Edgar Filing: UNION BANKSHARES INC

6.30.14 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

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2014

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, 2014:



Common Stock, $2 par value	4,458,517	shares

UNION BANKSHARES, INC.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION



Item 1. Financial Statements.
Unaudited Consolidated Financial Statements Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets	Page 1
Consolidated Statements of Income	Page 2
Consolidated Statements of Comprehensive Income	Page 3
Consolidated Statements of Changes in Stockholders' Equity	Page 4
Consolidated Statements of Cash Flows	Page 5
Notes to Unaudited Interim Consolidated Financial Statements	Page 7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	Page 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	Page 48
Item 4. Controls and Procedures.	Page 48

PART II OTHER INFORMATION

Item 1. Legal Proceedings.	Page 49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	Page 49
Item 6. Exhibits.	Page 49

Signatures	Page 50

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



	June 30, 2014			December 31, 2013
	(Unaudited)
Assets	(Dollars in thousands)
Cash and due from banks	$	4,154		$	5,223
Federal funds sold and overnight deposits	15,490			25,496
Cash and cash equivalents	19,644			30,719
Interest bearing deposits in banks	13,713			17,613
Investment securities available-for-sale	40,359			34,281
Investment securities held-to-maturity (fair value $9.3 million and $10.4 million at June 30, 2014 and December 31, 2013, respectively)	9,642			11,211
Loans held for sale	6,662			3,840
Loans	455,345			461,113
Allowance for loan losses	(4,610		)	(4,647		)
Net deferred loan costs	238			170
Net loans	450,973			456,636
Accrued interest receivable	1,741			1,663
Premises and equipment, net	10,979			10,678
Core deposit intangible	1,181			1,267
Goodwill	2,223			2,223
Investment in real estate limited partnerships	2,791			3,119
Company-owned life insurance	3,477			3,393
Other assets	8,103			8,800
Total assets	$	571,488		$	585,443
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	81,140		$	87,247
Interest bearing	290,980			269,614
Time	118,736			161,493
Total deposits	490,856			518,354
Borrowed funds	24,759			13,216
Accrued interest and other liabilities	3,986			4,053
Total liabilities	519,601			535,623
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,928,996 shares issued at June 30, 2014 and 4,927,286 shares issued at December 31, 2013	9,858			9,855
Additional paid-in capital	404			363
Retained earnings	44,769			43,405
Treasury stock at cost; 470,742 shares at June 30, 2014 and 468,927 shares at December 31, 2013	(3,922		)	(3,880		)
Accumulated other comprehensive income	778			77
Total stockholders' equity	51,887			49,820
Total liabilities and stockholders' equity	$	571,488		$	585,443

