================================================================================
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------

                                   FORM 10-KSB

            |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                   For the fiscal year ended December 31, 1998

                                       OR

            |_| 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 
   incorporation or organization)                        Identification No.)   
                         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)
                                ----------------
         Check 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       
                                  ------     ------
         Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B 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-KSB
or any amendment to this Form 10-KSB. |_|

         The Registrant's gross revenues for the fiscal year ended December 31,
1998 totaled $18.9 million.

         The aggregate market value of the voting stock of the registrant held
by non-affiliates, based on a closing price of $10.50 per share as of March 25,
1999, was approximately $13,097,049.

         As of March 25, 1999, there were outstanding 2,346,514 shares of Common
Stock.
                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the registrant's definitive Proxy Statement for its 1999
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 1999, are incorporated by reference into
Part III as specified.

         Certain Exhibits to this Annual Report on Form 10-KSB have been
incorporated by reference. See Index to Exhibits on Page E-1.

         Transitional Small Business Disclosure Format (check one)
                              Yes      No   X  
                                 -----    -----
================================================================================


<PAGE>


                             UNION BANKSHARES, LTD.

                                TABLE OF CONTENTS
                                                                            Page
                                                                            ----
                                     PART I


Item 1.  Business..............................................................1

Item 2.  Properties...........................................................28

Item 3.  Legal Proceedings....................................................29

Item 4.  Submission of Matters to a Vote of Security Holders..................29

                                     PART II

Item 5.  Market for Common Equity and Related Shareholder Matters.............30

Item 6.  Management's Discussion and Analysis of 
         Financial Condition and Results of
         Operations...........................................................31

Item 7.  Financial Statements.................................................45

Item 8.  Changes In and Disagreements With Accountants On 
         Accounting and Financial Disclosure..................................45

                                    PART III

Item 9.  Directors, Executive Officers, Promoters and Control Persons;
         Compliance with Section 16(a) of the Exchange Act....................46

Item 10. Executive Compensation...............................................46

Item 11. Security Ownership of Certain Beneficial Owners and 
         Management...........................................................46

Item 12. Certain Relationships and Related Transactions.......................46

Item 13. Exhibits and Reports on Form 8-K.....................................47


                                       -i-


<PAGE>


                                     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 0.9% and 0.06%, respectively, at
December 31, 1998.

         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 developing startup 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 views the acquisition of Lakewood State Bank as an opportunistic
enhancement of its branching strategy. 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 "Supervision and Regulation."

         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-KSB.


                                       -1-


<PAGE>


OPERATING STRATEGY

         The Company's strategy as an independent, one-bank holding company has
been carried out through the operations of the Bank and, since 1994, its
branches. The Bank, since its acquisition by the Company in 1985, has emphasized
local relationship banking for the small and medium-sized business 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.

         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 developing and carrying
out the customer service program. The Bank's executive management team believes
that by providing all employees an open opportunity to communicate their ideas
to management, and, if appropriate, implementing them, it can refine and improve
the operation of the Bank. This employee involvement has led to two successful
customer service efforts: the "Officer Call" program and the "Customer
Compliment and Service Improvement" program. Under the Bank's Officer Call
Program, which was implemented in 1986, lending officers call on existing
customers and prospects on a regular basis. At these meetings, the officers seek
to develop a better understanding of the business issues faced by the customer,
and can discuss services which the Bank can provide to help them address their
needs. In the Customer Compliment and Service Improvement program, the Bank, by
including requests in mailings of monthly statements, and direct mail pieces,
solicits customer feedback on the Bank's customer service performance. Customers
are provided with a bank officer's name and phone number to ease the contact
process, and are encouraged to speak (or write) freely with respect to both
positive and negative aspects of the Bank's service. The Bank also surveys new
customers (or existing customers who have opened additional accounts) to check
on the level of service they received, and, secondarily, to solicit information
that might help the Bank cross-sell additional services. As in the past, the
Bank met with present and potential customers at various times during the year.
The purpose of the meetings was to receive input from the Bank's customer base
pertaining to the Bank's future direction as an organization, present level of
service and products, and customers' ideas and philosophies of serving small and
medium-sized businesses. In 1997, the Bank held its third Customer Business
Fair, at which approximately 62 Union Bank & Trust customers elected to display
their goods and services. Over 400 other Union Bank & Trust customers attended
the Fair to view the exhibits. In 1998, the Bank held a Speakers' Conference in
place of the Customer Business Fair and attracted over 450 attendees to this new
event.

         Management believes that its policy of employee involvement, which it
refers to as its "staff to management" philosophy, has resulted in the
relatively low turnover experienced by the Bank at all levels of employment.
Management believes that this enables the Bank to provide continuity of service
by the same staff members, leading to long-term customer relationships, high
quality service and quick response to


                                       -2-


<PAGE>


customer needs. The Bank also emphasizes continuing education and training
through formal in-house training programs and outside accredited programs.

         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 6 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."


GROWTH STRATEGY

         The Company has analyzed several potential bank acquisitions during the
past five years and until the acquisition of Lakewood State Bank, discussed
below, chose not to finalize such potential acquisitions due to the heightened
price expectations of sellers in the Colorado market which have been brought
about by the purchase of local banks by out-of-state and, in some cases,
in-state banking groups at historically high multiples of book value. The
Company intends to continue to analyze potential acquisitions in the Denver
metropolitan area, as well as other areas in Colorado, but will aggressively
pursue its branching strategy.

         The Company is focused on growth as an independent entity and has
adopted an aggressive internal growth strategy through establishing full-service
branches in locations in the Denver metropolitan area that will reach the 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 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. Each of these branches have been well-received by its respective
community. 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, 1998.


                                       -3-


<PAGE>


                                            December 31, 1998
                                     ----------------------------
                                       Deposits           Loans  
                                     -------------     ----------
                                         (Dollars in millions)

Main                                     $158.0         $ 86.8
Lakeside                                   25.5           10.7
University Hills                           19.2            7.2
Lakewood                                   17.3           13.9
Littleton                                   7.1            5.3
Golden                                      1.8            0.7
Lakewood State Bank                        42.8           22.6
                                        =======          ======
         Total                           $271.7         $147.2

         The Company acquired Lakewood State Bank in a cash-for-stock merger in
which the shareholders Lakewood State Bank received a total of $8.35 million in
cash and Lakewood State Bank was merged with and into the Bank. Management
believes that the operating philosophy of Lakewood State Bank is consistent with
the Bank's and that the combined bank will be able to operate effectively in the
Denver marketplace. With the addition of Lakewood State Bank's approximately $42
million in assets, the Bank had approximately $309 million in total assets at
December 31, 1998.

         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 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 large 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 recent strength in
the metropolitan Denver economy. The metropolitan Denver economy's strength is
believed to reflect its diversification from its prior dependence on the oil and
gas industry, with strong contributions from the manufacturing,
telecommunications and government sectors. Total employment, retail sales and
home sales have all been healthy in recent years, 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 small manufacturing and high
technology industries, has broadened the economic base of Colorado. Although the
Company anticipates continued economic growth in metropolitan Denver and in
Colorado, there can be no assurance that growth will continue at or near the
rates recently experienced.


                                       -4-


<PAGE>


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.

         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 fifteen years lending
experience and are committed to the lending profession. The loan officer staff
includes three 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.

<TABLE>
<CAPTION>
                                                                      December 31,
                           -------------------------------------------------------------------------------------------------
                                   1998                 1997              1996                  1995                1994
                           ------------------    ----------------   ------------------   -----------------   ---------------
                             Amount       %        Amount     %      Amount       %        Amount     %        Amount    %  
                           ----------  ------    --------  ------   --------   -------   --------  -------   -------- ------
                                                                  (Dollars in thousands)
<S>                        <C>         <C>       <C>       <C>      <C>        <C>      <C>       <C>       <C>       <C>   

Commercial loans.......... $  105,618    73.1    $ 87,929    72.1   $ 70,631     71.4   $ 54,488     68.2   $ 43,472    67.8
Real estate-                                                                                                              
    construction loans....     12,881     8.9       9,625     7.9      5,758      5.8      5,064      6.3      4,040     6.3
Real estate-                                                                                                              
    mortgage loans........      4,101     2.8       4,297     4.5      5,489      5.5      7,975     10.0     10,573    16.5
Consumer loans............     24,595    17.0      20,933    17.2     18,854     19.1     13,785     17.3      7,114    11.1
                           ----------  ------    --------  ------   --------   ------   --------  -------   --------  ------
         Total............    147,195   101.9     122,784   101.7    100,732    101.8     81,312    101.8     65,199   101.7
Less allowance for                                                                                                        
     loan losses..........    (2,678)   (1.9)     (2,125)   (1.7)    (1,754)    (1.8)    (1,448)    (1.8)    (1,071)   (1.7)
                           ----------  ------    --------  ------   --------   ------   --------  -------   --------  ------
Loans receivable, net..... $  144,517   100.0    $120,659   100.0   $ 98,978    100.0   $ 79,864    100.0   $ 64,128   100.0
                           ==========  ======    ========  ======   ========   ======   ========  =======   ========  ======
</TABLE>


         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 $105.6 million at December 31, 1998 compared to $87.9
million at December 31, 1997. Many of the Bank's commercial loans are extended
to small business customers.


                                       -5-


<PAGE>


These clients are composed of a variety of manufacturers, wholesalers,
retailers, commercial contractors and service companies. 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 financing to
builders who have demonstrated a favorable record of performance for the
construction of pre-sold homes as well as homes built without a specific buyer
on a selective basis.

         The Bank generally provides commercial construction financing when the
borrower has received a binding commitment for permanent financing from either
the Bank or another lender. The Bank uses this service to solicit new customers
and to maintain existing relationships. 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-certified
appraisers. The Bank's real estate construction loans outstanding were $12.9
million at December 31, 1998, compared to $9.6 million at December 31, 1997.
This increase is primarily attributable to the acquisition of Lakewood State
Bank.

         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 complete
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
or cost, whichever is lower. 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 or cost, whichever is
lower. These loans are guaranteed from 75% to 80% of the amount of the loan by
the Federal government.

         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.


                                       -6-


<PAGE>


During the years ended December 31, 1998, 1997, and 1996, the Bank earned
interest income on such loans of $144,000, $59,000, and $6,000, respectively.
During the years ended December 31, 1998, 1997, and 1996, the Bank purchased
loans in the amounts of $48.4 million, $5.8 million and $4.1 million and sold
loans in the amounts of $44.1 million, $4.5 million and $4.1 million. All loans
sold back to the mortgage company are without recourse to the Bank.

         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 President 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 $24.6 million and $20.9 million
at December 31, 1998 and 1997, respectively. Approximately $7.0 million of the
$24.6 million of consumer loans outstanding as of December 31, 1998 was
attributable to the acquisition of Lakewood State Bank. The branches 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. The Bank's relationship with AAA of Colorado ("AAA") was terminated by
AAA in July 1997. The national office of AAA elected to move all of the
individual states' relationships to a central banking relationship, which is
provided by a large bank in Pennsylvania. At December 31, 1998, the Bank had
approximately $1 million of loans from the previous AAA program representing a
decrease from approximately $3 million of AAA loans at December 31, 1997. The
amount of these loans will continue to decrease as the individual loans are paid
off.

         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 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, Jerrold B. Evans, two Branch Presidents, and the outside directors of
the Bank. A quorum of the committee is a minimum of four members.

         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 ($3.7 million at December 31, 1998).


                                       -7-


<PAGE>


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, 1998 and 1997
were $3,068,000 and $2,927,000, 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.


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.

<TABLE>
<CAPTION>
                                                                      December 31,
                                                  ---------------------------------------------------------
                                                     1998      1997         1996        1995       1994
                                                  ---------  ---------  ----------   ---------   ----------
                                                                  (Dollars in thousands)
<S>                                               <C>        <C>         <C>         <C>         <C>       
Past due 90 days or more........................  $     --   $     --    $      --    $     82   $    121
Nonaccrual loans................................        16         23           14         110        821
Restructured loans..............................        --         --           --          --         --
                                                  ---------  ---------   ----------   ---------  ----------
Total nonperforming loans.......................        16         23           14         192        942
Foreclosed assets held for sale.................       158         --           --          --         83
                                                  ---------  ---------   ----------   ---------  ----------
       Total nonperforming assets...............  $    174   $     23    $      14    $    192   $  1,025
                                                  =========  =========   ==========   =========  ==========
Ratio of total nonperforming assets to total                                                              
       assets...................................      0.06%      0.01%        0.01%       0.12%       0.70%
Ratio of total nonperforming loans to total                                                               
       loans....................................      0.12%      0.02%        0.01%       0.24%       1.40%
Ratio of allowance for loan losses to total     
       nonperforming loans......................   1539.08%   9239.13%    12528.57%     754.17%     113.70%
</TABLE>

         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,
1998, the Company had $16,000 of loans accounted for on a non-accrual basis
compared to $23,000 and $14,000 at December 31, 1997 and 1996, 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


                                       -8-


<PAGE>


when it is anticipated that no loss of original principal will occur. The
Company had no restructured loans at December 31, 1998, 1997 and 1996.

         Impaired loans, which include non-accrual 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 $2,380,000 and $73,000 at December 31, 1998
and 1997, respectively. An allowance for loan loss of $362,000 and $19,000
relates to impaired loans at December 31, 1998 and 1997, respectively. Interest
of $158,000 and $8,000 was recognized on average impaired loans of $1,612,000
and $98,000 for 1998 and 1997, respectively. No interest was recognized on a
cash basis on impaired loans during 1998 and 1997.

         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. At December 31, 1998 and 1997, the Company had foreclosed assets held for
sale of $158,000 and $0, respectively.


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, holding and disposal costs and costs of capital. 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.


                                       -9-

<PAGE>


         The following table sets forth information regarding changes in the
Company's allowance for loan losses for the periods indicated.

<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                                -----------------------------------------------
                                                  1998     1997      1996       1995     1994
                                                -------  --------  --------  --------  --------
                                                              (Dollars in thousands)
<S>                                             <C>      <C>       <C>       <C>       <C>     
Balance of allowance for loan losses at         
   beginning of period..........................$ 2,125  $  1,754  $  1,448  $  1,071  $  1,006
                                                -------  --------  --------  --------  --------

   Charge-offs:                                                                               
     Commercial loans.........................       69        13        17        93       133
     Real estate -- construction loans........       13        --        --        --        10
     Real estate -- mortgage loans............       --        --        --        --        --
     Consumer loans...........................        4        11        12        13        11
                                                -------  --------  --------  --------  --------
   Total charge-offs..........................       86        24        29       106       154
                                                -------  --------  --------  --------  --------

   Recoveries:                                                                                 
     Commercial loans.........................        5        35        50       360        21
     Real estate -- construction loans........       --        --        --        --        --
     Real estate -- mortgage loans............       --        --        --        --        --
     Consumer loans...........................        6        --        --         3         3
                                                -------   -------  --------  --------  --------
   Total recoveries...........................       11        35        50       363        24
                                                -------   -------  --------  --------  --------
   Net charge-offs (recoveries)...............       75       (11)      (21)     (257)      130
                                                -------   -------  --------  --------  --------
   Provisions for loan losses.................      278       360       285       120       195
                                                -------   -------  --------  --------  --------
   Additions to allowance for loan loss(1)....      350        --        --        --        --
                                                -------   -------  --------  --------  --------
Balance of allowance for loan losses at end
   of period.................................. $  2,678   $ 2,125  $  1,754  $  1,448  $  1,071
                                               ========   =======  ========  ========  ========
Ratio of net charge-offs (recoveries)                                                          
   to average loans...........................    0.06%    (0.01%)   (0.02%)   (0.35%)    0.22%
   Average loans outstanding during the         
     period................................... $127,262  $113,043  $ 91,586  $ 74,260  $ 58,967

----------------------

(1)  Additional allowance for loan loss resulting from acquisition of Lakewood
     State Bank.
</TABLE>


                                      -10-


<PAGE>


         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.

