6.30.13 UNB 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

OR

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: June 30, 2013

Commission file number: 001-15985

UNION BANKSHARES, INC.
 
VERMONT
 
03-0283552
 

P.O. BOX 667
20 LOWER MAIN STREET
MORRISVILLE, VT 05661

Registrant’s telephone number:      802-888-6600

Former name, former address and former fiscal year, if changed since last report: Not applicable

Securities registered pursuant to section 12(b) of the Act:
 
Common Stock, $2.00 par value
 
Nasdaq Stock Market
 
 
(Title of class)
 
(Exchanges registered on)
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X]      No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]      No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [  ]
Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company)
Smaller reporting company [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes [  ]      No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 1, 2013:
 
Common Stock, $2 par value
 
4,458,389 shares
 
 




UNION BANKSHARES, INC.
TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
 
 
Consolidated Statements of Comprehensive Income
 
 
 
 
PART II OTHER INFORMATION
 
 
 
 
 




PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
June 30, 2013
December 31, 2012
 
(Unaudited)
 
Assets
(Dollars in thousands)
Cash and due from banks
$
3,977

$
5,023

Federal funds sold and overnight deposits
8,277

41,487

Cash and cash equivalents
12,254

46,510

Interest bearing deposits in banks
22,262

21,922

Investment securities available-for-sale
27,819

20,630

Investment securities held-to-maturity (fair value $8.8 million and $5.5 million at
  June 30, 2013 and December 31, 2012, respectively)
9,213

5,496

Loans held for sale
4,460

11,014

Loans
444,784

444,145

Allowance for loan losses
(4,752
)
(4,657
)
Net deferred loan costs
130

139

Net loans
440,162

439,627

Accrued interest receivable
1,573

1,539

Premises and equipment, net
10,184

10,289

Core deposit intangible
1,352

1,438

Goodwill
2,223

2,223

Investment in real estate limited partnerships
3,464

3,809

Company-owned life insurance
3,312

3,267

Other assets
8,396

9,492

Total assets
$
546,674

$
577,256

Liabilities and Stockholders’ Equity
 
 
Liabilities
 
 
Deposits
 
 
Noninterest bearing
$
79,888

$
83,715

Interest bearing
266,176

273,505

Time
127,953

152,773

Total deposits
474,017

509,993

Borrowed funds
20,178

15,747

Liability for defined benefit pension plan
2,648

2,753

Accrued interest and other liabilities
4,037

3,717

Total liabilities
500,880

532,210

Commitments and Contingencies


Stockholders’ Equity
 
 
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,925,786 shares
  issued at June 30, 2013 and 4,923,986 shares issued at December 31, 2012
9,852

9,848

Additional paid-in capital
330

295

Retained earnings
42,078

40,772

Treasury stock at cost; 468,830 shares at June 30, 2013
  and 467,905 shares at December 31, 2012
(3,878
)
(3,859
)
Accumulated other comprehensive loss
(2,588
)
(2,010
)
Total stockholders' equity
45,794

45,046

Total liabilities and stockholders' equity
$
546,674

$
577,256

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 1

UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2013
2012
2013
2012
 
(Dollars in thousands except per share data)
Interest and dividend income
 
 
 
 
Interest and fees on loans
$
5,787

$
5,840

$
11,455

$
11,650

Interest on debt securities:
 
 
 
 
Taxable
140

172

250

371

Tax exempt
70

92

140

180

Dividends
13

6

29

24

Interest on federal funds sold and overnight deposits
10

3

23

7

Interest on interest bearing deposits in banks
59

72

119

149

Total interest and dividend income
6,079

6,185

12,016

12,381

Interest expense
 
 
 
 
Interest on deposits
486

619

1,004

1,279

Interest on borrowed funds
127

234

257

484

Total interest expense
613

853

1,261

1,763

    Net interest income
5,466

5,332

10,755

10,618

Provision for loan losses
75

180

135

360

    Net interest income after provision for loan losses
5,391

5,152

10,620

10,258

Noninterest income
 
 
 
 
Trust income
154

159

317

306

Service fees
1,257

1,197

2,446

2,372

Net (losses) gains on sales of investment securities available-for-sale
(4
)
2

(1
)
44

Net gains on sales of loans held for sale
583

668

1,250

1,141

Other income
130

142

264

208

Total noninterest income
2,120

2,168

4,276

4,071

Noninterest expenses
 
 
 
 
Salaries and wages
2,235

2,235

4,392

4,469

Pension and employee benefits
638

1,057

1,321

2,115

Occupancy expense, net
291

285

622

629

Equipment expense
388

341

814

686

Other expenses
1,670

1,645

3,252

3,205

Total noninterest expenses
5,222

5,563

10,401

11,104

        Income before provision for income taxes
2,289

1,757

4,495

3,225

Provision for income taxes
492

319

961

560

        Net income
$
1,797

$
1,438

$
3,534

$
2,665

Earnings per common share
$
0.40

$
0.32

$
0.79

$
0.60

Weighted average number of common shares outstanding
4,456,802

4,456,858

4,456,315

4,456,969

Dividends per common share
$
0.25

$
0.25

$
0.50

$
0.50

 
 
 
 
 

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 2

UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)


 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2013
2012
2013
2012
 
(Dollars in thousands)
Net income
$
1,797

$
1,438

$
3,534

$
2,665

Other comprehensive (loss) income, net of tax:
 
 
 
 
Investment securities available-for-sale:
 
 
 
 
Net unrealized holding (losses) gains arising during the period on investment securities available-for-sale
(618
)
92

(609
)
54

Reclassification adjustments for net losses (gains) on investment securities available-for-sale realized in net income
3

(1
)
1

(29
)
     Total
(615
)
91

(608
)
25

Defined benefit pension plan:
 
 
 
 
Net actuarial (loss) gain arising during the period
—

—

(33
)
26

Reclassification adjustment for amortization of net actuarial loss realized in net income
63

104

63

194

Reclassification adjustment for amortization of prior service cost realized in net income
—

1

—

2

Total
63

105

30

222

Total other comprehensive (loss) income
(552
)
196

(578
)
247

Total comprehensive income
$
1,245

$
1,634

$
2,956

$
2,912


See accompanying notes to unaudited interim consolidated financial statements.