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,
	2014		2013			2014		2013
	(Dollars in thousands, except per share data)
Interest and dividend income
Interest and fees on loans	$	5,828	$	5,787		$	11,590	$	11,455
Interest on debt securities:
Taxable	206		140			411		250
Tax exempt	91		70			172		140
Dividends	16		13			31		29
Interest on federal funds sold and overnight deposits	4		10			8		23
Interest on interest bearing deposits in banks	39		59			84		119
Total interest and dividend income	6,184		6,079			12,296		12,016
Interest expense
Interest on deposits	421		486			893		1,004
Interest on borrowed funds	108		127			213		257
Total interest expense	529		613			1,106		1,261
Net interest income	5,655		5,466			11,190		10,755
Provision for loan losses	75		75			150		135
Net interest income after provision for loan losses	5,580		5,391			11,040		10,620
Noninterest income
Trust income	191		154			366		317
Service fees	1,285		1,257			2,557		2,446
Net gains (losses) on sales of investment securities available-for-sale	19		(4		)	62		(1		)
Net gains on sales of loans held for sale	508		583			941		1,250
Other income	107		130			147		264
Total noninterest income	2,110		2,120			4,073		4,276
Noninterest expenses
Salaries and wages	2,194		2,235			4,441		4,392
Pension and employee benefits	703		638			1,370		1,321
Occupancy expense, net	295		291			634		622
Equipment expense	410		388			797		814
Other expenses	1,668		1,670			3,217		3,252
Total noninterest expenses	5,270		5,222			10,459		10,401
Income before provision for income taxes	2,420		2,289			4,654		4,495
Provision for income taxes	501		492			971		961
Net income	$	1,919	$	1,797		$	3,683	$	3,534
Earnings per common share	$	0.43	$	0.40		$	0.83	$	0.79
Weighted average number of common shares outstanding	4,458,439		4,456,802			4,458,359		4,456,315
Dividends per common share	$	0.26	$	0.25		$	0.52	$	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,
	2014			2013			2014			2013
	(Dollars in thousands)
Net income	$	1,919		$	1,797		$	3,683		$	3,534
Other comprehensive income (loss), net of tax:
Investment securities available-for-sale:
Net unrealized holding gains (losses) arising during the period on investment securities available-for-sale	357			(618		)	742			(609		)
Reclassification adjustment for net (gains) losses on investment securities available-for-sale realized in net income	(13		)	3			(41		)	1
Total	344			(615		)	701			(608		)
Defined benefit pension plan:
Net actuarial loss arising during the period	—			—			—			(33		)
Reclassification adjustment for amortization of net actuarial loss realized in net income	—			63			—			63
Total	—			63			—			30
Total other comprehensive income (loss)	344			(552		)	701			(578		)
Total comprehensive income	$	2,263		$	1,245		$	4,384		$	2,956

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, 2014 and 2013 (Unaudited)



	Common Stock
	Shares, net of treasury		Amount		Additional paid-in capital		Retained earnings			Treasury stock			Accumulated other comprehensive income (loss)			Total stockholders’ equity
	(Dollars in thousands, except per share data)
Balances, December 31, 2013	4,458,359		$	9,855	$	363	$	43,405		$	(3,880	)	$	77		$	49,820
Net income	—		—		—		3,683			—			—			3,683
Other comprehensive income	—		—		—		—			—			701			701
Cash dividends declared ($0.52 per share)	—		—		—		(2,319		)	—			—			(2,319		)
Stock based compensation expense	—		—		11		—			—			—			11
Exercise of stock options	1,710		3		30		—			—			—			33
Purchase of treasury stock	(1,815	)	—		—		—			(42		)	—			(42		)
Balances, June 30, 2014	4,458,254		$	9,858	$	404	$	44,769		$	(3,922	)	$	778		$	51,887
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

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,
	2014			2013
	(Dollars in thousands)
Cash Flows From Operating Activities
Net income	$	3,683		$	3,534
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	463			464
Provision for loan losses	150			135
Deferred income tax provision	73			138
Net amortization of investment securities	37			24
Equity in losses of limited partnerships	328			345
Stock based compensation expense	11			6
Net (increase) decrease in unamortized loan costs	(68		)	9
Proceeds from sales of loans held for sale	43,439			67,450
Origination of loans held for sale	(45,320		)	(59,646		)
Net gains on sales of loans held for sale	(941		)	(1,250		)
Net (gains) losses on sales of investment securities available-for-sale	(62		)	1
Write-downs of impaired assets	—			36
Net (gains) losses on sales of other real estate owned	(6		)	5
Increase in accrued interest receivable	(78		)	(34		)
Amortization of core deposit intangible	86			86
(Increase) decrease in other assets	(180		)	879
(Decrease) increase in other liabilities	(67		)	261
Net cash provided by operating activities	1,548			12,443
Cash Flows From Investing Activities
Interest bearing deposits in banks
Proceeds from maturities and redemptions	5,779			4,379
Purchases	(1,879		)	(4,719		)
Investment securities held-to-maturity
Proceeds from maturities, calls and paydowns	3,571			500
Purchases	(2,000		)	(4,216		)
Investment securities available-for-sale
Proceeds from sales	4,426			1,015
Proceeds from maturities, calls and paydowns	2,725			2,798
Purchases	(12,144		)	(11,949		)
Redemption of nonmarketable stock	—			(77		)
Net decrease (increase) in loans	5,561			(705		)
Recoveries of loans charged off	20			26
Purchases of premises and equipment	(764		)	(359		)
Proceeds from sales of other real estate owned	365			367
Net cash provided by (used in) investing activities	5,660			(12,940		)