<TABLE>
<CAPTION>
                                                                      December 31,
                             ----------------------------------------------------------------------------------------
                                  1998              1997              1996              1995             1994
                             ----------------  ----------------  ----------------  ----------------  ----------------
                                     Loans in          Loans in          Loans in          Loans in          Loans in
                                     Category          Category          Category          Category          Category
                                     as a              as a              as a              as a              as a
                             Amount  Per-      Amount  Per-      Amount  Per-      Amount  Per-      Amount  Per-
                             of      centage   of      centage   of      centage   of      centage   of      centage
                             Allow-  of Gross  Allow-  of Gross  Allow-  of        Allow-  of Gross  Allow-  of Gross
                             ance    Loans     ance    Loans     ance    Loans     ance    Loans     ance    Loans
                             ------- -------   ------  -------   ------  -------   ------  -------   ------  -------
                                                                 (Dollars in Thousands)
<S>                          <C>     <C>       <C>     <C>       <C>     <C>       <C>     <C>       <C>      <C>  
Commercial loans............  $1,922   71.7%   $1,506    70.9%   $1,293    70.2%   $1,075    67.0%    $ 747    66.7%
Real estate -- construction                                                                                     
   loans...................      234    8.8%      165     7.7%       39     5.7%       48     6.2%       48     6.2%
Real estate -- mortgage                                                                                         
   loans...................       75    2.8%       95     4.5%      157     5.4%      164     9.8%      193    16.2%
Consumer loans.............      447   16.7%      359    16.9%      265    18.7%      161    17.0%       83    10.9%
                             ------- -------   ------  -------   ------  -------   ------  -------   ------  -------
   Total...................   $2,678  100.0%   $2,125   100.0%   $1,754   100.0%   $1,448   100.0%   $1,071   100.0%
                             ======= =======   ======  =======   ======  =======   ======  =======   ======  =======
</TABLE>


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 and Chief Operations Officer, its Executive Vice
President of Lending, its Senior Vice President of Finance, its Senior Vice
President of Information Systems, and the Branch Presidents, 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
1997, the Bank decreased the dollar duration of its portfolio as interest rates
remained relatively steady, and the investments which matured were replaced with
new investments with similar yield, but shorter maturities. In 1998, the Bank
modestly increased the dollar duration of its portfolio as interest rates
remained relatively steady through the first three quarters, then decreased
slightly in the fourth quarter, and the investments which matured were replaced
with new investments with slightly lower 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 1997. See "Item 6 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset/Liability
Management."


                                      -11-


<PAGE>


         The table below provides the amortized cost and fair value of the
Company's investment securities at each of the dates indicated.

<TABLE>
<CAPTION>
                                                                           December 31,
                                              --------------------------------------------------------------------
                                                       1998                   1997                   1996
                                              ----------------------  ---------------------  ---------------------
                                               Amortized              Amortized              Amortized            
                                                 Cost     Fair Value    Cost     Fair Value    Cost     Fair Value
                                              ----------  ----------  ---------  ----------  ---------  ----------
                                                                      (Dollars in Thousands)
<S>                                           <C>         <C>         <C>        <C>         <C>        <C>       
Held to Maturity:
     U.S. government agencies
       and corporations...................... $   21,591  $ 22,080    $  21,990  $ 22,371    $  18,638  $ 18,717
     Obligations of states and                                                                                
       political subdivisions................      5,878     6,340        5,939     6,310        5,996     6,253
                                              ----------  --------    ---------  --------    ---------  --------
                                                  27,469    28,420       27,929    28,681       24,634    24,970
                                              ----------  --------    ---------  --------    ---------  --------
Available for Sale:
     U.S. government agencies                                                                                 
       and corporations......................     54,438     54,704      12,804    12,781       14,227    14,244
     U.S. Treasury securities................      3,611      3,659       6,027     6,070        4,070     4,103
     Obligations of states and                                                                                
       political subdivisions................     18,482     19,231      16,981    17,330       20,384    20,799
     CMO/REMIC...............................         --         --          --        --           55        55
     Commercial Paper........................         --         --         999       999          703       703
                                              ----------  ---------   ---------  --------    ---------  --------

                                                  76,531     77,594      36,811    37,180       39,439    39,904
                                              ----------  ---------   ---------  --------    ---------  --------

     Total................................... $  104,000  $ 106,014   $  64,740  $ 65,861    $  64,073  $ 64,874
                                              ==========  =========   =========  ========    =========  ========
</TABLE>


         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:


                                                 December 31, 1998
                                           ----------------------------
                                              Amortized                
                                                 Cost       Fair Value
                                           ------------    ------------
                                              (Dollars in Thousands)

None..................................     $          0    $         0
                                           ------------    -----------

TOTAL.................................     $          0    $         0
                                           ============    ===========


                                      -12-


<PAGE>


         The following tables provide the carrying values, maturities and
weighted average yields of the Company's securities portfolio at the dates
indicated.

HELD-TO-MATURITY SECURITIES

<TABLE>
<CAPTION>
                                                                          December 31, 1998 (1)
                                                                          ---------------------
                                                                    Due
                                                                 after one       Due
                                                    Due in         year       after five
                                                     one          through       years
                                                   year or         five        through       Due after
                                                     less          years      ten years      ten years      Total
                                                  ---------     ----------   ----------    ------------   ----------
                                                                         (Dollars in Thousands)
<S>                                               <C>           <C>          <C>           <C>            <C>     
U.S. treasury securities:
     Balance...................................   $      --     $     --     $     --      $     --       $     --
     Weighted average yield....................       0.00%        0.00%        0.00%         0.00%          0.00%
U.S. government securities:
     Balance...................................          --           --        3,838            --          3,838
     Weighted average yield....................       0.00%        0.00%        6.35%         0.00%          6.35%
Agency Pools (2):
     Balance...................................         962        6,267        1,722         8,802         17,753
     Weighted average yield....................       8.55%        7.61%        7.94%         7.75%          7.76%
Municipal securities - nontaxable (3):
     Balance...................................          --          289        2,250         3,339          5,878
     Weighted average yield....................       0.00%        7.15%        5.83%         5.85%          5.90%
Municipal securities - taxable:
     Balance...................................          --           --           --            --             --
     Weighted average yield....................       0.00%        0.00%        0.00%         0.00%          0.00%
Total:
     Balance...................................   $     962     $  6,556     $  7,810      $ 12,141       $ 27,469
     Weighted average yield....................       8.55%        7.59%        6.55%         7.23%          7.17%
</TABLE>

----------------------------------


(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.


                                      -13-


<PAGE>


AVAILABLE-FOR-SALE SECURITIES

<TABLE>
<CAPTION>
                                                                          December 31, 1998 (1)
                                                                          ---------------------
                                                                    Due
                                                                 after one       Due
                                                    Due in         year       after five
                                                     one          through       years
                                                   year or         five        through       Due after
                                                     less          years      ten years      ten years      Total
                                                 ----------    ----------    ----------     ----------    ----------
                                                                         (Dollars in Thousands)
<S>                                               <C>          <C>           <C>            <C>           <C>     
U.S. treasury securities:
     Balance..................................   $    1,413    $    2,245    $       --     $       --    $    3,658
     Weighted average yield...................        5.48%         6.21%         0.00%          0.00%         6.00%
U.S. government securities:
     Balance..................................   $    6,169    $    7,732    $   13,110     $       --    $   27,011
     Weighted average yield...................        0.00%         5.57%         6.42%          0.00%         6.10%
Agency Pools (2):
     Balance..................................   $       --    $      184    $    2,702     $   24,811    $   27,697
     Weighted average yield...................        0.00%         8.00%         7.13%          7.53%         7.53%
Municipal securities - nontaxable (3):
     Balance..................................   $      691    $    4,422    $    6,644     $    5,456    $   17,213
     Weighted average yield...................        4.80%         5.35%         5.99%          5.79%         5.81%
Municipal securities - taxable:
     Balance..................................   $      272    $    1,557    $       --     $      186    $    2,015
     Weighted average yield...................        7.11%         7.05%         0.00%          7.87%         7.21%
Commercial paper:
     Balance..................................   $       --    $       --    $       --     $       --    $       --
     Weighted average yield...................        0.00%         0.00%         0.00%          0.00%         0.00%
Federal home loan bank stock:
     Balance..................................   $      988    $       --    $       --     $       --    $      988
     Weighted average yield...................        6.50%         0.00%         0.00%          0.00%         6.50%
Total:
     Balance..................................   $    9,533    $   16,140    $   22,456     $   30,453    $   78,582
     Weighted average yield...................        5.70%         5.77%         6.37%          7.22%         6.57%

</TABLE>

------------------------------------


(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.


                                      -14-


<PAGE>


         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 maintained the
same level of its investment in 1997 but modestly increased the size of its tax
exempt portfolio in 1998 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"). The Bank purchased $373,900 of dividend-bearing stock in the FHLB. In
1997 and 1998 the Bank increased its holdings of FHLB dividend-bearing stock to
$916,000 and $988,000, respectively. The FHLB provides the Bank with access to a
collateralized credit line of approximately $19.4 million, as well as a source
to sell excess federal funds.

         On January 14, 1997, the Bank borrowed $10 million from the FHLB in the
form of two $5 million loans. The purpose of securing these loans was primarily
to provide liquidity and allow the Bank to limit its capital exposure relative
to the Available for Sale portfolio. The first $5,000,000 enabled management to
reduce its current daily purchase of Federal Funds from approximately $8,000,000
to $3,000,000. With the remaining $5,000,000, the Bank purchased approximately
$5,000,000 in short-term U.S. Government securities, which were placed in the
Available for Sale portfolio. This allowed the Bank to transfer approximately
$5,000,000 in long-term GMNA mortgage pool securities with relatively high
coupon yields to Held to Maturity, which limits the Bank's capital exposure
should interest rates increase. The loans are structured as follows: $5,000,000
at 6.34%, maturing January 14, 1999; and $5,000,000 at 6.50%, maturing January
14, 2000. The loans cannot be prepaid without a prepayment penalty. Interest on
these notes is due monthly. The Company expects that maturities of securities
held in the Available for Sale portfolio will be adequate to fund repayment of
these loans. On January 14, 1999, the Bank paid the $5,000,000 which matured.

         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 ("CDs"), savings accounts, money market
accounts, checking and negotiable order of withdrawal 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


                                      -15-


<PAGE>


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, 1998.

         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.

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                            1998                   1997                    1996
                                                   --------------------  -----------------------   -------------------
                                                                          (Dollars in thousands)
                                                               Weighted                Weighted               Weighted
                                                               Average                 Average                Average
                                                     Average   Interest    Average     Interest     Average   Interest
                                                     Balance    Rate       Balance       Rate       Balance     Rate
                                                   ---------- ---------  -----------  ----------   ---------  --------
<S>                                                <C>          <C>      <C>              <C>      <C>          <C>   
Interest-bearing demand deposits.................  $  83,040    2.83%    $   72,494       2.89%    $ 73,722     2.98%
Certificates of deposit..........................     50,982    5.63%        32,195       5.40%      24,820     5.22%
Savings accounts.................................     11,932    2.51%        10,903       2.61%       9,313     2.64%
Noninterest-bearing demand deposits..............     59,648      N/A        49,438         N/A      43,042       N/A
                                                   --------- ---------   -----------  ----------   ---------  --------
          Total..................................  $ 205,602    3.57%    $  165,030       3.57%    $150,897     3.46%
                                                   ========= =========   ===========  ==========   =========  ========
</TABLE>


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

<TABLE>
<CAPTION>
                                                               December 31,
                                                            1998          1997
                                                       -----------   ------------
                                                            (Dollars in Thousands)
<S>                                                    <C>           <C>        
     CDs over $100,000 with remaining maturity
         Less than three months.....................   $   27,211    $    10,289
         Three to six months........................        3,872          3,156
         Over six months to one year................        2,616          2,513
         Over one year..............................       10,532          4,011
                                                       ----------    -----------
                  Total.............................   $   44,231    $    19,969
                                                       ==========    ===========
</TABLE>


COMPETITION

         The banking business in the greater Denver metropolitan area is highly
competitive. 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 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


                                      -16-


<PAGE>


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, 1998, the Company had approximately 140 full-time
equivalent 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.


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,


                                      -17-


<PAGE>


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.


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


                                      -18-


<PAGE>


Tier I Capital. At December 31, 1998, the Company's Tier I and Total Capital
ratios were 14.00% and 15.22%, 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, beginning on or before
January 1, 1998, 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 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, 1998, the Company's Tangible Tier I Capital
Leverage Ratio was 8.30%.

         Other Issues And Developments Relating To Regulatory Capital. Pursuant
to such authority and directives set forth in the International Lending
Supervision Act of 1983, 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, 1998, 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


                                      -19-


<PAGE>


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 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


                                      -20-


<PAGE>


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 serving the credit needs of the community in which it serves. The Company
and its subsidiaries have been deemed by regulators in the past to be adequately
serving its 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. The most important of such
measures include legislation designed to permit increased affiliations between
commercial and financial firms (including securities firms) and
federally-insured banks, reduce regulatory burdens on financial institutions,
and eliminate or revise the features of the specialized savings association
charter. 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.


DEPOSIT INSURANCE ASSESSMENTS

         The insured Bank is required to make quarterly deposit insurance
assessment payments to the Bank Insurance Fund ("BIF"), and most savings
associations to the Savings Associations Insurance Fund ("SAIF"), under a
risk-based assessment system established by the FDIC. (In addition, certain
banks must also pay deposit insurance assessments to the SAIF and certain
savings associations, to the BIF alone or to both funds; the Bank is responsible
for deposit insurance assessments to the BIF alone.) Under this system, each
institution's insurance assessment rate is determined by the risk assessment
classification into which it has been placed by the FDIC. The FDIC places each
insured institution in one of nine risk assessment classifications based upon
its level of capital and supervisory evaluations by its regulators: "well
capitalized," "adequately capitalized" or "less than adequately capitalized"
institutions, with each category of institution divided into subcategories of
institutions which are either "healthy," of "supervisory concern" or of


                                      -21-


<PAGE>


"substantial supervisory concern." Those institutions deemed weakest by the FDIC
are subject to the highest assessment rates; those deemed strongest are subject
to the lowest assessment rates. The FDIC establishes semi-annual assessment
rates with the objective of enabling the affected insurance fund to achieve or
maintain a statutorily-mandated target reserve ratio of 1.25% of insured
deposits. In establishing assessment rates, the FDIC Board of Directors is
required to consider (i) expected operating expenses, case resolution
expenditures and income of the FDIC; (ii) the effect of assessments upon
members' earnings and capital; and (iii) any other factors deemed appropriate by
it.

         Both BIF- and SAIF- assessable deposits are subject to an assessment
schedule providing for an assessment range of 0% to .27% (with intermediate
rates of .03%, .10%, .17%, and .24%, depending upon an institution's supervisory
risk group). Both BIF and SAIF assessment rates are subject to semi-annual
adjustment by the FDIC Board of Directors within a range of up to five basis
points without public comment. The FDIC Board of Directors also possesses
authority to impose special assessments from time to time.

         In addition to the payment of deposit insurance assessments, depository
institutions are required to make quarterly assessment payments to the FDIC on
both their BIF and SAIF assessable deposits which will be paid to the Financing
Corporation created pursuant to FIRREA to enable it to pay interest and certain
other expenses on bonds which it issued pursuant to FIRREA to facilitate the
resolution of failed savings associations. Pursuant to the Federal Home Loan
Bank Act, the Financing Corporation, with the approval of the FDIC Board of
Directors, establishes assessment rates based upon estimates of (i) expected
operating expenses, case resolution expenditures and income of the Financing
Corporation; (ii) the effect of assessments upon members' earnings and capital;
and (iii) any other factors deemed appropriate by it. Additionally, the
Financing Corporation is required to assess BIF-assessable deposits at a rate
one-fifth the rate applicable to SAIF-assessable deposits until the first to
occur of the merger of the BIF and SAIF funds or January 1, 2000. Assessment
rates for the first semi-annual period of 1997 have been set at 1.30 basis
points annually for BIF-assessable deposits and 6.48 basis points annually for
SAIF-assessable deposits.


