10-K 1 a421405.txt 2001 =============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to COMMISSION FILE NUMBER 0-21078 ---------------- UNION BANKSHARES, LTD. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) DELAWARE 84-0986148 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1825 LAWRENCE STREET, SUITE 444 DENVER, COLORADO 80202 (Address of principal executive offices) (303) 298-5352 (Issuer's telephone number) SECURITIES REGISTERED UNDER SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED UNDER SECTION 12(g) OF THE ACT: Common Stock, par value $.001 per share Union Bankshares Capital Trust I 9% Cumulative Trust Preferred Securities and the Guarantee of Union Bankshares, Ltd. with respect thereto (Titles of classes) ---------------- Indicate by check mark whether the Issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No -- -- Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ----- The aggregate market value of the voting stock of the registrant held by non-affiliates, based on a closing price of $11.60 per share as of March 25, 2002, was approximately $14,880,584. As of March 25, 2002, there were outstanding 2,410,078 shares of Common Stock. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement for its 2002 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 30, 2002, are incorporated by reference into Part III of this report. Certain Exhibits to this Annual Report on Form 10-K have been incorporated by reference. See Index to Exhibits on Page E-1. =============================================================================== UNION BANKSHARES, LTD. TABLE OF CONTENTS PAGE PART I Item 1. Business..........................................................1 Item 2. Properties.......................................................26 Item 3. Legal Proceedings................................................27 Item 4. Submission of Matters to a Vote of Security Holders..............27 PART II Item 5. Market for Common Equity and Related Shareholder Matters.........27 Item 6. Selected Financial Data. ........................................28 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................30 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.......44 Item 8. Financial Statements.............................................44 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial ........................................44 PART III Item 10. Directors, and Executive Officers of the Registrant..............45 Item 11. Executive Compensation...........................................45 Item 12. Security Ownership of Certain Beneficial Owners and Management...45 Item 13. Certain Relationships and Related Transactions...................45 Item 14. Exhibits and Reports on Form 8-K.................................46 -i- PART I ITEM 1. BUSINESS OVERVIEW Union Bankshares, Ltd. (the "Company") is an independent bank holding company whose predecessor was incorporated as a Colorado corporation in 1984. The Company was reincorporated in Delaware in 1992. The Company's principal asset is the common stock of Union Bank & Trust (the "Bank"), a state chartered commercial bank located in Denver, Colorado. The operations of the Bank and its predecessors date back to 1917. The Company acquired the Bank in 1985. The Bank attracts FDIC-insured deposits, and focuses on providing relationship banking based on personal attention and professional service to small and medium-sized businesses and individuals. This operating strategy has resulted in sustained growth in the Bank's asset and deposit base and loan portfolio, with strong operating results. The Bank has maintained its emphasis on asset quality and capital preservation by following conservative loan underwriting standards that have allowed it to avoid excessive loan losses. The Bank's ratios of nonperforming assets to capital and to total assets were 9.32% and 0.57%, respectively, at December 31, 2001. The Company continues to seek to take advantage of the opportunities in the Colorado banking market which have resulted from the relaxation of historical regulatory limitations on branch banking. In addition, recent acquisition activity in the industry has led to lapses in coverage of different customer needs and reduction in customer services, as well as disruption of existing account relationships. The Company believes that this continues to afford the Bank an opportunity for internal growth through attracting new customers and quality personnel with existing customer relationships. The Company's strategy for growth (see "Growth Strategy") is based primarily on the development of branches that are strategically located around the Denver metropolitan area to serve the Bank's focus market of small and medium-sized businesses and individuals. The Company has opened five branches in the last several years, the first in the Lakeside area in July 1994, the second in the University Hills area in March 1995, the third in the Lakewood area in December 1995, the fourth in the Littleton area in May 1998 and the fifth in the Golden area in October 1998. Each of these are full service branches, having the appearance of stand alone banks. In addition, the Company acquired Lakewood State Bank in December 1998 and established it as the Company's sixth branch. The Company continues to analyze opportunities to open additional full-service branches in the metropolitan Denver area, subject to identification of an appropriate market and branch location, negotiation of an acceptable lease and approval of the various regulatory bodies and branching restrictions under Colorado law. The Company will also assess additional acquisition opportunities as they present themselves. See "Management's Discussion and Analysis of Financial Condition and Results of Operation - Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995" for a discussion of matters regarding forward-looking statements in this Form 10-K. OPERATING STRATEGY The Company's strategy as an independent one-bank holding company has been carried out through the operations of the Bank, including its branches. The Bank, under the direction of the Company, emphasizes local relationship banking for small and medium-sized businesses and individuals. The Bank's operating strategies include: o Personal Attention and Professional Service o Maintaining Asset Quality o Asset/Liability Management The Company's branching efforts are structured to continue to build on the three strategies outlined above. The Company has located its branches in areas that produce a similar customer base to that of the Bank, has encouraged community participation at each branch, has developed transparent communication and data delivery systems, and has retained employees familiar with both the Company's operating philosophies and the community's needs. The Bank, through its branches, supports local community events through employee volunteers and sponsorships. For example, in 2001 the Bank sponsored a Check Fraud prevention seminar in conjunction with the Invest 2001 Expo and a seminar by national author and speaker, Francis X. McGuire. Personal Attention and Professional Service. The Bank's customer-oriented strategy is one of providing customers with personal attention and professional service by involving all employees in supporting the Bank's programs that are directed at providing exceptional customer service and empowering employees to make decisions to enhance customer satisfaction. The Bank measures staff performance in these areas in a number of ways including the use of both current bank customers and non-customers as testers in what we call a "mystery shop." In a mystery shop, our testers are sent to interact with Bank personnel at various branches by posing as customers. These test customers sample bank personnel competence and customer service skills by posing challenging questions to Bank employees regarding a range of Bank services. The results of these shops are used as training aids for employees, to assess performance and create performance benchmarks, and as a basis for discovering new ways to continually improve the Bank's service. Another performance evaluation tool the bank uses is the on-going service quality and product questionnaire. Each account opened at the Bank is sent a letter thanking them for their business and is asked to rate their experience. The Bank continues to receive high marks in the "excellent" category on these questionnaires. Under the Bank's Officer Call Program, which was originally implemented in 1986, lending officers call on existing customers and prospects on a regular basis. On these calls, the officers seek to develop a better understanding of the business issues faced by the customer and discuss services which the Bank can provide to help them address their needs. Branch officers also hosted several customer and prospect luncheons throughout the year in order to increase bank awareness with customers as well as prospects. The Bank requests customer feedback on customer communication pieces such as direct mail pieces, mailings in monthly statements, website contact and through the Bank's recorded on-hold message system. Customers are encouraged to speak or write freely with respect to both positive and negative aspects of the Bank's service. The Bank's advertising is targeted toward the business community, emphasizing the high quality of personal attention as well as unique opportunities for our commercial customers to grow their business. The Bank produces a quarterly newsletter that highlights 4 to 8 business customers called "Partners of Interest." -2- The Bank distributes the newsletter in the commercial business statements as well as posts the newsletter on the Bank's website. The Bank's website also has a partners link available to commercial customers that allows a link directly to the customer's website. Maintaining Asset Quality. The Bank has emphasized asset quality through its conservative lending policy rooted in relationship banking. The Bank generally is not a transaction-by-transaction lender, preferring instead to develop a full banking relationship with its loan customers. This philosophy has led to generally positive loan loss experience and low ratios of nonperforming assets to total assets. See "Nonperforming Assets." Asset/Liability Management. The Bank's asset/liability management policy is designed to manage the risk/return relationships between capital adequacy, market risk, liquidity and interest rate risk. A substantial component of this policy is to protect the Bank's portfolio from undue interest rate risk. Exposure to interest rate risk arises from volatile interest rates and changes in the Bank's balance sheet mix. The Bank's policy is to control the exposure of its earnings to changing interest rates by generally maintaining a position within a narrow range around an "earnings neutral position," which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management." GROWTH STRATEGY The Company has focused on growth as an independent entity and adopted an aggressive internal growth strategy through establishing full-service branches in locations in the Denver metropolitan area that reach small and medium-sized businesses in each location. The Bank's six existing full-service branches are structured to provide complete banking services in each location and each branch is headed by a branch president or branch manager with responsibility and authority to service the banking and lending needs of the local business. This structure compliments the Bank's philosophy of customer-to-staff-to-management direction so that the Bank responds to customer input rather than the customer being asked to respond to the Bank without having the opportunity to give input. In July 1994, the Bank opened its first branch in the Lakeside area of metropolitan Denver. Since then, the Bank has opened branches in the University Hills area in March 1995, the Lakewood area in December 1995, the Littleton area in May 1998 and the Golden area in October 1998. In addition, the Bank acquired Lakewood State Bank in December 1998, which the Bank developed into its sixth branch and is operating such branch as Union Bank & Trust Southwest. The following table sets forth the deposits attracted and the loans made by the Bank and each of its six branches as of December 31, 2001, 2000 and 1999. -3-

To accommodate the Company's anticipated growth, management intends to continue to recruit additional high-quality personnel and enhance its internal management systems. Management believes that such personnel and systems are necessary if the Company is to continue to achieve its growth strategy without compromising its customer-oriented approach to banking and its commitment to maximize asset quality. Further, the recent consolidation in the Colorado banking industry has resulted in the availability of a number of quality personnel with long-standing customer relationships. There can be no assurance, however, that the Company will achieve its growth objectives. ECONOMIC ENVIRONMENT IN MARKET AREAS SERVED The Company's principal market for loans and deposits is the greater Denver metropolitan area. The Bank has benefitted from the strength in the metropolitan Denver economy in recent years. The metropolitan Denver economy has diversified from its prior dependence on the oil and gas industry, with contributions from the manufacturing, telecommunications and government sectors. Total employment, retail sales and home sales have all been healthy in years past, while apartment vacancy and commercial office vacancy rates have generally declined. As with the metropolitan Denver economy, the Colorado economy has become more diversified over the past decade. An increase in tourism and international trade, together with growth in the small manufacturing and high technology industries, has broadened the economic base of Colorado. Due to current national and regional economic conditions, however, the Company anticipates slow, or no growth in metropolitan Denver and Colorado economies and we anticipate a corresponding reduction in the growth rate of both loans and deposits at the Bank. LENDING ACTIVITIES General. The Bank provides a range of commercial and retail lending services, including, but not limited to, commercial business loans, commercial and residential real estate construction loans, commercial and residential real estate mortgage loans, loan participations, consumer loans, revolving lines of credit, and letters of credit. Currently, the primary focus of the Bank is on commercial business lending to small and medium-sized businesses. The Bank places a strong emphasis on asset quality, and maintains conservative underwriting standards. The Bank monitors the concentration of its loan portfolio in an effort to avoid over-allocating its funds available for lending to any particular industry sector. -4- The Bank is not normally a transaction lender and generally requires a full banking relationship with its commercial customers. The Bank seeks to continually develop and maintain its strong community orientation by, among other things, considering the interests of its existing and potential customers in the Denver community. In particular, primary consideration is given to customers with interests in the Bank's and branches' surrounding communities, including the areas located within a five-mile radius of the Bank's main location and a three-mile radius of the branch locations. The Bank's loan officers have an average of over 15 years lending experience and are committed to the lending profession. The loan officer staff includes 3 past presidents of the Rocky Mountain Chapter of Robert Morris Associates (the national organization of bank credit officers). Loan Portfolio Composition. The following table sets forth the composition of the Company's loan portfolio by type of loan, aggregate dollar amount and percentage of total loans at the dates indicated.