Union Bankshares, Inc. Page 5



Cash Flows From Financing Activities
Repayment of long-term debt	(176		)	(935		)
Net increase in short-term borrowings outstanding	11,719			5,366
Net decrease in noninterest bearing deposits	(6,107		)	(3,827		)
Net increase (decrease) in interest bearing deposits	21,366			(7,329		)
Net decrease in time deposits	(42,757		)	(24,820		)
Issuance of common stock	33			33
Purchase of treasury stock	(42		)	(19		)
Dividends paid	(2,319		)	(2,228		)
Net cash used in financing activities	(18,283		)	(33,759		)
Net decrease in cash and cash equivalents	(11,075		)	(34,256		)
Cash and cash equivalents
Beginning of period	30,719			46,510
End of period	$	19,644		$	12,254
Supplemental Disclosures of Cash Flow Information
Interest paid	$	1,307		$	1,456
Income taxes paid	$	670		$	650

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, 2014, and for the three and six months ended June 30, 2014 and 2013, have been prepared in conformity with GAAP for interim financial information, general practices within the banking industry, and the accounting policies described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. The Company's sole subsidiary is Union Bank. 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 2013 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 ended December 31, 2014, or any other interim period.

Certain amounts in the 2013 consolidated financial statements have been reclassified to conform to the 2014 presentation.

The acronyms, abbreviations and capitalized terms identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Other Information". The following is provided to aid the reader and provide a reference page when reviewing this Form 10-Q.



AFS:	Available-for-sale	IRS:	Internal Revenue Service
ALL:	Allowance for loan losses	MBS:	Mortgage-backed security
ASC:	Accounting Standards Codification	MSRs:	Mortgage servicing rights
ASU:	Accounting Standards Update	OAO:	Other assets owned
Board:	Board of Directors	OCI:	Other comprehensive income (loss)
bp or bps:	Basis point(s)	OFAC:	U.S. Office of Foreign Assets Control
Branch Acquisition:	The acquisition of three New Hampshire branches in May 2011	OREO:	Other real estate owned
CDARS:	Certificate of Deposit Accounts Registry Service of the Promontory Interfinancial Network	OTTI:	Other-than-temporary impairment
Company:	Union Bankshares, Inc. and Subsidiary	OTT:	Other-than-temporary
FASB:	Financial Accounting Standards Board	Plan:	The Union Bank Pension Plan
FDIC:	Federal Deposit Insurance Corporation	RD:	USDA Rural Development
FHA:	U.S. Federal Housing Administration	SBA:	U.S. Small Business Administration
FHLB:	Federal Home Loan Bank of Boston	SEC:	U.S. Securities and Exchange Commission
FRB:	Federal Reserve Board	TDR:	Troubled-debt restructuring
FHLMC/Freddie Mac:	Federal Home Loan Mortgage Corporation	Union:	Union Bank, the sole subsidiary of Union Bankshares, Inc
GAAP:	Generally accepted accounting principles in the United States	USDA:	U.S. Department of Agriculture
HTM:	Held-to-maturity	VA:	U.S. Veterans Administration
HUD:	U.S. Department of Housing and Urban Development	2008 ISO Plan:	2008 Incentive Stock Option Plan of the Company
ICS:	Insured Cash Sweeps of the Promontory Interfinancial Network	2014 Equity Plan:	2014 Equity Incentive Plan

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.