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


                                      -22-


<PAGE>


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. 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 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 FDIC, and are subject to supervision and regulation by the
Federal Deposit Insurance Corporation 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 principal regulator 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 Federal Deposit Insurance Corporation 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.


                                      -23-


<PAGE>


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
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 re-invested 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 stronger than those in many
other regions of the country, we cannot


                                      -24-


<PAGE>


give any assurance that such conditions will continue to prevail. Moreover,
substantially all of the loans of the Company are to businesses and individuals
in the Denver area, and any 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-KSB
will continue or that negative trends or developments will not have a material
adverse effect on the Company. See "Item 6 - 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 in addition to the acquisition of Lakewood State
Bank, the Company in the future intends to review and solicit acquisition
opportunities and, at any given time, any 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. Interstate banking is permitted in
Colorado. As a result, management believes that the Company may experience
greater competition in its market area.

         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, 1998 the
Company had nonperforming loans of $174,000 and an allowance for loan losses of
$2,678,000 or 1.77% of total loans and 1539.08% 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. See 
"Item 6 - Management's Discussion and Analysis of Financial Condition and
Results of Operations."

         The Bank has established an allowance for loan losses in accordance
with generally accepted accounting principles. The Company believes that the
allowance is adequate. Nevertheless, future additions to the allowance in the
form of the provision for loan losses may be necessary due to changes in
economic conditions and growth of the Bank's loan portfolio. 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.


                                      -25-


<PAGE>


         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 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 52.02% 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 could include:

         o   prevailing economic conditions both nationally and in the Denver
             metropolitan market;


                                      -26-


<PAGE>


         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.

         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.

         Year 2000 Compliance. Some computer programs are written using two
digits rather than four to define the applicable year. As a result, those
compute programs have time-sensitive software that recognizes a date using "00"
as the year 1900 rather than 2000. This could cause a system failure or
miscalculation causing disruption of operation including, among other things, a
temporary inability to process transactions, pay invoices or engage in similar,
normal business activities.

         The Company has adopted and is implementing a Year 2000 Project
Management Plan in recognition of the potential problems that all computer
systems may have when the date January 1, 2000 arrives. The total Year 2000
project is not estimated to have a material impact on the Company's financial
position or the results of its operations. The Company estimates that its total
Year 2000 project cost will be approximately $500,000. These costs will be
expensed as incurred and approximately $375,000 in expenses has been incurred as
of December 31, 1998.

         The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to which the
Company is vulnerable to those third parties' failure to remediate their own
Year 2000 issue. The Company's total Year 2000 project cost and estimates for
completion include the estimated costs and time associated with the impact of a
third party's Year 2000 issue and are based on presently available information.
However, the Company cannot guarantee that the systems of other companies on
which the Company systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.

         The costs of the project are based on management's best estimates which
were derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, the ability to locate and correct
all relevant computer codes and similar uncertainties. Therefore, the company
cannot give any assurance that these estimates will be achieved and actual
results could differ materially from those anticipated. For further discussion
of Year 2000 compliance issues and the risks associated therewith see


                                      -27-


<PAGE>


"Item 6 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Impact of Year 2000" herein.


ITEM 2.  PROPERTIES

         The Bank leases space in a six-story office building in Denver,
Colorado, with approximately 21,279 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 and an employees' lounge. 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
$10.87 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 8,325 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 $13.74 per square foot, renewable on an annual
basis. The Bank leases this building at approximately $12.66 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 $12.94 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.

         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 will initially
occupy approximately 3,449 square feet; the Bank has plans to sublease a
remaining 1,708 square feet in the building, preferably on a short-term basis,
to accommodate future growth. The lease runs for a term of ten years from
February 4, 1998, renewable for two additional terms of five years. The


                                      -28-


<PAGE>


Bank leases this building at approximately $9.00 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 runs through July
31, 2001, renewable at the Bank's option for two additional terms of 8 years
each.  The Bank leases the building space at approximately $17.15 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 an 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 1998.


                                      -29-


<PAGE>


                                     PART II


ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Price Range of Common Stock


                                    1998                 1997
                              ----------------   ------------------
                                High     Low        High      Low
                              -------  ------    --------   -------
First Quarter                 $14.38   $11.75     $17.50    $15.25
Second Quarter                $16.00   $14.19     $17.25    $15.50
Third Quarter                 $15.63   $10.50     $28.75    $16.38
Fourth Quarter                $14.00   $10.50     $28.50    $22.63


                                                  1999
                                          ------------------
                                             High     Low
                                          --------  --------
First Quarter (to March 25, 1999)          $12.00    $9.75


         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, 1999, there were 101 shareholders of record and approximately 700
beneficial shareholders.

         On November 23, 1997, the NASDAQ-NMS and the Securities and Exchange
Commission approved changes to the listing and maintenance standards required to
be met for companies listed on the NASDAQ-NMS. In order to come into compliance
with the revised maintenance requirements, on May 27, 1998, the Company
completed a two-for-one split of its common stock in the form of a
share-for-share stock dividend.


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.


                                      -30-


<PAGE>


ITEM 6.  MANAGEMENT'S 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. The differences between the Company's financial
condition and results of operations and those of the Bank have historically
consisted primarily of the $10 million loan obtained by the Company upon the
acquisition of the Bank (the "Acquisition Loan"), the $6.9 million in 8.3%
convertible notes due 2003 (the "Convertible Notes") issued as part of the
Company's initial public offering in 1993 and principal and interest payments
thereon, the $4.0 million loan obtained in March 1996 in connection with the
redemption of the remaining Convertible Notes outstanding, and the amortization
of the values assigned to the Bank's core deposits and goodwill in the
acquisition of the Bank. In 1993, the Company began amortizing the remaining
goodwill relating to the acquisition at the rate of approximately $226,000 per
year through 2009.

         On March 1, 1996, the Company called the Convertible Notes for
redemption. The redemption on April 1, 1996 caused the Company to accelerate the
amortization of the debt issuance costs which were being amortized over a
ten-year period. On March 31, 1996, there was a write-off of the $473,000
balance of the debt issuance costs and the $65,000 call premium. The after-tax
effect of this transaction was a $337,000 non-cash charge to income in the first
quarter of 1996. This is reported as an extraordinary item in the Company's
financial statements.

         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.

         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, each of
the first three branches opened had an excess of income over direct costs.
Management expects the Littleton and Golden branches opened in 1998 to follow a
similar pattern.


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 interest-earning


                                      -31-


<PAGE>


assets and interest-bearing liabilities. During the fiscal years ended December
31, 1998, 1997 and 1996, average interest-earning assets were $218.4 million,
$181.5 million, and $157.5 million, respectively. During these same periods, net
interest margin, computed on a full tax equivalent basis, was 5.60%, 6.25% and
6.29%, respectively. See "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.


                                      -32-


<PAGE>

<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                ----------------------------------------------------------------------------------------------------
                                              1998                               1997                              1996
                                --------------------------------  --------------------------------   -------------------------------
                                             Interest   Average                Interest   Average                Interest   Average
                                  Average    earned or  yield or   Average     earned or  yield or    Average    earned or  yield or
                                balance (1)    paid       cost    balance (1)    paid       cost     balance (1)   paid      cost
                                -----------  ---------  --------  -----------  ---------  ---------  ----------- ---------  --------
                                                                       (Dollars in thousands)
<S>                             <C>          <C>        <C>       <C>          <C>        <C>        <C>         <C>        <C>     
ASSETS
Loans:
  Commercial Loans...........   $  90,585    $  8,878      9.80%  $  79,626    $  8,041     10.10%   $ 61,684    $ 6,359     10.31%
  Real estate mortgage.......       5,446         508      9.33%      4,892         465      9.51%      6,917        681      9.85%
  Real estate construction...      11,559       1,371     11.86%      8,251       1,050     12.73%      7,296        889     12.18%
  Consumer loans.............      19,672       1,828      9.29%     20,274       1,892      9.33%     15,689      1,475      9.40%
                                ---------    --------   --------  ---------    --------   --------   --------    -------    -------
    Total loans..............     127,262      12,585      9.89%    113,043      11,448     10.13%     91,586      9,404     10.27%
Allowance for loan loss......      (2,250)                           (1,934)                           (1,569)
Securities:
  U.S. Government............      52,160       3,121      5.98%     41,479       2,887      6.96%     33,222      2,215      6.67%
  Municipal -- nontaxable....      21,418       1,879      8.77%     17,250       1,479      8.58%     21,065      1,753      8.34%
  Municipal -- taxable.......       2,547         173      6.79%      5,561         416      7.48%      8,337        571      6.85%
                                ---------    --------   --------  ---------    --------      -----   --------    --------   -------
    Total securities.........      76,125       5,173      6.80%     64,290       4,782      7.44%     62,624      4,539      7.25%
Interest-bearing deposits
in other banks...............          --          --      0.00%         --          --      0.00%         --         --      0.00%
Federal funds sold...........      15,012         796      5.30%      4,134         226      5.47%      3,259        177      5.34%
                                ---------    --------   --------  ---------    --------      -----   --------    -------    -------
    Total interest-earning
      assets.................     218,399      18,554      8.50%    181,467      16,456      9.07%    157,469     14,120      8.97%
                                             --------                          --------                          -------           
Noninterest-earning assets:
  Excess of investment in
    subsidiary over net
    assets acquired..........       2,770                             2,841                             3,067                      
  Other assets...............      19,921                            15,138                            14,345                      
                                ---------                         ---------                          --------                      
    Total noninterest-earning
      assets.................      22,691                            17,979                            17,412                      
                                ---------                         ---------                          --------                      
    Total assets.............   $ 238,840                         $ 197,512                          $173,312                      
                                =========                         =========                          ========                      
</TABLE>


                                      -33-


<PAGE>

<TABLE>
<CAPTION>
                                              1998                               1997                              1996
                                --------------------------------  --------------------------------   -------------------------------
                                  Average    Interest   Average    Average     Interest   Average     Average    Interest   Average
                                balance (1)  earned or  yield or  balance (1)  earned or  yield or   balance (1) earned or  yield or
                                               paid       cost                   paid       cost                   paid      cost
                                -----------  ---------  --------  -----------  ---------  ---------  ----------- ---------  --------
                                                                        (Dollars in thousands)
<S>                             <C>          <C>        <C>       <C>          <C>        <C>        <C>         <C>        <C>     
LIABILITIES AND
STOCKHOLDERS' EQUITY
Liabilities:
  Interest-bearing demand
    accounts.................   $  83,040    $  2,350     2.83%   $  72,494    $  2,096      2.89%   $ 73,722    $ 2,195       2.98%
  Certificates of deposit....      50,982       2,869     5.63%      32,195       1,740      5.40%     24,820      1,295       5.22%
  Savings accounts...........      11,932         300     2.51%      10,903         285      2.61%      9,313        246       2.64%
                                ---------    --------   -------   ---------    --------   --------   --------    -------    --------
    Total interest-bearing
      accounts...............     145,954       5,519     3.78%     115,592       4,121      3.57%    107,855      3,736       3.46%
  Notes payable..............      11,469         799     6.97%      12,825         887      6.92%      4,602        385       8.34%
  Federal funds purchased....          32           2     6.25%       1,943         110      5.66%      1,991         91       4.57%
                                ---------    --------   -------   ---------    --------   --------   --------    -------    --------
    Total interest-bearing
      liabilities............     157,455       6,320     4.01%     130,360       5,118      3.93%    114,448      4,212       3.68%
Noninterest-bearing demand
  accounts...................      59,648                            49,438                            43,042
                                ---------                         ---------                          --------
    Total deposits and 
      interest-bearing
      liabilities............     217,103                           179,798                           157,490
Other noninterest-bearing
  liabilities................       2,532                               865                               745
                                ---------                         ---------                          --------
    Total liabilities........     219,635                           180,663                           158,235
Stockholders' equity.........      19,205                            16,849                            15,077
                                ---------                         ---------                          --------
     Total liabilities and
       stockholders' equity..   $ 238,840                         $ 197,512                          $173,312
                                =========                         =========                          ========
Net interest income..........                $ 12,234                          $ 11,338                          $ 9,908
                                             ========                          ========                          =======
Net interest spread..........                             4.49%                              5.14%                             5.29%
                                                        =======                           ========                          ========
Net interest margin..........                             5.60%                              6.25%                             6.29%
                                                        =======                           ========                          ========
Ratio of average interest-
    earning assets to average
    total deposits and 
    interest-bearing
    liabilities..............                           100.60%                            100.93%                            99.99%
                                                        =======                           ========                          ========
Return on average assets.....                             0.69%                              1.08%                             0.91%
                                                        =======                           ========                          ========
Return on average equity.....                             8.52%                             12.68%                            10.44%
                                                        =======                           ========                          ========
Dividend payout ratio........                             0.00%                              0.00%                             0.00%
                                                        =======                           ========                          ========
Ratio of average equity to
  average assets.............                             8.04%                              8.53%                             8.70%
                                                        =======                           ========                          ========
</TABLE>

(1) Average balances are based on daily averages and include nonaccrual loans.
    Loan fees are included in interest income as follows: 1998 -- $560,000;
    1997 -- $602,000; 1996 -- $589,000.


                                      -34-


<PAGE>


         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.

<TABLE>
<CAPTION>
                                               Year Ended December 31, 1998       Year Ended December 31, 1997
                                                            vs.                                vs.
                                               Year Ended December 31, 1997       Year Ended December 31, 1996
                                                    Increase (decrease)               Increase (decrease)
                                                  in net interest income            in net interest income
                                                -----------------------------     --------   -------------------
                                                 Volume      Rate      Total       Volume      Rate      Total
                                                --------   -------   --------     --------   -------   ---------
                                                                    (Dollars in Thousands)
<S>                                             <C>        <C>       <C>          <C>        <C>       <C>     
INTEREST-EARNING ASSETS
Loans:
  Commercial Loans............................  $ 1,107     $(270)   $   837      $  1,849   $ (167)   $ 1,682
  Real estate -- mortgage.....................       53       (10)        43          (199)     (17)      (216)
  Real estate -- construction.................      421      (100)       321           116       45        161
  Consumer loans..............................      (56)       (8)       (64)          431      (14)       417
                                                -------    ------    -------      --------   ------    -------
    Total loans...............................    1,525      (388)     1,137         2,197     (153)     2,044
Securities:
  U.S. government securities..................      743      (509)       234           551      121        672
  Municipal -- nontaxable.....................      357        43        400          (315)      42       (273)
  Municipal -- taxable........................     (225)      (18)      (243)         (190)      35       (155)
                                                -------    ------    -------      --------    -----    -------
    Total securities..........................      875      (484)       391            46      198        244

Interest-bearing deposits at other banks......       --        --         --            --       --         --
Federal funds sold............................      595       (25)       570            43        6         49
                                                -------    ------    -------      --------    -----    -------
    Total interest-earning assets.............    2,995      (897)     2,098         2,286       51      2,337
                                                -------    ------    -------      --------    -----    -------

INTEREST-BEARING LIABILITIES                                                                          
Deposits:
  Interest-bearing demand deposits............      305       (51)       254           (37)     (61)       (98)
  Certificates of deposit.....................    1,015       114      1,129           385       60        445
  Savings deposits............................       27       (12)        15            42       (3)        39
                                                -------    ------    -------      --------    -----    -------
    Total interest-bearing accounts...........    1,347        51      1,398           390       (4)       386

Notes payable.................................      (94)        6        (88)          686     (184)       502
Federal funds purchased.......................     (108)        0       (108)           (2)      21         19
                                                -------    ------    -------      --------    -----    -------
    Total interest-bearing liabilities........    1,145        57      1,202         1,074      (67)       907
                                                -------    ------    -------      --------    -----    -------
    Total increase (decrease) in net            
      interest income.........................  $ 1,850    $ (954)   $   896      $  1,212    $ 218    $ 1,430
                                                =======    ======    =======      ========    =====    =======
</TABLE>
------------------------
(1) This table is calculated on a full tax-equivalent basis.