Commercial Loans. Commercial lending is the Bank's primary focus and the strength of its lending activity. The Bank's areas of emphasis include, but are not limited to, loans to building contractors, wholesalers, manufacturers, business services companies and energy-related businesses. The Bank provides a wide range of commercial business loans, including lines of credit for working capital purposes and term loans for the acquisition of equipment and other purposes. Collateral for these loans generally includes accounts receivable, inventory, equipment and real estate. Where warranted by the overall financial condition of the borrower, loans may be made on an unsecured basis. Terms of commercial business loans generally range from one to five years. The majority of the Bank's commercial business loans have floating interest rates. Commercial loans outstanding were $163.1 million at December 31, 2001 compared to $153.7 million at December 31, 2000. Many of the Bank's commercial loans are extended to small business customers. The primary repayment risk is the failure of the business due to economic or financial factors. In most cases the Bank has taken security and receives personal guarantees to help assure an alternative source of repayment. Real Estate Construction Loans. The Bank originates single family and multi-family residential construction loans to builders who have demonstrated a favorable record of performance with the Bank or within the Bank's known service area on both a pre-sold and speculative basis. Homes built without a specific buyer are limited to specific concentration guidelines and factors set from time to time by Bank management. -5- The Bank is also actively involved in providing commercial construction financing to both existing and new customers. The Bank will normally require a pre-qualification letter for permanent financing from either the Bank or another lender. The Bank also provides acquisition and development, land and lot loans using conservative underwriting guidelines and specific concentration benchmarks in relation to capital set from time to time by Bank management. A variety of risks are present in construction loans, including the failure of the contractor to complete the work and the borrower's inability to pay. The Bank carefully monitors construction draws and inspects each property frequently to insure the work is being completed as specified. In addition, construction loans generally are made where a conservative loan-to-value ratio exists. These loans are frequently backed by personal guarantees and other collateral that provide an alternative source of repayment. The Bank further attempts to limit its risk through adherence to conservative underwriting procedures and by using only state licensed or certified appraisers on all loans above $250,000. The Bank's real estate construction loans outstanding were $36.3 million at December 31, 2001, compared to $27.0 million at December 31, 2000. Real Estate Mortgage Loans. The Bank generally restricts its commercial real estate lending activity to owner-occupied properties or to investor properties that are owned by customers with which the Bank has a solid banking relationship. Therefore, many loans classified as commercial real estate loans could be characterized as ordinary commercial loans which are secured by real estate. Commercial real estate loans are generally made at floating rates and for maturities ranging from five to ten years. The Bank's underwriting standards generally require that the loan-to-value ratio not exceed 75% of appraised value. Management does not believe that the Bank's existing commercial real estate loan portfolio represents a material risk of loan losses. The Bank can originate SBA real estate loans on owner occupied properties where the maturities may be up to twenty five years, and the loan-to-value ratio may reach 90% of appraised value. These loans are guaranteed by the Federal government at no less than 70% of the loan amount. The primary risks of real estate mortgage loans include the borrower's inability to pay and deterioration in the value of the real estate that is being held as collateral. The Bank also originates residential mortgage loans on a limited basis as a service to its customers. On those loans that are extended, the Bank attempts to have conservative loan-to-value ratios, personal guarantees, a strong history of debt servicing capability, fully amortizing terms over twenty-five years or less with the majority of these having a balloon maturity of ten years or less, and alternative collateral if necessary. From time to time, the Bank purchases loans from a locally owned mortgage company until the mortgage company sells the loans into the secondary mortgage market. The loans are then sold back to the mortgage company. Initially, the Bank receives interest during its holding period of prime plus .50%. All origination fees and interest on the loan in excess of the rate payable to the Bank are retained by the mortgage company. If the mortgage is not sold within specified periods, the Bank is entitled to receive all of the interest paid on the mortgage from inception and may be entitled to receive all or a portion of the origination fees. The mortgage company provides loan servicing during the period that the mortgage is held by the Bank. During the years ended December 31, 2001, 2000, and 1999, the Bank earned interest income on such loans of $102,000, $10,000, and $28,000, respectively. During the years ended December 31, 2001, 2000, and 1999, the Bank purchased loans in the amounts of $33.6 million, $4.8 million, and $9.4 million and sold loans in the amounts of $31.6 million, $4.8 million, and $13.7 million. All loans sold back to the mortgage company are without recourse to the Bank. -6- These loans carry the same risks as any other real estate mortgage loan. However, in most cases, the Bank bears these risks for only a short period. As a general matter, the loans are presold and remain in the Bank's portfolio for an average of less than 30 days. The Bank has not, to date, retained any of these loans. Mr. Zueck, the Chairman of the Board of the Bank and a director of the Company, is a director and Treasurer of the mortgage company. Consumer Lending. The Bank provides a full range of consumer loans. The primary risk of consumer lending relates to the personal circumstances of the borrower. The Bank provides as a service to its business customers and their employees the choice of dealing with the same loan officer for consumer and business matters. This service has been well received by new business customers and their employees who, in dealing with large holding company banks, have frequently had to deal with a variety of different officers for different types of transactions. Consumer loans outstanding were $33.5 million and $31.8 million at December 31, 2001 and 2000, respectively. During 2000, the Bank instituted a program to purchase dealer initiated loans. At December 31, 2001, the total loans from this program were $12.9 million. The branches tend to have a higher ratio of consumer loans to commercial loans than the main Bank has historically experienced. Management expects that this will continue in the future. Commitments and Contingent Liabilities. In the ordinary course of business, the Bank enters into various types of transactions that include commitments to extend credit as described in Note 10 of the Notes to Consolidated Financial Statements. The Bank applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. The Bank's exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. It is management's policy not to commit to extend credit at below market interest rates. Credit Authority and Loan Limits. All loans, credit lines, and letters of credit are subject to the same approval procedures and amount limitations. These limitations apply to the total outstanding indebtedness of the borrower to the Bank, including the indebtedness of any guarantor. All individual or aggregate credits in excess of $100,000 must be preapproved by the Bank's Loan Committee, with certain limited exceptions. The Bank allows certain senior loan officers the flexibility, based on their experience and the individual loan customer they are working with, to advance, without preapproval, up to $50,000 per request, with a limit of $100,000 per twelve-month period, to that customer, even if that customer's aggregate credits are over the $100,000 limit prior to the request. Any advance made under these conditions are then required to be ratified at the next regularly-scheduled Loan Committee meeting. The Loan Committee consists of the Bank's Chairman of the Board, Herman J. Zueck, its President, Charles B. Worthington, its Executive Vice President, Fred I. Artes, its Executive Vice President, Van A. Horsley, and the outside directors of the Bank. A quorum of the committee is a minimum of four members, two of which must be outside directors. Under federal law, permissible loans to one borrower by the Bank are generally limited to 15% of its unimpaired capital, surplus, undivided profits and loan loss reserve ($5.0 million at December 31, 2001). The Bank utilizes a guidepost "house limit" on loans to any borrower of $2,500,000, which has occasionally been exceeded. The Bank sells loan participations to accommodate borrowers whose financing needs exceed the Bank's lending limits. Total loan participations sold as of December 31, 2001 and 2000 were $4,921,000 and $2,683,000, respectively. Loan Policy. The Bank's lending activities are guided by its Statement of Lending Policies and Procedures. These policies are reviewed annually and approved by the Bank's Board of Directors. The Bank supplements its internal supervision and audits of its lending operations with independent examinations performed by professional, experienced consultants and auditors. -7- NONPERFORMING ASSETS The Company's nonperforming assets consist of nonaccrual loans, restructured loans, past due loans and foreclosed assets held for sale. The following table sets forth information with respect to these assets at the dates indicated.

Past Due, Nonaccrual and Impaired Loans. The Company's financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on its loan portfolio, unless a loan is placed on a nonaccrual basis. Loans are placed on nonaccrual when there are serious doubts about the collectibility of principal or interest. Amounts received on nonaccrual loans generally are applied first to principal and then to interest only if all principal has been collected or principal collection is assured. The Company's policy is to place a loan on nonaccrual status when the loan becomes past due for 90 days or more, unless the loan is well secured, is in the process of being collected and the Bank's Loan Committee has approved maintaining the loan on an accrual basis, which in practice is rarely done. At December 31, 2001, the Company had $895,000 of loans accounted for on a non-accrual basis compared to $70,000 and $4,000 at December 31, 2000 and 1999, respectively. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferral of interest or principal, have been granted due to the borrower's weakened financial condition. Interest on restructured loans is accrued at the restructured rates when it is anticipated that no loss of original principal will occur. The Company had no restructured loans at December 31, 2001, 2000 and 1999, respectively. Impaired loans, which include nonaccrual loans noted above and potential problem loans, where known information about possible credit problems causes management to doubt the ability of such borrowers to comply with contractual repayment terms total $4,510,000 and $5,112,000 at December 31, 2001 and 2000, respectively. An allowance for loan loss of $681,000 and $767,000 relates to impaired loans at December 31, 2001 and 2000, respectively. Interest of $316,000, $410,000 and $261,000 was recognized on average impaired loans of $4,761,000, $4,143,000 and $2,851,000 for 2001, 2000 and 1999, respectively. Foreclosed Assets Held for Sale. Assets acquired by foreclosure or in settlement of debt and held for sale are valued at estimated fair value as of the date of foreclosure, and a related valuation allowance is provided for estimated costs to sell the assets. Management evaluates the value of foreclosed assets held for -8- sale periodically and increases the valuation allowance for any subsequent declines in fair value. Increases in the valuation allowance and gains/losses on sales of foreclosed assets are included in noninterest expense, net. At December 31, 2001 and 2000, the Company had no foreclosed assets held for sale. ANALYSIS OF ALLOWANCE FOR LOAN LOSSES The allowance for loan losses represents management's recognition of the risks of extending credit and its evaluation of the quality of the loan portfolio. The allowance is maintained at a level considered adequate to provide for anticipated loan losses based on management's assessment of various factors affecting the loan portfolio, including a review of problem loans, business conditions and loss experience and an overall evaluation of the quality of the underlying collateral and holding and disposal costs. The allowance is increased by provisions charged to operations and reduced by loans charged off, net of recoveries. Allowances are provided for individual loans where ultimate collection is considered questionable by management after reviewing the current status of loans that are contractually past due and considering the net realizable value of the security and of the loan guarantees, if applicable. Management believes that the Company's allowance for loan losses is adequate to cover anticipated losses and is in accordance with generally accepted accounting principles. There can be no assurance, however, that management will not determine to increase the allowance for loan losses or that regulators, when reviewing the Bank's loan portfolio in the future, will not request the Bank to increase such allowance, either of which could adversely affect the Company's earnings. Further, there can be no assurance that the Company's actual loan losses will not exceed its allowance. The following table sets forth information regarding changes in the Company's allowance for loan losses for the periods indicated. -9-

-10- The following table sets forth the allowance for loan losses by loan category, based upon management's assessment of the risk associated with such categories, at the dates indicated and summarizes the percentage of gross loans in each category to total gross loans.

INVESTMENT ACTIVITIES The Company maintains a securities portfolio comprised primarily of U.S. government securities, municipal securities and other investment securities. The Company manages its investment portfolio to (i) maximize safety and soundness, (ii) provide adequate liquidity, (iii) maximize rate of return within the constraints of applicable liquidity requirements (with liquidity taking precedence over return) and (iv) complement asset/liability management policies. The Bank's Asset and Liability Management Committee, which is made up of the Bank's Chairman of the Board and Chief Executive Officer, its President, its Executive Vice President of Lending, its Executive Vice President of Finance, its Senior Vice President of Operations, and its Vice President and Controller, oversees the Bank's investment portfolio with the assistance of an outside consultant. The Bank uses a measurement known as dollar duration to analyze its exposure to interest rate risk. Dollar duration measures the percentage loss or gain that the portfolio will sustain with each 100 basis point parallel shift in interest rates. In 2001, the Bank increased the dollar duration of its portfolio as interest rates decreased steadily throughout the year, and the investments which matured were replaced with new investments with lower yields and longer maturities. In 2000, the Bank increased the dollar duration of its portfolio as interest rates remained relatively steady through the first two quarters, then increased during the last two quarters, and the investments which matured were replaced with new investments with slightly higher yields and longer maturities. As a result, the Bank has a relatively higher exposure to increased interest rates at this time than at year-end 2000. During June 2000, in order to maximize the Company's liquidity flexibility, the Company transferred its investment securities held to maturity portfolio with an amortized cost of $31,253,445 and an unrealized loss of $704,434 to investment securities available for sale. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Asset/Liability Management." -11- The table below provides the amortized cost and fair value of the Company's investment securities at each of the dates indicated.

The following table sets forth the securities held by the Company which (other than U.S. government securities) make up more than ten percent of stockholders' equity:

-12- The following tables provide the carrying values, maturities and weighted average yields of the Company's securities portfolio at the dates indicated. AVAILABLE-FOR-SALE SECURITIES

------------------------ (1) Based on contractual maturities and, therefore, do not reflect principal amortization. (2) Government guaranteed mortgage pools, such as FHLMC, FNMA, and GNMA, which act as pass-through entities for income on mortgages from debtors through the Agency pools to investors. (3) Yields have been calculated on a full tax-equivalent basis. (4) Includes $12,669,000 of securities pledged to overnight repurchase agreement. -13- The Company invests in tax-exempt securities to help control taxable income. Interest paid on tax-exempt securities is non-taxable for ordinary income tax purposes and partially taxable for alternative minimum tax purposes. Management attempts to balance its investments in tax-exempt securities in order to maximize the tax benefits from these investments. The Company modestly increased the size of its tax-exempt portfolio in 2000 and 2001 in order to accomplish these goals. TRUST DEPARTMENT ACTIVITIES Although the Bank maintains a trust department for individuals and corporate entities, it currently is engaging in a minimal level of trust activities, consisting primarily of acting as an escrow agent. SOURCE OF FUNDS General. The Bank's primary source of funds has historically been customer deposits. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and unscheduled loan prepayments, which are influenced by general interest rate levels, interest rates available on other investments, competition, economic conditions and other factors, are not. Although the Bank's deposit balances have shown historical growth, such balances may be influenced by changes in the banking industry. Borrowings may be used on a short-term basis to compensate for reductions in other sources of funds (such as deposit inflows at less than projected levels). Borrowings may also be used on a longer term basis to match the maturity or repricing intervals of assets. In 1994, the Bank became a member of the Federal Home Loan Bank of Topeka (the "FHLB"). In 2000 and 2001 the Bank's holdings of FHLB dividend-bearing stock were $2,430,000 and $2,750,000, respectively. The FHLB provides the Bank with access to a collateralized credit line of approximately $55.0 million, as well as a source to sell excess federal funds. The following table sets forth the Company's short term borrowings with maturities of less than a year and the weighted average interest rates of borrowings at the dates indicated.

In addition to the borrowings listed in the above table, the Bank has borrowed an additional $20,000,000 from the FHLB with maturities from January 31, 2003 through January 22, 2004 at rates from 3.37% to 4.59% which are not included in short term borrowings disclosed above. The maximum amount of total outstanding borrowings at any month end was $55,000,000 and $48,600,000 for the years ended December 31, 2001 and 2000, respectively. The average amounts outstanding were $39,327,000 and $39,493,000 with approximate weighted average interest rates of 4.41% and 6.61% for the years ending December 31, 2001 and 2000. -14- The Bank borrowed a total of $55,000,000 in 2001, representing an increase in its aggregate borrowings (long and short term combined) of $26.4 million as compared to 2000. The purpose for these borrowings was to provide an alternative source of funding to fund current loan growth at a time when the Bank's deposits had not increased and liquidation of a portion of the Bank's investment portfolio was not believed to be prudent. The Company expects that these loans will be repaid with liquidity from normal increases in deposits coupled with liquidity from the Bank's investment portfolio. Deposit Activities. The Bank offers a variety of accounts for depositors designed to attract both short-term and long-term deposits. These accounts include certificates of deposit ("CD's"), savings accounts, money market accounts, checking and negotiable order of withdrawal (NOW) accounts and individual retirement accounts. These accounts generally earn interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types or maturities of deposits. The Bank has not sought brokered deposits and does not currently intend to do so in the future. The Bank had no brokered deposits at December 31, 2001. The following table presents the average balances outstanding for each major category of deposits and weighted average interest rates paid for interest-bearing deposits for the periods indicated.

The following table shows the amount and maturity of CD's that had balances of more than $100,000 at the dates indicated.