Union Bankshares, Inc. Page 3

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended June 30, 2013 and 2012 (Unaudited)

 
Common Stock
 
 
 
 
 
 
Shares,
net of
treasury
Amount
Additional
paid-in
capital
Retained
earnings
Treasury
stock
Accumulated
other
comprehensive
loss
Total
stockholders’
equity
 
(Dollars in thousands except per share data)
Balances, December 31, 2012
4,456,081

$
9,848

$
295

$
40,772

$
(3,859
)
$
(2,010
)
$
45,046

   Net income
—

—

—

3,534

—

—

3,534

   Other comprehensive loss
—

—

—

—

—

(578
)
(578
)
   Cash dividends declared
       ($0.50 per share)
—

—

—

(2,228
)
—

—

(2,228
)
   Stock based compensation
  expense
—

—

6

—

—

—

6

   Exercise of stock options
1,800

4

29

—

—

—

33

   Purchase of treasury stock
(925
)
—

—

—

(19
)
—

(19
)
Balances, June 30, 2013
4,456,956

$
9,852

$
330

$
42,078

$
(3,878
)
$
(2,588
)
$
45,794

Balances, December 31, 2011
4,457,204

$
9,847

$
276

$
38,385

$
(3,823
)
$
(4,346
)
$
40,339

   Net income
—

—

—

2,665

—

—

2,665

   Other comprehensive income
—

—

—

—

—

247

247

   Cash dividends declared
  ($0.50 per share)
—

—

—

(2,228
)
—

—

(2,228
)
   Stock based compensation
  expense
—

—

6

—

—

—

6

   Exercise of stock options
700

1

11

—

—

—

12

   Purchase of treasury stock
(700
)
—

—

—

(13
)
—

(13
)
Balances, June 30, 2012
4,457,204

$
9,848

$
293

$
38,822

$
(3,836
)
$
(4,099
)
$
41,028


See accompanying notes to unaudited interim consolidated financial statements.


Union Bankshares, Inc. Page 4


UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended
June 30,
 
2013
2012
 
(Dollars in thousands)
Cash Flows From Operating Activities
 
 
Net income
$
3,534

$
2,665

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
Depreciation
464

405

Provision for loan losses
135

360

Deferred income tax provision (benefit)
138

(492
)
Net amortization of investment securities
24

47

Equity in losses of limited partnerships
345

315

Stock based compensation expense
6

6

Net decrease in unamortized loan costs
9

15

Proceeds from sales of loans held for sale
67,450

49,394

Origination of loans held for sale
(59,646
)
(58,470
)
Net gains on sales of loans held for sale
(1,250
)
(1,141
)
Net gain on disposals of premises and equipment
—

(14
)
Net losses (gains) on sales of investment securities available-for-sale
1

(44
)
Write-downs of impaired assets
36

77

Net losses on sales of other real estate owned
5

6

(Increase) decrease in accrued interest receivable
(34
)
79

Amortization of core deposit intangible
86

86

Decrease in other assets
879

149

Increase in other liabilities
261

911

Net cash provided by (used in) operating activities
12,443

(5,646
)
Cash Flows From Investing Activities

 
Interest bearing deposits in banks

 
Proceeds from maturities and redemptions
4,379

4,326

Purchases
(4,719
)
(2,333
)
Investment securities held-to-maturity
 
 
Proceeds from maturities, calls and paydowns
500

4,000

Purchases
(4,216
)
—

Investment securities available-for-sale
 
 
Proceeds from sales
1,015

1,290

Proceeds from maturities, calls and paydowns
2,798

11,631

Purchases
(11,949
)
(4,808
)
Purchase of nonmarketable stock, net
(77
)
—

Net (increase) decrease in loans
(705
)
2,951

Recoveries of loans charged off
26

29

Purchases of premises and equipment
(359
)
(1,537
)
Investments in limited partnerships
—

(690
)
Proceeds from sales of premises and equipment
—

19

Proceeds from sales of other real estate owned
367

32

Net cash (used in) provided by investing activities
(12,940
)
14,910

 
 
 

Union Bankshares, Inc. Page 5


Cash Flows From Financing Activities
 
 
Repayment of long-term debt
(935
)
(678
)
Net increase (decrease) in short-term borrowings outstanding
5,366

(4,354
)
Net decrease in noninterest bearing deposits
(3,827
)
(2,143
)
Net (decrease) increase in interest bearing deposits
(7,329
)
10,260

Net decrease in time deposits
(24,820
)
(22,149
)
Issuance of common stock
33

12

Purchase of treasury stock
(19
)
(13
)
Dividends paid
(2,228
)
(2,228
)
Net cash used in financing activities
(33,759
)
(21,293
)
Net decrease in cash and cash equivalents
(34,256
)
(12,029
)
Cash and cash equivalents
 
 
Beginning of period
46,510

24,381

End of period
$
12,254

$
12,352

Supplemental Disclosures of Cash Flow Information
 
 
Interest paid
$
1,456

$
1,962

Income taxes paid
$
650

$
725

 
 
 
Supplemental Schedule of Noncash Investing and Financing Activities
 
 
Other real estate acquired in settlement of loans
$
—

$
190

 
 
 

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 6

UNION BANKSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Note 1.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Union Bankshares, Inc. and Subsidiary (the Company) as of June 30, 2013, and for the three and six months ended June 30, 2013 and 2012, have been prepared in conformity with U.S. generally accepted accounting principles (GAAP) for interim financial information, general practices within the banking industry, and the accounting policies described in the Company’s Annual Report to Shareholders and Annual Report on Form 10-K for the year ended December 31, 2012. In the opinion of the Company’s management, all adjustments, consisting only of normal recurring adjustments and disclosures necessary for a fair presentation of the information contained herein, have been made. This information should be read in conjunction with the Company’s 2012 Annual Report to Shareholders and 2012 Annual Report on Form 10-K. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full fiscal year ending December 31, 2013, or any other interim period.