                                      -35-


<PAGE>


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 20 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 uses 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 $77,594,000 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.

         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. 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.


                                      -36-


<PAGE>


         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 anticipates that the Federal Reserve Board will not encourage
any substantial change in interest rates in 1999. As of December 31, 1998, the
dollar duration of the investment portfolio was 3.50 compared to 3.20 at
December 31, 1997. The increase in dollar duration during 1998 reflects
Management's replacement of investments which matured with investments that had
slightly lower yields and longer maturities, which lower yields and long
maturities were due to stable interest rates in the first three quarters of 1998
and slightly lower rates in the fourth quarter of 1998. The decision resulted in
increasing the dollar duration of the portfolio, and decreasing the gross yield
on the portfolio from 7.44% to 6.80%. 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 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-


<PAGE>


         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, 1998. 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-KSB 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.

<TABLE>
<CAPTION>
                                                                       December 31, 1998
                                                                 Estimated maturity of repricing
                                                  --------------------------------------------------------------
                                                   Less than     Three      One year                            
                                                     three     months to     to five    Over five               
                                                     months     one year     years       years           Total
                                                  ----------  ----------   ----------   ----------    ----------
<S>                                               <C>         <C>          <C>          <C>           <C>       
Interest-earnings assets:
  Fixed rate loans..............................  $   8,859   $  13,368    $  19,547    $  19,064     $  60,838
  Floating rate loans...........................     86,291       1,987          349        2,016        90,643
  Investment securities.........................      7,233      15,025       36,505       46,300       105,063
  FHLB stock....................................        988          --           --           --           988
  Federal funds sold............................     26,505          --           --           --        26,505
                                                  ----------  ----------   ----------   ----------    ----------
    Total interest-earning assets...............    129,876      30,380       56,401       67,380       284,037
                                                  ----------  ----------   ----------   ----------    ----------

Interest-bearing liabilities:
  Interest-bearing demand deposits..............     25,852          --           --           --        25,852
  Money market deposits.........................     65,453          --           --           --        65,453
  Certificates of deposits under $100,000.......      6,293      10,677       11,347        9,804        38,121
  Certificates of deposits over $100,000........     27,211       7,244        7,199        3,333        44,987
  Savings deposits..............................     19,221          --           --           --        19,221
  Notes payable.................................      5,000          --        5,000       10,304        20,304
  Federal funds purchased.......................         --          --           --           --            --
                                                  ----------  ----------   ----------   ----------    ----------
    Total interest-bearing liabilities..........    149,030      17,921       23,546       23,441       213,938
                                                  ----------  ----------   ----------   ----------    ----------

Interest rate gap...............................  $ (19,154)  $  12,459    $  32,855   $  43,939     
                                                  ==========  ==========   ==========  ==========
Cumulative interest rate gap....................  $ (19,154)  $  (6,695)   $  26,160   $  70,099      $  70,099
                                                  ==========  ==========   ==========  ==========     ==========
Cumulative interest rate gap to
  total assets..................................     (6.08)%     (2.12)%        8.30%      22.24%               
                                                  ==========  ==========   ==========  ==========               
Total consolidated assets.......................  $ 314,577
                                                  ==========
</TABLE>


                                      -38-


<PAGE>


         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. Management estimates that
approximately $16 million of loans maturing during the year ending December 31,
1999 will actually be paid off in cash during that period.

<TABLE>
<CAPTION>

                                                              December 31, 1998
                                                  -----------------------------------------------
                                                   Less than  One year to   Over five            
                                                    one year  five years    years         Total
                                                  ----------  -----------  ----------   ---------
<S>                                               <C>         <C>          <C>          <C>     
Commercial Loans................................  $  78,710   $  12,942    $  13,967    $105,619
Real estate -- construction loans...............     12,881          --           --      12,881
Real estate -- mortgage loans...................      6,480         575        1,331       8,836
Consumer loans..................................     12,434       6,379        5,782      24,595
                                                  ----------  ----------   ----------   ---------
         Total..................................  $ 110,505   $  19,896    $  21,080    $151,481
                                                  ==========  ==========   ==========   =========

Fixed rate loans................................              $  19,547    $  19,064
Floating rate loans.............................                    349        2,016
                                                              ----------   ----------
         Total..................................              $  19,896    $  21,080
                                                              ==========   ==========
</TABLE>


RESULTS OF OPERATIONS

Years ended December 31, 1998 and 1997

         Overview. Net income decreased $499,000 for 1998 to $1,637,000 from
$2,136,000. This decrease was primarily as a result of a $1,814,000 increase in
noninterest expense, which was partially offset by a $755,000 increase in net
interest income, an $82,000 decrease in provision for loan loss and a $474,000
decrease in income tax expense. Return on average assets and return on average
equity were .69% and 8.52%, respectively, for 1998 compared to 1.08% and 12.68%,
respectively, for 1997.

         Interest Income. Interest income increased $1,957,000 to $17,917,000
for 1998 from $15,960,000 for 1997. In 1998, interest income from loans
increased $1,137,000, interest income on securities increased $250,000 and
interest income on federal funds sold increased $570,000. The increase in
interest income from loans was primarily a result of an increase in consumer
loans made by the Bank bearing slightly higher interest rates. The increases in
interest income on securities and interest income on federal funds sold were
primarily a result of the investment by the Bank of excess customer deposits.

         Interest Expense. Interest expense increased $1,202,000 to $6,320,000
for 1998 from $5,118,000 in 1997. Interest expense on interest-bearing deposits
increased $1,398,000, interest expense on federal funds purchased decreased
$108,000, and interest expense on notes payable decreased $88,000 in 1998. The
increase in interest expense on interest-bearing deposits was primarily due to
greater deposit volume in 1998. The rates paid on interest bearing deposits was
relatively unchanged between 1997 and 1998. The decrease in interest expense on
notes payable was due to the $2.0 million reduction of the NationsBank note.

         Net Interest Income. Net interest income increased $755,000 to
$11,597,000 for 1998 from $10,842,000 for 1997. During 1998 average loans
outstanding increased $14,219,000, average securities owned increased
$11,835,000, average federal funds sold increased $10,878,000 and the net
interest spread decreased from 5.14% for 1997 to 4.49% for 1998. The increase in
net interest income resulted primarily


                                      -39-


<PAGE>


from the increase in the volume of interest earning assets, partially offset by
the increase in the volume of interest-bearing deposits.

         Noninterest Income.  Noninterest income increased $4,000 to $962,000
for 1998 from $958,000 for 1997.

         Noninterest Expense. Noninterest expense increased $1,814,000 to
$10,267,000 for 1998 from $8,453,000 for 1997. This increase is a result of the
following factors: (i) salary/benefit expense increased $834,000 primarily due
to increased staffing (at the Bank and the six branches) and yearly salary
increases; (ii) occupancy and equipment expense increased $305,000 primarily due
to the opening of two new branches and Year 2000 equipment expenses; and (iii)
other operating expenses increased $669,000 primarily as a result of higher
costs associated with the opening of two new branches and acquiring Lakewood
State Bank.


PROVISION FOR LOAN LOSSES

         The Company's provisions for loan losses in the years ended 
December 31, 1998, 1997 and 1996 were $278,000, $360,000, and $285,000,
respectively. See "Item 1 - Business - Analysis of Allowance for Loan Losses."


INCOME TAXES

         The Company's income tax expense for the years ended December 31, 1998,
1997 and 1996 was $377,000, $851,000, and $339,000 (which is net of the $201,000
tax effect of the extraordinary item), 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, 1998, deposits
increased to $271,650,000 from $190,076,000 and $156,409,000 at December 31,
1997 and 1996, respectively. None of the deposits at December 31, 1998, 1997 or
1996 were brokered deposits. Management believes that the increases in deposits
in 1997 and 1998 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, 1998, net loans were
$144,517,000 compared to $120,659,000 and $98,978,000 at December 31, 1997 and
1996, respectively. The Company's Acquisition Loan was renewed on January 1,
1993, and was paid off on March 17, 1993 with the proceeds from the sale of
Convertible Notes in the Offering. The Convertible Notes required semi-annual
interest only payments, with no principal due until maturity at March 17, 2003.
On March 1, 1996, the Company exercised the optional redemption provision of the
Convertible Notes. On the redemption date, April 1, 1996, the Company paid 101%
of the principal amount of each Convertible Note redeemed, plus


                                      -40-


<PAGE>


accrued and unpaid interest. Prior to 5:00 p.m. on the redemption date holders
of the Convertible Notes had the right to convert the Convertible Notes into the
Company's common stock at a rate of 78.68 shares for each $1,000 principal
amount of Convertible Notes (a conversion price of $12.71 per share). There were
$6,512,000 in principal amount of Convertible Notes outstanding and all except
$26,000 were tendered for redemption. The Company entered into a loan agreement
(the "Loan Agreement") with NationsBank, formerly Boatmen's First National Bank
of Kansas City ("Boatmen's"), to borrow up to $4,000,000 to fund the redemption.
The remainder of the funds needed to pay off the Convertible Notes was taken
from the investments which the Company held in its available for sale portfolio.

         In December 1998, Union Bankshares Capital Trust I, a newly formed
Delaware business trust completed the sale of $10.3 million of 9% Cumulative
Trust Preferred Securities, guaranteed on a subordinated basis by the Company.
The Company contributed $7 million of the proceeds of the offering to the Bank
to finance the acquisition of Lakewood State Bank. The remainder of the proceeds
was used for general corporate purposes, including the payoff of all outstanding
amounts to NationsBank under the Loan Agreement. The Company also terminated the
revolving line of credit it maintained with NationsBank.

         The Company has successfully negotiated with Exchange National Bank for
a revolving line of credit in an amount not to exceed $3,000,000. Any monies
advanced under this line would be used solely for capital needs of the Company
or to purchase the stock of banks or bank holding companies. This line of credit
would be 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 would be 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

         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


                                      -41-


<PAGE>


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 $20,344,000 at
December 31, 1998 from $18,222,000 at December 31, 1997. This increase is a
result of an increase in retained earnings of $1,676,000 relating to 1998 net
income and income tax benefit from employee stock option exercises, an increase
in common stock surplus of $24,000 relating to issuance of stock to the outside
Directors in lieu of their annual retainer and $32,000 relating to the exercise
of stock options, and an increase in unrealized gains on investment securities
available for sale of $390,000. At December 31, 1998, stockholders' equity was
6.5% of total assets, compared to 8.2% of total assets at December 31, 1997.
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 5% 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, 1998.

<TABLE>
<CAPTION>
                                                                    December 31, 1998
                                                                 -------------------------
                                                                   (Dollars in thousands) 
<S>                                                              <C>                      
Company
     Tier I Capital.........................................       $    23,357
     Total Capital..........................................            25,387
     Risk-Weighted..........................................           166,837
     Tier I Capital to Risk-Weighted Assets.................            14.00%
     Total Capital to Risk-Weighted Assets..................            15.22%
     Leverage Ratio.........................................             8.30%

Bank
     Tier I Capital.........................................       $    17,752
     Total Capital..........................................            19,860
     Risk-Weighted Assets...................................           168,046
     Tier I Capital to Risk-Weighted Assets.................            10.56%
     Total Capital to Risk-Weighted Assets..................            11.82%
     Leverage Ratio.........................................             6.79%
</TABLE>

         Bank management is anticipating 1999 capital expenditures of
approximately $750,000 in connection with updating its internal operating
systems and expenditures of approximately $170,000 for the conversion of the
Lakewood State Bank internal operating system. The Bank intends to use part of
its anticipated income in 1999 to finance these expenditures.


                                      -42-


<PAGE>


         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.


IMPACT OF YEAR 2000

         Some computer programs are written using two digits rather than four to
define the applicable year. As a result, those computer programs have
time-sensitive software that recognizes a date using "00" as the year 1900
rather than 2000. This could cause a system failure or miscalculation causing
disruption of operation including, among other things, a temporary inability to
process transactions, pay invoices or engage in similar, normal business
activities.

         In February 1998, the Company adopted a Year 2000 Project Management
Plan in recognition of the potential problems that all computer systems may have
when the date January 1, 2000 arrives. As part of the implementation of this
plan, in April 1998, the Company completed an assessment to determine whether it
would have to modify or replace portions of its hardware and software so that
its computer systems will function properly with respect to dates in the year
2000 and thereafter. By June 1998, the Company had completed all required
renovations of its critical internal information technology ("IT") systems and
by March 1999, had completed compliance testing of such systems. All critical IT
and non-IT systems have tested Year 2000 compliant. Testing is continuing on
non-critical systems and all reasonable steps required to achieve compliance of
such systems will be taken. The steps remaining in the total Year 2000 project
are not estimated to have a material impact on the Company's financial position
or the results of its operations. The Company estimates that its total Year 2000
project cost will be approximately $500,000. These costs will be expensed as
incurred and approximately $375,000 has been incurred as of December 31, 1998.

         The Company has initiated formal communications with all of its
significant suppliers and large customers and is continuing its assessment of
the extent to which the Company is vulnerable to those third parties' failure to
remediate their own Year 2000 issues. The Company's total Year 2000 project cost
and estimates for completion include the estimated costs and time associated
with the impact of a third party's Year 2000 issue and are based on presently
available information. However, there can be no guarantee that the systems of
other companies on which the Company's systems rely will be timely converted, or
that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.


                                      -43-


<PAGE>


         The Company has adopted a contingency plan in the event that third
parties significant to the Company are not timely Year 2000 compliant. The
Company has determined that the most reasonably likely worst-case scenario would
include power and communications failures. Under the contingency plan, the
Company believes that it could carry out its core-business activities for an
indefinite period in such an event. The Company's plan also addresses
contingencies related to liquidity and currency demands which may arise.

         The costs of the project and the date on which the Company believes it
will complete the Year 2000 modifications are based on management's best
estimates which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, the ability to locate
and correct all relevant computer codes and similar uncertainties. Therefore,
there can be no assurance that these estimates will be achieved and actual
results could differ materially from those anticipated.


NEW ACCOUNTING PRINCIPLES

         The Financial Accounting Standards Board recently issued Statement No.
130 (Statement No. 130), "Reporting Comprehensive Income." Statement No. 130,
which became effective for periods beginning after December 31, 1997,
establishes standards for reporting and display of comprehensive income. This
statement required that all items that are to be recognized under accounting
standard as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.

         The Financial Accounting Standards Board recently issued Statement No.
131 (Statement No. 131), "Disclosures about Segments of an Enterprise and
Related Information." Statement No. 131, which became effective for periods
beginning after December 15, 1997, requires that business enterprises report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of Statement No. 131 had no
significant impact on the company's financial statements.

         The Financial Accounting Standards Board recently issued Statement
No. 133 (Statement No. 33) "Accounting for Derivative Instruments and Hedging
Activities." Statement No. 133, which becomes effective for periods beginning
after June 15, 1999, requires that business enterprises recognize all derivative
instruments either as assets or liabilities in the financial statements and
record those instruments at fair value. Changes in fair value of these
derivatives is recognized in the statement of comprehensive income in the period
of change. Management has not determined the impact on the Company's financial
position and results of operations of adopting Statement No. 133.


"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: management's ability
to integrate the operations of Lakewood State Bank, 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.


                                      -44-


<PAGE>


         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 From 10-KSB 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 7.  FINANCIAL STATEMENTS

         See Index to Financial Statements appearing in Item 13 on Page 47.


ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
         FINANCIAL DISCLOSURE

         None.


                                      -45-


<PAGE>


                                    PART III


ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

         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 1999
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 1999.


ITEM 10. 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 1999
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 1999.


ITEM 11. 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 1999
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 1999.


ITEM 12. 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 1999
Annual Meeting of Shareholders, to be filed with the Securities and Exchange
Commission not later than April 30, 1999.