COMPETITION The banking business in the greater Denver metropolitan area is highly competitive, including approximately fifteen other banks. The Company competes for loans and deposits with other commercial banks, credit unions, thrifts, mortgage bankers and other institutions with respect to the scope and type of -15- services offered, interest rates paid on deposits and pricing of loans, among other things. Many of these competitors have substantially greater resources than the Company. In addition, by virtue of their larger capital bases or affiliation with larger multi-bank holding companies, some of the banks with which the Bank competes have substantially larger lending limits than the Bank, and perform other functions for their customers which the Bank can offer only through correspondents. The Company also faces significant competition for investors' funds from sellers of short-term money market securities and other corporate and government securities. The Company competes for loans principally through the range and quality of the services it provides, interest rates and loan fees. The Company believes its personal service philosophy in conjunction with its staff of experienced loan officers enables it to compete favorably with other financial institutions in its focus market of small and medium-sized businesses. The Company actively solicits deposit-related clients and competes for deposits by offering customers personal attention and professional service. Competition has intensified as a result of changes in Colorado banking laws that permit (i) unlimited branching (only limited statewide branching of Colorado-domiciled financial institutions was permitted until January 1, 1997), and (ii) out-of-state holding companies to acquire Colorado-based financial institutions, provided that the laws of the state in which the out-of-state institutions conduct their principal operations similarly permit Colorado-based institutions to acquire financial institutions domiciled in their states. During the past several years, substantial consolidation among financial institutions in Colorado has occurred. Management believes that this consolidation led to substantial account disruption for small and medium-sized businesses which are below the focus threshold for larger banks and which have had their lending relationships at such banks severed. Management further believes that this may lead customers in the Company's market area to seek a relationship with smaller, service-oriented institutions such as the Bank. EMPLOYEES At December 31, 2001, the Company had approximately 170 total employees. In order to effectuate its "staff to management" philosophy, the Company has placed a high priority on staff development. This development involves extensive training (including customer service training) and selective hiring. New hires are selected on the basis of both technical skills and customer service capabilities. Emphasis is placed upon hiring and retaining additional key officers in areas such as lending, administration and finance. None of the Company's employees are covered by a collective bargaining agreement with the Company and management believes that its relationship with its employees as a group is good. SUPERVISION AND REGULATION Bank holding companies and banks are extensively regulated under both federal and state law. The information contained in this section summarizes portions of the applicable laws and regulations relating to the supervision and regulation of the Company and its subsidiaries. These summaries do not purport to be complete, and they are qualified in their entirety by reference to the particular statutes and regulations described. Any change in applicable law or regulation may have a material effect on the business and prospects of the Company and its subsidiaries. -16- BANK HOLDING COMPANY REGULATION The Company is a bank holding company within the meaning of the Bank Holding Company Act and is registered as such with the Federal Reserve Board. Under the current terms of that Act, activities of the Company, and those of companies which it controls or in which it holds more than 5% of the voting stock, are limited to banking or managing or controlling banks or furnishing services to or performing services for its subsidiaries, or any other activity which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve Board is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency that outweigh the possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. Bank holding companies, such as the Company, are required to file with the Federal Reserve Board certain reports and information and are required to obtain prior approval of the Board to engage in a new activity or to acquire more than 5% of any class of voting stock of any company. Pursuant to the Riegle-Neal Interstate Branching and Efficiency Act of 1994 ("Riegle-Neal Act"), subject to approval by the Federal Reserve Board, bank holding companies are authorized to acquire either control of, or substantial assets of, a bank located outside the bank holding company's home state. These acquisitions are subject to limitations which are mentioned in the discussion on "Interstate Banking" which follows. The Riegle-Neal Act reaffirms the right of states to segregate and tax separately incorporated subsidiaries of a bank or bank holding company. The Riegle-Neal Act also affects interstate branching and mergers. The Federal Reserve Board has authorized the acquisition and control by bank holding companies of savings and loan associations and certain other savings institutions without regard to geographic restrictions applicable to acquisition of shares of a bank. The Federal Reserve Board is authorized to adopt regulations affecting various aspects of bank holding companies. Pursuant to the general supervisory authority of the Bank Holding Company Act and directives set forth in the International Lending Supervision Act of 1983, the Federal Reserve Board has adopted capital adequacy guidelines prescribing both risk-based capital and leverage ratios. The enactment of the Gramm-Leach-Bliley Act of 1999 (the "GLB Act") repeals sections 20 and 32 of the Banking Act of 1933, allowing new opportunities to be available for banks, other depository institutions, insurance companies and securities firms to enter into combinations that permit a single financial services organization to offer customers a more complete array of financial products and services. To further this goal, the GLB Act amends section 4 of the Act providing a new regulatory framework for regulation through the financial holding company ("FHC"), which will have as its umbrella regulator the Federal Reserve Board. Functional regulation of the FHC's separately regulated subsidiaries will be conducted by their primary functional regulator. Pursuant to the GLB Act, bank holding companies, subsidiary depository institutions thereof and foreign banks electing to qualify as a FHC must be "well managed," "well capitalized" and at least rated satisfactory under the Community Reinvestment Act in order for them to engage in new financial activities. The GLB Act provides a federal right to privacy of non-public personal information of individual customers. The GLB Act and Regulation S-P became effective on November 13, 2000 with full compliance mandatory by July 1, 2001. Union Bankshares and its Affiliates are also subject to certain state laws that deal with the use and distribution of non-public personal information. In October 2001, the USA PATRIOT Act of 2001 and the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 were enacted. These statutes contain law enforcement -17- and regulatory provisions that require the Bank to respond to requests for information or verify information provided from time to time by the Federal Deposit Insurance Corporation. REGULATORY CAPITAL REQUIREMENTS Risk-Based Capital Guidelines. The Federal Reserve Board established risk-based capital guidelines for bank holding companies effective March 15, 1989. The guidelines define Tier I Capital and Total Capital. Tier I Capital consists of common and qualifying preferred shareholders' equity and minority interests in equity accounts of consolidated subsidiaries, less goodwill and 50% (and in some cases up to 100%) of investment in unconsolidated subsidiaries. Total Capital consists of Tier I Capital plus qualifying mandatory convertible debt, perpetual debt, certain hybrid capital instruments, certain preferred stock not qualifying as Tier I Capital, subordinated and other qualifying term debt up to specified limits, and a portion of the allowance for credit losses, less investments in unconsolidated subsidiaries and in other designated subsidiaries or other associated companies at the discretion of the Federal Reserve Board, certain intangible assets, a portion of limited-life capital instruments approaching maturity and reciprocal holdings of banking organizations' capital instruments. The Tier I component must constitute at least 50% of qualifying Total Capital. Risk-based capital ratios are calculated with reference to risk-weighted assets, which include both on-balance sheet and off-balance sheet exposures. The risk-based capital framework contains four risk-weighted categories for bank holding company assets -- 0%, 20%, 50%, and 100%. Zero percent risk-weighted assets include, generally, cash and balances due from Federal Reserve Banks, and obligations unconditionally guaranteed by the U.S. government or its agencies. Twenty percent risk-weighted assets include, generally, claims on U.S. Banks and obligations guaranteed by U.S. government sponsored agencies as well as general obligations of states or other political subdivisions of the United States. Fifty percent risk-weighted assets include, generally, loans fully secured by first liens on one-to-four family residential properties, subject to certain conditions. All assets not included in the foregoing categories are assigned to the 100% risk-weighted category, including loans to commercial and other borrowers. As of year-end 1992, the minimum required ratio for qualifying Total Capital became 8%, of which at least 4% must consist of Tier I Capital. At December 31, 2001, the Company's Tier I and Total Capital ratios were 10.9% and 13.5%, respectively. The current risk-based capital ratio analysis establishes minimum supervisory guidelines and standards. It does not evaluate all factors affecting an organization's financial condition. Factors which are not evaluated include (i) overall interest rate exposure; (ii) quality and level of earnings; (iii) investment or loan portfolio concentrations; (iv) quality of loans and investments; (v) the effectiveness of loan and investment policies; (vi) certain risks arising from nontraditional activities; and (vii) management's overall ability to monitor and control other financial and operating risks, including the risks presented by concentrations of credit and nontraditional activities. The capital adequacy assessment of federal bank regulators will, however, continue to include analyses of the foregoing considerations and in particular, the level and severity of problem and classified assets. Market risk of a banking organization -- risk of loss stemming from movements in market prices -- is not evaluated under the current risk-based capital ratio analysis (and is therefore analyzed by the bank regulators through a general assessment of an organization's capital adequacy) unless trading activities constitute 10 percent or $1 billion or more of the assets of such organization. Such an organization (unless exempted by the banking regulators) and certain other banking organizations designated by the banking regulators must include in its risk-based capital ratio analysis charges for, and hold capital against, general market risk of all positions held in its trading account and of foreign exchange and commodity positions wherever located, as well as against specific risk of debt and -18- equity positions located in its trading account. Currently, the Company and the Bank do not calculate a risk-based capital charge for their market risk. Minimum Leverage Ratio. The Federal Reserve Board has adopted capital standards and leverage capital guidelines that include a minimum leverage ratio of 3% Tier I Capital to total assets (the "leverage ratio"). The leverage ratio is used in tandem with a risk-based ratio of 8% that took effect at the end of 1992. The Federal Reserve Board has emphasized that the leverage ratio constitutes a minimum requirement for well-run banking organizations having well-diversified risk, including no undue interest rate exposure, excellent asset quality, high liquidity, good earnings, and a composite rating of 1 under the Interagency Bank Rating System. Banking organizations experiencing or anticipating significant growth, as well as those organizations which do not exhibit the characteristics of a strong, well-run banking organization described above, will be required to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Furthermore, the Federal Reserve Board has indicated that it will consider a "tangible Tier I Capital Leverage Ratio" (deducting all intangibles) and other indices of capital strength in evaluating proposals for expansion or new activities. At December 31, 2001, the Company's Tangible Tier I Capital Leverage Ratio was 6.5%. Other Issues And Developments Relating To Regulatory Capital. Pursuant to such authority and directives set forth in the 1988 Basle Capital Accord, as amended, the Comptroller of the Currency, the FDIC, and the Federal Reserve Board have issued regulations establishing the capital requirements for banks under federal law. The regulations, which apply to the Bank, establish minimum risk-based and leverage ratios which are substantially similar to those applicable to the Company. As of December 31, 2001, the risk-based and leverage ratio of the Bank exceeded the minimum requirements. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires the federal banking regulators to take "prompt corrective action" in respect of banks that do not meet minimum capital requirements and imposes certain restrictions upon banks which meet minimum capital requirements but are not "well capitalized" for purposes of FDICIA. FDICIA established five capital tiers: "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." Implementing regulations adopted by the federal banking agencies define the corrective action by the federal banking agencies. A bank may be placed in a capitalization category that is lower than is indicated by its capital position if it receives an unsatisfactory examination rating with respect to certain matters. Failure to meet capital guidelines could subject a bank to a variety of restrictions and enforcement remedies. All insured banks are generally prohibited from making any capital distributions and from paying management fees to persons having control of the bank where such payments would cause the bank to be undercapitalized. Holding companies of significantly undercapitalized, critically undercapitalized and certain undercapitalized banks may be required to obtain the approval of the Federal Reserve Board before paying capital distributions to their shareholders. Moreover, a bank that is not well capitalized is generally subject to various restrictions on "pass through" insurance coverage for certain of its accounts and is generally prohibited from accepting brokered deposits and offering interest rates on any deposits significantly higher than the prevailing rate in its normal market area or nationally (depending upon where the deposits are solicited). Such banks and their holding companies are also required to obtain regulatory approval prior to their retention of senior executive officers. Banks which are classified undercapitalized, significantly undercapitalized or critically undercapitalized are required to submit capital restoration plans satisfactory to their federal banking regulator and guaranteed within stated limits by companies having control of such banks (i.e., to the extent of the lesser of five percent of the institution's total assets at the time it became undercapitalized or the amount necessary to bring the institution into compliance with all applicable capital standards as of the time the institution fails -19- to comply with its capital restoration plan, until the institution is adequately capitalized on average during each of four consecutive calendar quarters), and are subject to regulatory monitoring and various restrictions on their operations and activities, including those upon asset growth, acquisitions, branching and entry into new lines of business and may be required to divest themselves of or liquidate subsidiaries under certain circumstances. Holding companies of such institutions may be required to divest themselves of such institutions or divest themselves of or liquidate nondepository affiliates under certain circumstances. Critically undercapitalized institutions are also prohibited from making payments of principal and interest on debt subordinated to the claims of general creditors as well as to the mandatory appointment of a conservator or receiver within 90 days of becoming critically undercapitalized unless periodic determinations are made by the appropriate federal banking agency, with the concurrence of the FDIC, that forbearance from such action would better protect the affected deposit insurance fund. Unless appropriate findings and certifications are made by the appropriate federal banking agency with the concurrence of the FDIC, a critically undercapitalized institution must be placed in receivership if it remains critically undercapitalized on average during the calendar quarter beginning 270 days after the date it became critically undercapitalized. Other Regulatory and Supervisory Issues. Pursuant to FDICIA, the federal banking agencies have adopted regulations or guidelines prescribing standards for safety and soundness of insured banks and in some instances their holding companies, including standards relating to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality, earnings and stock valuation, as well as other operational and managerial standards deemed appropriate by the agencies. Upon a determination by a federal banking agency that an insured bank has failed to satisfy any such standard, the bank will be required to file an acceptable plan to correct the deficiency. If the bank fails to submit or implement an acceptable plan, the federal banking agency may, and in some instances must, issue an order requiring the institution to correct the deficiency, restrict its asset growth or increase its ratio of tangible equity to assets, or imposing other operating restrictions. FDICIA also contains provisions which, among other things, restrict investments and activities as principal by state nonmember banks to those eligible for national banks, impose limitations on deposit account balance determinations for the purpose of the calculation of interest, and require the federal banking regulators to prescribe, implement or modify standards for extensions of credit secured by liens on interests in real estate or made for the purpose of financing construction of a building or other improvements to real estate, loans to bank insiders, regulatory accounting and reports, internal control reports, independent audits, exposure on interbank liabilities, contractual arrangements under which institutions receive goods, products or services, deposit account-related disclosures and advertising as well as to impose restrictions on federal reserve discount window advances for certain institutions and to require that insured depository institutions generally be examined on-site by federal or state personnel at least once every 12 months. In connection with an institutional failure or FDIC rescue of a financial institution, the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") grants to the FDIC the right, in many situations, to charge its actual or anticipated losses against commonly controlled depository institution affiliates of the failed or rescued institution (although not against a bank holding company itself). The Community Reinvestment Act ("CRA") requires banks to help serve the credit needs in their communities, including credit to low and moderate income individuals and geographies. Should the Company or its subsidiaries fail to adequately serve the community, there are penalties which might be imposed. Corporate applications to expand branches, relocate, add subsidiaries and affiliates, and merge with or purchase other financial institutions could be denied. Community groups are encouraged through the regulation to protest applications for any bank subject to this regulation if they feel that the bank is not -20- serving the credit needs of the community in which it serves. The Company and the bank have been deemed by regulators in the past to be adequately serving their communities. The nature of the banking and financial services industry, as well as banking regulation, may be further affected by various legislative and regulatory measures currently under consideration. It is impossible to predict whether or in what form these proposals may be adopted in the future and, if adopted, what the effect of their adoption will be on the Company and the Bank. There are many other regulations requiring detailed compliance procedures which increase costs and require additional time commitments of employees. Regulators and the Congress continue to put in place rules and laws to protect consumers, which have a cumulative additional impact on the cost of doing business. At this point, management cannot completely assess how earnings might be affected by these consumer laws. INTERSTATE BANKING Existing laws and various regulatory developments have allowed financial institutions to conduct significant activities on an interstate basis for a number of years. During recent years, a number of financial institutions have expanded their out-of-state activities and various states and the Congress have enacted legislation intended to allow certain interstate banking combinations. The Riegle-Neal Act dramatically affects interstate banking activities. As discussed previously, the Riegle-Neal Act allows the Federal Reserve Board to approve the acquisition by a bank holding company of control or substantial assets of a bank located outside the bank holding company's home state. An insured bank may apply to the appropriate federal agency for permission to merge with an out-of-state bank and convert its offices into branches of the resulting bank. States retain the option to prohibit out-of-state mergers if they enacted a statute specifically barring such mergers before June 1, 1997, and such law applies equally to all out-of-state banks. Interstate mergers authorized by the Riegle-Neal Act are subject to conditions and requirements, the most significant of which include adequate capitalization and management of the acquiring bank or bank holding company, existence of the acquired bank for up to five years before purchase where required under state law, existence of state laws that condition acquisitions on institutions making assets available to a "state-sponsored housing entity," and limitations on control by the acquiring bank holding company of not more than 10% of the total amount of deposits in insured depository