Union Bankshares, Inc. Page 7

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 2014, the FASB issued ASU No. 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this ASU permit institutions to make accounting policy elections to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the ASU requires the investment to be accounted for as an equity method investment or a cost method investment. The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. Management has reviewed the ASU and does not believe that it will have a material effect on the Company's consolidated financial position or results of operations.

In January 2014, the FASB issued ASU No. 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments in this ASU clarify that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure. The amendments in this ASU are effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Management has reviewed the ASU and does not believe that it will have a material effect on the Company's consolidated financial position or results of operations.

Note 5. Goodwill and Other Intangible Assets

As a result of the 2011 Branch Acquisition , 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 accounting 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.

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.

Union Bankshares, Inc. Page 8

Amortization expense for the core deposit intangible was $43 thousand for the three months ended June 30, 2014 and 2013 and was $86 thousand for the six months ended June 30, 2014 and 2013. 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, 2014, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:



	(Dollars in thousands)
2014	$	85
2015	171
2016	171
2017	171
2018	171
Thereafter	412
Total	$	1,181

Note 6. Investment Securities

Investment securities as of the balance sheet dates consisted of the following:



June 30, 2014	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	11,895	$	3	$	(358	)	$	11,540
Agency mortgage-backed	5,897		45		(27		)	5,915
State and political subdivisions	14,764		343		(59		)	15,048
Corporate	6,498		68		(63		)	6,503
Total debt securities	39,054		459		(507		)	39,006
Marketable equity securities	746		332		—			1,078
Mutual funds	275		—		—			275
Total	$	40,075	$	791	$	(507	)	$	40,359
Held-to-maturity
U.S. Government-sponsored enterprises	$	9,642	$	4	$	(351	)	$	9,295

Union Bankshares, Inc. Page 9



December 31, 2013	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	14,327	$	11	$	(1,101	)	$	13,237
Agency mortgage-backed	3,804		18		(75		)	3,747
State and political subdivisions	11,930		328		(94		)	12,164
Corporate	3,994		—		(160		)	3,834
Total debt securities	34,055		357		(1,430		)	32,982
Marketable equity securities	746		296		(1		)	1,041
Mutual funds	258		—		—			258
Total	$	35,059	$	653	$	(1,431	)	$	34,281
Held-to-maturity
U.S. Government-sponsored enterprises	$	11,211	$	2	$	(849	)	$	10,364

Proceeds from the sale of AFS securities were $2.0 million and $4.4 million for the three and six months ended June 30, 2014, respectively. Gross realized gains from the sale of AFS securities were $19 thousand and $62 thousand for the three and six months ended June 30, 2014, respectively, while there were no gross realized losses for either period. Proceeds from the sale of AFS securities 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 AFS securities 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 periods. The specific identification method is used to determine realized gains and losses on sales of securities AFS.

The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of June 30, 2014 were as follows:



	Amortized Cost		Fair Value
	(Dollars in thousands)
Available-for-sale
Due in one year or less	$	827	$	827
Due from one to five years	3,813		3,855
Due from five to ten years	17,780		17,778
Due after ten years	10,737		10,631
	33,157		33,091
Agency mortgage-backed	5,897		5,915
Total debt securities available-for-sale	$	39,054	$	39,006
Held-to-maturity
Due from one to five years	$	1,996	$	1,988
Due from five to ten years	2,000		1,930
Due after ten years	5,646		5,377
Total debt securities held-to-maturity	$	9,642	$	9,295

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 MBS because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these agency MBS are shown separately and are not included in the contractual maturity categories in the above maturity summary.

