Edgar Filing: UNION BANKSHARES INC

SEC Document

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: March 31, 2016

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 [ X ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]

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 May 1, 2016:



Common Stock, $2 par value	4,458,372	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 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	Page 40
Item 4. Controls and Procedures.	Page 41

PART II OTHER INFORMATION

Item 1. Legal Proceedings.	Page 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	Page 41
Item 6. Exhibits.	Page 41

Signatures	Page 43

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



	March 31, 2016			December 31, 2015
	(Unaudited)
Assets	(Dollars in thousands)
Cash and due from banks	$	4,130		$	4,217
Federal funds sold and overnight deposits	9,887			13,744
Cash and cash equivalents	14,017			17,961
Interest bearing deposits in banks	12,354			12,753
Investment securities available-for-sale	57,516			54,110
Investment securities held-to-maturity (fair value $5.2 million and $5.1 million at March 31, 2016 and December 31, 2015, respectively)	5,217			5,217
Loans held for sale	6,725			5,635
Loans	512,577			500,506
Allowance for loan losses	(5,125		)	(5,201		)
Net deferred loan costs	546			515
Net loans	507,998			495,820
Accrued interest receivable	2,078			1,832
Premises and equipment, net	13,037			13,055
Core deposit intangible	882			925
Goodwill	2,223			2,223
Investment in real estate limited partnerships	2,255			2,373
Company-owned life insurance	8,873			8,800
Other assets	7,644			8,175
Total assets	$	640,819		$	628,879
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	101,943		$	99,826
Interest bearing	311,656			310,203
Time	145,405			150,379
Total deposits	559,004			560,408
Borrowed funds	21,883			9,564
Accrued interest and other liabilities	5,257			5,339
Total liabilities	586,144			575,311
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,933,136 shares issued at March 31, 2016 and 4,931,796 shares issued at December 31, 2015	9,866			9,864
Additional paid-in capital	542			501
Retained earnings	50,080			49,524
Treasury stock at cost; 474,764 shares at March 31, 2016 and 474,619 shares at December 31, 2015	(4,023		)	(4,019		)
Accumulated other comprehensive loss	(1,790		)	(2,302		)
Total stockholders' equity	54,675			53,568
Total liabilities and stockholders' equity	$	640,819		$	628,879

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 March 31,
	2016		2015
	(Dollars in thousands, except per share data)
Interest and dividend income
Interest and fees on loans	$	5,995	$	5,732
Interest on debt securities:
Taxable	249		215
Tax exempt	137		107
Dividends	17		15
Interest on federal funds sold and overnight deposits	5		8
Interest on interest bearing deposits in banks	45		40
Total interest and dividend income	6,448		6,117
Interest expense
Interest on deposits	425		476
Interest on borrowed funds	88		89
Total interest expense	513		565
Net interest income	5,935		5,552
Provision for loan losses	75		100
Net interest income after provision for loan losses	5,860		5,452
Noninterest income
Trust income	172		177
Service fees	1,412		1,346
Net gains on sales of loans held for sale	500		729
Other income	102		83
Total noninterest income	2,186		2,335
Noninterest expenses
Salaries and wages	2,458		2,323
Pension and employee benefits	943		734
Occupancy expense, net	317		381
Equipment expense	509		407
Other expenses	1,594		1,545
Total noninterest expenses	5,821		5,390
Income before provision for income taxes	2,225		2,397
Provision for income taxes	466		513
Net income	$	1,759	$	1,884
Earnings per common share	$	0.39	$	0.42
Weighted average number of common shares outstanding	4,458,165		4,457,871
Dividends per common share	$	0.27	$	0.27

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 March 31,
	2016		2015
	(Dollars in thousands)
Net income	$	1,759	$	1,884
Other comprehensive income, net of tax:
Investment securities available-for-sale:
Net unrealized holding gains arising during the period on investment securities available-for-sale	512		274
Total other comprehensive income	512		274
Total comprehensive income	$	2,271	$	2,158

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 3

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Three Months Ended March 31, 2016 and 2015 (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, 2015	4,457,177		$	9,864	$	501	$	49,524		$	(4,019	)	$	(2,302	)	$	53,568
Net income	—		—		—		1,759			—			—			1,759
Other comprehensive income	—		—		—		—			—			512			512
Cash dividends declared ($0.27 per share)	—		—		—		(1,203		)	—			—			(1,203		)
Stock based compensation expense	—		—		16		—			—			—			16
Exercise of stock options	1,340		2		25		—			—			—			27
Purchase of treasury stock	(145	)	—		—		—			(4		)	—			(4		)
Balances, March 31, 2016	4,458,372		$	9,866	$	542	$	50,080		$	(4,023	)	$	(1,790	)	$	54,675