                                      -46-


<PAGE>


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

<TABLE>
<CAPTION>
(a)      Index to Financial Statements

                                                                                 Page Reference
                                                                                 --------------
<S>                                                                              <C>           
         Reports of Independent Accountants                                         F-1
         Consolidated Balance Sheets at December 31, 1998 and 1997                  F-2
         Consolidated Statements of Income for the Years Ended
             December 31, 1998, 1997 and 1996                                       F-4
         Consolidated Statements of Comprehensive Income for the
             Years Ended December 31, 1998, 1997 and 1996                           F-6
         Consolidated Statements of Changes in Stockholders' Equity for the
             Years Ended December 31, 1998, 1997 and 1996                           F-7
         Consolidated Statements of Cash Flows for the Years Ended
             December 31, 1998, 1997 and 1996                                       F-9
         Notes to Consolidated Financial Statements                                 F-11

         Exhibits

             See Exhibit Index on Page E-1 of this Form 10-KSB.

(b)      Reports on Form 8-K

             Form 8-K filed on September 2, 1998.  Items 5 and 7 reported.
             Form 8-K filed on December 21, 1998.  Items 5 and 7 reported.
</TABLE>


                                      -47-


<PAGE>


                             UNION BANKSHARES, LTD.

                         Independent Accountants' Report
                      and Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


<PAGE>


                             UNION BANKSHARES, LTD.


                        DECEMBER 31, 1998, 1997 AND 1996


                                TABLE OF CONTENTS



                                                                           PAGE

INDEPENDENT ACCOUNTANTS' REPORT.............................................F-1


CONSOLIDATED FINANCIAL STATEMENTS
  Balance Sheets............................................................F-2
  Statements of Income......................................................F-4
  Statements of Comprehensive Income........................................F-6
  Statements of Stockholders' Equity........................................F-7
  Statements of Cash Flows..................................................F-9
  Notes to Financial Statements............................................F-11


<PAGE>


                         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, 1998 and 1997, 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, 1998. 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 generally accepted auditing
standards. 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 1998 and 1997 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
UNION BANKSHARES, LTD. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

    As described in Note 1, in 1997, the Company retroactively changed its
method of computing earnings per share to adopt the provisions of Financial
Accounting Standards Board Statement No. 128.



                                             /s/ Baird, Kurtz & Dobson

                                             BAIRD, KURTZ & DOBSON


Denver, Colorado
January 20, 1999


                                      F-1


<PAGE>


                             UNION BANKSHARES, LTD.

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 1998 AND 1997



<TABLE>
<CAPTION>
                                     ASSETS

                                                                 1998            1997
                                                              ------------    ------------
<S>                                                          <C>             <C>          

Cash and due from banks                                      $  18,914,000   $  15,314,000
Federal funds sold                                              26,505,000      11,400,000
                                                              ------------    -------------
              Total Cash and Cash Equivalents                   45,419,000      26,714,000

Held-to-maturity securities                                     27,469,000      27,929,000

Available-for-sale securities                                   77,594,000      37,180,000

Other investments                                                  988,000         916,000

Loans, net                                                     144,517,000     120,659,000

Mortgage loans held for sale                                     4,285,000       1,253,000

Excess of cost over fair value of net assets acquired,
  net of amortization                                            7,169,000       2,720,000

Premises and equipment                                           3,276,000       1,378,000

Accrued interest receivable                                      1,542,000       1,353,000

Other assets                                                     2,318,000       1,403,000
                                                              ------------    ------------







              Total Assets                                   $ 314,577,000   $ 221,505,000
                                                              ============    ============
</TABLE>

See Notes to Consolidated Financial Statements


                                       F-2


<PAGE>





<TABLE>
<CAPTION>
                      LIABILITIES AND STOCKHOLDERS' EQUITY

                                                                 1998            1997     
                                                              ------------    ------------
<S>                                                          <C>             <C>          
LIABILITIES
  Deposits:
    Demand                                                   $  78,017,000   $  57,565,000
    NOW                                                         25,852,000      18,914,000
    Money Market                                                65,452,000      65,074,000
    Savings                                                     19,221,000      10,798,000
    Time                                                        83,108,000      37,725,000
                                                              ------------    ------------
              Total Deposits                                   271,650,000     190,076,000

  Notes payable                                                 10,000,000      12,000,000
  Guaranteed Preferred Beneficial Interests in
    Company's Debentures                                        10,304,000               -
  Federal funds purchased                                                -               -
  Accrued interest payable                                         471,000         187,000
  Other liabilities                                              1,808,000       1,020,000
                                                              ------------    ------------
              Total Liabilities                                294,233,000     203,283,000
                                                              ------------    ------------

STOCKHOLDERS' EQUITY
  Preferred stock, $.001 par value; authorized
    1,355,790 shares; issued and outstanding -0- shares                  -               -
  Common stock, $.001 par value; authorized
    10,000,000 shares; issued and outstanding
    1998 - 2,342,014 shares; 1997 - 2,332,014 shares                 2,000           2,000
  Additional paid-in capital                                     9,678,000       9,583,000
  Retained earnings                                             10,021,000       8,384,000
  Accumulated other comprehensive income:
    Unrealized appreciation on available-for-sale
      securities, net of applicable income taxes of
      $365,000 and $116,000 in 1998 and 1997, respectively         643,000         253,000
                                                              ------------    ------------
              Total Stockholders' Equity                        20,344,000      18,222,000
                                                              ------------    ------------

              Total Liabilities and Stockholders' Equity     $ 314,577,000   $ 221,505,000
                                                              ============    ============
</TABLE>

See Notes to Consolidated Financial Statements


                                       F-3


<PAGE>


<TABLE>
<CAPTION>
                             UNION BANKSHARES, LTD.

                        CONSOLIDATED STATEMENTS OF INCOME

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                                     1998             1997           1996     
                                                  ------------    ------------    ------------
<S>                                              <C>             <C>             <C>          
INTEREST INCOME
  Interest and fees on loans                     $  12,585,000   $  11,448,000   $   9,404,000
  Interest on investment securities:
    U.S. government agencies and corporations        3,121,000       2,887,000       2,215,000
    State and other political subdivisions           1,415,000       1,399,000       1,730,000
    Interest on federal funds sold and
      interest-bearing deposits in other banks         796,000         226,000         177,000
                                                  ------------    ------------    ------------
              Total interest income                 17,917,000      15,960,000      13,526,000
                                                  ------------    ------------    ------------

INTEREST EXPENSE
  Deposits                                           5,519,000       4,121,000       3,736,000
  Federal funds purchased                                2,000         110,000          91,000
  Notes payable                                        799,000         887,000         385,000
                                                  ------------    ------------    ------------
              Total interest expense                 6,320,000       5,118,000       4,212,000
                                                  ------------    ------------    ------------

NET INTEREST INCOME                                 11,597,000      10,842,000       9,314,000

PROVISION FOR LOAN LOSSES                              278,000         360,000         285,000
                                                  ------------    ------------    ------------

NET INTEREST INCOME AFTER
  PROVISION FOR LOAN LOSSES                         11,319,000      10,482,000       9,029,000
                                                  ------------    ------------    ------------


NONINTEREST INCOME
  Service charges                                      405,000         371,000         368,000
  Gain on sale of available-for-sale
    securities, net                                     43,000         101,000         162,000
  Other                                                514,000         486,000         507,000
                                                  ------------    ------------    ------------
              Total noninterest income                 962,000         958,000       1,037,000
                                                  ------------    ------------    ------------
</TABLE>

See Notes to Consolidated Financial Statements


                                       F-4


<PAGE>


<TABLE>
<CAPTION>
                             UNION BANKSHARES, LTD.

                        CONSOLIDATED STATEMENTS OF INCOME
                                   (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                                     1998             1997           1996     
                                                  ------------    ------------    ------------
<S>                                              <C>             <C>             <C>          
NONINTEREST EXPENSE
  Salaries and employee benefits                 $   5,311,000   $   4,477,000   $   3,994,000
  Amortization of excess of cost over
    fair value of net assets acquired                  232,000         226,000         226,000
  Occupancy and equipment                            1,537,000       1,232,000       1,223,000
  Other operating expenses                           3,187,000       2,518,000       2,173,000
                                                  ------------    ------------    ------------
              Total noninterest expense             10,267,000       8,453,000       7,616,000
                                                  ------------    ------------    ------------

INCOME BEFORE INCOME TAXES AND
  EXTRAORDINARY ITEM                                 2,014,000       2,987,000       2,450,000

INCOME TAXES                                           377,000         851,000         540,000
                                                  ------------    ------------    ------------

INCOME BEFORE EXTRAORDINARY ITEM                     1,637,000       2,136,000       1,910,000

EXTRAORDINARY ITEM
  Loss on early extinguishment of debt
    (net of applicable income taxes of
    $201,000)                                                -               -         337,000
                                                  ------------    ------------    ------------

NET INCOME                                       $   1,637,000   $   2,136,000   $   1,573,000
                                                  ============    ============    ============

EARNINGS PER SHARE
  BASIC
    Income before extraordinary item             $         .70   $         .92   $         .83
    Extraordinary item, net                      $           -   $           -   $        (.15)
    Net income                                   $         .70   $         .92   $         .68
    Weighted average number of common
      shares outstanding                             2,339,119       2,317,056       2,298,804

  DILUTED
    Income before extraordinary item             $         .62   $         .84   $         .79
    Extraordinary item, net                      $           -   $           -   $        (.14)
    Net income                                   $         .62   $         .84   $         .65
    Weighted average number of common
     shares outstanding                              2,622,753       2,534,904       2,415,488
</TABLE>

See Notes to Consolidated Financial Statements


                                       F-5


<PAGE>


<TABLE>
<CAPTION>
                             UNION BANKSHARES, LTD.

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

<S>                                              <C>              <C>             <C>          
                                                      1998            1997            1996      
                                                  ------------    ------------    ------------

NET INCOME                                       $   1,637,000   $   2,136,000   $   1,573,000

OTHER COMPREHENSIVE INCOME (LOSS)
  Unrealized appreciation (depreciation)
  on available-for-sale securities, net
  of income taxes $195,000, $-0-, and
  $(214,000) for December 31, 1998,
  1997, and 1996, respectively                         416,000               -        (360,000)

LESS: reclassification adjustment for
  realized (gain) losses included in net
  income, net of income taxes of $15,000,
  $38,000, and $60,000, for December 31,
  1998, 1997, and 1996, respectively                   (26,000)        (63,000)       (102,000)

Unrealized appreciation on investment
  securities transferred from
  available-for-sale to held-to-
  maturity including amortization                            -         (32,000)        (42,000)
                                                  ------------    ------------    ------------


COMPREHENSIVE INCOME                             $   2,027,000   $   2,041,000   $   1,069,000
                                                  ============    ============    ============
</TABLE>

See Notes to Consolidated Financial Statements


                                       F-6


<PAGE>


<TABLE>
<CAPTION>
                             UNION BANKSHARES, LTD.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                                                                                     Accumulated
                                                                                       Other
                                                                                    Comprehensive
                                                                                       Income    
                                                                                    -------------
                                                                                      Unrealized
                                                                                     Appreciation
                                                                                    (Depreciation)
                                                                      Additional     on Available-
                                                                       Paid-in         for-Sale        Retained
                                                Shares      Amount     Capital        Securities       Earnings        Total   
                                              ----------   -------    ----------    -------------     ----------    -----------
<S>                                            <C>        <C>        <C>           <C>               <C>           <C>         
BALANCE, DECEMBER 31, 1995                     2,291,340  $  2,000   $ 9,383,000   $      852,000    $ 4,675,000   $ 14,912,000
  Shares issued for stock option plan              4,540         -        25,000                -              -         25,000
  Shares issued upon conversion and
    retirement of notes                            4,084         -        26,000                -              -         26,000
  Net change in unrealized appreciation
    of available-for-sale securities,
    net of income taxes of $238,000                    -         -             -         (462,000)             -       (462,000)
  Unrealized appreciation on investment
    securities transferred from available-
    for-sale to held-to-maturity
    including amortization                             -         -             -          (42,000)             -        (42,000)
  Net income                                           -         -             -                -      1,573,000      1,573,000
                                              ----------   -------    ----------    -------------     ----------    -----------

BALANCE, DECEMBER 31, 1996                     2,299,964     2,000     9,434,000          348,000      6,248,000     16,032,000
    Shares issued for stock option plan           32,050         -       149,000                -              -        149,000
    Net change in unrealized appreciation
      of available-for-sale securities,
      net of income taxes of $33,000                   -         -             -          (63,000)             -        (63,000)
    Net change in unrealized appreciation on
      investment securities transferred from
      available-for-sale to held-to-maturity
      including amortization                           -         -             -          (32,000)             -        (32,000)
    Net income                                         -         -             -                -      2,136,000      2,136,000
                                              ----------   -------    ----------    -------------     ----------    -----------

BALANCE, DECEMBER 31, 1997                     2,332,014  $  2,000   $ 9,583,000   $      253,000    $ 8,384,000   $ 18,222,000
                                              ----------   -------    ----------    -------------     ----------    -----------
</TABLE>

See Notes to Consolidated Financial Statements


                                      F-7


<PAGE>


<TABLE>
<CAPTION>
                             UNION BANKSHARES, LTD.

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                                                                     Accumulated
                                                                                       Other
                                                                                    Comprehensive
                                                                                       Income    
                                                                                    -------------
                                                                                      Unrealized
                                                                                     Appreciation
                                                                                    (Depreciation)
                                                                      Additional     on Available-
                                                                       Paid-in         for-Sale        Retained
                                                Shares      Amount     Capital        Securities       Earnings        Total   
                                              ----------   -------    ----------    -------------     ----------    -----------
<S>                                            <C>        <C>        <C>           <C>               <C>           <C>         
BALANCE, DECEMBER 31, 1997
  (brought forward)                            2,332,014  $  2,000   $ 9,583,000   $      253,000    $ 8,384,000   $ 18,222,000
    Shares issued for stock option plan           10,000         -        56,000                -              -         56,000
    Net change in unrealized appreciation
      of available-for-sale securities,
      net of income taxes of $249,000                  -         -             -          390,000              -        390,000
    Increase in retained earnings due to
      stock option plans                               -         -        39,000                -              -         39,000
    Net income                                         -         -             -                -      1,637,000      1,637,000
                                              ----------    ------    ----------    -------------     ----------    -----------

BALANCE, DECEMBER 31, 1998                     2,342,014  $  2,000   $ 9,678,000   $      643,000    $10,021,000   $ 20,344,000
                                              ==========    ======    ==========    =============     ==========    ===========
</TABLE>

See Notes to Consolidated Financial Statements


                                       F-8


<PAGE>


<TABLE>
<CAPTION>
                                             UNION BANKSHARES, LTD.

