 to $1.5 million in 2009 was $436 thousand between periods. The result of the changes in interest income and expense was that net interest income for the first quarter of 2009 was $4.4 million, up $22 thousand or 0.5% from the first quarter of 2008 of $4.3 million. During the first quarter of 2009, the Company's net interest margin decreased 40 basis points to 4.54%, from 4.94% for the first quarter of 2008. Despite the decreased interest rate margin, there was a slight increase in net interest income due to growth in the balance sheet. The Company's net interest spread declined 21 basis points to 4.20% for the first quarter of 2009, compared to 4.41% 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 400 basis point drop in the prime rate between January 1, 2008 and March 31, 2009 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 as the individual instruments reprice.

The Company's total assets decreased from $440.1 million at December 31, 2008, to $421.8 million at March 31, 2009, a decrease of $18.3 million, or 4.2%. The decrease between periods is a normal seasonal decline which management believes may have been exacerbated by the tightening economy. Deposits decreased from $364.4 million at December 31, 2008 to $346.5 million at March 31, 2009, a decrease of $17.9 million, or 4.9%, with that decrease comprised of a drop of $13.3 million in commercial noninterest-bearing deposits and a drop of $14.7 million in overall Municipal deposits which are subject to great seasonality. These decreases were partially offset by an increase in consumer deposits with savings accounts growing $3.7 million and money market accounts growing $9.2 million. Total loans, including loans held for sale, decreased $4.5 million, or 1.3%, from $353.4 million at December 31, 2008 to $348.9 million at March 31, 2009. Total loans at March 31, 2009 are net of $18.0 million in residential real estate loans sold during the first quarter of 2009. Despite a weakening economy, loan demand is strong 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.

The provision for loan losses for the first quarter of 2009 was $95 thousand versus a $50 thousand provision for the first quarter of 2008. The $95 thousand provision was deemed appropriate for the first quarter of 2009 in light of higher net charge-offs for the quarter ended March 31, 2009, which were $127 thousand compared to net charge-offs of $27 thousand for the quarter ended March 31, 2008. There is continuing strong loan demand and an upward trend in the dollar amount of commercial real estate loans. Although there continues to be a softening of the economy, there was a decrease in loans 30 or more days past due between years as well as a decline in classified loans. 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 months ended March 31, 2009 and 2008, respectively:

                                                        Three Months Ended March 31,
                                                          2009               2008
Return on average assets (ROA) (1)                             1.19%              1.44%
Return on average equity (ROE) (1)                            13.00%             13.33%
Net interest margin (1)(2)                                     4.54%              4.94%
Efficiency ratio (3)                                          68.38%             68.83%
Net interest spread (4)                                        4.20%              4.41%
Loan to deposit ratio                                        100.68%            100.58%
Net loan charge-offs to average loans not held for             0.15%
sale (1)                                                                          0.04%
Allowance for loan losses to loans not held for sale           1.02%              1.10%
Non-performing assets to total assets                          1.85%              1.70%
Equity to assets                                               9.24%             10.86%
Total capital to risk weighted assets                         15.44%             16.72%
Book value per share                                 $          8.72     $         9.39
Earnings per share                                   $          0.28     $         0.31
Dividends paid per share                             $          0.28     $         0.28
Dividend payout ratio (5)                                     100.0%             90.32%


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Annualized

The ratio of tax equivalent net interest income to average earning assets. See page 17 for more information.

The ratio of noninterest expense to tax equivalent net interest income and noninterest income, excluding securities gains of $21 thousand at March 31, 2009. The efficiency ratio is a non-GAAP standard measure of expense utilization effectiveness used in the banking industry.

The difference between the average rate earned on assets minus the average rate paid on liabilities. See page 18 for more information.

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 increased $22 . . .