Balances, December 31, 2014	4,458,430		$	9,859	$	418	$	46,462		$	(3,925	)	$	(1,380	)	$	51,434
Net income	—		—		—		1,884			—			—			1,884
Other comprehensive income	—		—		—		—			—			274			274
Cash dividends declared ($0.27 per share)	—		—		—		(1,204		)	—			—			(1,204		)
Stock based compensation expense	—		—		12		—			—			—			12
Purchase of treasury stock	(1,077	)	—		—		—			(26		)	—			(26		)
Balances, March 31, 2015	4,457,353		$	9,859	$	430	$	47,142		$	(3,951	)	$	(1,106	)	$	52,374

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)



	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Cash Flows From Operating Activities
Net income	$	1,759		$	1,884
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	320			227
Provision for loan losses	75			100
Deferred income tax provision (credit)	307			(4		)
Net amortization of investment securities	84			46
Equity in losses of limited partnerships	118			122
Stock based compensation expense	16			12
Net increase in unamortized loan costs	(31		)	(33		)
Proceeds from sales of loans held for sale	23,383			32,049
Origination of loans held for sale	(23,973		)	(28,834		)
Net gains on sales of loans held for sale	(500		)	(729		)
Increase in accrued interest receivable	(246		)	(228		)
Amortization of core deposit intangible	43			43
Decrease (increase) in other assets	52			(50		)
Contribution to defined benefit pension plan	(750		)	—
Increase (decrease) in other liabilities	668			(729		)
Net cash provided by operating activities	1,325			3,876
Cash Flows From Investing Activities
Interest bearing deposits in banks
Proceeds from maturities and redemptions	896			543
Purchases	(497		)	(1,393		)
Investment securities held-to-maturity
Proceeds from maturities, calls and paydowns	—			2,000
Investment securities available-for-sale
Proceeds from maturities, calls and paydowns	3,950			2,732
Purchases	(6,664		)	(14,413		)
Purchase of nonmarketable stock, net	(165		)	—
Net increase in loans	(12,227		)	(13,060		)
Recoveries of loans charged off	5			4
Purchases of premises and equipment	(302		)	(865		)
Purchase of company-owned life insurance	—			(5,000		)
Net cash used in investing activities	(15,004		)	(29,452		)

Union Bankshares, Inc. Page 5



Cash Flows From Financing Activities
Advances on long-term borrowings	5,000			—
Repayment of long-term debt	(76		)	(72		)
Net increase in short-term borrowings outstanding	7,395			3,541
Net increase in noninterest bearing deposits	2,117			6,813
Net increase in interest bearing deposits	1,453			510
Net decrease in time deposits	(4,974		)	(12,579		)
Issuance of common stock	27			—
Purchase of treasury stock	(4		)	(26		)
Dividends paid	(1,203		)	(1,204		)
Net cash provided by (used in) financing activities	9,735			(3,017		)
Net decrease in cash and cash equivalents	(3,944		)	(28,593		)
Cash and cash equivalents
Beginning of period	17,961			41,744
End of period	$	14,017		$	13,151
Supplemental Disclosures of Cash Flow Information
Interest paid	$	368		$	394
Income taxes paid	$	225		$	200

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 (together, the Company) as of March 31, 2016, and for the three months ended March 31, 2016 and 2015, 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, 2015. 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 2015 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, 2016, or any interim period.

Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 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
ALCO:	Asset Liability Committee	MBS:	Mortgage-backed security
ALL:	Allowance for loan losses	MSRs:	Mortgage servicing rights
ASC:	Accounting Standards Codification	OAO:	Other assets owned
ASU:	Accounting Standards Update	OCI:	Other comprehensive income (loss)
Board:	Board of Directors	OFAC:	U.S. Office of Foreign Assets Control
bp or bps:	Basis point(s)	OREO:	Other real estate owned
Branch Acquisition:	The acquisition of three New Hampshire branches in May 2011	OTTI:	Other-than-temporary impairment
CDARS:	Certificate of Deposit Accounts Registry Service of the Promontory Interfinancial Network	OTT:	Other-than-temporary
Company:	Union Bankshares, Inc. and Subsidiary	Plan:	The Union Bank Pension Plan
DRIP:	Dividend Reinvestment Plan	RD:	USDA Rural Development
FASB:	Financial Accounting Standards Board	RSU:	Restricted Stock Unit
FDIC:	Federal Deposit Insurance Corporation	SBA:	U.S. Small Business Administration
FHA:	U.S. Federal Housing Administration	SEC:	U.S. Securities and Exchange Commission
FHLB:	Federal Home Loan Bank of Boston	TDR:	Troubled-debt restructuring
FRB:	Federal Reserve Board	Union:	Union Bank, the sole subsidiary of Union Bankshares, Inc
FHLMC/Freddie Mac:	Federal Home Loan Mortgage Corporation	USDA:	U.S. Department of Agriculture
GAAP:	Generally Accepted Accounting Principles in the United States	VA:	U.S. Veterans Administration
HTM:	Held-to-maturity	2008 ISO Plan:	2008 Incentive Stock Option Plan of the Company
HUD:	U.S. Department of Housing and Urban Development	2014 Equity Plan:	2014 Equity Incentive Plan
ICS:	Insured Cash Sweeps of the Promontory Interfinancial Network