Certain amounts in the 2012 consolidated financial statements have been reclassified to conform to the 2013 presentation.

Note 2. Legal Contingencies
In the normal course of business, the Company is involved in various legal and other proceedings. In the opinion of management, any liability resulting from such proceedings is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.

Note 3. Per Share Information
Earnings per common share are computed based on the weighted average number of shares of common stock outstanding during the period and reduced for shares held in treasury. The assumed conversion of outstanding exercisable stock options does not result in material dilution and is not included in the calculation.

Note 4. Recent Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.”  This ASU amends the scope of FASB ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities,” which requires additional disclosure regarding offsetting of assets and liabilities to enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position. The provisions of the ASUs were effective for annual and interim reporting periods beginning on or after January 1, 2013. As the ASUs address financial statement disclosures only, their adoption effective January 1, 2013 did not impact the Company's consolidated financial position or results of operations.

In February 2013, the FASB issued ASU No. 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This ASU adds new disclosure requirements for items reclassified out of accumulated other comprehensive income to be in a single location in the financial statements. The Company's disclosures of the components of accumulated other comprehensive income are disclosed in its Consolidated Statements of Comprehensive Income. For the three and six months ended June 30, 2013, the items requiring reclassification out of accumulated other comprehensive income are disclosed in Note 10. The new guidance became effective for all interim and annual periods beginning January 1, 2013. Since this ASU addresses financial statement disclosures only, the adoption of this guidance effective January 1, 2013 did not have an impact on the Company's consolidated financial position or results of operations.

Note 5. Goodwill and Other Intangible Assets
As a result of the acquisition of three New Hampshire branches in May 2011, the Company recorded goodwill amounting to $2.2 million. The goodwill is not amortizable. Goodwill is evaluated for impairment annually, in accordance with current authoritative guidance. Management assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the Company, in total, is less than its carrying amount. Management is not aware of any such events or circumstances that would cause it to conclude that the fair value of the Company is less than its carrying amount.

Union Bankshares, Inc. Page 7



The Company also recorded $1.7 million of acquired identifiable intangible assets in connection with the branch acquisition, representing the core deposit intangible which is subject to straight-line amortization over the estimated 10 year average life of the core deposit base, absent any future impairment. Management will evaluate the core deposit intangible for impairment if conditions warrant.

Amortization expense for the core deposit intangible was $42 thousand for the three months ended June 30, 2013 and 2012, and was $86 thousand for the six months ended June 30, 2013 and 2012. The amortization expense is included in other noninterest expense on the consolidated statement of income and is deductible for tax purposes. As of June 30, 2013, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:
 
(Dollars in thousands)
2013
$
85

2014
171

2015
171

2016
171

2017
171

Thereafter
583

Total
$
1,352


Note 6. Investment Securities
Investment securities as of the balance sheet dates consisted of the following:
June 30, 2013
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
(Dollars in thousands)
Available-for-sale
 
 
 
 
Debt securities:
 
 
 
 
U.S. Government-sponsored enterprises
$
12,379

$
4

$
(433
)
$
11,950

Agency mortgage-backed
2,054

17

(32
)
2,039

State and political subdivisions
9,789

341

(57
)
10,073

Corporate
2,795

—

(148
)
2,647

Total debt securities
27,017

362

(670
)
26,709

Marketable equity securities
746

159

(2
)
903

Mutual funds
207

—

—

207

Total
$
27,970

$
521

$
(672
)
$
27,819

Held-to-maturity
 
 
 
 
U.S. Government-sponsored enterprises
$
9,213

$
—

$
(393
)
$
8,820



Union Bankshares, Inc. Page 8


December 31, 2012
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
(Dollars in thousands)
Available-for-sale
 
 
 
 
Debt securities:
 
 
 
 
U.S. Government-sponsored enterprises
$
4,500

$
22

$
(3
)
$
4,519

Agency mortgage-backed
1,343

36

—

1,379

State and political subdivisions
9,803

664

(5
)
10,462

Corporate
3,294

28

(22
)
3,300

Total debt securities
18,940

750

(30
)
19,660

Marketable equity securities
746

66

(15
)
797

Mutual funds
173

—

—

173

Total
$
19,859

$
816

$
(45
)
$
20,630

Held-to-maturity
 
 
 
 
U.S. Government-sponsored enterprises
$
5,496

$
3

$
(22
)
$
5,477


Proceeds from the sale of securities available-for-sale were $504 thousand and $1.0 million for the three and six months ended June 30, 2013, respectively. Gross realized gains from the sale of securities available-for-sale were $0 and $3 thousand for the three and six months ended June 30, 2013, respectively, while gross realized losses were $4 thousand for both the three and six months ended June 30, 2013. Proceeds from the sale of securities available-for-sale were $502 thousand and $1.3 million for the three and six months ended June 30, 2012, respectively. Gross realized gains from the sale of securities available-for-sale were $2 thousand and $44 thousand for the three and six months ended June 30, 2012, respectively, while there were no gross realized losses for either period. The specific identification method is used to determine realized gains and losses on sales of securities available-for-sale.

The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of June 30, 2013 were as follows:
 
Amortized
Cost
Fair
Value
 
(Dollars in thousands)
Available-for-sale
 
 
Due in one year or less
$
190

$
191

Due from one to five years
2,343

2,386

Due from five to ten years
11,539

11,368

Due after ten years
10,891

10,725

 
24,963

24,670

Agency mortgage-backed securities
2,054

2,039

Total debt securities available-for-sale
$
27,017

$
26,709

Held-to-maturity
 
 
Due from one to five years
$
997

$
971

Due from five to ten years
2,000

1,923

Due after ten years
6,216

5,926

Total debt securities held-to-maturity
$
9,213

$
8,820


Actual maturities may differ for certain debt securities that may be called by the issuer prior to the contractual maturity. Actual maturities usually differ from contractual maturities on agency mortgage-backed securities because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these agency mortgage-backed securities are shown separately and not included in the contractual maturity categories in the above maturity summary.