Union Bankshares, Inc. Page 10

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, 2014	Less Than 12 Months						12 Months and over						Total
	Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses
		(Dollars in thousands)
Debt securities:
U.S. Government-sponsored enterprises	—	$	—	$	—		20	$	16,314	$	(709	)	20	$	16,314	$	(709	)
Agency mortgage-backed	1	464		(5		)	2	846		(22		)	3	1,310		(27		)
State and political subdivisions	7	2,267		(28		)	2	573		(31		)	9	2,840		(59		)
Corporate	3	1,204		(1		)	3	1,457		(62		)	6	2,661		(63		)
Total	11	$	3,935	$	(34	)	27	$	19,190	$	(824	)	38	$	23,125	$	(858	)



December 31, 2013	Less Than 12 Months						12 Months and over						Total
	Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses
		(Dollars in thousands)
Debt securities:
U.S. Government-sponsored enterprises	21	$	16,213	$	(1,292	)	6	$	4,839	$	(658	)	27	$	21,052	$	(1,950	)
Agency mortgage-backed	6	2,844		(75		)	—	—		—			6	2,844		(75		)
State and political subdivisions	9	3,175		(72		)	1	329		(22		)	10	3,504		(94		)
Corporate	6	2,420		(53		)	3	1,414		(107		)	9	3,834		(160		)
Total debt securities	42	24,652		(1,492		)	10	6,582		(787		)	52	31,234		(2,279		)
Marketable equity securities	—	—		—			1	13		(1		)	1	13		(1		)
Total	42	$	24,652	$	(1,492	)	11	$	6,595	$	(788	)	53	$	31,247	$	(2,280	)

The Company evaluates all investment securities on a quarterly basis, and more frequently when economic conditions warrant, to determine if OTTI exists. A 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 OTT.

Declines in the fair values of individual equity securities that are deemed to be OTT are reflected in noninterest income when identified. An unrealized loss on a debt security is generally deemed to be OTT 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 OTTI write-down is recorded, net of tax effect, through net income as a component of net OTTI losses in the consolidated statement of income, while the remaining portion of the impairment loss is recognized in OCI, 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 OTTI 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 11


•	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.

The Company has the ability to hold the investment securities that had unrealized losses at June 30, 2014 for the foreseeable future and no declines were deemed by management to be OTT.

Investment securities with a carrying amount of $3.1 million and $3.3 million at June 30, 2014 and December 31, 2013, 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 ALL, 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 to all loan classes, which the Company considers to be the same as the portfolio segments. 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. Generally, 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 recorded 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 2011 Branch Acquisition 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,
	2014			2013			2014			2013
	(Dollars in thousands)
Balance at beginning of period	$	354		$	434		$	374		$	454
Loan premium amortization	(20		)	(20		)	(40		)	(40		)
Balance at end of period	$	334		$	414		$	334		$	414

Loan premium amortization has been charged to Interest and fees on loans on the Company's consolidated statements of income for the periods reported. The remaining accretable loan premium component balance was $334 thousand at June 30, 2014 and $374 thousand at December 31, 2013. The balance of the nonaccretable credit risk component was $296 thousand at June 30, 2014 and December 31, 2013. The net carrying amounts of the acquired loans were $16.5 million and $17.0 million at June 30, 2014 and December 31, 2013, respectively, and are included in the loan balances below.

Union Bankshares, Inc. Page 12

The composition of Net loans as of the balance sheet dates were as follows:



	June 30, 2014			December 31, 2013
	(Dollars in thousands)
Residential real estate	$	160,662		$	159,441
Construction real estate	31,755			30,898
Commercial real estate	218,517			210,718
Commercial	23,264			20,569
Consumer	4,493			5,396
Municipal	16,654			34,091
Gross loans	455,345			461,113
Allowance for loan losses	(4,610		)	(4,647		)
Net deferred loan costs	238			170
Net loans	$	450,973		$	456,636

Residential real estate loans aggregating $3.7 million and $22.7 million at June 30, 2014 and December 31, 2013, respectively, were pledged as collateral on deposits of municipalities. Qualifying residential first mortgage loans held by Union may be pledged as collateral for borrowings from the FHLB under a blanket lien.