Union Bankshares, Inc. Page 7

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 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Liabilities. The ASU was issued to enhance the reporting model for financial instruments to provide users of financial statements with more useful information for decisions. The ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted for only one of the six amendments, otherwise it is not permitted. The Company is evaluating the potential impact of the ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and liabilities (including operating leases) on the balance sheet and disclosing key information about leasing arrangements. Previous lease accounting did not require the inclusion of operating leases in the balance sheet. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, early application is permitted. The Company is evaluating the potential impact of the ASU on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The ASU simplifies several aspects of the accounting for share-based payment award transactions, including: (1) income tax consequences; (2) classification of awards as either equity or liabilities, and (3) classification on the statement of cash flows. The ASU is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods, early adoption is permitted. The Company is evaluating the potential impact of the ASU on its consolidated financial statements.

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 2011 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 March 31, 2016 and 2015. The amortization expense is included in other noninterest expense on the consolidated statement of income and is deductible for tax purposes. As of March 31, 2016, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:



	(Dollars in thousands)
2016	$	128
2017	171
2018	171
2019	171
2020	171
Thereafter	70
Total	$	882

Note 6. Investment Securities

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



March 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	7,647	$	58	$	(14	)	$	7,691
Agency mortgage-backed	11,543		182		(2		)	11,723
State and political subdivisions	24,997		553		(50		)	25,500
Corporate	12,262		259		(252		)	12,269
Total debt securities	56,449		1,052		(318		)	57,183
Mutual funds	333		—		—			333
Total	$	56,782	$	1,052	$	(318	)	$	57,516
Held-to-maturity
U.S. Government-sponsored enterprises	$	5,217	$	10	$	—		$	5,227



December 31, 2015	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	10,805	$	30	$	(143	)	$	10,692
Agency mortgage-backed	11,083		39		(64		)	11,058
State and political subdivisions	19,653		404		(25		)	20,032
Corporate	12,266		76		(359		)	11,983
Total debt securities	53,807		549		(591		)	53,765
Mutual funds	345		—		—			345
Total	$	54,152	$	549	$	(591	)	$	54,110
Held-to-maturity
U.S. Government-sponsored enterprises	$	5,217	$	—	$	(101	)	$	5,116

Union Bankshares, Inc. Page 9

There were no sales of AFS securities for the three months ended March 31, 2016 and March 31, 2015. 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 March 31, 2016 were as follows:



	Amortized Cost		Fair Value
	(Dollars in thousands)
Available-for-sale
Due from one to five years	$	4,778	$	4,874
Due from five to ten years	25,239		25,563
Due after ten years	14,888		15,023
	44,905		45,460
Agency mortgage-backed	11,544		11,723
Total debt securities available-for-sale	$	56,449	$	57,183
Held-to-maturity
Due from one to five years	$	998	$	1,001
Due from five to ten years	1,000		1,001
Due after ten years	3,219		3,225
Total debt securities held-to-maturity	$	5,217	$	5,227

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.

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:



March 31, 2016	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	2	$	1,005	$	(3	)	1	$	443	$	(11	)	3	$	1,448	$	(14	)
Agency mortgage-backed	1	186		—			1	460		(2		)	2	646		(2		)
State and political subdivisions	9	4,255		(45		)	3	1,147		(5		)	12	5,402		(50		)
Corporate	8	3,859		(183		)	2	630		(69		)	10	4,489		(252		)
Total	20	$	9,305	$	(231	)	7	$	2,680	$	(87	)	27	$	11,985	$	(318	)

Union Bankshares, Inc. Page 10



December 31, 2015	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	12	$	9,081	$	(157	)	5	$	3,607	$	(87	)	17	$	12,688	$	(244	)
Agency mortgage-backed	12	7,459		(58		)	1	259		(6		)	13	7,718		(64		)
State and political subdivisions	4	1,512		(14		)	2	785		(11		)	6	2,297		(25		)
Corporate	12	5,750		(277		)	4	1,632		(82		)	16	7,382		(359		)
Total	40	$	23,802	$	(506	)	12	$	6,283	$	(186	)	52	$	30,085	$	(692	)

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

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. Declines in the fair values of individual equity securities that are deemed by management to be OTT are reflected in noninterest income when identified.

Management considers the following factors in determining whether OTTI exists and the period over which the 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


•	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 March 31, 2016 for the foreseeable future and no declines were deemed by management to be OTT.

Investment securities with a carrying amount of $30.0 million and $25.7 million at March 31, 2016 and December 31, 2015, 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 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. 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

Union Bankshares, Inc. Page 11

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. Loans are considered in process of foreclosure when a judgment of foreclosure has been issued by the court.

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 initially 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. As of March 31, 2016 and December 31, 2015, there was no remaining accretable loan premium component balance and no remaining nonaccretable credit risk component balance due to the transfer of the remaining acquired portfolios to the Company's existing loan portfolios during the fourth quarter of 2015. There were no acquired loans at March 31, 2016 and December 31, 2015.