Union Bankshares, Inc. Page 9


Information pertaining to all investment securities with gross unrealized losses as of the balance sheet dates, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
June 30, 2013
Less Than 12 Months
12 Months and over
Total
 
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
 
(Dollars in thousands)
Debt securities:
 
 
 
 
 
 
U.S. Government-sponsored
  enterprises
$
19,266

$
(826
)
$
—

$
—

$
19,266

$
(826
)
Agency mortgage-backed
961

(32
)
—

—

961

(32
)
State and political subdivisions
1,301

(57
)
—

—

1,301

(57
)
Corporate
2,647

(148
)
—

—

2,647

(148
)
Total debt securities
24,175

(1,063
)
—

—

24,175

(1,063
)
Marketable equity securities
43

(1
)
13

(1
)
56

(2
)
Total
$
24,218

$
(1,064
)
$
13

$
(1
)
$
24,231

$
(1,065
)
December 31, 2012
Less Than 12 Months
12 Months and over
Total
 
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
Fair
Value
Gross
Unrealized
Losses
 
(Dollars in thousands)
Debt securities:
 
 
 
 
 
 
U.S. Government-sponsored
  enterprises
$
4,472

$
(25
)
$
—

$
—

$
4,472

$
(25
)
State and political subdivisions
345

(5
)
—

—

345

(5
)
Corporate
2,266

(22
)
—

—

2,266

(22
)
Total debt securities
7,083

(52
)
—

—

7,083

(52
)
Marketable equity securities
91

(7
)
42

(8
)
133

(15
)
Total
$
7,174

$
(59
)
$
42

$
(8
)
$
7,216

$
(67
)
The Company evaluates all investment securities on a quarterly basis, and more frequently when economic conditions warrant, to determine if an other-than-temporary impairment exists. A debt security is considered impaired if the fair value is lower than its amortized cost basis at the report date. If impaired, management then assesses whether the unrealized loss is other-than-temporary.

An unrealized loss on a debt security is generally deemed to be other-than temporary and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of an other-than-temporary impairment write-down is recorded, net of tax effect, through net income as a component of net other-than-temporary impairment losses in the consolidated statement of income, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), provided the Company does not intend to sell the underlying debt security and it is "more likely than not" that the Company will not have to sell the debt security prior to recovery.

Management considers the following factors in determining whether an other-than-temporary impairment exists and the period over which the debt security is expected to recover:
•
The length of time, and extent to which, the fair value has been less than the amortized cost;
•
Adverse conditions specifically related to the security, industry, or geographic area;
•
The historical and implied volatility of the fair value of the security;
•
The payment structure of the debt security and the likelihood of the issuer being able to make payments that may increase in the future;
•
Failure of the issuer of the security to make scheduled interest or principal payments;
•
Any changes to the rating of the security by a rating agency;
•
Recoveries or additional declines in fair value subsequent to the balance sheet date; and

Union Bankshares, Inc. Page 10


•
The nature of the issuer, including whether it is a private company, public entity or government-sponsored enterprise, and the existence or likelihood of any government or third party guaranty.

At June 30, 2013, held-to-maturity and available-for-sale securities, consisting of 23 U.S. Government-sponsored enterprise securities, two agency mortgage-backed securities, five tax-exempt municipal securities, six corporate bonds, and two marketable equity securities, had aggregate unrealized losses of $1.1 million. One marketable equity security had continuous unrealized losses for longer than twelve months. The Company has the ability to hold such securities for the foreseeable future. No declines were deemed by management to be other-than-temporary at June 30, 2013.

Investment securities with a carrying amount of $2.5 million and $6.7 million at June 30, 2013 and December 31, 2012, respectively, were pledged as collateral for public deposits and for other purposes as required or permitted by law.

Note 7.  Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their unpaid principal balances, adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
Loan interest income is accrued daily on outstanding balances. The following accounting policies, related to accrual and nonaccrual loans, apply to all portfolio segments and loan classes, which the Company considers to be the same. The accrual of interest is normally discontinued when a loan is specifically determined to be impaired and/or management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. Normally, any unpaid interest previously accrued on those loans is reversed against current period interest income. A loan may be restored to accrual status when its financial status has significantly improved and there is no principal or interest past due. A loan may also be restored to accrual status if the borrower makes six consecutive monthly payments or the lump sum equivalent. Income on nonaccrual loans is generally not recognized unless a loan is returned to accrual status or after all principal has been collected. Interest income generally is not recognized on impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Delinquency status is determined based on contractual terms for all portfolio segments and loan classes. Loans past due 30 days or more are considered delinquent.
Loan origination fees and direct loan origination costs are deferred and amortized as an adjustment of the related loan's yield using methods that approximate the interest method. The Company generally amortizes these amounts over the estimated average life of the related loans.
The loans purchased in the May 2011 acquisition of branches were recorded at $32.9 million, the estimated fair value at the time of purchase. The estimated fair value contains both accretable and nonaccretable components. The accretable component is amortized as an adjustment to the related loan yield over the average life of the loan. The nonaccretable component represents probable loss due to credit risk and is reviewed by management periodically and adjusted as deemed necessary. At the acquisition date, the fair value of the loans acquired resulted in an accretable loan premium component of $545 thousand, less a nonaccretable credit risk component of $318 thousand.
The following table summarizes activity in the accretable loan premium component for the acquired loan portfolio:
 
For The Three Months Ended June 30,
For The Six Months Ended June 30,
 
2013
2012
2013
2012
 
(Dollars in thousands)
Balance at beginning of period
$
434

$
468

$
454

$
491

Loan premium amortization
(20
)
(23
)
(40
)
(46
)
Balance at end of period
$
414

$
445

$
414

$
445

Loan premium amortization has been charged to Interest and fees on loans on the Company's statements of income for the periods reported. The remaining accretable loan premium component balance was $414 thousand at June 30, 2013 and $454 thousand at December 31, 2012. The balance of the nonaccretable credit risk component was $296 thousand at June 30, 2013 and December 31, 2012. The net carrying amounts of the acquired loans were $19.3 million and $22.9 million at June 30, 2013 and December 31, 2012, respectively, and are included in the loan balances below.