institutions in the United States or not more than 30% of the deposits in insured depository institutions within that state. States may impose lower deposit concentration limits, so long as those limits apply to all bank holding companies equally and Colorado has imposed a 25% limit on such concentrations. Additional requirements placed on mergers include conformity with state law branching requirements and compliance with "host state" merger filing requirements to the extent that those requirements do not discriminate against out-of-state banks or out-of-state bank holding companies. The Riegle-Neal Act also permits banks to establish and operate a "de novo branch" in any state that expressly permits all out-of-state banks to establish de novo branches in such state, if the law applies equally to all banks. (A "de novo branch" is a branch office of a national bank or state bank that is originally established as a branch and does not become a branch as a result of an acquisition, conversion, merger, or consolidation.) Utilization of this authority is conditioned upon satisfaction of most of the conditions applicable to interstate mergers under the Riegle-Neal Act, including adequate capitalization and management of the branching institution, satisfaction with certain filing and notice requirements imposed -21- under state law and receipt of federal regulatory approvals. The State of Colorado did not exercise the option to opt out of the federal legislation. Accordingly, the provisions of the Riegle-Neal Act as summarized herein are applicable in the State of Colorado. THE BANK The Bank is a Colorado banking corporation, the deposits of which are insured by the Federal Deposit Insurance Corporation, and are subject to supervision and regulation by the FDIC and the Colorado Division of Banking. No Colorado bank may engage in any activity not permitted for national banks, unless the institution complies with applicable capital requirements and the FDIC determines that the activity poses no significant risk to the insurance fund. This limitation does not now affect the Bank, since it is not presently involved in the types of transactions covered by this limitation. Dividends paid by the Bank provide substantially all of the cash flow of the Company. Under Colorado law and Federal Deposit Insurance Corporation policies, the approval of the Colorado Banking Board and the FDIC is required prior to the declaration of any dividend by a bank if the total of all dividends declared in any calendar year exceed the total of its net profits of that year combined with its retained net profits for the preceding two years. In addition, a bank cannot pay a dividend if it will cause the bank to be "undercapitalized." The FDIC insures deposits of the Bank up to the prescribed limit per depositor through the Bank Insurance Fund ("BIF"), and the amount of FDIC assessments paid by each BIF member institution is based upon its relative risk of default as measured by regulatory capital ratios and other factors. The BIF assessment rate currently ranges from zero to 27 cents per $100 of domestic deposits. The FDIC may increase or decrease the assessment rate and schedule on a semi-annual basis. As of December 31, 2000, the Bank qualified for the lowest BIF assessment rate. DEPOSIT INSURANCE ASSESSMENTS The FDIC periodically examines and evaluates state-chartered banks that are not members of the Federal Reserve System. Based upon such an evaluation, the examining regulator may revalue the assets of an insured institution and require that it establish specific reserves to compensate for the difference between the value determined by the regulator and the book value of such assets. The Colorado Division of Banking also conducts examinations of state-chartered banks. The Colorado Division of Banking may accept the results of a federal examination in lieu of conducting an independent examination. The Colorado Division of Banking also has the authority to revalue the assets of a state-chartered institution and require it to establish reserves. EFFECT ON ECONOMIC ENVIRONMENT The policies of regulatory authorities, including the monetary policy of the Board of Governors, have a significant effect on the operating results of bank holding companies and their subsidiaries. Among the means available to the Board of Governors to affect the money supply are open market operations in U.S. Government securities, changes in the discount rate on member bank borrowings, imposing or changing reserve requirements against member bank deposits, and imposing or changing reserve requirements against certain borrowings by banks and their affiliates. These means are used in varying combinations to influence -22- overall growth and distribution of bank loans, investments and deposits, and their use may affect the interest rate charged on loans or paid on deposits. The Board of Governors' monetary policies have materially affected the operating results of commercial banks in the past and are expected to continue to do so in the future. The nature of future monetary policies and the effect of such policies on the business and earnings of the Company and its subsidiaries cannot be predicted. RISK FACTORS RELATING TO THE COMPANY Economic Conditions and Impact of Interest Rates. The Company's profitability, like that of most similar financial institutions, depends largely on the Bank's net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing liabilities, such as deposits and borrowings. Accordingly, the Company's results of operations and financial condition are largely dependent on movements in market interest rates and its ability to manage its assets in response to such movements. The difference between the amount of the total interest-bearing assets and interest-bearing liabilities which reprice within a given time period could have a negative effect on the Bank's net interest income depending on whether such difference was positive or negative and whether interest rates are rising or falling. Increases in interest rates may reduce demand for loans and, thus, the amount of loan and commitment fees earned by the Bank. In addition, fluctuations in interest rates may also result in disintermediation, which is the flow of funds away from depository institutions into direct investments which pay a higher rate of return, and may affect the value of the Company's investment securities and other interest earning assets. Because the Bank's assets consist of a substantial number of loans with interest rates which change in accordance with changes in prevailing market rates, if interest rates rise sharply, many of the Bank's borrowers would be required to make higher interest payments on their loans. Therefore, increases in interest rates may cause the Bank to experience an increase in delinquent loans and defaults to the extent that borrowers are unable to meet their increased debt servicing obligations. In addition, the Bank has a substantial portfolio of fixed-rate loans that may be prepaid without significant penalty, so that customers might prepay or refinance them in a period of declining interest rates. That would alter the Bank's asset-liability gap position and ultimately reduce the rates earned on those assets, as cash flows from loan repayments would be reinvested at lower rates. Results of operations for financial institutions, including the Company, may be materially and adversely affected by changes in prevailing economic conditions, including declines in real estate values, rapid changes in interest rates and the monetary and fiscal policies of the federal government. The profitability of the Company depends in part on the spread between the interest rates earned on assets and the interest rates paid on deposits and other interest-bearing liabilities. Although management believes that the maturities of the Company's assets are moderately balanced in relation to maturities of liabilities ("asset/liability management"), asset/liability management involves estimates as to how changes in the general level of interest rates will impact the yields earned on assets and the rates paid on liabilities. A decrease in interest rate spreads would have a negative effect on the net interest income and profitability of the Company, and we cannot give any assurance that this spread will not decrease. Although economic conditions in the Denver metropolitan area have been generally strong in recent years, the Denver economy has slowed in recent months, as has the national economy. Moreover, substantially all of the loans of the Company are to businesses and individuals in the Denver area, and any significant decline in the economy of this market area could have an adverse impact on the Company. We cannot give any assurance that positive trends or developments discussed in this Annual Report on Form 10-K will continue or that negative trends or -23- developments will not have a material adverse effect on the Company. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." Growth and Acquisition Risks. The Company has pursued and intends to continue to pursue an internal growth strategy, the success of which will depend primarily on generating an increasing level of loans and deposits at acceptable risk levels and terms without proportionate increases in noninterest expenses. The Company has grown by the establishment of new branches, and intends to consider new branching opportunities in the future. The Company cannot give any assurance that it will be successful in continuing its internal growth strategy. Although the Company does not have any discussions or negotiations underway relating to any acquisitions, the Company in the future intends to review and solicit acquisition opportunities and, at any given time, may attempt to acquire financial institutions. The Company may not be successful in identifying acquisition candidates, integrating acquired institutions or preventing loss of deposits at acquired institutions. Competition for acquisitions in the Company's market area is highly competitive, and the Company may not be able to acquire institutions on terms beneficial to the Company. Furthermore, the level of success of the Company's growth strategy will depend on maintaining sufficient regulatory capital levels and on continued favorable economic conditions in the Denver area. Competitive Banking Environment. The banking business in Colorado is highly competitive. The Company competes for loans and deposits with other local, regional and national commercial banks, savings banks, savings and loan associations, finance companies, money market funds, brokerage houses, credit unions and nonfinancial institutions, any of which have substantially greater financial resources than the Company. Allowance for Loan Losses. Inability of borrowers to repay loans can erode earnings and capital of banks. Like all banks, the Company maintains an allowance for loan losses to provide for loan defaults and nonperformance. The allowance is based on prior experience with loan losses, as well as an evaluation of the risks in the current portfolio, and is maintained at a level considered adequate by management to absorb anticipated losses. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond management's control, and such losses may exceed current estimates. At December 31, 2001, the Company had nonperforming loans of $2,557,000 and an allowance for loan losses of $3,351,000 or 1.4% of total loans 131.05% of nonperforming loans. We cannot give any assurance that the Company's allowance for loan losses will be adequate to cover actual losses. Future provisions for loan losses could materially and adversely affect results of operations of the Company. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses. An increase in the Bank's provision for loan losses would negatively affect the Company's earnings. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." Lending Risks -- Credit Quality. A central focus of the Company's and the Bank's strategy is the continued development and growth of a diversified loan portfolio, with emphasis on commercial business lending to small- and medium-sized businesses. Certain risks are inherent in the lending function, including a borrower's inability to pay, insufficient collateral coverage and changes in interest rates. Repayment risk on commercial loans is significantly affected by changing economic conditions in a particular geographical area, business or industry which could impair future operating performance. Risks associated with general business loans include changes in general economic conditions which may affect the borrower's ability to repay as well as underlying collateral values. Installment and other consumer loans are also subject to repayment risk. Dependence on Key Personnel. The Company depends on the continued services of Charles R. Harrison, Chairman of the Board and Chief Executive Officer of the Company, Herman J. Zueck, the Bank's -24- Chairman of the Board and Chief Executive Officer and President of the Company and Bruce E. Hall, Vice President of the Company. The Company has employment agreements with Messrs. Harrison, Zueck and Hall. The loss of the services of Mr. Harrison, Mr. Zueck or Mr. Hall, or of certain other key personnel, could adversely affect the Company. The Company is the beneficiary of key-person life insurance on the lives of each of Messrs. Harrison, Zueck and Hall. The Company's anticipated growth and expansion into areas and activities requiring additional expertise are expected to place increased demands on the Company's resources. These demands are expected to require the addition of new management personnel and the development of additional expertise by existing management personnel. The failure to acquire such services or to develop such expertise could have a material adverse effect on the Company's future growth. Control by Officers and Directors as a Group; Anti-takeover Effect. The Company's officers and directors own beneficially approximately 57.3% of the outstanding shares of Common Stock. This percentage includes the shares of Common Stock held in the Company's 401(k) plan over which certain officers of the Company have voting control as trustees of the 401(k) plan. As a result, they alone may elect by simple majority the Board of Directors. This may impede the efforts of a third party to acquire control of the Company or to change the Board of Directors of the Company. Government Regulation and Recent Legislation. The Company and the Bank are subject to extensive federal and state legislation, regulation and supervision which is intended primarily to protect depositors and the Bank Insurance Fund, rather than investors. Recently enacted, proposed and future legislation and regulations designed to strengthen the banking industry have had and may have a significant impact on the banking industry. Although some of the legislative and regulatory changes may benefit the Company and the Bank, others may increase their costs of doing business or otherwise adversely affect the Company and the Bank and create competitive advantages for non-bank competitors. The financial institutions industry is subject to significant regulation which has materially affected the financial institutions industry in the past and will do so in the future. Such regulations, which affect the Company on a daily basis, may be changed at any time, and the interpretation of the relevant law and regulations are also subject to change by the authorities who examine the Company and the Bank and interpret those laws and regulations. We cannot make any assurance that any present or future changes in the laws or regulations or in their interpretation will not adversely and materially affect the Company. Economic Conditions and Monetary Policies. Conditions beyond the Company's control may have a significant impact on the Company's operations and its net interest income from one period to another. Examples of such conditions include: o prevailing economic conditions both nationally and in the Denver metropolitan market; o the strength of credit demands by customers; o fiscal and debt management policies of the federal government, including changes in tax laws; o the Federal Reserve's monetary policy, including the percentage of deposits that may be held in the form of non-earning cash reserves; o the introduction and growth of new investment instruments and transaction accounts by non-bank financial competitors; and o changes in rules and regulations governing the payment of interest on deposit accounts. -25- Potential Liability for Undercapitalized Subsidiary Bank. Under a federal law, a bank holding company may be required to guarantee a capital plan filed by an undercapitalized bank or thrift subsidiary with its primary regulator. If the subsidiary defaults under the plan, the holding company may be required to contribute to the capital of the subsidiary bank an amount equal to the lesser of 5% of the bank's assets at the time it became undercapitalized or the amount necessary to bring the bank into compliance with applicable capital standards. It is, therefore, possible that the Company would be required to contribute capital to the Bank or any other bank it may acquire in the event that the Bank or such other bank becomes undercapitalized. ITEM 2. PROPERTIES The Bank leases space in a six-story office building in Denver, Colorado, with approximately 21,300 rentable square feet. This space houses the Bank's loan and teller facilities, new accounts personnel, safe deposit facilities, the trust department and administrative offices. The Bank also leases a 1,723 square-foot detached facility located one block from the Bank's main offices, which is used for drive-up and walk-in customer services. In addition, the Bank leases 2,220 square feet of space in an adjacent building which is used for storage. The lease provides the Bank with parking rights for use by the Bank's customers. The foregoing leases run for a term of ten years from July 2, 1994, renewable at the Bank's option for two additional terms of five years each. Effective June 1, 1996, the Bank leased 2,347 additional square feet in the six-story office building, renewable on an annual basis. The space is occupied by the Bank's Real Estate/Construction Loan Department. Effective July 1, 1997, this lease agreement was amended to be concurrent with the same terms of the Bank's original lease agreement dated July 2, 1994. The Bank leases all of the above space at an average of approximately $17.00 per square foot. The Company expanded its operations in July 1994 through the opening of a full-service branch in the Lakeside area of metropolitan Denver. The branch occupies a two-story office building with approximately 9,278 square feet. The building houses the branch's operations, the Bank's customer service operations and the Bank's data processing operations. The original lease expires on July 31, 2004 and is renewable for two additional terms of five years each. Due to the consolidation of customer service operations, on August 15, 1996, the Bank leased 1,474 additional square feet on the second floor. The addendum to the original lease expires August 14, 2001 and is renewable at the Bank's option for three additional years. As a result of growth of data processing, effective December 1, 1997, the Bank leased an additional 1,320 square feet on the second floor in order to expand the Bank's data processing department. The Bank leases this space at approximately $16.83 per square foot, renewable on an annual basis. The Bank leases this building at approximately $16.95 per square foot, with rental subject to annual per square foot escalation. The Company again expanded its operations in March 1995 by leasing a 3,917 square-foot building to house a branch in the University Hills area of metropolitan Denver. The lease expires on March 31, 2005 and is renewable at the Bank's option for two additional terms of five years. The Bank leases this building at approximately $13.64 per square foot. On December 4, 1995, the Company opened its third branch, this one in the Lakewood area of metropolitan Denver. The Bank leased space in a three-story building with approximately 3,955 rentable square feet, along with a separate drive-up facility with two stalls and a control booth. The lease runs through October 31, 2005, renewable at the Bank's option for two additional terms of five years each. The Bank leases the building space and drive-up facility at approximately $18.75 per square foot. -26- In connection with the establishment of a fourth branch, which opened May 11, 1998, the Company is leasing a single-story building with 5,157 square feet in the Littleton area of metropolitan Denver. The branch occupies approximately 3,449 square feet; the Bank subleases the remaining 1,708 square feet in the building, at approximately $9.00 per square foot with rental subject to annual per square foot escalation. The lease expired December 31, 2001. The sublease was renewed for two years through December 31, 2003 at $13.00. The lease runs for a term of ten years from February 4, 1998, renewable for two additional terms of five years. The Bank leases this building at approximately $10.00 per square foot, with rental subject to bi-annual per square foot escalation. On October 19, 1998, the Company opened its fifth branch in the Golden area of metropolitan Denver. The Bank leased space in a multi-tenant single story building with approximately 1,705 square feet. The lease expired July 31, 2001, renewable at the Bank's option for two additional terms of 8 years each. The Bank exercised the first option for an additional term of eight years on July 31, 2001 through July 31, 2009. The Bank leases the building space at approximately $23.25 per square foot. On December 17, 1998, the Company acquired Lakewood State Bank, located in the Lakewood area of metropolitan Denver. The site, which was owned by Lakewood State Bank and is now owned by the Company, contains a three-story building constructed in 1972 with a total net rentable area of approximately 20,079 square feet and includes eight drive-through lanes at the rear of the building. The building and drive-throughs are situated on a parcel containing a total of approximately 1.425 acres of land. The Bank occupies approximately 15,000 square feet and subleases approximately 90% of the remaining space to eight (8) small tenants. Parking is provided by an asphalt paved parking lot which contains 89 spaces. The Company believes its existing facilities will be adequate to meet the Company's needs for the foreseeable future. Should the Company need additional space, management believes it will be able to secure facilities at reasonable rates. The Company believes that the facilities are adequately covered by insurance. ITEM 3. LEGAL PROCEEDINGS Periodically and in the ordinary course of business, various claims and lawsuits are brought against the Company, such as claims to enforce liens, condemnation proceedings on properties in which the Company holds security interests, claims involving the making and servicing of real property loans and other issues incident to the Company's business. In the opinion of the Company's management, the ultimate liability, if any, resulting from such claims or lawsuits will not have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2001. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS Price Range of Common Stock -27-