                                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



                                                                      1998               1997             1996    
                                                                  ------------      ------------      ------------
<S>                                                              <C>               <C>               <C>          
CASH FLOWS FROM OPERATING ACTIVITIES                                                                 
  Net income                                                     $   1,637,000     $   2,136,000     $   1,573,000
  Adjustments to reconcile net income to net cash                                                    
    provided by (used in) operating activities:                                                      
      Gain on sale of securities                                       (41,000)         (101,000)         (162,000)
      Extraordinary item                                                     -                 -           337,000
      Federal Home Loan Bank stock dividend                            (72,000)          (53,000)                -
      Amortization (accretion) of premium/discount                                                  
        on investments                                                 455,000          (140,000)       (2,323,000)
      Amortization of deferred loan fees, net of costs              (1,296,000)         (955,000)         (395,000)
      Deferred income taxes                                           (230,000)         (216,000)         (125,000)
      Provision for loan losses                                        278,000           360,000           285,000
      Depreciation and amortization                                    491,000           415,000           429,000
      Amortization of excess of cost over fair                                                      
        value of net assets acquired                                   232,000           226,000           226,000
  Changes in:                                                                                        
      Mortgage loans held for sale                                  (3,032,000)       (1,253,000)                -
      Accrued interest receivable                                       72,000          (246,000)          (22,000)
      Prepaid expenses and other assets                               (581,000)            7,000           (83,000)
      Accrued interest payable                                          97,000            92,000          (135,000)
      Other liabilities                                                671,000           103,000           (13,000)
                                                                  ------------      ------------      ------------
              Net cash (used in) provided                                                            
                by operating activities                             (1,319,000)          375,000          (408,000)
                                                                  ------------      ------------      ------------
                                                                                                     
CASH FLOWS FROM INVESTING ACTIVITIES                                                                 
  Proceeds from maturities of available-for-sale securities      $  24,932,000     $   8,809,000     $   8,600,000
  Proceeds from maturities of held-to-                                                               
    maturity securities                                              6,995,000         8,652,000         3,473,000
  Proceeds from sale of available-for-sale securities                2,312,000        13,161,000        34,111,000
  Purchase of available-for-sale securities                        (55,426,000)      (24,077,000)      (38,731,000)
  Purchase of held-to-maturity securities                           (6,710,000)       (7,003,000)       (1,010,000)
  Purchase of other investments                                              -          (369,000)          (85,000)
  Net decrease (increase) in loans                                     104,000       (21,086,000)      (19,004,000)
  Purchase of Lakewood State Bank, net of cash acquired                520,000                 -                 -
  Purchase of premises and equipment                                (1,306,000)         (220,000)         (295,000)
                                                                   -----------      ------------      ------------
              Net cash used in investing activities                (28,579,000)      (22,133,000)      (12,941,000)
                                                                   -----------      ------------      ------------
</TABLE>

See Notes to Consolidated Financial Statements


                                       F-9


<PAGE>


<TABLE>
<CAPTION>
                             UNION BANKSHARES, LTD.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (CONTINUED)

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996



                                                                      1998               1997             1996    
                                                                  ------------      ------------      ------------
<S>                                                              <C>                <C>               <C>         
CASH FLOWS FROM FINANCING ACTIVITIES 
  Net increase in demand deposits, money market,
    NOW, and savings accounts                                    $   8,700,000     $  23,547,000     $  11,665,000
  Net increase in time deposits                                     31,543,000        10,120,000         4,569,000
  Change in federal funds purchased                                          -        (6,200,000)        2,200,000
  Proceeds from issuance of notes payable                                    -        10,000,000         4,000,000
  Principal repayments of notes payable                             (2,000,000)       (1,500,000)       (7,077,000)
  Proceeds from issuance of common stock                                56,000           149,000            51,000
  Proceeds from issuance of Guaranteed Preferred                                  
    Beneficial Interests in Company's Debentures                    10,304,000                 -                 -
                                                                  ------------      ------------     -------------
              Net cash provided by financing activities             48,603,000        36,116,000        15,408,000
                                                                  ------------      ------------     -------------
                                                                                  
NET INCREASE IN CASH AND CASH EQUIVALENTS                           18,705,000        14,358,000         2,059,000
                                                                                  
CASH AND CASH EQUIVALENTS,                                                        
  BEGINNING OF YEAR                                                 26,714,000        12,356,000        10,297,000
                                                                  ------------      ------------     -------------
                                                                                  
CASH AND CASH EQUIVALENTS, END OF YEAR                           $  45,419,000     $  26,714,000     $  12,356,000
                                                                  ============      ============     ==============
</TABLE>

See Notes to Consolidated Financial Statements


                                      F-10


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 1:   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

    Union Bank and Trust (Bank) is a wholly-owned subsidiary of Union
Bankshares, Ltd. (Bankshares) (collectively referred to as Company). The Bank
provides a full range of banking services to customers, primarily living in the
Denver metropolitan area, through its home office and three 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 generally
accepted accounting principles 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-11


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 1:   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
          (CONTINUED)

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. At December 31, 1998, cash
equivalents consisted of federal funds sold.

    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 $4,263,000 and $1,525,000 at December 31, 1998
and 1997, respectively.

    As of December 31, 1998, the Company had approximately $5,330,000 on deposit
in 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.

    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.



                                      F-12


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 1:   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
          (CONTINUED)

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

    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.

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.

    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.


                                      F-13


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 1:   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
          (CONTINUED)

MORTGAGE LOANS HELD FOR SALE

    Mortgage loans held for sale are normally sold within 120 days of
origination and are carried at the lower of cost or market. Gains and losses
resulting from sales of mortgage loans are recognized when the respective loans
are sold to investors. Gains and losses are determined by the difference between
the selling price and the carrying amount of the loans sold, net of discounts
collected or paid and considering a normal servicing rate.

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.

EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED

    Excess costs of the purchased subsidiary acquired by the Company in 1985 in
excess of the fair value of underlying net tangible assets is amortized on a
straight-line basis over a 25 year period. The remaining balance is being
amortized through 2009 at a rate of approximately $226,000 per year. The excess
cost over purchase price 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
$312,000 through 2014. Amortization expense related to the purchased subsidiary
and branch bank in 1998 was $232,000.

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.


                                      F-14


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 1:   NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
          (CONTINUED)

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.

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.

    All share and per share amounts have been restated to reflect the
two-for-one stock split which was voted on and approved by stockholders on 
May 27, 1998.


                                      F-15


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 2:   INVESTMENTS IN DEBT AND EQUITY SECURITIES

    The amortized cost and approximate fair value of held-to-maturity
securities was as follows at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                            Gross           Gross
                                                           Amortized      Unrealized      Unrealized        Approximate
                                                             Cost           Gains           Losses           Fair Value
                                                         ------------     ----------     ------------      ------------
<S>                                                     <C>              <C>            <C>               <C>          
    1998:
    ----

    U.S. Government agencies and
      corporations                                      $  21,591,000    $   501,000    $     (12,000)    $  22,080,000
    Obligations of state and political
      subdivisions                                          5,878,000        462,000                -         6,340,000
                                                         ------------     ----------     ------------      ------------

                                                        $  27,469,000    $   963,000    $     (12,000)    $  28,420,000
                                                         ============     ==========     ============      ============

    1997:
    ----

    U.S. Government agencies and
      corporations                                      $  21,989,000    $   383,000    $      (1,000)    $  22,371,000
    Obligations of state and political
      subdivisions                                          5,940,000        370,000                -         6,310,000
                                                         ------------     ----------     ------------      ------------

                                                        $  27,929,000    $   753,000    $      (1,000)    $  28,681,000
                                                         ============     ==========     ============      ============

    Maturities of held-to-maturity securities at  December 31, 1998:
                                                                                           Amortized        Approximate
                                                                                              Cost          Fair Value
                                                                                         ------------      ------------
    One year or less                                                                    $           -     $           -
    After one year through five years                                                       4,439,000         4,552,000
    After five years through ten years                                                      3,735,000         3,919,000
    After ten years                                                                         1,538,000         1,710,000
    Mortgage-backed and other debt
      securities                                                                           17,757,000        18,239,000
                                                                                         ------------      ------------

                                                                                        $  27,469,000     $  28,420,000
                                                                                         ============      ============
</TABLE>


                                      F-16


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 2:   INVESTMENTS IN DEBT AND EQUITY SECURITIES  (CONTINUED)

   The amortized cost and approximate fair value of available-for-sale
securities was as follows at December 31, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                            Gross           Gross
                                                           Amortized      Unrealized      Unrealized        Approximate
                                                             Cost           Gains           Losses           Fair Value
                                                         ------------     ----------     ------------      ------------
<S>                                                     <C>              <C>            <C>               <C>          
    1998:
    ----

    U.S. Government agencies and
      corporations                                      $  54,438,000    $   276,000    $     (10,000)    $  54,704,000
    U.S. Treasury securities                                3,611,000         48,000                -         3,659,000
    Obligations of state and political
      subdivisions                                         18,482,000        774,000          (25,000)       19,231,000
                                                         ------------     ----------     ------------      ------------

                                                        $  76,531,000    $ 1,098,000    $     (35,000)    $  77,594,000
                                                         ============     ==========     ============      ============

    1997:
    ----

    U.S. Government agencies and
      corporations                                      $  12,804,000    $     7,000    $     (30,000)    $  12,781,000
    U.S. Treasury securities                                6,027,000         43,000                -         6,070,000
    Obligations of state and political
      subdivisions                                         16,981,000        388,000          (39,000)       17,330,000
    Commercial paper                                          999,000              -                -           999,000
                                                         ------------     ----------     ------------      ------------

                                                        $  36,811,000    $   438,000    $     (69,000)    $  37,180,000
                                                         ============     ==========     ============      ============

    Maturities of available-for-sale securities at December 31, 1998:
                                                                                          Amortized         Approximate
                                                                                             Cost           Fair Value
                                                                                         ------------      ------------

    One year or less                                                                    $   8,286,000     $   8,295,000
    After one year through five years                                                      14,292,000        14,508,000
    After five years through ten years                                                     19,391,000        19,763,000
    Due after ten years                                                                     7,014,000         7,337,000
    Mortgage-backed and other debt securities                                              27,548,000        27,691,000
                                                                                         ------------      ------------
                                                                                     
                                                                                        $  76,531,000     $  77,594,000
                                                                                         ============      ============
</TABLE>


                                      F-17


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 2:   INVESTMENTS IN DEBT AND EQUITY SECURITIES  (CONTINUED)

    The book value of securities pledged as collateral, to secure notes payable,
public deposits, and for other purposes, amounted to $55,125 at December 31,
1998 and $29,008,000 at December 31, 1997. The approximate fair value of pledged
securities amounted to $56,249 at December 31, 1998 and $29,725,000 at December
31, 1997.

    Gross gains of $43,000, $131,000, and $349,000 and gross losses of $2,000,
$46,000, and $187,000 resulting from sales of available-for-sale securities were
realized for 1998, 1997 and 1996, respectively.

    The Company redesignated available-for-sale securities with an aggregate
amortized cost of $5,061,000 and $8,830,000 to the held-to-maturity portfolio
during 1997 and 1996, respectively.

    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 $19,396,000 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, 1998,
of $10,000,000.


NOTE 3:   LOANS AND ALLOWANCE FOR LOAN LOSSES

    Categories of loans at December 31, 1998 and 1997, include:

<TABLE>
<CAPTION>
                                                   1998                1997    
                                             ---------------     --------------
<S>                                         <C>                 <C>            
    Commercial                              $    105,618,000    $    87,929,000
    Real estate mortgage                           4,101,000          4,297,000
    Real estate construction                      12,881,000          9,625,000
    Consumer                                      24,595,000         20,933,000
                                             ---------------     --------------
                                                 147,195,000        122,784,000
    Allowance for loan losses                     (2,678,000)        (2,125,000)
                                             ---------------     --------------

    Net loans                               $    144,517,000    $   120,659,000
                                             ===============     ==============
</TABLE>


                                      F-18


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 3:   LOANS AND ALLOWANCE FOR LOAN LOSSES   (CONTINUED)

    Transactions in the allowance for loan losses were as follows:

<TABLE>
<CAPTION>
                                                    1998            1997              1996 
                                             ------------     ------------     ------------
<S>                                         <C>              <C>              <C>          

    Balance, beginning of year              $   2,125,000    $   1,754,000    $   1,448,000
                                             ------------     ------------     ------------

    Allowance for loan losses of 
     acquired institution                         350,000                -                -
                                             ------------     ------------     ------------
    Charge offs                                   (86,000)         (24,000)         (29,000)
    Recoveries                                     11,000           35,000           50,000
                                             ------------     ------------     ------------
    Net recoveries                                (75,000)          11,000           21,000
    Provision charged to operating
     expenses                                     278,000          360,000          285,000
                                             ------------     ------------     ------------

    Balance, end of year                    $   2,678,000    $   2,125,000    $   1,754,000
                                             ============     ============     ============
</TABLE>


    Impaired loans totaled $2,380,000 and $73,000 at December 31, 1998 and 1997,
respectively. An allowance for loan losses of $362,000 and $19,000 related to
impaired loans at December 31, 1998 and 1997, respectively. At December 31, 1998
and 1997, all impaired loans had allocated allowances.

    Interest of $158,000 and $8,000 was recognized on average impaired loans of
$1,612,000 and $98,000 for 1998 and 1997, respectively. No interest was
recognized on impaired loans on a cash basis during 1998 and 1997.


                                      F-19


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 4:   PREMISES AND EQUIPMENT

    Major classifications of premises and equipment, stated at cost, at
December 31, were as follows:
<TABLE>
<CAPTION>
                                                    1998             1997    
                                               -------------     ------------
<S>                                           <C>               <C>
    Land                                      $      150,000    $           -
    Building                                         750,000                -
    Leasehold improvements                         2,056,000        1,485,000
    Furniture and equipment                        3,082,000        2,162,000
                                               -------------     ------------
                                                   6,038,000        3,647,000
    Less accumulated depreciation 
     and amortization                             (2,762,000)      (2,269,000)
                                               -------------     ------------

    Net premises and equipment                $    3,276,000    $   1,378,000
                                               =============     ============
</TABLE>


NOTE 5:   DEPOSITS

     Interest bearing deposits in denominations of $100,000 or more were
$44,231,000 on December 31, 1998, and $19,969,000 on December 31, 1997.

    At December 31, 1998, the scheduled maturities of time deposits were as
follows:

                     1999                               $   51,424,000
                     2000                                   10,923,000
                     2001                                    7,566,000
                     2002                                       57,000
                     2003 and thereafter                    13,138,000
                                                         -------------

                                                        $   83,108,000
                                                         =============

                                      F-20


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 6:   NOTES PAYABLE

    Notes payable at December 31, 1998 and 1997, consisted of the following
components:

<TABLE>
<CAPTION>
                                                           1998              1997   
                                                       ------------     ------------
<S>                                                   <C>              <C>          
           Advances from FHLB                         $  10,000,000    $  10,000,000
           Note payable to financial institution                  -        2,000,000
                                                       ------------     ------------

           Total notes payable                        $  10,000,000    $  12,000,000
                                                       ============     ============
</TABLE>

    The Bank entered into two $5,000,000 advance agreements with the FHLB on
January 21, 1997. One advance has an interest rate of 6.34% and matured January
14, 1999. The other advance has an interest rate of 6.5% and matures January 14,
2000. The advances are secured by pledges of securities as discussed in Note 2.


NOTE 7:   GUARANTEED PREFERRED BENEFICIAL INTERESTS IN COMPANY'S
          DEBENTURES
<TABLE>
<CAPTION>
                                                                 1998             1997     
                                                             -------------     ------------
<S>                                                         <C>              <C>           
           Guaranteed Preferred Beneficial Interests
           In Company's Debentures                          $   10,304,000   $            -
                                                             =============    =============
</TABLE>

    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.