Union Bankshares, Inc. Page 11


The composition of Net loans as of the balance sheet dates was as follows:
 
June 30,
2013
December 31,
2012
 
(Dollars in thousands)
Residential real estate
$
162,805

$
154,938

Construction real estate
33,347

36,018

Commercial real estate
208,583

197,240

Commercial
21,770

21,463

Consumer
5,624

6,065

Municipal
12,655

28,421

    Gross loans
444,784

444,145

Allowance for loan losses
(4,752
)
(4,657
)
Net deferred loan costs
130

139

    Net loans
$
440,162

$
439,627

Residential real estate loans aggregating $4.5 million and $11.4 million at June 30, 2013 and December 31, 2012, respectively, were pledged as collateral on deposits of municipalities. Qualified residential first mortgage loans held by Union may be pledged as collateral for borrowings from the Federal Home Loan Bank (FHLB) of Boston under a blanket lien.

A summary of current, past due and nonaccrual loans as of the balance sheet dates follows:
June 30, 2013
Current
30-59 Days
60-89 Days
90 Days and Over and accruing
Nonaccrual
Total
 
(Dollars in thousands)
Residential real estate
$
159,286

$
248

$
665

$
885

$
1,721

$
162,805

Construction real estate
33,315

—

6

—

26

33,347

Commercial real estate
206,070

1,788

444

12

269

208,583

Commercial
21,695

23

—

—

52

21,770

Consumer
5,566

16

—

8

34

5,624

Municipal
12,655

—

—

—

—

12,655

Total
$
438,587

$
2,075

$
1,115

$
905

$
2,102

$
444,784


December 31, 2012
Current
30-59 Days
60-89 Days
90 Days and Over and accruing
Nonaccrual
Total
 
(Dollars in thousands)
Residential real estate
$
148,479

$
2,573

$
1,274

$
296

$
2,316

$
154,938

Construction real estate
35,944

24

6

—

44

36,018

Commercial real estate
193,079

2,943

812

—

406

197,240

Commercial
20,541

811

39

—

72

21,463

Consumer
6,012

31

10

11

1

6,065

Municipal
28,421

—

—

—

—

28,421

Total
$
432,476

$
6,382

$
2,141

$
307

$
2,839

$
444,145


Aggregate interest on nonaccrual loans not recognized was $1.1 million and $1.0 million as of June 30, 2013 and 2012, respectively, and $1.0 million as of December 31, 2012.


Union Bankshares, Inc. Page 12


Note 8.  Allowance for Loan Losses and Credit Quality

The allowance for loan losses is established for estimated losses in the loan portfolio through a provision for loan losses charged to earnings. For all loan classes, loan losses are charged against the allowance when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio as of the balance sheet date. The amount of the allowance is based on management's periodic evaluation of the collectability of the loan portfolio, including the nature, volume and risk characteristics of the portfolio, credit concentrations, trends in historical loss experience, estimated value of any underlying collateral, specific impaired loans and economic conditions. There has been no change to the methodology used to estimate the allowance for loan losses. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions or other relevant factors.

In addition, various regulatory agencies, as an integral part of their examination process, regularly review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses, with a corresponding charge to earnings, based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

The allowance consists of specific, general and unallocated components. The specific component relates to the loans that are classified as impaired. Loans are evaluated for impairment and may be classified as impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans may also include troubled loans that are restructured. A troubled debt restructuring (TDR) occurs when the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that would otherwise not be granted. TDR may include the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan's terms (such as reduction of stated interest rates below market rates, extension of maturity that does not conform to the Company's policies, reduction of face amount of the loan, reduction of accrued interest, or reduction or deferment of loan payments ), or a combination. A specific reserve amount is allocated to the allowance for individual loans that have been classified as impaired based on management's estimate of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. The Company accounts for the change in present value attributable to the passage of time in the loan loss reserve. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship.

The general component represents the level of allowance allocable to each loan portfolio segment with similar risk characteristics and is determined based on historical loss experience, adjusted for qualitative factors, for each class of loan. Management deems a five year average to be an appropriate time frame on which to base historical losses for each portfolio segment. Qualitative factors considered include underwriting, economic and market conditions, portfolio composition, collateral values, delinquencies, lender experience and legal issues. The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows:
•
Residential real estate - Loans in this segment are collateralized by owner-occupied 1-4 family residential real estate, second and vacation homes, 1-4 family investment properties, home equity and second mortgage loans. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, could have an effect on the credit quality of this segment.

•
Construction real estate - Loans in this segment include residential and commercial construction properties, land and land development loans. Repayment is dependent on the credit quality of the individual borrower and/or the underlying cash flows generated by the properties being constructed. The overall health of the economy, including unemployment rates, housing prices, vacancy rates and material costs, could have an effect on the credit quality of this segment.

•
Commercial real estate - Loans in this segment are primarily properties occupied by businesses or income-producing properties. The underlying cash flows generated by the properties may be adversely impacted by a

Union Bankshares, Inc. Page 13


downturn in the economy as evidenced by a general slowdown in business or increased vacancy rates which, in turn, could have an effect on the credit quality of this segment. Management requests business financial statements at least annually and monitors the cash flows of these loans.