The following table summarizes activity in the accretable loan premium component for the acquired loan portfolio during the three month comparison periods:



	For The Three Months Ended March 31,
	2016		2015
	(Dollars in thousands)
Balance at beginning of period	$	—	$	292
Loan premium amortization	—		(18		)
Balance at end of period	$	—	$	274

Changes in the accretable and nonaccretable components have been charged to Interest and fees on loans on the Company's consolidated statements of income for the periods reported.

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



	March 31, 2016			December 31, 2015
	(Dollars in thousands)
Residential real estate	$	165,640		$	165,396
Construction real estate	39,392			42,889
Commercial real estate	237,032			230,442
Commercial	27,619			21,397
Consumer	3,695			3,963
Municipal	39,199			36,419
Gross loans	512,577			500,506
Allowance for loan losses	(5,125		)	(5,201		)
Net deferred loan costs	546			515
Net loans	$	507,998		$	495,820

Residential real estate loans aggregating $17.2 million at December 31, 2015 were pledged as collateral on deposits of municipalities. There were no loans pledged as collateral on deposits of municipalities at March 31, 2016. Qualifying residential first mortgage loans held by Union may be pledged as collateral for borrowings from the FHLB under a blanket lien.

Union Bankshares, Inc. Page 12

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



March 31, 2016	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)
Residential real estate	$	160,436	$	3,282	$	6	$	259	$	1,657	$	165,640
Construction real estate	38,965		400		—		—		27		39,392
Commercial real estate	235,096		824		—		398		714		237,032
Commercial	27,524		42		24		—		29		27,619
Consumer	3,689		6		—		—		—		3,695
Municipal	39,199		—		—		—		—		39,199
Total	$	504,909	$	4,554	$	30	$	657	$	2,427	$	512,577



December 31, 2015	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)
Residential real estate	$	159,895	$	2,034	$	1,195	$	368	$	1,904	$	165,396
Construction real estate	42,616		7		204		34		28		42,889
Commercial real estate	228,513		667		641		111		510		230,442
Commercial	20,977		—		20		321		79		21,397
Consumer	3,950		10		1		2		—		3,963
Municipal	36,419		—		—		—		—		36,419
Total	$	492,370	$	2,718	$	2,061	$	836	$	2,521	$	500,506

There were two residential real estate loans totaling $79 thousand in process of foreclosure at March 31, 2016. Aggregate interest on nonaccrual loans not recognized was $1.2 million and $1.1 million as of March 31, 2016 and 2015, respectively, and $1.2 million as of December 31, 2015.

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 first quarter of 2016. 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

Union Bankshares, Inc. Page 13

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. A specific reserve amount is allocated to the ALL 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, commercial real estate development loans (while in the construction phase of the projects), 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.


•	Commercial - Loans in this segment are made to businesses and are generally secured by non-real 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 class of loan.

Union Bankshares, Inc. Page 14

Changes in the ALL, by class of loans, for the three months ended March 31, 2016 and 2015 were as follows:



For The Three Months Ended March 31, 2016	Residential Real Estate			Construction Real Estate			Commercial Real Estate			Commercial			Consumer			Municipal		Unallocated		Total
	(Dollars in thousands)
Balance, December 31, 2015	$	1,419		$	514		$	2,792		$	209		$	28		$	38	$	201	$	5,201
Provision (credit) for loan losses	87			(51		)	(63		)	41			(1		)	9		53		75
Recoveries of amounts charged off	—			3			—			1			1			—		—		5
	1,506			466			2,729			251			28			47		254		5,281
Amounts charged off	(120		)	—			—			(33		)	(3		)	—		—		(156		)
Balance, March 31, 2016	$	1,386		$	466		$	2,729		$	218		$	25		$	47	$	254	$	5,125



For The Three Months Ended March 31, 2015	Residential Real Estate		Construction Real Estate			Commercial Real Estate		Commercial			Consumer			Municipal		Unallocated			Total
	(Dollars in thousands)
Balance, December 31, 2014	$	1,330	$	439		$	2,417	$	176		$	27		$	42	$	263		$	4,694
Provision (credit) for loan losses	9		(63		)	251		20			10			12		(139		)	100
Recoveries of amounts charged off	—		3			—		—			1			—		—			4
	1,339		379			2,668		196			38			54		124			4,798
Amounts charged off	—		—			—		(13		)	(12		)	—		—			(25		)
Balance, March 31, 2015	$	1,339	$	379		$	2,668	$	183		$	26		$	54	$	124		$	4,773

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:



March 31, 2016	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	76	$	—	$	86	$	20	$	—	$	—	$	—	$	182
Collectively evaluated for impairment	1,310		466		2,643		198		25		47		254		4,943
Total allocated	$	1,386	$	466	$	2,729	$	218	$	25	$	47	$	254	$	5,125



December 31, 2015	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	109	$	—	$	227	$	21	$	—	$	—	$	—	$	357
Collectively evaluated for impairment	1,310		514		2,565		188		28		38		201		4,844
Total allocated	$	1,419	$	514	$	2,792	$	209	$	28	$	38	$	201	$	5,201