A summary of current, past due and nonaccrual loans as of the balance sheet dates follows:



June 30, 2014	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)
Residential real estate	$	157,842	$	128	$	1,235	$	508	$	949	$	160,662
Construction real estate	31,675		—		41		12		27		31,755
Commercial real estate	215,436		1,698		122		434		827		218,517
Commercial	23,182		—		37		—		45		23,264
Consumer	4,443		6		12		2		30		4,493
Municipal	16,654		—		—		—		—		16,654
Total	$	449,232	$	1,832	$	1,447	$	956	$	1,878	$	455,345



December 31, 2013	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)
Residential real estate	$	153,469	$	3,371	$	1,247	$	262	$	1,092	$	159,441
Construction real estate	30,513		300		59		—		26		30,898
Commercial real estate	207,429		1,117		1,938		—		234		210,718
Commercial	20,326		195		—		—		48		20,569
Consumer	5,295		66		—		1		34		5,396
Municipal	34,091		—		—		—		—		34,091
Total	$	451,123	$	5,049	$	3,244	$	263	$	1,434	$	461,113

Aggregate interest on nonaccrual loans not recognized was $1.0 million and $1.1 million as of June 30, 2014 and 2013, respectively, and $1.1 million as of December 31, 2013.

Union Bankshares, Inc. Page 13

Note 8. Allowance for Loan Losses and Credit Quality

The ALL 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 ALL when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the ALL.

The ALL 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 ALL 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 ALL during the second quarter of 2014. While management uses available information to recognize losses on loans, future additions to the ALL 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 ALL. Such agencies may require the Company to recognize additions to the ALL, 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 ALL 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 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. A TDR classification may result from 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 the face amount of the loan, reduction of accrued interest, or reduction or deferment of loan payments ), or a combination of factors. 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. Management has established the threshold for individual impairment evaluation for commercial loans with balances greater than $500 thousand, based on an evaluation of the Company's historical loss experience on substandard commercial loans.

The general component represents the level of ALL 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 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.

Union Bankshares, Inc. Page 14


•	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 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 ALL 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 ALL is general in nature and is available to absorb losses from any loan segment.

Changes in the ALL, by class of loans, for the three and six months ended June 30, 2014 and 2013 were as follows:



For The Three Months Ended June 30, 2014	Residential Real Estate			Construction Real Estate		Commercial Real Estate			Commercial		Consumer			Municipal			Unallocated			Total
	(Dollars in thousands)
Balance, March 31, 2014	$	1,237		$	374	$	2,575		$	169	$	22		$	43		$	274		$	4,694
Provision (credit) for loan losses	39			12		164			36		3			(25		)	(154		)	75
Recoveries of amounts charged off	—			3		—			1		2			—			—			6
	1,276			389		2,739			206		27			18			120			4,775
Amounts charged off	(18		)	—		(142		)	—		(5		)	—			—			(165		)
Balance, June 30, 2014	$	1,258		$	389	$	2,597		$	206	$	22		$	18		$	120		$	4,610



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 Six Months Ended June 30, 2014	Residential Real Estate			Construction Real Estate			Commercial Real Estate			Commercial		Consumer			Municipal			Unallocated			Total
	(Dollars in thousands)
Balance, December 31, 2013	$	1,251		$	390		$	2,644		$	163	$	23		$	35		$	141		$	4,647
Provision (credit) for loan losses	60			(7		)	95			41		(1		)	(17		)	(21		)	150
Recoveries of amounts charged off	2			6			—			2		10			—			—			20
	1,313			389			2,739			206		32			18			120			4,817
Amounts charged off	(55		)	—			(142		)	—		(10		)	—			—			(207		)
Balance, June 30, 2014	$	1,258		$	389		$	2,597		$	206	$	22		$	18		$	120		$	4,610

Union Bankshares, Inc. Page 15



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

The allocation of the ALL, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates were as follows:



June 30, 2014	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	40	$	2	$	134	$	—	$	—	$	—	$	—	$	176
Collectively evaluated for impairment	1,218		387		2,463		206		22		18		120		4,434
Total allocated	$	1,258	$	389	$	2,597	$	206	$	22	$	18	$	120	$	4,610