•
Commercial - Loans in this segment are made to businesses and are generally secured by nonreal estate assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer or business spending, could have an effect on the credit quality of this segment.

•
Consumer - Loans in this segment are made to individuals for personal expenditures, such as an automobile purchase, and include unsecured loans. Repayment is primarily dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment, could have an effect on the credit quality of this segment.

•
Municipal - Loans in this segment are made to municipalities located within the Company's service area. Repayment is primarily dependent on taxes or other funds collected annually by the municipalities. Management considers there to be minimal risk surrounding the credit quality of this segment.
An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

All evaluations are inherently subjective as they require estimates that are susceptible to significant revision as more information becomes available or as changes occur in economic conditions or other relevant factors. Despite the allocation shown in the tables below, the Allowance for loan losses is general in nature and is available to absorb losses from any loan type.
Changes in the Allowance for loan losses, by class of loans, for the three and six months ended June 30, 2013 and 2012 were as follows:
For The Three Months Ended June 30, 2013
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Balance, March 31, 2013
$
1,281

$
373

$
2,722

$
175

$
34

$
32

$
97

$
4,714

Provision (credit) for loan losses
24

71

47

36

(1
)
(18
)
(84
)
75

Recoveries of amounts
  charged off
9

3

—

2

1

—

—

15

 
1,314

447

2,769

213

34

14

13

4,804

Amounts charged off
(16
)
(16
)
—

(18
)
(2
)
—

—

(52
)
Balance, June 30, 2013
$
1,298

$
431

$
2,769

$
195

$
32

$
14

$
13

$
4,752

For The Three Months Ended June 30, 2012
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Balance, March 31, 2012
$
1,260

$
381

$
2,405

$
248

$
54

$
27

$
31

$
4,406

Provision (credit) for loan losses
39

43

49

16

—

(13
)
46

180

Recoveries of amounts
  charged off
7

3

—

1

8

—

—

19

 
1,306

427

2,454

265

62

14

77

4,605

Amounts charged off
(8
)
(8
)
(3
)
—

(6
)
—

—

(25
)
Balance, June 30, 2012
$
1,298

$
419

$
2,451

$
265

$
56

$
14

$
77

$
4,580


Union Bankshares, Inc. Page 14


For The Six Months Ended June 30, 2013
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Balance, December 31, 2012
$
1,291

$
456

$
2,532

$
159

$
39

$
30

$
150

$
4,657

Provision (credit) for loan losses
23

(15
)
237

51

(8
)
(16
)
(137
)
135

Recoveries of amounts
  charged off
10

6

—

3

7

—

—

26

 
1,324

447

2,769

213

38

14

13

4,818

Amounts charged off
(26
)
(16
)
—

(18
)
(6
)
—

—

(66
)
Balance, June 30, 2013
$
1,298

$
431

$
2,769

$
195

$
32

$
14

$
13

$
4,752

For The Six Months Ended June 30, 2012
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Balance, December 31, 2011
$
1,250

$
367

$
2,278

$
232

$
60

$
21

$
18

$
4,226

Provision (credit) for loan losses
49

54

176

29

—

(7
)
59

360

Recoveries of amounts
  charged off
7

6

—

4

12

—

—

29

 
1,306

427

2,454

265

72

14

77

4,615

Amounts charged off
(8
)
(8
)
(3
)
—

(16
)
—

—

(35
)
Balance, June 30, 2012
$
1,298

$
419

$
2,451

$
265

$
56

$
14

$
77

$
4,580


The allocation of the Allowance for loan losses, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates was as follows:
June 30, 2013
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
51

$
16

$
20

$
3

$
—

$
—

$
—

$
90

Collectively evaluated
   for impairment
1,247

415

2,749

192

32

14

13

4,662

Total allocated
$
1,298

$
431

$
2,769

$
195

$
32

$
14

$
13

$
4,752

December 31, 2012
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
49

$
18

$
53

$
—

$
—

$
—

$
—

$
120

Collectively evaluated
   for impairment
1,242

438

2,479

159

39

30

150

4,537

Total allocated
$
1,291

$
456

$
2,532

$
159

$
39

$
30

$
150

$
4,657



Union Bankshares, Inc. Page 15


The recorded investment in loans, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates was as follows:
June 30, 2013
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
888

$
351

$
3,262

$
117

$
—

$
—

$
4,618

Collectively evaluated
   for impairment
153,957

32,990

194,974

21,306

5,443

12,169

420,839

 
154,845

33,341

198,236

21,423

5,443

12,169

425,457

Acquired loans
7,960

6

10,347

347

181

486

19,327

Total
$
162,805

$
33,347

$
208,583

$
21,770

$
5,624

$
12,655

$
444,784

December 31, 2012
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
703

$
145

$
3,427

$
127

$
—

$
—

$
4,402

Collectively evaluated
   for impairment
144,921

35,866

181,406

20,851

5,846

27,913

416,803

 
145,624

36,011

184,833

20,978

5,846

27,913

421,205

Acquired loans
9,314

7

12,407

485

219

508

22,940

Total
$
154,938

$
36,018

$
197,240

$
21,463

$
6,065

$
28,421

$
444,145


Risk and collateral ratings are assigned to loans and are subject to ongoing monitoring by lending and credit personnel with such ratings updated annually or more frequently if warranted. The following is an overview of the Company's loan rating system:

1-3 Rating - Pass
Risk-rating grades "1" through "3" comprise those loans ranging from those with lower than average credit risk, defined as borrowers with high liquidity, excellent financial condition, strong management, favorable industry trends or loans secured by highly liquid assets, through those with marginal credit risk, defined as borrowers that, while creditworthy, exhibit some characteristics requiring special attention by the account officer.

4/M Rating - Satisfactory/Monitor
Borrowers exhibit potential credit weaknesses or downward trends warranting management's attention. While potentially weak, these borrowers are currently marginally acceptable; no loss of principal or interest is envisioned. When warranted, these credits may be monitored on the watch list.