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 were as follows:



March 31, 2016	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	1,176	$	91	$	3,107	$	475	$	—	$	—	$	4,849
Collectively evaluated for impairment	164,464		39,301		233,925		27,144		3,695		39,199		507,728
Total	$	165,640	$	39,392	$	237,032	$	27,619	$	3,695	$	39,199	$	512,577



December 31, 2015	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	1,197	$	92	$	3,094	$	493	$	—	$	—	$	4,876
Collectively evaluated for impairment	164,199		42,797		227,348		20,904		3,963		36,419		495,630
Total	$	165,396	$	42,889	$	230,442	$	21,397	$	3,963	$	36,419	$	500,506

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:



March 31, 2016	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Pass	$	152,296	$	34,070	$	180,005	$	24,820	$	3,664	$	39,199	$	434,054
Satisfactory/Monitor	9,851		5,204		51,620		1,652		31		—		68,358
Substandard	3,493		118		5,407		1,147		—		—		10,165
Total	$	165,640	$	39,392	$	237,032	$	27,619	$	3,695	$	39,199	$	512,577

Union Bankshares, Inc. Page 16



December 31, 2015	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Pass	$	150,535	$	37,750	$	175,438	$	18,347	$	3,902	$	36,419	$	422,391
Satisfactory/Monitor	11,329		4,968		49,745		2,384		61		—		68,487
Substandard	3,532		171		5,259		666		—		—		9,628
Total	$	165,396	$	42,889	$	230,442	$	21,397	$	3,963	$	36,419	$	500,506

The following table provides information with respect to impaired loans by class of loan as of and for the three months ended March 31, 2016:



	As of March 31, 2016						For The Three Months Ended March 31, 2016
	Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Residential real estate	$	402	$	411	$	76
Commercial real estate	511		534		86
Commercial	475		475		20
With an allowance recorded	1,388		1,420		182

Residential real estate	774		1,011		—
Construction real estate	91		91		—
Commercial real estate	2,596		2,661		—
With no allowance recorded	3,461		3,763		—

Residential real estate	1,176		1,422		76		$	1,186	$	11
Construction real estate	91		91		—		92		1
Commercial real estate	3,107		3,195		86		3,100		14
Commercial	475		475		20		484		—
Total	$	4,849	$	5,183	$	182	$	4,862	$	26

____________________


(1)	Does not reflect government guaranties on impaired loans as of March 31, 2016 totaling $590 thousand.

The following table provides information with respect to impaired loans by class of loan as of and for the three months ended March 31, 2015:



	As of March 31, 2015						For The Three Months Ended March 31, 2015
	Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Residential real estate	$	692	$	809	$	69	$	821	$	11
Construction real estate	252		275		—		264		3
Commercial real estate	3,295		3,361		228		3,313		34
Commercial	—		—		—		61		—
Total	$	4,239	$	4,445	$	297	$	4,459	$	48

____________________


(1)	Does not reflect government guaranties on impaired loans as of March 31, 2015 totaling $240 thousand.

Union Bankshares, Inc. Page 17

The following table provides information with respect to impaired loans as of December 31, 2015:



	December 31, 2015
	Recorded Investment (1)		Principal Balance (1)		Related Allowance
	(Dollars in thousands)
Residential real estate	$	659	$	668	$	109
Commercial real estate	2,142		2,161		227
Commercial	493		493		21
With an allowance recorded	3,294		3,322		357

Residential real estate	538		697		—
Construction real estate	92		92		—
Commercial real estate	952		1,015		—
With no allowance recorded	1,582		1,804		—

Residential real estate	1,197		1,365		109
Construction real estate	92		92		—
Commercial real estate	3,094		3,176		227
Commercial	493		493		21
Total	$	4,876	$	5,126	$	357

____________________


(1)	Does not reflect government guaranties on impaired loans as of December 31, 2015 totaling $606 thousand.

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



	March 31, 2016			December 31, 2015
	Number of Loans	Principal Balance		Number of Loans	Principal Balance
	(Dollars in thousands)
Residential real estate	12	$	1,176	11	$	1,197
Construction real estate	1	91		1	92
Commercial real estate	5	962		5	950
Commercial	2	475		2	493
Total	20	$	2,704	19	$	2,732

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.

There was no new TDR activity during the three months ended March 31, 2015. The following table provides new TDR activity for the three months ended March 31, 2016:



	New TDRs During the
	Three Months Ended March 31, 2016
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Residential real estate	1	$	57	$	57

Union Bankshares, Inc. Page 18

There were no TDR loans modified within the previous twelve months that had subsequently defaulted during the three month periods ended March 31, 2016 or March 31, 2015. TDR loans are considered defaulted at 90 days past due.