NOTE 8:   INCOME TAXES

    The provision for income taxes consists of:

<TABLE>
<CAPTION>
                                     1998             1997             1996  
                                  ----------     ------------     -----------
<S>                              <C>            <C>              <C>         

    Taxes currently payable      $   607,000    $   1,067,000    $    464,000
    Deferred income taxes           (230,000)        (216,000)       (125,000)
                                  ----------     ------------     -----------

                                 $   377,000    $     851,000    $    339,000
                                  ==========     ============     ===========
</TABLE>


                                      F-21


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 8:   INCOME TAXES   (CONTINUED)

    The tax effects of temporary differences related to deferred taxes shown in
the December 31, balance sheets are:

<TABLE>
<CAPTION>
                                                       1998            1997   
                                                   ------------     -----------
<S>                                               <C>              <C>
    Deferred tax assets:
      Allowance for loan losses                   $     761,000    $    572,000
      Accrued expenses                                  160,000          96,000
      Deferred loan fees                                167,000         134,000
      Deferred compensation                              37,000          24,000
      Furniture, equipment, and improvements                  -          52,000
      Other real estate owned                            94,000               -
      Other                                                   -           9,000
                                                   ------------     -----------
                                                      1,219,000         887,000
                                                   ------------     -----------

    Deferred tax liabilities:
      Federal Home Loan Bank Stock                      (47,000)        (20,000)
      Furniture, equipment, and improvements            (65,000)              -
      Unrealized gains on available-for-sale
        securities                                     (365,000)       (116,000)
      Other                                             (27,000)              -
                                                   ------------     -----------
                                                       (504,000)       (136,000)
                                                   ------------     -----------

              Net deferred tax asset              $     715,000    $    751,000
                                                   ============     ===========
</TABLE>

    A reconciliation of income tax expenses at the statutory rate to the
Company's actual income tax is shown below:
<TABLE>
<CAPTION>
                                                              1998            1997          1996   
                                                           ---------      -----------     ---------
<S>                                                       <C>            <C>              <C>      
    Computed at the statutory rate (34%)                  $   685,000    $  1,016,000    $  651,000
    Increase (decrease) in income taxes
      resulting from:
        Tax-exempt interest                                  (367,000)       (328,000)     (406,000)
        Amortization of excess of investment
          in subsidiary over net assets acquired               79,000          79,000        79,000
        State income taxes, net of federal tax benefit         16,000          17,000        24,000
        Nondeductible interest                                 42,000          30,000        25,000
        Other, net                                            (78,000)         37,000       (34,000)
                                                           ----------     -----------     ---------

    Income tax expense                                    $   377,000    $    851,000    $  339,000
                                                           ==========     ===========     =========
</TABLE>


                                      F-22


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 9:   EARNINGS PER SHARE

    A reconciliation of the numerators and denominators of the basic and diluted
earnings per share calculation for income before extraordinary item is shown
below for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
                                            Income            Shares       Per-Share
                                           Numerator)      (Denominator)    Amount   
                                         ------------    ---------------  -----------
<S>     <C>    <C>    <C>    <C>    <C> 
           1998
           ----
    Income before extraordinary item     $  1,637,000       2,339,119
              Basic earnings per share                                   $        .70
                                                                          ===========

    Effect of dilutive securities:
              Stock options                         -         283,634
                                         ------------    ------------

    Diluted earnings per share           $  1,637,000       2,622,753    $        .62
                                          ===========    ============     ===========

           1997
           ----
    Income before extraordinary item     $  2,136,000       2,317,056
              Basic earnings per share                                   $        .92
                                                                          ===========

    Effect of dilutive securities:
              Stock options                         -         217,848
                                         ------------    ------------

    Diluted earnings per share           $  2,136,000       2,534,904    $        .84
                                          ===========    ============     ===========

           1996
           ----
    Income before extraordinary item     $  1,910,000       2,298,804
              Basic earnings per share                                   $        .83
                                                                          ===========

    Effect of dilutive securities:
              Stock options                         -         116,684
                                         ------------    ------------

    Diluted earnings per share           $  1,910,000       2,415,488    $        .79
                                          ===========    ============     ===========
</TABLE>


                                      F-23


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



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 on balance
sheet instruments.

    At December 31, 1998 and 1997, the Bank had granted unused lines of credit
to borrowers aggregating approximately $58,719,000 and $45,875,000,
respectively. At December 31, 1998, unused lines of credit consisted of
approximately $57,771,000 for commercial lines and $948,000 for open-end
consumer lines.

    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 $1,318,000 and
$948,000 at December 31, 1998 and 1997, respectively, with terms ranging from 15
days to two years.

    At December 31, 1998 and 1997, the Bank had outstanding commitments to
originate loans aggregating approximately $12,780,000 and $9,468,000,
respectively. The commitments extended over varying periods of time with the
majority being disbursed within a one-year period.


                                      F-24


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 11:  OPERATING LEASES

    The Bank leases premises under a noncancelable lease which expires in 2001.
The lease contains a renewal option clause for an additional five-year term and
provides for periodic rental adjustment based on the Consumer Price Index.

    The estimated future minimum lease payments under noncancelable operating
leases at December 31, 1998, were as follows:

       1999                                            $    597,000
       2000                                                 600,000
       2001                                                 582,000
       2002                                                 560,000
       2003                                                 556,000
       Thereafter                                           640,000
                                                        -----------

       Total future minimum lease payment              $  3,535,000
                                                        ===========

    Total rental expense for all operating leases (net of month-to-month
sublease rental income in 1995), including certain cancelable equipment leases,
was $614,000, $509,000, and $458,000 for the years ended December 31, 1998, 1997
and 1996, respectively.


NOTE 12:  EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS

    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 $226,000,
$195,000, and $174,000 in 1998, 1997 and 1996, respectively. The Company matches
50% of the first 6% of the participants' contributions; additional contributions
may be made at the discretion of the Board of Directors. Company 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.


                                      F-25



<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 12:  EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS  (CONTINUED)

    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 $6,000 annually 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 1998 and 1997, the Company issued 2,000, and 3,750 common shares,
respectively, pursuant to the Compensation Plan at exercise prices of $24.00 and
$16.00, respectively.

    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.

    A summary of the status of the Incentive Plan at December 31, and changes
during the year is presented below:

<TABLE>
<CAPTION>
                                                                         (Restated)              (Restated)
                                                   1998                     1997                    1996         
                                            -------------------    --------------------     --------------------
                                                       Weighted                Weighted                 Weighted
                                                        Average                 Average                  Average
                                                       Exercise                Exercise                 Exercise
                                             Shares      Price      Shares       Price        Shares      Price 
                                            --------   --------    --------    --------     --------    --------
<S>                                         <C>       <C>          <C>        <C>           <C>        <C>      
    Outstanding, beginning of year           443,400  $    5.61     429,200   $    4.92      401,500   $    4.78
    Granted                                   43,700      11.38      40,600       11.75       27,700        7.63
    Exercised                                 (6,500)      3.97     (22,800)       4.16            -           -
    Forfeited                                 (1,400)      5.19      (3,600)       6.13            -           -
                                            --------   --------    --------    --------     --------    --------

    Outstanding, end of year                 479,200  $    6.16     443,400   $    5.61      429,200   $    4.92
                                            ========   ========    ========    ========     ========    ========

    Options exercisable, end of year         436,734                407,500                  351,400            
</TABLE>


                                      F-26


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 12:  EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS  (CONTINUED)

    The following table summarizes information about stock options under the
Incentive Plan outstanding at December 31, 1998:
<TABLE>
<CAPTION>
                             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 
    ---------------  -----------  -----------  --------  -----------  --------
    <S>                  <C>      <C>           <C>          <C>      <C>     
             $4.50       154,000   4 years      $  4.50      154,000  $   4.50
             $4.00        20,000   5 years      $  4.00       20,000  $   4.00
    $3.75 to $3.81        28,000   6 years      $  3.76       28,000  $   3.76
             $5.38       166,800   7 years      $  5.38      166,800  $   5.38
             $7.63        26,300   8 years      $  7.63       26,300  $   7.63
            $11.75        40,400   9 years      $ 11.75       27,067  $  11.75
            $11.38        43,700  10 years      $ 11.38       14,567  $  11.38
</TABLE> 
                                          
    The Company also adopted a Nonemployee Directors' Stock Option Plan
(Directors' Plan) in December 1992. An aggregate of 22,000 shares of common
stock are reserved for issuance under the Directors' Plan. Nonemployee 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.

    A summary of the status of the Directors' Plan at December 31, and changes
during the year is presented below:

<TABLE>
<CAPTION>
                                                                    (Restated)             (Restated)
                                                 1998                  1997                   1996        
                                          ------------------    ------------------     -------------------
                                                    Weighted              Weighted                Weighted
                                                     Average               Average                 Average
                                                    Exercise              Exercise                Exercise
                                          Shares     Price      Shares      Price       Shares     Price  
                                          ------    --------    ------    --------     -------    --------
<S>                                       <C>       <C>         <C>       <C>          <C>       <C>      

    Outstanding, beginning of year         9,000    $   7.14     12,500   $  10.17      10,000   $    4.47
    Granted                                2,000       12.50      2,000      12.07       2,500        8.00
    Exercised                             (1,500)       4.13    (5,500)       4.48           -           -
    Forfeited                                  -           -         -          -            -           -
                                          ------    --------    -------    -------     -------    --------

    Outstanding, end of year               9,500   $    8.74      9,000   $   7.14      12,500   $   10.17
                                          ======    ========    =======    =======     =======    ========

    Options exercisable, end of year       7,500                  7,000                 10,000
</TABLE>


                                      F-27


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 12:  EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS  (CONTINUED)

    The following table summarizes information about stock options under the
Directors' Plan outstanding at December 31, 1998:
<TABLE>
<CAPTION>

                             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 
    ---------------  -----------  -----------  --------  -----------  --------
            <S>            <C>        <C>      <C>            <C>     <C>     
             $3.75         1,500      1 years  $   3.75        1,500  $   3.75
             $5.50         1,500      2 years  $   5.50       1,5000  $   5.50
             $8.00         2,500      3 years  $   8.00       2,5000  $   8.00
            $12.07         2,000      4 years  $  12.07       2,0000  $  12.07
            $12.50         2,000      5 years  $  12.50            -  $      -
</TABLE>

    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:
<TABLE>
<CAPTION>
                                                1998                    1997        
                                         -------------------     -------------------
                                                    Weighted                Weighted
                                                     Average                 Average
                                                    Exercise                Exercise
                                          Shares      Price       Shares      Price 
                                         -------    --------     -------    --------
<S>                                      <C>       <C>           <C>        <C>     
    Outstanding, beginning of year        78,586   $    7.93      72,802    $   7.63
    Granted                              129,129       11.38       5,784       11.75
    Exercised                                  -           -           -           -
    Forfeited                                  -           -           -           -
                                         -------    --------     -------     -------

    Outstanding, end of year             207,715   $   10.07      78,586    $   7.93
                                         =======    ========     =======     =======

    Options exercisable, end of year      78,586                       -            
</TABLE>


                                      F-28


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 12:  EMPLOYEE BENEFIT PLANS AND STOCK OPTIONS  (CONTINUED)

    The following table summarizes information about stock options under the
Bonus Plan outstanding at December 31, 1998:
<TABLE>
<CAPTION>

                             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 
    ---------------  -----------  -----------  --------  -----------  --------
            <S>       <C>           <C>        <C>            <C>     <C>     
              $7.63       72,802      8 years  $   7.63       72,802  $   7.63
             $11.75        5,784      9 years  $  11.75        5,784  $  11.75
             $11.38      129,129     10 years  $  11.38            -  $      -
</TABLE>

    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 $368,000, $172,000, and $323,000 in 1998, 1997 and
1996, respectively. In addition, the Company's basic earnings per share would
have decreased by $.16 per share, $.07 per share, and $.14 per share in 1998,
1997 and 1996, respectively. Diluted earnings per share would have decreased
$.14 per share, $.07 per share, and $.14 per share, respectively.


                                      F-29



<PAGE>

                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 13:  OTHER OPERATING EXPENSES

    Other operating expenses consist of the following:
<TABLE>
<CAPTION>
                                                      1998             1997              1996   
                                                  ------------     ------------     ------------
<S>                                              <C>              <C>              <C>          
    Professional services                        $     729,000    $     586,000    $     618,000
    Credit card                                        352,000          309,000          247,000
    Legal and accounting                               253,000          271,000           91,000
    Advertising and promotion                          286,000          200,000          144,000
    Postage and delivery                               176,000          150,000          114,000
    Software maintenance and amortization              164,000          140,000          124,000
    Service charges                                    131,000          129,000          140,000
    Supplies                                           191,000          112,000          138,000
    Insurance and bonds                                127,000          106,000           88,000
    Telephone                                          107,000           88,000           89,000
    Printing                                           124,000           86,000           93,000
    Travel and entertainment                           114,000           67,000          104,000
    Dues and subscriptions                              80,000           67,000           76,000
    Deposit insurance                                   23,000           19,000            2,000
    Amortization of debt issuance costs                  2,000                -           17,000
    Other operating expenses                           332,000          188,000           88,000
                                                  ------------     ------------     ------------

                                                 $   3,191,000    $   2,518,000    $   2,173,000
                                                  ============     ============     ============
</TABLE>


                                      F-30


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 14:  BUSINESS ACQUISITIONS

    On December 17, 1998, the Company acquired all the outstanding shares of
Lakewood State Bank common stock for $8,350,000, including $7,515,000 in cash
and $835,000 held on deposit at the Bank. The acquisition has been accounted for
as a purchase by recording the assets and liabilities of the acquiree at their
estimated market values at the acquisition date. The consolidated operations of
the Company include the operations of the acquiree, which was liquidated into
another branch bank from the acquisition date. Unaudited Pro Forma consolidated
operations assuming the purchase was made at the beginning of each year are
shown below:
<TABLE>
<CAPTION>
                                                1998             1997           1996   
                                          -------------     ------------    -----------
            <S>                           <C>                <C>            <C>        
            Net Interest Income           $  12,580,000      $12,099,000    $10,399,000

            Net Income                    $   1,386,000      $ 1,795,000    $ 1,285,000

            Basic earnings per share               0.57             0.77           0.56
</TABLE>

    The Pro Forma results are not necessarily indicative of what would have
occurred had the acquisition been on those date, nor are they necessarily
indicative of future operations.

    Pro Forma data reflect the amortization expense from revaluing Lakewood
State Bank's investment portfolio, additional interest expense related to the
financing of the purchase, and amortization expense related to debt issuance
costs and the excess of cost over the fair value of assets acquired. These items
each affect income tax expense proportionally.


NOTE 15:  TRANSACTIONS WITH RELATED PARTIES

    At December 31, 1998 and 1997, the Bank had loans outstanding to
shareholders, executive officers, and directors of the Company and their
affiliates, in the amount of $3,341,000 and $2,175,000, respectively. New loans
made to shareholders, executive officers, and directors of the Company and their
affiliates approximated $1,510,000 and $716,000, and repayments approximated
$344,000 and $221,000 for the years ended December 31, 1998 and 1997,
respectively.


                                      F-31


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 15:  TRANSACTIONS WITH RELATED PARTIES   (CONTINUED)

    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
collectability or present other unfavorable features.

    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, 1998, 1997 and 1996, the Bank earned interest income on such loans of
$276,000, $59,000, and $6,000, respectively. During the years ended December 31,
1998, 1997 and 1996, the Bank purchased loans in the amounts of $48,364,000,
$5,762,000, and $4,106,000 and sold loans in the amount of $44,079,000,
$4,509,000, and $4,106,000, 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.


NOTE 16:  SUBSEQUENT EVENTS

    On January 14, 1999, the Bank transferred $15,405,000 of available-for-sale
securities to held-to-maturity.