5-7 Rating - Substandard
Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. The loan may be inadequately protected by the net worth and paying capacity of the obligor and/or the underlying collateral is inadequate.


Union Bankshares, Inc. Page 16


The following tables summarize the loan ratings applied to the Company's loans by class as of the balance sheet dates:
June 30, 2013
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Pass
$
141,026

$
30,253

$
138,330

$
18,608

$
5,307

$
12,169

$
345,693

Satisfactory/Monitor
11,052

2,591

51,043

2,451

120

—

67,257

Substandard
2,767

497

8,863

364

16

—

12,507

Total
154,845

33,341

198,236

21,423

5,443

12,169

425,457

Acquired loans
7,960

6

10,347

347

181

486

19,327

Total
$
162,805

$
33,347

$
208,583

$
21,770

$
5,624

$
12,655

$
444,784


December 31, 2012
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Pass
$
134,737

$
30,115

$
130,956

$
18,258

$
5,722

$
27,913

$
347,701

Satisfactory/Monitor
7,749

5,751

46,174

2,476

102

—

62,252

Substandard
3,138

145

7,703

244

22

—

11,252

Total
145,624

36,011

184,833

20,978

5,846

27,913

421,205

Acquired loans
9,314

7

12,407

485

219

508

22,940

Total
$
154,938

$
36,018

$
197,240

$
21,463

$
6,065

$
28,421

$
444,145


Acquired loans are risk rated, as appropriate, according to the Company's loan rating system, but such ratings are not taken into account in establishing the allowance for loan losses. Rather, in accordance with applicable accounting principles, acquired loans are initially recorded at fair value, determined based upon an estimate of the amount and timing of both principal and interest cash flows expected to be collected and discounted using a market interest rate, which includes an estimate of future credit losses expected to be incurred over the life of the portfolio. The primary credit quality indicator for acquired loans is whether there has been a decrease in expected cash flows. Monitoring of this portfolio is ongoing to determine if there is evidence of deterioration in credit quality since acquisition. As of June 30, 2013, there was no allowance for loan losses for acquired loans.


Union Bankshares, Inc. Page 17


The following table provides information with respect to impaired loans by class of loan as of and for the three and six months ended June 30, 2013:
 
As of June 30, 2013
For The Three Months Ended June 30, 2013
For The Six Months Ended June 30, 2013
 
Recorded Investment
(1)
Principal Balance
(1)
Related Allowance
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
 
(Dollars in thousands)
With an allowance recorded:
 
 
 
 
 
 
 
Residential real estate
$
446

$
457

$
51

 
 
 
 
Construction real estate
325

325

16

 
 
 
 
Commercial real estate
2,102

2,102

20

 
 
 
 
Commercial
117

117

3

 
 
 
 
 
2,990

3,001

90

 
 
 
 
With no allowance recorded:
 
 
 
 
 
 
 
Residential real estate
442

601

—

 
 
 
 
Construction real estate
26

48

—

 
 
 
 
Commercial real estate
1,160

1,256

—

 
 
 
 
 
1,628

1,905

—

 
 
 
 
Total:
 
 
 
 
 
 
 
Residential real estate
888

1,058

51

$
820

$
4

$
781

$
8

Construction real estate
351

373

16

246

1

213

2

Commercial real estate
3,262

3,358

20

3,329

41

3,362

70

Commercial
117

117

3

120

2

122

4

Total
$
4,618

$
4,906

$
90

$
4,515

$
48

$
4,478

$
84

____________________
(1)
Does not reflect government guaranties on impaired loans as of June 30, 2013 totaling $750 thousand.

The following table provides information with respect to impaired loans by class of loan as of and for the three and six months ended June 30, 2012:
 
As of June 30, 2012
For The Three Months Ended June 30, 2012
For The Six Months Ended June 30, 2012
 
Recorded Investment
(1)
Principal Balance
(1)
Related Allowance
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
 
(Dollars in thousands)
Total:
 
 
 
 
 
 
 
Residential real estate
$
399

$
489

$
19

$
403

$
2

$
408

$
2

Construction real estate
43

48

13

21

—

14

—

Commercial real estate
2,761

2,830

104

2,426

23

2,359

69

Total
$
3,203

$
3,367

$
136

$
2,850

$
25

$
2,781

$
71

____________________
(1)
Does not reflect government guaranties on impaired loans as of June 30, 2012 totaling $87 thousand.


Union Bankshares, Inc. Page 18


The following table provides information with respect to impaired loans as of December 31, 2012:
 
December 31, 2012
 
 
 
Recorded Investment
(1)
Principal Balance
(1)
Related Allowance
 
 
 
(Dollars in thousands)
 
 
With an allowance recorded:
 
 
 
 
 
Residential real estate
$
354

$
360

$
49

 
 
Construction real estate
145

150

18

 
 
Commercial real estate
2,380

2,411

53

 
 
 
2,879

2,921

120

 
 
With no allowance recorded:
 
 
 
 
 
Residential real estate
349

491

—

 
 
Commercial real estate
1,047

1,133

—

 
 
Commercial
127

127

—

 
 
 
1,523

1,751

—

 
 
 
 
 
 
 
 
Total:
 
 
 
 
 
Residential real estate
703

851

49

 
 
Construction real estate
145

150

18

 
 
Commercial real estate
3,427

3,544

53

 
 
Commercial
127

127

—

 
 
Total
$
4,402

$
4,672

$
120

 
 
____________________
(1)
Does not reflect government guaranties on impaired loans as of December 31, 2012 totaling $770 thousand.

The following is a summary of TDR loans by class of loan as of the following dates:
 
June 30, 2013
December 31, 2012
 
Number of Loans
Principal Balance
Number of Loans
Principal Balance
Residential real estate
4

$
419

5

$
479

Construction real estate
2

130

2

145

Commercial real estate
2

502

3

2,226

Total
8

$
1,051

10

$
2,850

The TDR loans above represent loan modifications in which a concession was provided to the borrower, such as due date extensions, maturity date extensions, interest rate reductions or the forgiveness of accrued interest. Troubled loans, that are restructured and meet established thresholds, are classified as impaired and a specific reserve amount is allocated to the allowance on the basis of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows.