At March 31, 2016 and December 31, 2015, 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 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 the pension benefit 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 for the three months ended March 31 consisted of the following components:



	Three Months Ended March 31,
	2016			2015
	(Dollars in thousands)
Service cost	$	—		$	—
Interest cost on projected benefit obligation	175			170
Expected return on plan assets	(259		)	(286		)
Amortization of prior service cost	—			—
Amortization of net loss	41			14
Net periodic benefit	$	(43	)	$	(102	)

Note 10. Stock Based Compensation

The Company's current stock-based compensation plan is the Union Bankshares, Inc. 2014 Equity Incentive Plan. Under the 2014 Equity Plan, 50,000 shares of the Company’s common stock are available for equity awards of incentive stock options, nonqualified stock options, restricted stock and RSUs to eligible officers and (except for awards of incentive stock options) nonemployee directors. Shares available for issuance of awards under the 2014 Equity Plan consist of unissued shares of the Company’s common stock and/or shares held in treasury.

During the three months ended March 31, 2016 the following awards and contingent awards were made to eligible officers under the 2014 Equity Plan:

•

A total of 5,444 RSUs were granted at a fair value of $27.91 per share, based on the closing market price of the Company's common stock on the December 31, 2015 earned date of the award. 50% of the RSUs awarded in the form of Time-Based RSUs, which will vest over three years, approximately one-third per year on the anniversary of the earned date; and 50% of the RSUs awarded were in the form of Performance-Based RSUs, which are subject to both performance and time based vesting conditions. The Performance-Based conditions were satisfied during 2015 and vesting of the Performance-Based RSUs will occur over two years, with approximately one-half vesting on the anniversary of the earned date. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights. The terms of the awards were described in a 2015 Award Plan Summary approved by the Board of Directors. Unrecognized compensation expense related to the unvested RSUs as of March 31, 2016 was $138 thousand.

•

A total of 4,456 contingent RSUs were provisionally granted at a fair value of $29.10 per share, based on the closing market price of the Company's stock on the March 16, 2016 grant date. The estimated number of contingent RSUs provisionally granted was based on target payout amounts as detailed in the 2016 Award Plan Summary adopted by the Board of Directors. As with the 2015 grants, one half is in the form of Time-Based RSUs and one-half is in the form of Performance-Based RSUs. The actual number of RSUs granted (if any) will be determined as of the earned date of December 31, 2016. The contingent RSUs were granted on substantially the same terms and conditions as the RSUs granted under the 2015 Award Plan Summary. As of March 31, 2016 the estimated unrecognized compensation expense

Union Bankshares, Inc. Page 19

related to the contingent unvested RSUs, based on the closing market price of the Company's stock on the grant date of March 16, 2016 was $130 thousand.

As of March 31, 2016, 5,660 options granted in December 2014 under the 2014 Equity Plan remained outstanding and exercisable and will expire in December 2021. There was no unrecognized compensation cost related to these options as of March 31, 2016 and all exercisable options were "in the money".

As of March 31, 2016, 36,436 shares remained available for future equity awards under the 2014 Equity Plan.

As of March 31, 2016, 5,000 options granted under the 2008 ISO Plan remained outstanding and exercisable, with the last of such options expiring in December 2020. There was no unrecognized compensation cost related to these options as of March 31, 2016 and all exercisable options were "in the money".

Note 11. 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 statements 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:



	March 31, 2016			December 31, 2015
	(Dollars in thousands)
Net unrealized gain (loss) on investment securities available-for-sale	$	485		$	(27	)
Defined benefit pension plan net unrealized actuarial loss	(2,275		)	(2,275		)
Total	$	(1,790	)	$	(2,302	)

The following table discloses the tax effects allocated to each component of OCI for the three months ended March 31:



	Three Months Ended
	March 31, 2016							March 31, 2015
	Before-Tax Amount		Tax Expense			Net-of-Tax Amount		Before-Tax Amount		Tax Expense			Net-of-Tax Amount
	(Dollars in thousands)
Investment securities available-for-sale:
Net unrealized holding gains arising during the period on investment securities available-for-sale	$	776	$	(264	)	$	512	$	415	$	(141	)	$	274
Total other comprehensive income	$	776	$	(264	)	$	512	$	415	$	(141	)	$	274

There were no reclassification adjustments from OCI for the three months ended March 31, 2016 and 2015.

Note 12. Fair Value Measurements and Disclosures

The Company utilizes FASB ASC Topic 820, Fair Value Measurements and Disclosures, as guidance for accounting for assets and liabilities carried at fair value. This standard defines fair value as the price that would be received, without adjustment for transaction costs, to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance in FASB ASC Topic 820 establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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The three levels of the fair value hierarchy are:


•	Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;


•	Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;


•	Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following is a description of the valuation methodologies used for the Company’s assets that are measured on a recurring basis at estimated fair value:

AFS securities: Marketable equity securities and mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1. However, the majority of the Company’s AFS securities have been valued utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

Assets measured at fair value on a recurring basis at March 31, 2016 and December 31, 2015, segregated by fair value hierarchy level, are summarized below:



	Fair Value Measurements
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
March 31, 2016:
Investment securities available-for-sale (market approach)
Debt securities:
U.S. Government-sponsored enterprises	$	7,691	$	—	$	7,691	$	—
Agency mortgage-backed	11,723		—		11,723		—
State and political subdivisions	25,500		—		25,500		—
Corporate	12,269		—		12,269		—
Total debt securities	57,183		—		57,183		—
Mutual funds	333		333		—		—
Total	$	57,516	$	333	$	57,183	$	—

December 31, 2015:
Investment securities available-for-sale (market approach)
Debt securities:
U.S. Government-sponsored enterprises	$	10,692	$	—	$	10,692	$	—
Agency mortgage-backed	11,058		—		11,058		—
State and political subdivisions	20,032		—		20,032		—
Corporate	11,983		—		11,983		—
Total debt securities	53,765		—		53,765		—
Mutual funds	345		345		—		—
Total	$	54,110	$	345	$	53,765	$	—

There were no significant transfers in or out of Levels 1 and 2 for the three months ended March 31, 2016. Certain other assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an

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ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring basis in periods after initial recognition, such as impaired loans, HTM securities, MSRs and OREO, were not considered material at March 31, 2016 or December 31, 2015. The Company has not elected to apply the fair value method to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.

FASB ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of financial instruments. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Management’s estimates and assumptions are inherently subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could dramatically affect the estimated fair values.

Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments may be excluded from disclosure requirements. Thus, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments of the Company.

The following methods and assumptions were used by the Company in estimating the fair value of its significant financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values and are classified as Level 1.

Interest bearing deposits in banks: Fair values for interest bearing deposits in banks are based on discounted present values of cash flows and are classified as Level 2.

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair value measurements consider observable data which may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows. Investment securities are classified as Level 1 or Level 2 depending on availability of recent trade information.

Loans held for sale: The fair value of loans held for sale is estimated based on quotes from third party vendors, resulting in a Level 2 classification.

Loans: The fair values of loans are estimated for portfolios of loans with similar financial characteristics and segregated by loan class or segment. For variable-rate loan categories that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts adjusted for credit risk. The fair values for other loans (for example, fixed-rate residential, commercial real estate, and rental property mortgage loans as well as commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future cash flows, future expected loss experience and risk characteristics. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. The fair value methods and assumptions that utilize unobservable inputs as defined by current accounting standards are classified as Level 3.

Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values and are classified as Level 1, 2, or 3 in accordance with the classification of the related principal's valuation.

Nonmarketable equity securities: It is not practical to determine the fair value of the nonmarketable securities, such as FHLB stock, due to restrictions placed on their transferability.

Deposits: The fair values disclosed for noninterest bearing deposits and other interest bearing nontime deposits are, by definition, equal to the amount payable on demand at the reporting date, resulting in a Level 1 classification. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated expected maturities on such deposits, resulting in a Level 2 classification.

Borrowed funds: The fair values of the Company’s long-term debt are estimated using discounted cash flow analysis based on interest rates currently being offered on similar debt instruments, resulting in a Level 2 classification. The fair

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values of the Company’s short-term debt approximate the carrying amounts reported in the balance sheet, resulting in a Level 1 classification.

Off-balance-sheet financial instruments: Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The only commitments to extend credit that are normally longer than one year in duration are the home equity lines whose interest rates are variable quarterly. The only fees collected for commitments are an annual fee on credit card arrangements and often a flat fee on commercial lines of credit and standby letters of credit. The fair value of off-balance-sheet financial instruments as of the balance sheet dates was not significant.

As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:



	March 31, 2016
	Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	14,017	$	14,017	$	14,017	$	—	$	—
Interest bearing deposits in banks	12,354		12,503		—		12,503		—
Investment securities	62,733		62,743		333		62,410		—
Loans held for sale	6,725		6,882		—		6,882		—
Loans, net
Residential real estate	164,430		168,304		—		—		168,304
Construction real estate	38,968		39,336		—		—		39,336
Commercial real estate	234,302		235,822		—		—		235,822
Commercial	27,430		27,463		—		—		27,463
Consumer	3,674		3,770		—		—		3,770
Municipal	39,194		39,939		—		—		39,939
Accrued interest receivable	2,078		2,078		—		463		1,615
Nonmarketable equity securities	2,053		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	101,943	$	101,943	$	101,943	$	—	$	—
Interest bearing	311,656		311,656		311,656		—		—
Time	145,405		145,462		—		145,462		—
Borrowed funds
Short-term	11,016		11,016		11,016		—		—
Long-term	10,867		10,683		—		10,683		—
Accrued interest payable	415		415		—		415		—

Union Bankshares, Inc. Page 23



	December 31, 2015
	Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	17,961	$	17,961	$	17,961	$	—	$	—
Interest bearing deposits in banks	12,753		12,610		—		12,610		—
Investment securities	59,327		59,226		345		58,881		—
Loans held for sale	5,635		5,745		—		5,745		—
Loans, net
Residential real estate	164,147		164,462		—		—		164,462
Construction real estate	42,419		41,956		—		—		41,956
Commercial real estate	227,686		230,282		—		—		230,282
Commercial	21,210		20,849		—		—		20,849
Consumer	3,939		4,032		—		—		4,032
Municipal	36,419		38,131		—		—		38,131
Accrued interest receivable	1,832		1,832		—		389		1,443
Nonmarketable equity securities	1,932		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	99,826	$	99,826	$	99,826	$	—	$	—
Interest bearing	310,203		310,200		—		310,200		—
Time	150,379		150,665		—		150,665		—
Borrowed funds
Short-term	3,622		3,621		3,621		—		—
Long-term	5,942		6,296		—		6,296		—
Accrued interest payable	269		269		—		269		—

The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions.