December 31, 2013	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	46	$	13	$	278	$	—	$	—	$	—	$	—	$	337
Collectively evaluated for impairment	1,205		377		2,366		163		23		35		141		4,310
Total allocated	$	1,251	$	390	$	2,644	$	163	$	23	$	35	$	141	$	4,647

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 were as follows:



June 30, 2014	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	645	$	301	$	4,227	$	99	$	—	$	—	$	5,272
Collectively evaluated for impairment	152,948		31,454		205,620		22,945		4,388		16,212		433,567
	153,593		31,755		209,847		23,044		4,388		16,212		438,839
Acquired loans	7,069		—		8,670		220		105		442		16,506
Total	$	160,662	$	31,755	$	218,517	$	23,264	$	4,493	$	16,654	$	455,345

Union Bankshares, Inc. Page 16



December 31, 2013	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	821	$	348	$	4,219	$	109	$	—	$	—	$	5,497
Collectively evaluated for impairment	151,297		30,550		197,696		20,145		5,264		33,627		438,579
	152,118		30,898		201,915		20,254		5,264		33,627		444,076
Acquired loans	7,323		—		8,803		315		132		464		17,037
Total	$	159,441	$	30,898	$	210,718	$	20,569	$	5,396	$	34,091	$	461,113

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.

The following tables summarize the loan ratings applied to the Company's loans by class as of the balance sheet dates:



June 30, 2014	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Pass	$	143,965	$	29,254	$	161,740	$	20,603	$	4,307	$	16,212	$	376,081
Satisfactory/Monitor	7,494		2,200		40,618		2,147		73		—		52,532
Substandard	2,134		301		7,489		294		8		—		10,226
Total	153,593		31,755		209,847		23,044		4,388		16,212		438,839
Acquired loans	7,069		—		8,670		220		105		442		16,506
Total	$	160,662	$	31,755	$	218,517	$	23,264	$	4,493	$	16,654	$	455,345



December 31, 2013	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Pass	$	141,909	$	29,648	$	145,225	$	17,309	$	5,180	$	33,627	$	372,898
Satisfactory/Monitor	7,953		891		50,198		2,694		82		—		61,818
Substandard	2,256		359		6,492		251		2		—		9,360
Total	152,118		30,898		201,915		20,254		5,264		33,627		444,076
Acquired loans	7,323		—		8,803		315		132		464		17,037
Total	$	159,441	$	30,898	$	210,718	$	20,569	$	5,396	$	34,091	$	461,113

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 ALL. Rather, in accordance with applicable accounting principles, acquired loans are initially recorded

Union Bankshares, Inc. Page 17

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, 2014, there was no ALL for acquired loans.

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, 2014:



	As of June 30, 2014						For The Three Months Ended June 30, 2014				For The Six Months Ended June 30, 2014
	Recorded Investment		Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
With an allowance recorded:
Residential real estate	$	336	$	345	$	40
Construction real estate	99		99		2
Commercial real estate	2,185		2,189		134
	2,620		2,633		176
With no allowance recorded:
Residential real estate	309		485		—
Construction real estate	202		224		—
Commercial real estate	2,042		2,088		—
Commercial	99		99		—
	2,652		2,896		—
Total:
Residential real estate	645		830		40		$	648	$	5	$	706	$	10
Construction real estate	301		323		2		325		4		333		8
Commercial real estate	4,227		4,277		134		4,230		45		4,226		87
Commercial	99		99		—		102		2		104		4
Total	$	5,272	$	5,529	$	176	$	5,305	$	56	$	5,369	$	109

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)
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.