Union Bankshares, Inc. Page 19


There was no new TDR activity during the three and six months ended June 30, 2013. The following table provides new TDR activity for the three and six months ended June 30, 2012:
 
New TDRs During the
New TDRs During the
 
Three Months Ended June 30, 2012
Six Months Ended June 30, 2012
 
Number of Loans
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
Number of Loans
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
 
(Dollars in thousands)
Construction real estate
1

$
43

$
43

1

$
43

$
43


There were no TDR loans modified within the previous twelve months that had subsequently defaulted during the three and six month periods ended June 30, 2013 or June 30, 2012. TDR loans are considered defaulted at 90 days past due.

At June 30, 2013 and December 31, 2012, the Company was not committed to lend any additional funds to borrowers whose loans were nonperforming, impaired or restructured.

Note 9. Defined Benefit Pension Plan

Union Bank, the Company’s sole subsidiary, sponsors a noncontributory defined benefit pension plan covering all eligible employees employed prior to October 5, 2012. On October 5, 2012, the Company closed The Union Bank Pension Plan ('Plan') to new participants and froze the accrual of retirement benefits for current participants. It is Union's current intent to continue to maintain the frozen Plan and related Trust and to distribute benefits to participants at such time and in such manner as provided under the terms of the Plan. The Company will continue to recognize pension expense and cash funding obligations for the remaining life of the associated liability for the frozen benefits under the Plan. The Plan provides defined benefits based on years of service and final average salary prior to October 5, 2012.

Net periodic pension benefit cost for the three and six months ended June 30 consisted of the following components:
 
Three Months Ended
June 30,
Six Months Ended
June 30,
 
2013
2012
2013
2012
 
(Dollars in thousands)
Service cost
$
—

$
294

$
—

$
550

Interest cost on projected benefit obligation
175

220

350

442

Expected return on plan assets
(252
)
(237
)
(504
)
(474
)
Amortization of prior service cost
—

2

—

4

Amortization of net loss
95

158

95

294

Net periodic benefit (credit) cost
$
18

$
437

$
(59
)
$
816


Note 10. Other Comprehensive Income (Loss)

Accounting principles generally require recognized revenue, expenses, gains and losses be included in net income or loss. Certain changes in assets and liabilities, such as the after tax effect of unrealized gains and losses on investment securities available-for-sale that are not other than temporarily impaired and the unfunded liability for the defined benefit pension plan, are not reflected in the consolidated statement of income. The cumulative effect of such items, net of tax effect, is reported as a separate component of the equity section of the balance sheet (Accumulated other comprehensive income or loss). Other comprehensive income or loss, along with net income, comprises the Company's total comprehensive income or loss.


Union Bankshares, Inc. Page 20


As of the balance sheet dates, the components of Accumulated other comprehensive loss, net of tax, were:
 
June 30,
2013
December 31,
2012
 
(Dollars in thousands)
Net unrealized (loss) gain on investment securities available-for-sale
$
(100
)
$
508

Defined benefit pension plan:
 
 
Net unrealized actuarial loss
(2,488
)
(2,518
)
Total
$
(2,588
)
$
(2,010
)

The following table discloses the tax effects allocated to each component of other comprehensive (loss) income for the three months ended June 30:
 
Three Months Ended
 
June 30, 2013
June 30, 2012
 
Before-Tax Amount
Tax (Expense) or Benefit
Net-of-Tax Amount
Before-Tax Amount
Tax (Expense) or Benefit
Net-of-Tax Amount
 
(Dollars in thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
Net unrealized holding (losses) gains arising during the period on investment securities available-for-sale
$
(936
)
$
318

$
(618
)
$
139

$
(47
)
$
92

Reclassification adjustment for net losses (gains) on investment securities available-for-sale realized in net income
4

(1
)
3

(2
)
1

(1
)
        Total
(932
)
317

(615
)
137

(46
)
91

Defined benefit pension plan:
 
 
 
 
 
 
Reclassification adjustment for amortization of net actuarial loss realized in net income
95

(32
)
63

158

(54
)
104

Reclassification adjustment for amortization of prior service cost realized in net income
—

—

—

2

(1
)
1

Total
95

(32
)
63

160

(55
)
105

Total other comprehensive (loss) income
$
(837
)
$
285

$
(552
)
$
297

$
(101
)
$
196



Union Bankshares, Inc. Page 21


The following table discloses the tax effects allocated to each component of other comprehensive (loss) income for the six months ended June 30:
 
Six Months Ended
 
June 30, 2013
June 30, 2012
 
Before-Tax Amount
Tax (Expense) or Benefit
Net-of-Tax Amount
Before-Tax Amount
Tax (Expense) or Benefit
Net-of-Tax Amount
 
(Dollars in thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
Net unrealized holding (losses) gains arising during the period on investment securities available-for-sale
$
(922
)
$
313

$
(609
)
$
82

$
(28
)
$
54

Reclassification adjustment for net losses (gains) on investment securities available-for-sale realized in net income
1

—

1

(44
)
15

(29
)
        Total
(921
)
313

(608
)
38

(13
)
25

Defined benefit pension plan:
 
 
 
 
 
 
Net actuarial (loss) gain arising during the period
(49
)
16

(33
)
39

(13
)
26

Reclassification adjustment for amortization of net actuarial loss realized in net income
95

(32
)
63

294

(100
)
194

Reclassification adjustment for amortization of prior service cost realized in net income
—

—

—

4

(2
)
2

Total
46

(16
)
30

337

(115
)
222

Total other comprehensive (loss) income
$
(875
)
$
297

$
(578
)
$
375

$
(128
)
$
247