NOTE 17:  ADDITIONAL CASH FLOW INFORMATION

    The Company purchased all of the capital stock of Lakewood State Bank for
$8,350,000 ($7,515,000 in cash and $835,000 held on deposit at the Bank). In
conjunction with the acquisition, assets acquired and liabilities assumed are as
follows:

    Fair value of assets acquired                         $ 50,020,000
    Cash paid for the capital stock                         (7,515,000)
                                                           -----------

                Liabilities assumed                       $ 42,505,000
                                                           ===========


                                      F-32


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 17:  ADDITIONAL CASH FLOW INFORMATION   (CONTINUED)

<TABLE>
<CAPTION>
ADDITIONAL CASH PAYMENT INFORMATION

                                                   1998          1997            1996    
                                               ----------     ----------      -----------
<S>                                           <C>            <C>             <C>         
  Income taxes paid                           $    638,000   $    819,000    $    397,000
                                               ===========    ===========     ===========
                                                                                         
  Interest paid                               $  5,900,000   $  5,012,000    $  4,347,000
                                               ===========    ===========     ===========
                                                                                         
NON-CASH INVESTING ACTIVITIES                                                            
                                                                                         
  Reclassification of securities from                                                    
    available-for-sale to held-to-maturity                                               
    at fair value                             $     -        $  5,092,000    $  8,808,000
                                               ===========    ===========     ===========
</TABLE>


                                      F-33


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 18:  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.
<TABLE>
<CAPTION>
                            CONDENSED BALANCE SHEETS

                           DECEMBER 31, 1998 AND 1997


                                     ASSETS
                                     ------
                                                                           1998                1997   
                                                                       -------------     -------------
<S>                                                                   <C>               <C>           
Cash                                                                  $    2,432,000    $      311,000
Available-for-sale securities                                              2,685,000         3,700,000
Excess of cost over fair value of net
  assets acquired, net of amortization                                     2,494,000         2,720,000
Investment in subsidiary                                                  22,550,000        13,757,000
Accrued interest receivable                                                   37,000            40,000
Income taxes receivable                                                       33,000                 -
Deferred income taxes                                                              -            26,000
Other assets                                                                 577,000                 -
                                                                       -------------     -------------

                Total Assets                                          $   30,808,000    $   20,554,000
                                                                       =============     =============


                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

LIABILITIES
  Cumulative Trust Preferred Securities                               $   10,304,000    $            -
  Note payable                                                                     -         2,000,000
  Accrued interest payable                                                    36,000                 -
  Other liabilities                                                          124,000           332,000
                                                                       -------------     -------------
                Total Liabilities                                         10,464,000         2,332,000
                                                                       -------------     -------------

STOCKHOLDERS' EQUITY
  Common stock                                                                 1,000             1,000
  Additional paid-in capital                                               9,640,000         9,584,000
  Unrealized gains on subsidiary's available-for-sale securities             643,000           253,000
  Retained earnings                                                       10,060,000         8,384,000
                                                                       -------------     -------------
                Total Stockholders' Equity                                20,344,000        18,222,000
                                                                       -------------     -------------

                Total Liabilities and Stockholders' Equity            $   30,808,000    $   20,554,000
                                                                       =============     =============
</TABLE>


                                      F-34


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 18:  CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)

<TABLE>
<CAPTION>
                         CONDENSED STATEMENTS OF INCOME

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996


                                                        1998               1997            1996    
                                                    ------------      ------------     ------------
<S>                                                <C>              <C>               <C>          
OPERATING INCOME
  Dividends from subsidiary                        $   1,000,000    $    1,600,000    $   1,250,000
  Interest income                                        157,000           224,000          241,000
                                                    ------------     -------------     ------------
             Total operating income                    1,157,000         1,824,000        1,491,000
                                                    ------------     -------------     ------------

OPERATING EXPENSES
  Interest                                               157,000           268,000          385,000
  Amortization of excess of investment in
    subsidiary over net assets acquired                  228,000           226,000          226,000
  Salaries and employee benefits                         374,000           479,000          354,000
  Occupancy and equipment                                 36,000            13,000           13,000
  Other                                                  516,000           305,000          321,000
                                                    ------------     -------------     ------------
             Total operating expenses                  1,311,000         1,291,000        1,299,000
                                                    ------------     -------------     ------------

INCOME BEFORE EQUITY IN UNDISTRIBUTED
  EARNINGS OF SUBSIDIARY, INCOME TAX
  BENEFIT, AND EXTRAORDINARY ITEM                       (154,000)          533,000          192,000

EQUITY IN UNDISTRIBUTED EARNINGS
  OF SUBSIDIARY                                        1,424,000         1,337,000        1,398,000

INCOME TAX BENEFIT                                       367,000           266,000          320,000
                                                    ------------     -------------     ------------

INCOME BEFORE EXTRAORDINARY ITEM                       1,637,000         2,136,000        1,910,000

EXTRAORDINARY ITEM
  Loss on early extinguishment of debt
    (net of applicable income taxes of $201,000)               -                 -          337,000
                                                    ------------     -------------     ------------

NET INCOME                                         $   1,637,000     $   2,136,000    $   1,573,000
                                                    ============      ============     ============
</TABLE>


                                      F-35


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 18:  CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY (CONTINUED)
<TABLE>
<CAPTION>
                       CONDENSED STATEMENTS OF CASH FLOWS

                  YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

                                                                             1998               1997             1996 
                                                                          ------------      ------------     --------------
<S>                                                                      <C>               <C>              <C>            
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                             $   1,637,000     $   2,136,000    $    1,573,000
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
      (Gains) losses on repurchase of notes payable                                  -                 -            65,000
      Amortization                                                             229,000           206,000           617,000
      Deferred taxes                                                            26,000            (3,000)          (12,000)
  Change in:
      Other assets                                                            (573,000)           26,000           (26,000)
      Accrued interest receivable                                                2,000            (4,000)           16,000
      Due from subsidiary                                                            -             7,000            41,000
      Equity in undistributed earnings of subsidiary                        (1,403,000)       (1,337,000)       (1,398,000)
      Other liabilities                                                       (170,000)          164,000          (228,000)
                                                                          ------------      ------------     -------------
             Net cash (used in) provided by operating activities              (252,000)        1,195,000           648,000
                                                                          ------------      ------------     -------------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchases of available-for-sale securities                                (2,686,000)       (3,704,000)       (6,351,000)
  Capital contribution to banking subsidiary                                (7,000,000)                -                 -
  Proceeds from sales of available-for-sale securities                               -                 -         4,890,000
  Proceeds from maturities of available-for-sale securities                  3,700,000         3,460,000         3,830,000
                                                                          ------------      ------------     -------------
             Net cash provided by (used in) investing activities            (5,986,000)         (244,000)        2,369,000
                                                                          ------------      ------------     -------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of trust preferred securities                      10,304,000                 -                 -
  Proceeds from notes payable                                                        -                 -         4,000,000
  Principal repayments of notes payable                                     (2,000,000)       (1,500,000)       (7,077,000)
  Proceeds from issuance of common stock                                        56,000           149,000            51,000
                                                                          ------------      ------------     -------------
             Net cash used in financing activities                           8,360,000        (1,351,000)       (3,026,000)
                                                                          ------------      ------------     -------------

NET INCREASE (DECREASE) IN CASH
  AND CASH EQUIVALENTS                                                       2,122,000          (400,000)           (9,000)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                   311,000           711,000           720,000
                                                                          ------------      ------------     -------------

CASH AND CASH EQUIVALENTS, END OF YEAR                                   $   2,433,000     $     311,000    $      711,000
                                                                          ============      ============     =============
</TABLE>


                                      F-36


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 19:  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, 1998, that the Company and the Bank meet all capital adequacy
requirements to which they are subject.

    As of December 31, 1998, 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-37


<PAGE>

                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 19:  REGULATORY CAPITAL REQUIREMENTS  (CONTINUED)

    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.
<TABLE>
<CAPTION>

                                                                                                      To be Well     
                                                                                                  Capitalized Under  
                                                                             For Capital          Prompt Corrective  
                                                     Actual              Adequacy Purposes        Action Provisions  
                                             ----------------------     ---------------------    --------------------
                                                Amount       Ratio         Amount       Ratio       Amount      Ratio
                                             ------------   -------     ------------   ------    ------------   -----
<S>                                          <C>            <C>         <C>            <C>       <C>            <C>  
    AS OF DECEMBER 31, 1998:
      Total risk-based capital
        (to risk-weighted assets):
          Consolidated                       $ 25,387,000    15.2%      $ 13,347,000    8.0%     $ 16,684,000   10.0%
          Bank                               $ 19,860,000    11.8%      $ 13,444,000    8.0%     $ 16,805,000   10.0%
      Tier I risk-based capital
        (to risk-weighted assets):
          Consolidated                       $ 23,357,000    14.0%      $  6,673,000    4.0%     $ 10,010,000    6.0%
          Bank                               $ 17,752,000    10.6%      $  6,722,000    4.0%     $ 10,083,000    6.0%
      Tier I leverage capital
        (to adjusted total assets):
          Consolidated                       $ 23,357,000     8.3%      $ 11,261,000    4.0%     $ 14,076,000    5.0%
          Bank                               $ 17,752,000     6.8%      $ 10,457,000    4.0%     $ 13,072,000    5.0%

    AS OF DECEMBER 31, 1997:
      Total risk-based capital
        (to risk-weighted assets):
          Consolidated                       $ 17,208,000    11.2%      $ 12,308,000    8.0%     $ 15,386,000   10.0%
          Bank                               $ 15,415,000    10.1%      $ 12,216,000    8.0%     $ 15,270,000   10.0%
      Tier I risk-based capital
        (to risk-weighted assets):
          Consolidated                       $ 15,249,000     9.9%      $  6,154,000    4.0%     $  9,231,000    6.0%
          Bank                               $ 13,504,000     8.8%      $  6,108,000    4.0%     $  9,162,000    6.0%
      Tier I leverage capital
        (to adjusted total assets):
          Consolidated                       $ 15,249,000     6.9%      $  8,866,000    4.0%     $ 11,083,000    5.0%
          Bank                               $ 13,504,000     6.6%      $  8,230,000    4.0%     $ 10,287,000    5.0%
</TABLE>


    The Bank is subject to certain restrictions on the amount of dividends that
it may declare without prior regulatory approval. At December 31, 1998,
approximately $2,740,000 of retained earnings were available for dividend
declaration without prior regulatory approval.


                                      F-38


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 20:  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

    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.

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.

MORTGAGE LOANS HELD FOR SALE

    Fair values of mortgage loans held for sale is estimated using the quoted
market prices for securities backed by similar loans, adjusted for differences
in loan characteristics.

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.

NOTES PAYABLE

    Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt.


                                      F-39


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 20:  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS  (CONTINUED)

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.

    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.


                                      F-40


<PAGE>


                             UNION BANKSHARES, LTD.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        DECEMBER 31, 1998, 1997 AND 1996



NOTE 20:  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS  (CONTINUED)
<TABLE>
<CAPTION>
                                                              December 31, 1998                   December 31, 1997       
                                                    ---------------------------------     -------------------------------
                                                         Carrying                            Carrying                    
                                                          Amount         Fair Value           Amount          Fair Value 
                                                    --------------     --------------     -------------    --------------
<S>                                                 <C>               <C>                 <C>              <C>           
FINANCIAL ASSETS
  Cash and due from banks                           $   18,914,000     $   18,914,000     $  15,314,000    $   15,314,000
  Federal funds sold                                    26,505,000         26,505,000        11,400,000        11,400,000
  Available-for-sale securities                         77,594,000         77,594,000        37,180,000        37,180,000
  Held-to-maturity securities                           27,469,000         28,420,000        27,929,000        28,681,000
  Other investments                                        988,000            988,000           916,000           916,000
  Interest receivable                                    1,542,000          1,542,000         1,353,000         1,353,000
  Loans, net of allowance for loan losses              144,518,000        152,234,000       120,659,000       123,906,000
  Mortgage loans held for sale                           4,285,000          4,285,000         1,253,000         1,253,000

FINANCIAL LIABILITIES
  Deposits                                             271,650,000        267,851,000       190,076,000       186,829,000
  Notes payable                                         10,000,000         10,000,000        12,000,000        12,137,000
  Guaranteed Preferred Beneficial
    Interests in Company's Debentures                   10,304,000         10,304,000
  Interest payable                                         471,000            471,000           187,000           187,000

UNRECOGNIZED FINANCIAL 
 INSTRUMENTS (net of contract amount):
    Commitments to extend credit                                 -                  -                 -                 -
    Letters of credit                                            -                  -                 -                 -
    Lines of credit                                              -                  -                 -                 -
</TABLE>


NOTE 21:  FUTURE CHANGES IN ACCOUNTING PRINCIPLES

    The Financial Accounting Standards Board recently issued Statement No. 133
"Accounting for Derivative Instruments and Hedging Activities." Statement No.
133, which becomes effective for periods beginning after June 15, 1999, requires
that business enterprises recognized all derivative instruments either as assets
or liabilities in the financial statements and record those instruments at fair
value. Changes in fair value of these derivatives are recognized in the
statement of income or comprehensive income in the period of change. Management
has not yet determined the impact on the Company's financial position and
results of operations of adapting Statement No. 133.


                                      F-41


<PAGE>


                                   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 30, 1999                 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.

<TABLE>
<CAPTION>

      Signature                              Title                              Date
      ---------                              -----                              ----

<S>                                <C>                                      <C> 
/s/ Charles R. Harrison            Chairman of the Board, Chief             March 30, 1999
-------------------------------    Executive Officer and a Director
Charles R. Harrison                (Principal Executive Officer)

/s/ Bruce E. Hall                  Vice President-Finance, Secretary,       March 30, 1999
-------------------------------    Treasurer and a Director (Principal
Bruce E. Hall                      Financial and Accounting Officer

/s/ Wayne T. Biddle                Director                                 March 30, 1999
-------------------------------
Wayne T. Biddle

/s/ Jerrold B. Evans               Director                                 March 30, 1999
-------------------------------
Jerrold B. Evans

/s/ Harold R. Logan, JR.           Director                                 March 30, 1999
-------------------------------
Harold R. Logan, Jr.

/s/ Ralph D. Johnson               Director                                 March 30, 1999
-------------------------------
Ralph D. Johnson

/s/ Richard C. SaunderS            Director                                 March 30, 1999
-------------------------------
Richard C. Saunders

/s/ Herman J. Zueck                Director                                 March 30, 1999
-------------------------------
Herman J. Zueck

</TABLE>


                                       S-1


<PAGE>


                          EXHIBIT DESCRIPTION AND INDEX

Exhibit
Number       Description
-------      -----------

3.1          Certificate of Incorporation of Union Bankshares, Ltd. *

3.2          Certificate of Amendment to Certificate of Incorporation of Union
             Bankshares, Ltd.+

3.3          Bylaws of Union Bankshares, Ltd. *

4.1          Form of Subordinated Indenture dated to be entered into between
             the Registrant and American Securities Transfer & Trust, Inc.,
             as Indenture Trustee +

4.2          Form of Junior Subordinated Debenture (included as an exhibit to 
             Exhibit 4.1

4.3          Certificate of Trust of Union Bankshares Capital Trust I +

4.4          Trust Agreement of Union Bankshares Capital Trust I dated as of 
             October 14, 1998 +

4.5          Form of Amended and Restated Trust Agreement of Union Bankshares 
             Capital Trust I +

4.6          Form of Preferred Security Certificate of Union Bankshares Capital 
             Trust I (included as an exhibit to Exhibit 4.5)

4.7          Form of Preferred Securities Guarantee Agreement +

4.8          Form of Agreement as to Expenses and Liabilities +

10.1         Certificate of Incorporation of Union Bank & Trust Company *

10.2         Bylaws of Union Bank & Trust Company *

10.3         Lease Agreement, dated July 1, 1994, between Lichtenberg 
             Corporation of Delaware and the Bank ***

10.4         Form of Employment Agreement *

10.5         Equity Incentive Plan *

10.6         Nonemployee Directors' Stock Option Plan *

10.7         Agreement between Union Bank & Trust and Colorado Bankers
             Mortgage, Inc.*

10.8         Nonemployee Directors Equity Compensation Plan **

10.9         Amended Shareholders' Agreement **

10.10        Agreement between Union Bank & Trust and Colorado National Bank ***


                                       E-1


<PAGE>


10.11        Loan Agreement between Union Bankshares, Ltd., Union Bank & Trust
             and Boatmen's First National Bank of Kansas City ****

10.12        Line of Credit Agreement between Union Bankshares, Ltd., Union
             Bank & Trust and Boatmen's First National Bank of Kansas City *****

10.13        Option Bonus Plan *****

10.14        Agreement and Plan of Merger, dated August 27, 1998, among Union
             Bank and Trust Company, LSB Acquisition Corp. and Lakewood State
             Bank +

10.15        Loan Agreement among Union Bankshares, Ltd., and Union Bank & Trust
             and Exchange National Bank******

21           Subsidiaries of the Registrant ******

23.1         Consent of Baird, Kurtz & Dobson ******


----------------------------------


*      Incorporated by reference to the Company's S-1 Registration Statement
       filed with the Commission on January 6, 1993, as amended (Reg. 
       No. 33-56736).

**     Incorporated by reference to the Company's Form 10-KSB filed with the
       Commission on March 31, 1994.

***    Incorporated by reference to the Company's Form 10-KSB filed with the
       Commission on March 31, 1995.

****   Incorporated by reference to the Company's Form 8-K filed with the
       Commission on March 1, 1996.

*****  Incorporated by reference to the Company's Form 10-KSB filed with the
       Commission on March 31, 1997.

****** Filed herewith.

+      Incorporated by reference to the Company's S-2 Registration Statement
       filed with the Commission on October 26, 1998, as amended (Reg. 
       No. 333-66153).


                                       E-2