Union Bankshares, Inc. Page 18

The following table provides information with respect to impaired loans as of December 31, 2013:



	December 31, 2013
	Recorded Investment (1)		Principal Balance (1)		Related Allowance
	(Dollars in thousands)
With an allowance recorded:
Residential real estate	$	437	$	451	$	46
Construction real estate	322		322		13
Commercial real estate	2,534		2,534		278
	3,293		3,307		337
With no allowance recorded:
Residential real estate	384		612		—
Construction real estate	26		48		—
Commercial real estate	1,685		1,742		—
Commercial	109		109		—
	2,204		2,511		—

Total:
Residential real estate	821		1,063		46
Construction real estate	348		370		13
Commercial real estate	4,219		4,276		278
Commercial	109		109		—
Total	$	5,497	$	5,818	$	337

____________________


(1)	Does not reflect government guaranties on impaired loans as of December 31, 2013 totaling $669 thousand.

The following is a summary of TDR loans by class of loan as of the balance sheet dates:



	June 30, 2014			December 31, 2013
	Number of Loans	Principal Balance		Number of Loans	Principal Balance
Residential real estate	4	$	390	4	$	402
Construction real estate	3	301		3	349
Commercial real estate	4	1,552		2	489
Total	11	$	2,243	9	$	1,240

The TDR loans above represent loan modifications in which a concession was provided to the borrower, including 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 ALL 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 for the the three and six months ended June 30, 2013 or the three months ended June 30, 2014. The following table provides new TDR activity for the six months ended June 30, 2014:



	New TDRs During the
	Six Months Ended June 30, 2014
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Commercial real estate	2	$	1,018	$	1,068

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, 2014 or June 30, 2013. TDR loans are considered defaulted at 90 days past due.

At June 30, 2014 and December 31, 2013, 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 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 account 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 (benefit) 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) expense for the three and six months ended June 30 consisted of the following components:



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(Dollars in thousands)
Service cost	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	193			175			386			350
Expected return on plan assets	(306		)	(252		)	(604		)	(504		)
Amortization of prior service cost	—			—			—			—
Amortization of net loss	—			95			—			95
Net periodic (benefit) expense	$	(113	)	$	18		$	(218	)	$	(59	)

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 AFS that are not OTTI 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 consolidated balance sheet (Accumulated OCI). OCI, along with net income, comprises the Company's total comprehensive income or loss.

As of the balance sheet dates, the components of Accumulated OCI, net of tax, were:



	June 30, 2014		December 31, 2013
	(Dollars in thousands)
Net unrealized gain (loss) on investment securities available-for-sale	$	188	$	(513	)
Defined benefit pension plan net unrealized actuarial gain	590		590
Total	$	778	$	77

Union Bankshares, Inc. Page 20

The following table discloses the tax effects allocated to each component of OCI for the three months ended June 30:



	Three Months Ended
	June 30, 2014									June 30, 2013
	Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount			Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount
	(Dollars in thousands)
Investment securities available-for-sale:
Net unrealized holding gains (losses) arising during the period on investment securities available-for-sale	$	541		$	(184	)	$	357		$	(936	)	$	318		$	(618	)
Reclassification adjustment for net (gains) losses on investment securities available-for-sale realized in net income	(19		)	6			(13		)	4			(1		)	3
Total	522			(178		)	344			(932		)	317			(615		)
Defined benefit pension plan:
Reclassification adjustment for amortization of net actuarial loss realized in net income	—			—			—			95			(32		)	63
Total other comprehensive income (loss)	$	522		$	(178	)	$	344		$	(837	)	$	285		$	(552	)

The following table discloses the tax effects allocated to each component of OCI for the six months ended June 30:



	Six Months Ended
	June 30, 2014							June 30, 2013
	Before-Tax Amount		Tax (Expense) Benefit			Net-of-Tax Amount		Before-Tax Amount			Tax (Expense) Benefit		Net-of-Tax Amount
	(Dollars in thousands)
Investment securities available-for-sale:
Net unrealized holding gains (losses) arising during the period on investment securities available-for-sale	$	1,124	$	(382	)	$	742	$	(922	)	$	313	$	(609	)
Reclassification adjustment for net (gains) losses on investment securities available-for-sale realized in net income	(62