Note 13. Subsequent Events

Subsequent events represent events or transactions occurring after the balance sheet date but before the financial statements are issued. Financial statements are considered “issued” when they are widely distributed to shareholders and others for general use and reliance in a form and format that complies with GAAP. Events occurring subsequent to March 31, 2016 have been evaluated as to their potential impact to the consolidated financial statements.

On April 20, 2016, the Company declared a regular quarterly cash dividend of $0.28 per share, payable May 10, 2016, to stockholders of record on April 30, 2016, representing an increase of $0.01, or 3.7%, over the quarterly cash dividend paid in each of the five previous fiscal quarters.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

GENERAL

The following discussion and analysis focuses on those factors that, in management's view, had a material effect on the financial position of the Company as of March 31, 2016 and December 31, 2015, and its results of operations for the three months ended March 31, 2016 and 2015. This discussion is being presented to provide a narrative explanation of the consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes and with other financial data appearing elsewhere in this filing and with the Company's Annual Report on Form 10-K for the year ended December 31, 2015. In the opinion of the Company's management, the interim unaudited data reflects all adjustments, consisting only of normal recurring adjustments and disclosures necessary to fairly present the Company's consolidated financial position and results of operations for the interim periods presented. Management is not aware of the occurrence of any events after March 31, 2016 which would materially affect the information presented.

Please refer to Note 1 in the Company's unaudited interim consolidated financial statements at Part I, Item 1 of this Report for definitions of acronyms, abbreviations and capitalized terms used throughout the following discussion and analysis.

CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS

The Company may from time to time make written or oral statements that are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance or conditions and assumptions relating thereto. The Company may include forward-looking statements in its filings with the SEC, in its reports to stockholders, including this quarterly report, in press releases, other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others.

Forward-looking statements reflect management's current expectations and are subject to uncertainties, both general and specific, and risk exists that actual results will differ from those predictions, forecasts, projections and other estimates contained in forward-looking statements. These risks cannot be readily quantified. When management uses any of the words “believes,” “expects,” “anticipates,” “intends,” "projects," “plans,” “seeks,” “estimates,” "targets," "goals," “may,” "might," “could,” “would,” “should,” or similar expressions, they are making forward-looking statements. Many possible events or factors, including those beyond the control of management, could affect the future financial results and performance of the Company.

Factors that may cause results or performance to differ materially from those expressed in forward-looking statements include, but are not limited to: (1) continuing general economic conditions and financial instability, either nationally, internationally, regionally or locally resulting from elevated unemployment rates, changes in monetary and fiscal policies, and adverse changes in the credit rating of U.S. government debt; (2) increased competitive pressures including those from tax-advantaged credit unions and other financial service providers in the Company's northern Vermont and New Hampshire market area or in the financial services industry generally, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems; (3) interest rates change in such a way that continues to put pressure on the Company's margins, or result in lower fee income and lower gain on sale of real estate loans; (4) changes in laws or government rules, or the way in which courts or government agencies interpret or implement those laws or rules, that increase our costs of doing business or otherwise adversely affect the Company's business; (5) changes in federal or state tax policy; (6) the effect of federal and state health care reform efforts; (7) changes in the level of nonperforming assets and charge-offs; (8) changes in estimates of future reserve requirements based upon relevant regulatory and accounting requirements; (9) changes in information technology that require increased capital spending; (10) changes in consumer and business spending, borrowing and savings habits; (11) further changes to the regulations governing the calculation of the Company’s regulatory capital ratios; (12) the effect of and changes in the United States monetary and fiscal policies, including interest rate policies and regulation of the money supply by the FRB; (13) increased cyber security threats; and (14) the effects of national and state election results.

When evaluating forward-looking statements to make decisions with respect to the Company, investors and others are cautioned to consider these and other risks and uncertainties, and are reminded not to place undue reliance on such statements. Investors should not consider the foregoing list of factors to be a complete list of risks or uncertainties. Forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to update them to reflect new or changed information or events, except as may be required by federal securities laws.

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Non-GAAP Financial Measures

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Yields Earned and Rates Paid), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

CRITICAL ACCOUNTING POLICIES

The Company has established various accounting policies which govern the application of GAAP in the preparation of the Company's consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the reported amount of assets, liabilities, capital, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates on matters tha