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

OR

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 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 October 29, 2016:
 
Common Stock, $2 par value
 
4,459,655

shares
 




UNION BANKSHARES, INC.
TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 
Item 1A. Risk Factors.
 
 




PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
September 30, 2016
December 31, 2015
 
(Unaudited)
 
Assets
(Dollars in thousands)
Cash and due from banks
$
3,952

$
4,217

Federal funds sold and overnight deposits
31,622

13,744

Cash and cash equivalents
35,574

17,961

Interest bearing deposits in banks
9,753

12,753

Investment securities available-for-sale
59,671

54,110

Investment securities held-to-maturity (fair value $1.0 million and $5.1 million at
  September 30, 2016 and December 31, 2015, respectively)
999

5,217

Loans held for sale
10,214

5,635

Loans
522,361

500,506

Allowance for loan losses
(5,226
)
(5,201
)
Net deferred loan costs
649

515

Net loans
517,784

495,820

Accrued interest receivable
1,962

1,832

Premises and equipment, net
13,377

13,055

Core deposit intangible
797

925

Goodwill
2,223

2,223

Investment in real estate limited partnerships
2,957

2,373

Company-owned life insurance
8,556

8,800

Other assets
8,712

8,175

Total assets
$
672,579

$
628,879

Liabilities and Stockholders’ Equity
 
 
Liabilities
 
 
Deposits
 
 
Noninterest bearing
$
116,381

$
99,826

Interest bearing
350,376

310,203

Time
105,429

150,379

Total deposits
572,186

560,408

Borrowed funds
37,513

9,564

Accrued interest and other liabilities
6,075

5,339

Total liabilities
615,774

575,311

Commitments and Contingencies


Stockholders’ Equity
 
 
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,934,296 shares
  issued at September 30, 2016 and 4,931,796 shares issued at December 31, 2015
9,869

9,864

Additional paid-in capital
605

501

Retained earnings
51,989

49,524

Treasury stock at cost; 474,642 shares at September 30, 2016
  and 474,619 shares at December 31, 2015
(4,023
)
(4,019
)
Accumulated other comprehensive loss
(1,635
)
(2,302
)
Total stockholders' equity
56,805

53,568

Total liabilities and stockholders' equity
$
672,579

$
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
September 30,
Nine Months Ended
September 30,
 
2016
2015
2016
2015
 
(Dollars in thousands, except per share data)
Interest and dividend income
 
 
 
 
Interest and fees on loans
$
6,355

$
5,962

$
18,604

$
17,553

Interest on debt securities:
 
 
 
 
Taxable
211

242

683

714

Tax exempt
144

109

427

322

Dividends
27

16

62

40

Interest on federal funds sold and overnight deposits
12

1

23

13

Interest on interest bearing deposits in banks
37

43

123

124

Total interest and dividend income
6,786

6,373

19,922

18,766

Interest expense
 
 
 
 
Interest on deposits
363

375

1,200

1,285

Interest on borrowed funds
108

86

303

262

Total interest expense
471

461

1,503

1,547

    Net interest income
6,315

5,912

18,419

17,219

Provision for loan losses
—

150

150

400

    Net interest income after provision for loan losses
6,315

5,762

18,269

16,819

Noninterest income
 
 
 
 
Trust income
171

171

523

538

Service fees
1,538

1,439

4,377

4,133

Net gains on sales of investment securities available-for-sale
53

41

71

41

Net gains on sales of loans held for sale
921

700

2,196

2,214

Other income
121

182

420

468

Total noninterest income
2,804

2,533

7,587

7,394

Noninterest expenses
 
 
 
 
Salaries and wages
2,622

2,426

7,522

7,080

Pension and employee benefits
865

739

2,659

2,242

Occupancy expense, net
297

293

923

986

Equipment expense
553

479

1,603

1,346

Other expenses
1,842

1,737

5,219

4,966

Total noninterest expenses
6,179

5,674

17,926

16,620

        Income before provision for income taxes
2,940

2,621

7,930

7,593

Provision for income taxes
672

571

1,764

1,642

        Net income
$
2,268

$
2,050

$
6,166

$
5,951

Earnings per common share
$
0.51

$
0.45

$
1.38

$
1.33

Weighted average number of common shares outstanding
4,459,602

4,458,345

4,458,755

4,458,323

Dividends per common share
$
0.28

$
0.27

$
0.83

$
0.81

 
 
 
 
 

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
September 30,
Nine Months Ended
September 30,
 
2016
2015
2016
2015
 
(Dollars in thousands)
Net income
$
2,268

$
2,050

$
6,166

$
5,951

Other comprehensive (loss) income, net of tax:
 
 
 
 
Investment securities available-for-sale:
 
 
 
 
Net unrealized holding (losses) gains arising during the period on investment securities available-for-sale
(182
)
299

714

81

Reclassification adjustment for net gains on sales of investment securities available-for-sale realized in net income
(35
)
(27
)
(47
)
(27
)
Total other comprehensive (loss) income
(217
)
272

667

54

Total comprehensive income
$
2,051

$
2,322

$
6,833

$
6,005


See accompanying notes to unaudited interim consolidated financial statements.