Union Bankshares' Common Stock has been traded on the NASDAQ National Market System ("NASDAQ-NMS") stock market since March 1993 under the symbol "UBSC". The above prices represent closing sale prices on the NASDAQ-NMS. As of March 25, 2002, there were 103 shareholders of record and approximately 700 beneficial shareholders. DIVIDEND POLICY The Company's policy is to retain its earnings to support the growth of its business. The Board of Directors of the Company has not historically declared cash dividends on its Common Stock, and does not plan to do so in the foreseeable future. The ability of the Company to pay cash dividends largely depends on the amount of cash dividends paid to it by the Bank. Capital distributions, including dividends, by institutions such as the Bank are subject to restrictions tied to the institution's earnings. ITEM 6. SELECTED FINANCIAL DATA. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with the Company's Consolidated Financial Statements and the accompanying Notes, presented elsewhere herein.

------------------------------------------ (1) Includes available for sale and held to maturity securities (2) Calculated on a tax equivalent basis (3) Represents noninterest expense divided by the total of our net interest income before provision for loan losses plus our noninterest income. ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's Consolidated Financial Statements show its financial condition and information on a consolidated basis. The Bank is the only operating unit of the Company. When the Bank was acquired by the Company in 1985, a portion of the purchase price was allocated to goodwill. In 1993, the Company began amortizing the remaining goodwill relating to the acquisition of the Bank at the rate of approximately $226,000 per year through 2001. Beginning in 2002, the Company will no longer amortize goodwill in accordance with FAS 141 Business Combinations and FAS 142 Goodwill and Other Intangibles. On December 17, 1998, Union Bankshares Capital Trust I, a newly-formed Delaware business trust, issued approximately $10.3 million of its 9% Cumulative Trust Preferred Securities guaranteed on a subordinated basis by the Company. The Company contributed approximately $7 million of the proceeds of the public offering to the Bank to finance the acquisition of Lakewood State Bank. The remainder of the net proceeds was used for general corporate purposes including the payoff of all outstanding amounts of the $4.0 million loan obtained in March 1996. Currently, the differences between the Company's financial condition and results of operations and those of the Bank consist of the interest expense relating to the 9% Cumulative Trust Preferred Securities, and the amortization of the remaining goodwill relating to the acquisition of the Bank (which ended at December 31, 2001, as noted above). The Company has opened five branches since July 1994 and acquired Lakewood State Bank in December 1998. As expected, the branches have all experienced greater expenses than income during the early stages of operations. As the deposit and loan balances have grown, however, the monthly net losses have become smaller. During the last quarter of 1997 and all of 1998, 1999 and 2000, each of the first three branches opened had an excess of income over direct costs. During the third quarter of 2000, the Littleton branch, opened in May of 1998, became profitable. Management expects the Golden branch opened in December 1998 to follow a similar pattern and be profitable by the end of 2002. NET INTEREST INCOME For most financial institutions, the primary component of earnings is net interest income. Net interest income is the difference between interest income, principally from loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. Volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities. Spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Margin refers to net interest income divided by average interest-earning assets and is influenced by the level and relative mix of -30- interest-earning assets and interest-bearing liabilities. During the fiscal years ended December 31, 2001, 2000 and 1999, average interest-earning assets were $384.1 million, $342.4 million and $307.6 million, respectively. During these same periods, net interest margin, computed on a full tax equivalent basis, was 4.88%, 5.44% and 4.99%, respectively. See "Asset/Liability Management" and "Results of Operations." The following tables set forth for the periods indicated information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and the ratio of average interest-earning assets to average interest-bearing liabilities. Net interest income is computed on a full tax equivalent basis to reflect the effect of tax exempt income earned on municipal obligations in the investment securities portfolio. Full tax equivalent interest income on tax exempt securities is the amount of income that would have to be earned on taxable securities to yield the same after tax return. A 34% tax rate was used. -31-

-32-

(1) Average balances are based on daily averages and include nonaccrual loans. Loan fees are included in interest income as follows: 2000 -- $971,000; 1999 -- $924,000; 1998 -- $560,000. -33- The following table illustrates the changes in the Company's net interest income due to changes in volume and changes in interest rate on a full tax equivalent basis. Changes attributable to the combined effect of volume and interest rate have been allocated proportionately to the change due to volume and the change due to interest rate.

------------------------ (1)This table is calculated on a full tax-equivalent basis. -34- MARKET RISK MANAGEMENT Market risk arises from changes in interest rates. The Company has risk management policies to monitor and limit exposure to market risk as discussed below. See "Asset/Liability Management." Disclosures about the fair value of financial instruments, which reflect changes in market prices and rates, can be found in Note 19 of Notes to Consolidated Financial Statements. ASSET/LIABILITY MANAGEMENT The Company's results of operations depend substantially on its net interest income. Like most financial institutions, the Company's interest income and cost of funds are affected by general economic conditions and by competition in the marketplace. The function of asset/liability management is to manage the risk/return relationships between capital adequacy, market risk, liquidity and interest rate risk. To manage these relationships, the Bank analyzes the following items: equity, free capital, debt/capital, liquidity, volatile liability coverage, portfolio maturities, maturing assets and maturing liabilities. In addition, in reviewing the needs of the Bank with regard to proper management of its asset/liability program, the Company's management has projected its needs into the future, taking into consideration historical periods of high loan demand, low deposit balances, projected loan increases (due to increased demand through marketing), and interest rate changes (as projected by consulting economists). The Bank's Asset and Liability Management Committee is responsible for establishing procedures that enable the Company to achieve its goals while adhering to prudent banking practices and existing loan and investment policies. The excess of the Bank's interest-earning assets over its interest-bearing liabilities have generally been invested in securities when suitable lending opportunities have not been sufficient to use such excess funds. The Bank's securities portfolio plays an important part in the overall asset/liability management program and is a major contributor to the Company's financial results. The primary objectives in the overall management of the securities portfolio are safety, liquidity, yield, interest rate risk and pledging for public deposits. The securities designated as available for sale generally are more liquid and have a shorter term than those designated as held to maturity. In connection with the preparation of its Consolidated Financial Statements, the Company has designated securities with a carrying value of $181,411,000 as available for sale. These securities are to be available for sale to assist management in providing an adequate asset/liability and liquidity management program for the Bank. Securities designated as held to maturity typically have less liquidity and also have less call protection than those held for sale. At December 31, 2001 and 2000, the Company had no securities designated as held to maturity. During June 2000, in order to maximize the Company's liquidity flexibility, the Company transferred its investment securities held to maturity portfolio, with an amortized cost of $31,253,445 and an unrealized loss of $704,434, to investment securities available for sale. A critical element of the Company's asset/liability management program is management of exposure to interest rate risk. Exposure to interest rate risk arises from volatile interest rates and changes in the balance sheet mix. The Bank's policy is to control the exposure of its earnings to changing interest rates by generally maintaining a position within a narrow range around an "earnings neutral position," which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes. -35- Accordingly, in addition to performing gap analysis, management also evaluates the impact of differing interest rates on net interest income using an earnings simulation model. The model incorporates the factors not captured by gap analysis by projecting income under a variety of interest rate scenarios. The following table shows the anticipated effect on net interest income with a 100 and 200 basis point parallel shift up or down interest rate scenario. Change in rate Change in net interest Percent change in net income interest income -------------- ---------------------- --------------------- +200 bp $(36,000) (.2)% +100 bp $(14,000) (.1)% -100 bp $ 13,000 .1% -200 bp $(58,000) (.3)% The Bank uses a measurement tool known as dollar duration to help maintain an earnings neutral position. Dollar duration measures the percentage of loss or gain that the portfolio would sustain with a 100 basis point parallel shift in applicable interest rates. In order to control interest rate risk in a rising interest rate environment, or when management believes there is a significant risk of rising interest rates, management's philosophy is generally to reduce the dollar duration of the investment portfolio in order to achieve a more asset sensitive position, thereby allowing quicker repricings and maximizing net interest margin. Conversely, in a declining interest rate environment, management's philosophy is to increase the dollar duration of the investment portfolio, thereby becoming more liability sensitive. Management would ideally take steps to increase dollar duration at the time of a peak in interest rates or during the stabilization period prior to the anticipated decline of rates. This strategy provides that rates on the investments are locked in at higher levels and enhances the effect on net interest margin. The Bank decreases the dollar duration of its investment portfolio by taking steps to increase the coupon rate and decrease the average life (the period for which a security is actually held as opposed to its stated maturity) of the securities held in the portfolio. The Bank increases the dollar duration of its investment portfolio by taking steps to decrease the coupon rate and increase the average life of the securities held in the portfolio. The Bank does not anticipate that the Federal Reserve Board will change the interest rates substantially during 2002. As of December 31, 2001, the dollar duration of the investment portfolio was 5.34 compared to 4.63 at December 31, 2000. The increase in dollar duration for 2001 reflects management's replacement of investments which matured with investments that had lower yields and longer maturities, which lower yields and longer maturities were due to falling interest rates during 2001. The decision resulted in increasing the dollar duration of the portfolio, and decreasing the gross yield on the portfolio from 7.00% to 6.41%. During a portion of 2000, the Company's merger agreement with Gold Banc restricted its ability to engage in additional transactions which would have had the result of limiting the increase in dollar duration in 2000. The Company may also engage in hedging transactions to control interest rate risk. The effect of these efforts in any given period may be to negatively impact reported net non-interest income and the interest earned on the securities. Although analysis of interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is one standard tool for the measurement of exposure to interest rate risk, the Company believes that because interest rate gap analysis does not address all factors that can affect earnings performance, such as early withdrawal of time deposits and prepayment -36- of loans, it should not be used as the primary indicator of exposure to interest rate risk and the related volatility of net interest income in a changing interest rate environment. Interest rate gap analysis is primarily a measure of liquidity based upon the amount of change in principal amounts of assets and liabilities outstanding, as opposed to a measure of changes in the overall net interest margin. The Company believes that since interest rate risk is caused by a combination of (i) differing volumes of re-pricing assets and liabilities (i.e. gaps), (ii) variability of interest rate changes (i.e. multiples) and (iii) variability of occurrence of rate changes for various classes of assets and liabilities (i.e. lags), that its system of measuring the effect of each of these factors is a preferable tool for management of interest rate risk. The Bank has contracted with a consulting firm to assist it with economic outlook, interest rate forecasting, asset/liability management and purchase and/or sale of securities. This firm does not have discretionary authority to act on behalf of the Company. -37- The following table sets forth the estimated maturity or repricing, and the resulting interest rate gap, of the Company's interest-earning assets and interest-bearing liabilities at December 31, 2001. The amounts in the table are derived from internal data from the Company. The amounts are based upon regulatory reporting formats and, therefore, may not be consistent with financial information appearing elsewhere in this Form 10-K that has been prepared in accordance with generally accepted accounting principles. The amounts could be significantly affected by external factors such as changes in prepayment assumptions, early withdrawals of deposits and competition.

-38- The following table presents at the date indicated (i) the aggregate loans by maturity in each major category of the Company's loan portfolio and (ii) the aggregate amounts of variable and fixed rate loans that mature after one year. Actual maturities may differ from the contractual maturities shown below as a result of renewals and prepayments.

RESULTS OF OPERATIONS Years ended December 31, 2001 and 2000 Overview. Net income decreased $74,000 for 2001 to $2,755,000 from $2,829,000 in 2000. This decrease was primarily the result of a $128,000 increase in provision for loan loss, a $1,470,000 increase in noninterest expense and a $160,000 increase in income tax expense, partially offset by a $167,000 increase in net interest income and a $1,517,000 increase in noninterest income. Return on average assets and return on average equity were .66% and 10.34%, respectively, for 2001 compared to .76% and 13.79%, respectively, for 2000. Interest Income. Interest income decreased $602,000 to $29,280,000 for 2001 from $29,882,000 for 2000. Interest income on loans decreased $1,358,000, interest income on securities increased $940,000 and interest income on federal funds sold decreased $184,000 in 2001. The decrease in interest income on loans and federal funds sold was primarily a result of the decrease in the interest rates over the period as a response to the reduction in the federal funds rate by the Federal Reserve. The net increase in interest income on securities was primarily a result of the investment by the Bank of excess customer deposits in investment securities. Interest Expense. Interest expense decreased $769,000 to $11,162,000 for 2001 from $11,931,000 in 2000. Interest expense on interest-bearing deposits increased $154,000, interest expense on federal funds purchased decreased $43,000, and interest expense on FHLB notes payable decreased $880,000 in 2001. The increase in interest expense on interest-bearing deposits was primarily due to higher deposits in 2001. The average rates paid on interest-bearing deposits decreased 47 basis points between 2000 and 2001. The decrease in interest expense on FHLB notes payable was due to the decrease in interest rates on borrowings from the FHLB. Net Interest Income. Net interest income increased $167,000 to $18,118,000 for 2001 from $17,951,000 for 2000. During 2001 average loans outstanding increased $17,288,000, average securities owned increased $25,656,000, average federal funds sold decreased $1,285,000. However, the net interest spread decreased from 4.32% for 2000 to 3.98% for 2001, reflecting the decline in interest rates during that period. The increase in net interest income resulted primarily from the increase in the volume of interest -39- earning assets, partially offset by the increase in the volume of interest- bearing deposits and the decline in net interest spread. Noninterest Income. Noninterest income increased $1,517,000 to $2,717,000 for 2001 from $1,200,000 for 2000. This increase was primarily due to a $1,443,000 increase in gain on sale of securities available for sale and an $88,000 increase in service charge income, offset by a $14,000 decrease in other noninterest income. Noninterest Expense. Noninterest expense increased $1,470,000 to $16,161,000 for 2001 from $14,691,000 for 2000. This increase is primarily a result of increases in salary and benefit expense of $723,000, and increases in various other noninterest expenses aggregating $751,000. Years ended December 31, 2000 and 1999 Overview. Net income increased $1,361,000 for 2000 to $2,829,000 from $1,468,000 in 1999. This increase was primarily a result of a $3,187,000 increase in net interest income, partially offset by a $154,000 increase in provision for loan loss and a $421,000 decrease in noninterest income, a $377,000 increase in noninterest expense and an $874,000 increase in income tax expense. Return on average assets and return on average equity were .76% and 13.79%, respectively, for 2000 compared to .43% and 7.30%, respectively, for 1999. Interest Income. Interest income increased $5,667,000 to $29,882,000 for 2000 from $24,215,000 for 1999. Interest income from loans increased $5,588,000, interest income on securities increased $56,000 and interest income on federal funds sold increased $23,000 in 2000. The increase in interest income on loans was primarily a result of an increase in commercial and real estate construction loans made by the Bank. The net increase in interest income on securities and federal funds sold was primarily a result of the investment by the Bank of excess customer deposits. Interest Expense. Interest expense increased $2,480,000 to $11,931,000 for 2000 from $9,451,000 in 1999. Interest expense on interest-bearing deposits increased $1,132,000, interest expense on federal funds purchased decreased $73,000, and interest expense on the notes payable increased $1,421,000 in 2000. The increase in interest expense on interest-bearing deposits was primarily due to higher deposit rates in 2000. The average rates paid on interest-bearing deposits increased 41 basis points between 1999 and 2000. The increase in interest expense on the notes payable was due to the increase in borrowings from the FHLB. Net Interest Income. Net interest income increased $3,187,000 to $17,951,000 for 2000 from $14,764,000 for 1999. During 2000 average loans outstanding increased $44,613,000, average securities owned decreased $8,429,000, average federal funds sold decreased $1,400,000 and the net interest spread increased from 4.05% for 1999 to 4.32% for 2000. The increase in net interest income resulted primarily from the increase in the volume of interest earning assets, offset by the increase in the volume of interest- bearing deposits. Noninterest Income. Noninterest income decreased $421,000 to $1,200,000 for 2000 from $1,621,000 for 1999. This decrease was primarily due to a $611,000 decrease in gain on sale of securities available for sale, offset by a$171,000 increase in service charge income and a $19,000 increase in other noninterest income. Noninterest Expense. Noninterest expense increased $377,000 to $14,691,000 for 2000 from $14,314,000 for 1999. This increase is primarily a result of increases in salary and benefit expense. -40- PROVISION FOR LOAN LOSSES The Company's provisions for loan losses in the years ended December 31, 2001, 2000 and 1999 were $509,000, $381,000 and $227,000, respectively. INCOME TAXES The Company's income tax expense for the years ended December 31, 2001, 2000, and 1999 was $1,410,000, $1,250,000 and $376,000, respectively. The Company's effective tax rate typically differs from the expected 34% enacted tax rate due to interest income received on tax-exempt securities, which is partially offset by the amortization of excess of investment in subsidiary over net assets acquired. LIQUIDITY AND SOURCES OF FUNDS The Company's primary sources of funds are customer deposits, sales and maturities of investment securities and loan repayments. These funds are used to make loans, to acquire investment securities and other assets and to fund continuing operations. During the year ended December 31, 2001, deposits increased to $333,207,000 from $315,329,000 and $290,055,000 at December 31, 2000 and 1999, respectively. None of the deposits at December 31, 2001, 2000 or 1999 were brokered deposits. Management believes that the increases in deposits in 2000 and 2001 were the result of (i) the successful opening of the Bank's two new branches in 1998 and the resulting increase in new customers at each branch and the acquisition of Lakewood State Bank in December of 1998; (ii) referrals from existing customers; (iii) continued success of the Bank's Officer Call Program; and (iv) recent bank acquisition activity in Colorado which has improved the Bank's opportunities to attract new business from customers in its small and medium-sized business focus area. See "Item 1 - Business - Operating Strategy" and "- Growth Strategy." At December 31, 2001, net loans were $235,163,000 compared to $213,522,000 and $181,733,000 at December 31, 2000 and 1999, respectively. In 1998 the Company successfully negotiated with Gold Banc (f/k/a Exchange National Bank) for a revolving line of credit in an amount not to exceed $3,000,000. Any monies advanced under this are used solely for capital needs of the Company or to purchase the stock of banks or bank holding companies. This line of credit is available for one year only, with renewals to be negotiated each year. If any principal is advanced on this line, the terms of the repayment would also be negotiated depending upon the use of proceeds. Interest is due quarterly. There is currently no amount outstanding under this line of credit. The line of credit is secured by the pledge of all of the shares of capital stock of the Bank, and contains standard representations, warranties and covenants. Annual renewal of the line of credit is based on the compliance by the Bank with the following criteria: 1. Capital Ratio of not less than 6.25%; 2. Return on Average Assets of not below 1.00%; 3. Loan Loss Reserve/Total Loans Ratio of not below 1.00%; 4. Non-Performing Loans/Total Loans Ratio of not greater than 2.00%; 5. Debt Service Coverage Ratio of not less than 2:1; and -41- 6. Absence of regulatory dividend restrictions. In the event the Bank does not meet any of these criteria calculated as of December 31 of each year and based on its financial statements, the Company will have 90 days from the delivery of the financial statements to cure the deficiency. Management anticipates that the Company will continue to rely primarily on customer deposits, sales and maturities of investment securities, loan sales, and loan repayments, as well as retained earnings, to provide liquidity and will use funds so provided primarily to make loans and to purchase securities. The Company believes that its customer deposits provide a strong source of liquidity because of the high percentage of core deposits, many of which are held as compensating balances under long-standing loan relationships. As a secondary source of funds, management uses federal funds and its membership in the FHLB. See "Item 1 - Business - Source of Funds." CAPITAL RESOURCES The Company's total stockholders' equity increased to $27,422,000 at December 31, 2001 from $24,160,000 at December 31, 2000. This increase is a result of an increase in retained earnings of $2,755,000 relating to 2001 net income, an increase in common stock surplus of $30,000 relating to issuance of stock to the outside Directors in lieu of their annual retainer and $49,000 relating to the exercise of stock options, and an increase in unrealized gains on investment securities available for sale of $410,000. At December 31, 2001, stockholders' equity was 6.1% of total assets, compared to 6.4% of total assets at December 31, 2000. Management presently intends to retain earnings, if any, to support growth. Accordingly, the Company does not intend to pay cash dividends on its Common Stock in the foreseeable future. Federal Reserve Board and FDIC guidelines call for a 4% Tier I capital to risk-weighted assets ratio, 8% total capital to risk-weighted assets ratio, and a 4% leverage ratio. See "Item 1 - Business - Government Regulation - The Company - Capital Adequacy" and "- The Bank - Capital Adequacy." The Company and the Bank currently exceed the applicable regulatory capital requirements. The Company contributed $7.0 million of the net proceeds of the offering of the 9% Cumulative Trust Preferred Securities to the Bank to enhance its regulatory capital levels to support continued asset growth. The following table sets forth the Company's and the Bank's capital ratios at December 31, 2001. December 31, 2001 ----------------------- (Dollars in thousands) Company Tier I Capital................................ $ 28,534 Total Capital................................. 35,238 Risk-Weighted Assets.......................... 261,980 Tier I Capital to Risk-Weighted Assets........ 10.90% Total Capital to Risk-Weighted Assets......... 13.50% Leverage Ratio................................ 6.50% -42- Bank Tier I Capital................................ $ 26,109 Total Capital................................. 29,364 Risk-Weighted Assets.......................... 261,454 Tier I Capital to Risk-Weighted Assets........ 9.90% Total Capital to Risk-Weighted Assets......... 11.23% Leverage Ratio................................ 5.96% Bank management is anticipating 2002 capital expenditures of approximately $650,000 in connection with updating its internal operating systems. The Bank intends to use part of its anticipated income in 2002 to finance these expenditures. Management expects that the current capital levels, together with internally generated funds, will be sufficient to support the Company's operations for the foreseeable future. However, depending upon the nature and scale of the Company's acquisition opportunities, the Company may be required to obtain additional capital resources through borrowing or the issuance of additional securities. The Company's ability to incur additional indebtedness may be limited by government regulations. See "Item 1 - Business - Government Regulation." EFFECTS OF INFLATION AND CHANGING PRICES The primary impact of inflation on the Company's operations is increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Although interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services, increases in inflation generally have resulted in increased interest rates. The effects of inflation, however, can magnify the growth of assets in the banking industry. If significant, this would require that equity capital increase at a faster rate than would otherwise be necessary. "SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Statements which are not historical facts contained in this document are forward-looking statements that involve risks and uncertainties that could cause actual results to differ from projected results. Factors that could cause actual results to differ materially include, among others: continued success of the Bank's branching strategy, general economic conditions, economic conditions in the Denver metropolitan area, the monetary policy of the Federal Reserve Board, changes in interest rates, inflation, competition in the banking business, changes in the state and federal regulatory regime applicable to the Company's and the Bank's operations, the results of financing efforts and other risk factors contained herein and detailed elsewhere in the Company's filings with the Securities and Exchange Commission. On September 11, 2001, the United States was the target of terrorist attacks of unprecedented scope. These attacks have caused instability in the global economy and have led to military action by the United States against suspected terrorists. Such military action may lead to further acts of terrorism and/or civil disturbances in the United States or elsewhere, which may cause further instability and have a material adverse effect on our business, financial condition and operating results. -43- Information included in this document includes "forward-looking statements," which can be identified by the use of forward-looking terminology such as "may," "will," "expect," "anticipate," "believe," "estimate," or "continue," or the negative thereof or other variations thereon or comparable terminology. The statements in "risk factors" and other statements and disclaimers in this Annual Report on Form 10-K constitute cautionary statements identifying important factors, including certain risks and uncertainties, with respect to such forward-looking statements that could cause actual results to differ materially from those reflected in such forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. See Market Risk Management and Asset/Liability Management beginning on Page 35. ITEM 8. FINANCIAL STATEMENTS See Index to Financial Statements appearing in Item 14 on Page 46. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -44- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is incorporated by reference to the information set forth under the similarly titled captions contained in the definitive Proxy Statement to be used by the Company in connection with its 2002 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 30, 2002. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated by reference to the information set forth under the similarly titled caption contained in the definitive Proxy Statement to be used by the Company in connection with its 2002 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 30, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated by reference to the information set forth under the similarly titled caption contained in the definitive Proxy Statement to be used by the Company in connection with its 2002 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 30, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated by reference to the information set forth under the similarly titled caption contained in the definitive Proxy Statement to be used by the Company in connection with its 2002 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission not later than April 30, 2002. -45- ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K (a) Index to Financial Statements Page Reference -------------- Reports of Independent Accountants F-1 Consolidated Balance Sheets at December 31, 2001 and 2000 F-2 Consolidated Statements of Income for the Years Ended December 31, 2001, 2000 and 1999 F-3 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 F-6 Notes to Consolidated Financial Statements F-7 Exhibits See Exhibit Index on Page E-1 of this Form 10-K. (b) Reports on Form 8-K None. -46- UNION BANKSHARES, LTD. Accountants' Report and Consolidated Financial Statements December 31, 2001, 2000 and 1999 UNION BANKSHARES, LTD. DECEMBER 31, 2001, 2000 AND 1999 TABLE OF CONTENTS PAGE INDEPENDENT ACCOUNTANTS' REPORT............................................F-1 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets...........................................................F-2 Statements of Income.....................................................F-3 Statements of Comprehensive Income.......................................F-4 Statements of Stockholders' Equity.......................................F-5 Statements of Cash Flows.................................................F-6 Notes to Financial Statements............................................F-7 INDEPENDENT ACCOUNTANTS' REPORT The Board of Directors Union Bankshares, Ltd. Denver, Colorado We have audited the accompanying consolidated balance sheets of UNION BANKSHARES, LTD. as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of UNION BANKSHARES, LTD. as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ BKD, LLP Colorado Springs, Colorado February 19, 2002 F-1 UNION BANKSHARES, LTD. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2000

See Notes to Consolidated Financial Statements F-2 UNION BANKSHARES, LTD. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See Notes to Consolidated Financial Statements F-3 UNION BANKSHARES, LTD. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See Notes to Consolidated Financial Statements F-4 UNION BANKSHARES, LTD. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See Notes to Consolidated Financial Statements F-5 UNION BANKSHARES, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See Notes to Consolidated Financial Statements F-6 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Union Bank and Trust (the Bank) is a wholly-owned subsidiary of Union Bankshares, Ltd. (Bankshares) (collectively referred to as the Company). The Bank provides a full range of banking services to customers, primarily living in the Denver metropolitan area, through its home office and six branch facilities located in the Denver area. The Bank is subject to competition from other financial institutions. The Bank is also subject to the regulation of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the valuation of foreclosed assets held for sale, management obtains independent appraisals for significant properties. Management believes that the allowance for loan losses and the valuation of foreclosed assets held for sale are adequate. While management uses available information to recognize losses on loans and foreclosed assets held for sale, changes in economic conditions may necessitate revision of these estimates in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank's allowance for loan losses and valuation of foreclosed assets held for sale. Such agencies may require the Bank to recognize additional losses based on their judgments of information available to them at the time of their examination. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Union Bankshares, Ltd. and its wholly-owned subsidiary, Union Bank and Trust. All significant intercompany balances and transactions have been eliminated. F-7 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 OPERATING SEGMENTS The Bank is organized on a branch by branch basis, upon which management makes decisions regarding how to allocate resources and assess performance. Each of the branch banks provides a group of similar community banking services, including such core products and services as loans, time deposits, checking and saving accounts, as well as products that compliment these core products. CASH AND CASH EQUIVALENTS The Company considers all liquid investments with original maturities of three months or less to be cash equivalents. Pursuant to normal banking practices, the Bank is required to maintain certain balances (reserves) with the Federal Reserve Bank. Included in cash and due from banks in the accompanying consolidated balance sheets, are required reserve balances of approximately $25,000 and $352,000 at December 31, 2001 and 2000, respectively. As of December 31, 2001 and 2000, the Company had approximately $3,100,000 and $7,700,000 on deposit with one financial institution. INVESTMENTS IN DEBT AND EQUITY SECURITIES Available-for-sale securities, which include any security for which the Company has no immediate plan to sell but which may be sold in the future, are carried at fair value. Realized gains and losses, based on specifically identified amortized cost of the specific security, are included in other income. Unrealized gains and losses are recorded, net of related income tax effects, in stockholders' equity. Premiums and discounts are amortized and accreted, respectively, to interest income using the level-yield method over the period to maturity. Securities pledged to repurchase agreement represents securities pledged under lending transactions through an overnight repurchase agreement. Under the repurchase agreement the Bank maintains effective control of the securities and therefore does not meet the criteria of a sales transaction. The securities pledged are carried at an equal amount to the amount outstanding under the agreement on the close of business. The repurchase agreement liability is considered a secured borrowing. F-8 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Held-to-maturity securities, which include any security for which the Company has the positive intent and ability to hold until maturity, are carried at historical cost adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are amortized and accreted, respectively, to interest income using the level-yield method over the period to maturity. Interest and dividends on investments in debt and equity securities are included in income when earned. FEE INCOME Loan origination fees, net of direct origination costs, are recognized as income using the level-yield method over the term of the loans. LOANS The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial and real estate loans throughout the Denver metropolitan area. The ability of the Bank's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-offs are reported at their outstanding principal adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans. Interest income is accrued on the unpaid principal balance. Discounts and premiums on purchased consumer loans are recognized over the expected lives of the loans using methods that approximate the interest method. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is increased by provisions charged to expense and reduced by loans charged off, net of recoveries. The allowance is maintained at a level considered adequate to provide for potential loan losses, based on management's evaluation of the loan portfolio, as well as on prevailing and anticipated economic conditions and historical losses by loan category. General allowances have been established, based upon the aforementioned factors, and allocated to the individual loan categories, including consumer loans and real estate mortgage loans that are collectively evaluated. Allowances are accrued on specific loans evaluated for impairment for which the basis of each loan, including accrued interest, exceeds the discounted amount of expected future collections of interest and principal or, alternatively, the fair value for loan collateral using a single risk category method of identification. F-9 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 A loan is considered impaired when it is probable that the Bank will not receive all amounts due according to the contractual terms of the loan. This includes loans that are delinquent 90 days or more (nonaccrual loans) and certain other loans identified by management. Accrual of interest is generally discontinued, and interest accrued and unpaid is removed, at the time such amounts are delinquent 90 days. Interest is recognized for nonaccrual loans only upon receipt, and only after all principal amounts are current according to the terms of the contract. Loans are charged off when, in the opinion of management, all or a portion of the principal outstanding is no longer collectible. FORECLOSED ASSETS HELD FOR SALE Assets acquired by foreclosure or in settlement of debt and held for sale are valued at estimated fair value as of the date of foreclosure, and a related valuation allowance is provided for estimated costs to sell the assets. Management evaluates the value of foreclosed assets held for sale periodically and increases the valuation allowance for any subsequent declines in fair value. Increases in the valuation allowance and gains/losses on sales of foreclosed assets are included in noninterest expense, net. PREMISES AND EQUIPMENT Depreciable assets are stated at cost less accumulated depreciation. Depreciation is charged to expense using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized using the straight-line method over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter. GOODWILL The Company purchased a subsidiary in 1985 in which the excess costs over the fair value of certain underlying net tangible assets, goodwill, were amortized over a period of nine years. The remaining goodwill is being amortized on a straight-line basis over a 25-year period at a rate of approximately $226,000 per year. The goodwill of the branch bank acquired in 1998 is also being amortized on a straight-line basis over a 15-year life at an annual rate of $313,000. Amortization expense related to the purchased subsidiary and branch bank in 2001, 2000 and 1999 was $539,000, each year. DEBT ISSUANCE COSTS Debt issuance costs associated with the issuance of the 9.0% Cumulative Trust Preferred Securities are being amortized over a ten year period. Amortization expense was $76,000 each, for the years ended December 31, 2001, 2000 and 1999. F-10 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 INCOME TAXES Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. EARNINGS PER COMMON SHARE Basic earnings per share is computed based on the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed assuming exercise of all stock options having exercise prices less than the average market price of the common stock using the treasury stock method. NOTE 2: INVESTMENTS IN DEBT AND EQUITY SECURITIES During June 2000, in order to maximize the Company's liquidity and flexibility, the Company transferred all of its investment securities held-to-maturity portfolio with an amortized cost of $31,263,445 and an unrealized loss of $704,434 to investment securities available-for-sale. The amortized cost and approximate fair value of available-for-sale securities was as follows:

F-11 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999

Maturities of available-for-sale securities at December 31, 2001: Amortized Approximate Cost Fair Value ---- ---------- One year or less $ 388,000 $ 396,000 After one year through five years 7,080,000 7,339,000 After five years through ten years 11,602,000 11,777,000 After ten years 162,041,000 161,899,000 ----------- ----------- $181,111,000 $181,411,000 =========== =========== The amortized cost of securities pledged as collateral, to secure notes payable, public deposits and for other purposes, amounted to $73,849,000 at December 31, 2001 and $54,168,000 at December 31, 2000. The approximate fair value of pledged securities amounted to $73,560,265 at December 31, 2001 and $53,745,000 at December 31, 2000. Gross gains of $1,166,000, $60,000, and $303,000 and gross losses of $68,000, $405,000, and $37,000 resulting from sales of available-for-sale securities were realized for 2001, 2000 and 1999, respectively. The Company redesignated available-for-sale securities with an aggregate amortized cost of $15,405,000 to the held-to-maturity portfolio during 1999. F-12 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 The Bank, as a member of the Federal Home Loan Bank (FHLB) system, is required to maintain an investment in capital stock of the FHLB. As a member, the Bank has access to a $55,000,000 credit line which is secured by investment securities. No ready market exists for the FHLB stock, and it has no quoted market value. Such stock is recorded at cost and reported as other investments. As discussed in Note 6, the Bank had advances outstanding at December 31, 2001 and 2000 of $55,000,000 and $28,600,000, respectively. NOTE 3: LOANS AND ALLOWANCE FOR LOAN LOSSES Categories of loans include: 2001 2000 ---- ---- Commercial $163,054,000 $ 153,727,000 Real estate mortgage 5,685,000 4,372,000 Real estate construction 36,246,000 26,955,000 Consumer 33,529,000 31,754,000 ---------- ----------- 238,514,000 216,808,000 Allowance for loan losses (3,351,000) (3,286,000) ---------- ----------- Net loans $235,163,000 $ 213,522,000 =========== =========== Transactions in the allowance for loan losses were as follows: 2001 2000 1999 ---- ---- ---- Balance, beginning of year $3,286,000 $2,892,000 $ 2,678,000 Charge offs (463,000) (214,000) (27,000) Recoveries 19,000 227,000 14,000 Provision charged to operating expenses 509,000 381,000 227,000 --------- --------- ---------- expenses Balance, end of year $3,351,000 $3,286,000 $ 2,892,000 ========= ========= ========== Impaired loans totaled $4,510,000 and $5,112,000 at December 31, 2001 and 2000, respectively. An allowance for loan losses of $681,000 and $767,000 related to impaired loans at December 31, 2001 and 2000, respectively. At December 31, 1999, all impaired loans had allocated allowances. F-13 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Interest of $316,000 and $410,000 was recognized on average impaired loans of $4,761,000 and $4,143,000 for 2001 and 2000, respectively. Interest of $380,072 and $621,000 was recognized on impaired loans on a cash basis during 2001 and 2000, respectively. NOTE 4: PREMISES AND EQUIPMENT Major classifications of premises and equipment, stated at cost at December 31, were as follows: 2001 2000 ---- ---- Land $ 150,000 $ 150,000 Building 750,000 750,000 Leasehold improvements 2,061,000 2,361,000 Furniture and equipment 3,230,000 3,311,000 --------- --------- 6,191,000 6,572,000 Less accumulated depreciation and amortization (3,866,000) (3,848,000) ---------- ---------- Net premises and equipment $2,325,000 $2,724,000 ========= ========= NOTE 5: DEPOSITS Interest bearing deposits in denominations of $100,000 or more were $144,064,000 on December 31, 2001 and $96,938,000 on December 31, 2000. At December 31, 2001, the scheduled maturities of time deposits were as follows: 2001 $ 81,422,000 2002 3,272,000 2003 1,780,000 2004 250,000 2005 and thereafter 397,000 ----------- $ 87,121,000 =========== F-14 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 NOTE 6: ADVANCES FROM FHLB The Company had advances from FHLB of $55,000,000 and $28,600,000 as of December 31, 2001 and 2000, respectively. At December 31, 2001, $20,000,000 is considered long-term. Maturities at December 31, 2001 are: Amount Interest Rate ------ ------------- January 7, 2002 $ 5,000,000 2.49% January 18, 2002 5,000,000 1.92% February 22, 2002 5,000,000 1.96% March 26, 2002 5,000,000 1.97% July 26, 2002 5,000,000 4.00% October 3, 2002 5,000,000 2.58% December 31, 2002 5,000,000 4.95% January 31, 2003 5,000,000 4.09% July 22, 2003 5,000,000 4.36% October 15, 2003 5,000,000 3.37% January 22, 2004 5,000,000 4.59% ----------- $ 55,000,000 =========== The Company has an unused $3,000,000 revolving line-of-credit with a financial institution, with interest payable quarterly at prime, adjusted the same day a rate change occurs. The line-of-credit is secured by the pledge of all of the shares of capital stock of the Bank and contains standard representations, warranties and financial covenants. NOTE 7: GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S DEBENTURES 2001 2000 ---- ---- Guaranteed Preferred Beneficial Interests in Company's Debentures $ 10,304,000 $ 10,304,000 =========== =========== On October 14, 1998, the Company formed a wholly-owned business trust (the Trust) to issue preferred securities representing undivided beneficial interests in the assets of the Trust. The sole assets of the Trust are $10.3 million, aggregate principal amount of the Company's 9.00% Subordinated Debenture Notes due December 17, 2028, which are redeemable on or after December 17, 2003. Such securities qualify as Tier I capital for regulatory purposes. F-15 NOTE 8: INCOME TAXES The provision for income taxes consists of: 2001 2000 1999 ---- ---- ---- Taxes currently payable $1,621,000 $1,402,000 $ 395,000 Deferred income taxes (211,000) (152,000) (19,000) --------- --------- --------- Income Tax Expense $1,410,000 $1,250,000 $ 376,000 ========= ========= ========= The tax effects of temporary differences related to deferred taxes shown in the December 31, balance sheets were: 2001 2000 ---- ---- Deferred tax assets: Allowance for loan losses $1,146,000 $ 982,000 Accrued expenses 316,000 20,000 Deferred loan fees 56,000 95,000 Deferred compensation 85,000 67,000 Furniture, equipment and improvements 61,000 86,000 Unrealized losses on available-for-sale securities -- 113,000 State net operating loss and credit carryforwards -- 104,000 --------- --------- 1,664,000 1,467,000 Deferred tax liabilities: Federal Home Loan Bank Stock (79,000) (79,000) Unrealized gains on available for sale securities (112,000) -- Prepaid expenses (77,000) -- Discount accretion on tax exempt municipal securities (102,000) (19,000) --------- --------- (370,000) (98,000) --------- --------- Net Deferred Tax Asset $1,294,000 $1,369,000 ========= ========= F-16 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 A reconciliation of income tax expenses at the statutory rate to the Company's actual income tax is shown below: 2001 2000 1999 ---- ---- ---- Computed at the statutory rate (34%) $1,417,000 $1,387,000 $ 627,000 Increase (decrease) in income taxes resulting from: Tax-exempt interest (491,000) (447,000) (387,000) Amortization of goodwill 182,000 182,000 79,000 State income taxes, net of federal tax 61,000 -- (51,000) benefit Nondeductible interest 49,000 48,000 40,000 Other, net 192,000 80,000 68,000 -------- --------- --------- Income Tax Expense $1,410,000 $1,250,000 $ 376,000 ========= ========= ========= NOTE 9: EARNINGS PER SHARE Earnings per share (EPS) were computed as follows: Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ 2001 ---- Net Income $2,755,000 2,400,709 Basic earnings per share $ 1.15 ===== Effect of dilutive securities: Stock options -- 242,634 --------- --------- Diluted earnings per share $2,755,000 2,643,343 $ 1.04 ========= ========= ===== 2000 ---- Net Income $2,829,000 2,387,901 Basic earnings per share $ 1.18 ===== Effect of dilutive securities: Stock options -- 209,658 --------- --------- Diluted earnings per share $2,829,000 2,597,559 $ 1.09 ========= ========= ===== F-17 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- ------ 1999 ---- Net Income $ 1,468,000 2,352,540 Basic earnings per share $ .62 ==== Effect of dilutive securities: Stock options -- 296,933 ----------- --------- Diluted earnings per share $ 1,468,000 2,649,473 $ .55 =========== ========= ==== Options to purchase 94,955, 241,052 and -0-, shares of common stock at option prices per share ranging from $ 11.38 to $13.13 were outstanding at December 31, 2001, 2000 and 1999, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. NOTE 10: COMMITMENTS AND CREDIT RISKS The Bank grants commercial, residential, and other installment loans to customers throughout the state of Colorado and, in addition, invests in municipal obligations of various entities in the state. Lines-of-credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Lines-of-credit generally have fixed expiration dates. Since a portion of the line may expire without being drawn upon, the total unused lines do not necessarily represent future cash requirements. Each customer's creditworthiness is evaluated on a case-by-case basis. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, commercial real estate, and residential real estate. Management uses the same credit policies in granting lines-of-credit as it does for balance sheet instruments. At December 31, 2001 and 2000, the Bank had granted unused lines-of-credit to borrowers aggregating approximately $83,806,000 and $74,434,000, respectively. At December 31, 2001, unused lines-of-credit consisted of approximately $80,378,000 for commercial lines and $3,428,000 for open-end consumer lines. F-18 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 Letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. The Bank had total outstanding letters of credit amounting to $3,498,696 and $3,103,906 at December 31, 2001 and 2000, respectively, with terms ranging from 15 days to two years. At December 31, 2001 and 2000, the Bank had outstanding commitments to originate loans aggregating approximately $13,632,800 and $7,515,500, respectively. The commitments extended over varying periods of time with the majority being disbursed within a one-year period. NOTE 11: OPERATING LEASES The Bank leases numerous premises under noncancelable leases that expire from 2004 to 2008. Several of the leases contain various renewal option clauses for additional terms and provide for periodic rental adjustments based on the Consumer Price Index. The estimated future minimum lease payments under noncancelable operating leases at December 31, 2001 were as follows: 2002 $ 551,000 2003 448,000 2004 295,000 2005 121,000 2006 40,000 Thereafter 111,000 --------- Total future minimum lease payments $1,566,000 ========= Total rental expense for all operating leases including certain cancelable equipment leases, was $799,000, $759,000, and $690,000 for the years ended December 31, 2001, 2000 and 1999, respectively. F-19 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 NOTE 12: EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS 401(K) PROFIT SHARING PLAN The Company provides a 401(k) profit sharing plan for its employees, contributing annually to a profit sharing trust. All employees who are at least 21 years old and who have been employed by the Company for at least one year are eligible to participate. Total contributions were approximately $361,000, $323,000, and $304,000 in 2001, 2000 and 1999, respectively. Effective for the year beginning January 1, 1999, the Company matches 100% of the first 3% of the participants' contributions and 50% of the next 2% of participant contributions. These employer matching contributions are 100% vested. Prior to 1999, the Company matched 50% of the first 6% of the participants' contributions. Additional bonus profit sharing contributions may be made at the discretion of the Board of Directors. The Company's pre-1999 and all bonus profit sharing matching contributions are 20% vested after the participant has completed two years of service, with 20% incremental increases in vesting for each of the next four years. NON-EMPLOYEE DIRECTOR EQUITY COMPENSATION PLAN During the year ended December 31, 1994, the Company adopted a Non-Employee Director Equity Compensation Plan (Compensation Plan) effective January 1, 1995. The Compensation Plan provides for the initial authorization of 50,000 shares of common stock. Under the provisions of the Compensation Plan, the directors are compensated annually $7,500 for 2001, 2000 and 1999, provided certain performance measures are met. The directors have the option of accepting the Company's common stock in lieu of cash compensation. If the director opts for common stock, the number of shares issued is determined on the first business day of the year. The director has voting rights on the common stock issued as compensation; however, the common stock is restricted until the director has met all performance measures. In January 2001, 2000 and 1999, the Company issued 2,484, 2,284 and 2,500 common shares, respectively, pursuant to the Compensation Plan at exercise prices of $12.06, $13.13 and $12.00 respectively. INCENTIVE PLAN The Company adopted the Equity Incentive Plan (Incentive Plan) in December 1992 for certain key employees of the Company. The Incentive Plan provides for the authorization of 624,000 shares of common stock, plus an additional authorization of one-half percent of the outstanding shares of common stock as of each succeeding annual anniversary of the effective date of the Incentive Plan. Options issued within the Incentive Plan vest in three equal increments on the date of grant and the first two anniversaries thereof, and expires ten years after date of grant. F-20 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 A summary of the status of the Incentive Plan at December 31, and changes during the year is presented below: 2001 2000 1999 ------------------- ----------------- ----------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ----- ----- ------ ----- Outstanding, beginning of year 511,200 $ 7.12 473,800 $ 6.50 479,200 $ 6.16 Granted 64,100 11.32 54,400 12.38 23,400 12.50 Exercised (7,400) 5.00 (13,300) 5.26 (26,900) 5.20 Forfeited (9,100) 10.74 (3,700) 11.82 (1,900) 9.48 ------- ------- ------- Outstanding, end of year 558,800 $ 7.57 511,200 $ 7.12 473,800 $ 6.50 ======== ======= ======= Options exercisable, end of year 498,700 467,500 444,000 The fair value of each option granted is estimated on the date of the grant using the minimum value method with the following weighted-average assumptions: 2001 2000 1999 ---- ---- ---- Dividend per share $ 0 $ 0 $ 0 Risk-free interest rate 4.40% 4.98% 6.55% Expected life of options 4 years 4 years 10 years Weighted-average fair value of options granted during year $ 3.54 $ 4.52 $ 7.86 F-21 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 The following table summarizes information about stock options under the Incentive Plan outstanding at December 31, 2001: Options Outstanding Options Exercisable ---------------------------------- ------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ---- ----- ----------- ----- $ 4.50 154,000 1 years $ 4.50 154,000 $ 4.50 $ 4.00 11,000 2 years $ 4.00 11,000 $ 4.00 $ 3.75 to $3.81 16,000 3 years $ 3.76 16,000 $ 3.76 $ 5.38 144,500 4 years $ 5.38 144,500 $ 5.38 $ 7.63 21,500 5 years $ 7.63 21,500 $ 7.63 $ 11.75 36,300 6 years $ 11.75 36,300 $ 11.75 $ 11.38 39,100 7 years $ 11.38 39,100 $ 11.38 $ 12.50 20,300 8 years $ 12.50 20,300 $ 12.50 $ 12.38 52,000 9 years $ 12.38 34,667 $ 12.38 $ 10.50 to $12.25 64,100 10 years $ 11.32 21,367 $ 11.32 DIRECTORS' PLAN The Company also adopted a Non-Employee Directors' Stock Option Plan (Directors' Plan) in December 1992. An aggregate of 22,000 shares of common stock were reserved for issuance under the Directors' Plan. Effective June 6, 2001, the shareholders approved an increase of 20,000 share for the Directors' Plan. Non-employee directors are automatically granted options to purchase 500 common shares during each fiscal year following election to the Board. The Board of Directors, or a committee consisting of such board members or other persons as may be appointed by the Board, administer the Directors' Plan. The Directors' Plan is currently administered by the Board of Directors. Each option under the Directors' Plan expires five years from the date of grant. F-22 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 A summary of the status of the Directors' Plan at December 31, and changes during the year is presented below:

The fair value of each option granted is estimated on the date of the grant using the minimum value method with the following weighted-average assumptions: 2001 2000 1999 ---- ---- ---- Dividend per share $ 0 $ 0 $ 0 Risk-free interest rate 4.40% 4.98% 6.55% Expected life of options 4 years 4 years 4 years Weighted-average fair value $ 3.54 $ 4.52 $ 5.05 of options granted during year F-23 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 The following table summarizes information about stock options under the Directors' Plan outstanding at December 31, 2001: Options Outstanding Options Exercisable ---------------------------------- ------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ---- ----- ----------- ----- $12.07 1,500 1 years $ 12.07 1,500 $12.07 $12.50 2,000 2 years $ 12.50 2,000 $12.50 $13.13 2,000 3 years $ 13.13 2,000 $13.13 $11.88 2,000 4 years $ 11.88 2,000 $11.88 $10.05 2,000 5 years $ 10.05 -- -- OPTION BONUS PLAN In May 1996, the Company adopted an "Option Bonus Plan" (Bonus Plan). The exercise price on all options is equal to the market price of the common stock on the date of grant. The option period expires ten years from the date the options were granted. The options vest and are exercisable six months after they are granted. The maximum number of shares that may be issued pursuant to the exercise of these options is 300,000 shares. A summary of the status of the Bonus Plan at December 31, and changes during the year is presented below:

F-24 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 The fair value of each option granted is estimated on the date of the grant using the minimum value method with the following weighted-average assumptions: 2001 2000 1999 ---- ---- ---- Dividend per share $ 0 $ 0 $ 0 Risk-free interest rate 4.40% 4.98% 6.55% Expected life of options 4 years 4 years 4 years Weighted-average fair value $ 3.54 $ 4.52 $ 5.05 of options granted during year The following table summarizes information about stock options under the Bonus Plan outstanding at December 31, 2001: Options Outstanding Options Exercisable ---------------------------------- ------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- ----------- ---- ----- ----------- ----- $7.63 72,802 5 years $ 7.63 72,802 $ 7.63 $11.75 5,784 6 years $ 11.75 5,784 $11.75 $11.38 123,917 7 years $ 11.38 123,917 $11.38 $12.50 4,851 8 years $ 13.13 4,851 $12.50 $12.38 6,304 9 years $ 12.38 6,304 $12.38 $11.25 19,912 10 years $ 11.25 -- $ -- The Company applies APB Opinion 25 and related Interpretations in accounting for its stock option plans, and no compensation cost has been recognized for the plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates using Statement of Financial Accounting Standards No. 123, the Company's net income would have decreased by approximately $189,000, $150,000 and $102,000 in 2001, 2000 and 1999, respectively. In addition, the Company's basic earnings per share would have decreased by $.08 per share, $.06 per share and $.04 per share in 2001, 2000 and 1999, respectively. Diluted earnings per share would have decreased $.07 per share, $.06 per share and $.04 per share in 2001, 2000 and 1999, respectively. F-25 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 NOTE 13: OTHER OPERATING EXPENSES Other operating expenses consist of the following: 2001 2000 1999 ---- ---- ---- Professional services $ 969,000 $ 818,000 $ 990,000 Credit card 424,000 442,000 445,000 Legal and accounting 644,000 360,000 210,000 Advertising and promotion 468,000 291,000 263,000 Postage and delivery 281,000 242,000 238,000 Software maintenance and amortization 103,000 99,000 102,000 Service charges 220,000 193,000 199,000 Supplies 266,000 205,000 234,000 Insurance and bonds 146,000 136,000 140,000 Telephone 204,000 183,000 165,000 Printing 158,000 166,000 192,000 Travel and entertainment 117,000 162,000 122,000 Dues and subscriptions 116,000 97,000 113,000 Deposit insurance 60,000 103,000 31,000 Amortization of debt issuance costs 76,000 76,000 76,000 Other operating expenses 527,000 455,000 448,000 Merger cost -- -- 325,000 --------- --------- --------- $4,779,000 $4,028,000 $4,293,000 ========= ========= ========= NOTE 14: TRANSACTIONS WITH RELATED PARTIES At December 31, 2001 and 2000, the Bank had loans outstanding to shareholders, executive officers, and directors of the Company and their affiliates, in the amount of $1,784,000 and $3,219,000, respectively. New loans made to shareholders, executive officers, and directors of the Company and their affiliates approximated $439,000 and $1,769,000, and repayments approximated $1,874,000 and $1,856,000 for the years ended December 31, 2001 and 2000, respectively. In management's opinion, such loans and other extensions of credit and deposits were made in the ordinary course of business and were made on substantially the same terms (including interest rates and collateral) as those prevailing at the time of comparable transactions with other persons. Further, in management's opinion, these loans did not involve more than normal risk of collectibility or present other unfavorable features. F-26 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 From time to time, the Bank purchases loans from a locally owned mortgage company until the mortgage company sells the loans into the secondary mortgage market. The loans are then sold back to the mortgage company. Initially, the Bank receives interest during its holding period of prime plus .50%. All origination fees and interest on the loan in excess of the rate payable to the Bank are retained by the mortgage company. If the mortgage is not sold within specified periods, the Bank is entitled to receive all of the interest paid on the mortgage from inception and may be entitled to receive all or a portion of the origination fees. The mortgage company provides loan servicing during the period that the mortgage is held by the Bank. During the years ended December 31, 2001, 2000 and 1999, the Bank earned interest income on such loans of $102,000, $10,000 and $28,000, respectively. During the years ended December 31, 2001, 2000 and 1999, the Bank purchased loans in the amounts of $33,585,000, $4,754,000 and $9,389,000 and sold loans in the amount of $31,548,000, $4,754,000 and $13,674,000, respectively. All loans sold back to the mortgage company are without recourse to the Bank. The Chairman of the Board of the Bank is a director and treasurer of the mortgage company. During the year ended December 31, 2001, the Bank entered into secured lending transactions with one of its directors. The balance outstanding at year-end was $12,669,000. The Bank incurred interest expense of $38,408 for the year ended December 31, 2001. NOTE 15: ADDITIONAL CASH FLOW INFORMATION ADDITIONAL CASH PAYMENT INFORMATION 2001 2000 1999 ---- ---- ---- Income taxes paid (net of refunds) $ 1,385,000 $ 1,020,000 $ 783,000 =========== ========== =========== Interest paid $ 11,275,000 $11,930,000 $ 9,540,000 =========== ========== =========== NON-CASH INVESTING ACTIVITIES Reclassification of securities from available- for-sale to held-to-maturity at fair value $ 0 $ 0 $ 15,434,000 =========== ========== =========== Real estate acquired in settlement of loans $ 153,000 $ 0 $ 0 =========== ========== =========== Sale and financing of foreclosed assets $ 42,000 $ 0 $ 0 =========== ========== =========== Reclassification of securities from held-to-maturity to available-for-sale at fair value $ 0 $31,264,000 $ 6,940,000 =========== ========== =========== F-27 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 NOTE 16: CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY Financial statements of the parent company, Union Bankshares, Ltd., are shown below and should be read in conjunction with the consolidated financial statements. CONDENSED BALANCE SHEETS DECEMBER 31, 2001 AND 2000 ASSETS 2001 2000 ---- ---- Cash $ 5,783,000 $ 3,477,000 Available-for-sale securities -- 2,246,000 Investment in subsidiary 30,035,000 26,607,000 Goodwill 1,816,000 2,042,000 Accrued interest receivable -- 45,000 Other assets 525,000 600,000 ---------- ---------- Total Assets $38,159,000 $35,017,000 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Guaranteed preferred beneficial interest in $10,304,000 $10,304,000 Company's debentures Accrued interest payable 39,000 39,000 Other liabilities 394,000 514,000 ---------- ---------- Total Liabilities 10,737,000 10,857,000 ---------- ---------- STOCKHOLDERS' EQUITY Common stock 2,000 2,000 Additional paid-in capital 10,066,000 9,987,000 Retained earnings 17,166,000 14,393,000 Unrealized gains on subsidiary's available-for-sale securities 188,000 (222,000) ---------- ---------- Total Stockholders' Equity 27,422,000 24,160,000 ---------- ---------- Total Liabilities and Stockholders' Equity $38,159,000 $35,017,000 ========== ========== F-28 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 CONDENSED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 2001 2000 1999 ---- ---- ---- OPERATING INCOME Dividends from subsidiary $ 1,400,000 $ 1,400,000 $ 1,400,000 Gain on sale of securities 85,000 -- -- Interest income 65,000 167,000 172,000 ---------- ---------- ---------- Total Operating Income 1,550,000 1,567,000 1,572,000 ---------- ---------- ---------- OPERATING EXPENSES Interest 927,000 927,000 925,000 Amortization of goodwill 226,000 226,000 226,000 Salaries and employee benefits 726,000 835,000 696,000 Occupancy and equipment 167,000 115,000 88,000 Other 743,000 687,000 919,000 ---------- ---------- ---------- Total Operating Expenses 2,789,000 2,790,000 2,854,000 ---------- ---------- ---------- (LOSS) BEFORE EQUITY IN UNDISTRIBUTED EARNINGS OF SUBSIDIARY, INCOME TAX BENEFIT (1,239,000) (1,223,000) (1,282,000) EQUITY IN UNDISTRIBUTED EARNINGS 3,161,000 3,031,000 2,027,000 INCOME TAX BENEFIT 833,000 1,021,000 723,000 ---------- ---------- ---------- NET INCOME $ 2,755,000 $ 2,829,000 1,468,000 ========== ========== ========== F-29 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 CONDENSED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

F-30 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 NOTE 17: REGULATORY CAPITAL REQUIREMENTS The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weighing, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table following) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to adjusted total assets (as defined). Management believes, as of December 31, 2000, that the Company and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2000, the most recent notification from the Federal Deposit Insurance Corporation (FDIC) categorized the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the category. F-31 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 The Company's and the Bank's actual capital amounts and ratios are also presented in the table. In accordance with FDIC regulations, no amount has been deducted from capital for interest rate risk.

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval. At December 31, 2001, approximately $7,940,000 of retained earnings were available for dividend declaration without prior regulatory approval. F-32 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 NOTE 18: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents estimated fair values of the Company's financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which method involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: CASH AND CASH EQUIVALENTS For these short-term instruments, the carrying amount approximates fair value. F-33 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 INVESTMENT SECURITIES Fair values for investment securities equal quoted market prices, if available. If quoted market prices are not available, fair values are estimated based on quoted market prices of similar securities. LOANS The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value. DEPOSITS The fair value of demand deposits, savings accounts, NOW accounts, and certain money market deposits is the amount payable on demand at the reporting date (i.e., their carrying amount). The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. The carrying amount of accrued interest payable approximates its fair value. SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE For these short-term instruments, the carrying amount is a reasonable estimate of fair value. ADVANCES FROM FHLB Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S DEBENTURES Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. COMMITMENTS TO EXTEND CREDIT AND LETTERS OF CREDIT The fair value of commitments is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of letters of credit and lines-of-credit is based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. F-34 UNION BANKSHARES, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001, 2000 AND 1999 NOTE 19: IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board (FASB) recently adopted Statement of Financial Accounting Standards (SFAS) 142, "Goodwill and Other Intangible Assets." This Statement establishes new financial accounting and reporting standards for acquired goodwill and other intangible assets. The Statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets (including those acquired in a business combination) should be accounted for after they have been initially recognized in the financial statements. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The impact of adopting SFAS 142 will result in no longer requiring the amortization of goodwill, which will increase net income by $539,000 per year. Additionally, the standard requires a transitional and annual evaluation of goodwill impairment, the impact of applying this aspect of the standard has not yet been determined. F-35 SIGNATURES In accordance with Section 13 or 15(d) Securities Exchange Act of 1934, as amended, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNION BANKSHARES, LTD. Date: March 28, 2002 By: /S/ CHARLES R. HARRISON ----------------------------- Charles R. Harrison, Chairman of the Board, Chief Executive Officer and a Director In accordance with the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

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UNION BANKSHARES LTD 10-K