Union Bankshares, Inc. Page 3

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 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
—

—

—

6,166

—

—

6,166

   Other comprehensive income
—

—

—

—

—

667

667

   Issuance of common stock
190

—

4

—

2

—

6

   Cash dividends declared
       ($0.83 per share)
—

—

—

(3,701
)
—

—

(3,701
)
   Stock based compensation
  expense
—

—

49

—

—

—

49

   Exercise of stock options
2,500

5

51

—

—

—

56

   Purchase of treasury stock
(213
)
—

—

—

(6
)
—

(6
)
Balances, September 30, 2016
4,459,654

$
9,869

$
605

$
51,989

$
(4,023
)
$
(1,635
)
$
56,805

 
 
 
 
 
 
 
 
Balances, December 31, 2014
4,458,430

$
9,859

$
418

$
46,462

$
(3,925
)
$
(1,380
)
$
51,434

   Net income
—

—

—

5,951

—

—

5,951

   Other comprehensive income
—

—

—

—

—

54

54

   Cash dividends declared
  ($0.81 per share)
—

—

—

(3,612
)
—

—

(3,612
)
   Stock based compensation
  expense
—

—

29

—

—

—

29

   Exercise of stock options
2,500

5

48

—

—

—

53

   Purchase of treasury stock
(3,638
)
—

—

—

(91
)
—

(91
)
Balances, September 30, 2015
4,457,292

$
9,864

$
495

$
48,801

$
(4,016
)
$
(1,326
)
$
53,818


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)
 
Nine Months Ended
September 30,
 
2016
2015
 
(Dollars in thousands)
Cash Flows From Operating Activities
 
 
Net income
$
6,166

$
5,951

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation
967

785

Provision for loan losses
150

400

Deferred income tax provision
259

93

Net amortization of investment securities
261

151

Equity in losses of limited partnerships
391

365

Stock based compensation expense
49

29

Net increase in unamortized loan costs
(134
)
(136
)
Proceeds from sales of loans held for sale
101,213

104,642

Origination of loans held for sale
(103,596
)
(98,941
)
Net gains on sales of loans held for sale
(2,196
)
(2,214
)
Net loss on disposals of premises and equipment
—

6

Net gains on sales of investment securities available-for-sale
(71
)
(41
)
Write-downs of impaired assets
—

29

Net gains on sales of other real estate owned
—

(28
)
Increase in accrued interest receivable
(130
)
(34
)
Amortization of core deposit intangible
129

129

Increase in other assets
(403
)
(1,105
)
Contribution to defined benefit pension plan
(750
)
—

Increase (decrease) in other liabilities
1,486

(305
)
Net cash provided by operating activities
3,791

9,776

Cash Flows From Investing Activities
 
 
Interest bearing deposits in banks
 
 
Proceeds from maturities and redemptions
3,995

2,832

Purchases
(996
)
(3,333
)
Investment securities held-to-maturity
 
 
Proceeds from maturities, calls and paydowns
4,220

2,000

Investment securities available-for-sale
 
 
Proceeds from sales
6,617

11,040

Proceeds from maturities, calls and paydowns
8,403

5,203

Purchases
(19,761
)
(21,487
)
Purchase of nonmarketable stock, net
(567
)
—

Net increase in loans
(22,015
)
(18,074
)
Recoveries of loans charged off
35

44

Purchases of premises and equipment
(1,289
)
(1,798
)
Purchase of Company-owned life insurance
—

(5,000
)
Proceeds from Company-owned life insurance death benefit
73

—

Investments in limited partnerships
(975
)
(32
)
Proceeds from sales of other real estate owned
—

295

Net cash used in investing activities
(22,260
)
(28,310
)
 
 
 

Union Bankshares, Inc. Page 5


Cash Flows From Financing Activities
 
 
Advances on long-term borrowings
25,452

—

Repayment of long-term debt
(229
)
(219
)
Net increase in short-term borrowings outstanding
2,726

2,522

Net increase in noninterest bearing deposits
16,555

13,229

Net increase in interest bearing deposits
40,173

6,224

Net decrease in time deposits
(44,950
)
(27,632
)
Issuance of common stock
62

53

Purchase of treasury stock
(6
)
(91
)
Dividends paid
(3,701
)
(3,612
)
Net cash provided by (used in) financing activities
36,082

(9,526
)
Net increase (decrease) in cash and cash equivalents
17,613

(28,060
)
Cash and cash equivalents
 
 
Beginning of period
17,961

41,744

End of period
$
35,574

$
13,684

Supplemental Disclosures of Cash Flow Information
 
 
Interest paid
$
1,674

$
1,679

Income taxes paid
$
975

$
1,460

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

$
59

Investment in limited partnerships acquired by capital contributions payable
$
287

$
—

 
 
 

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 September 30, 2016, and for the three and nine months ended September 30, 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 and restricted stock units 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.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Under the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model ("CECL"), requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as available for sale. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. 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.

Amortization expense for the core deposit intangible was $43 thousand for the three months ended September 30, 2016 and 2015 and was $129 thousand for the nine months ended September 30, 2016 and 2015. The amortization expense is included in other

Union Bankshares, Inc. Page 8


expenses on the consolidated statement of income and is deductible for tax purposes. As of September 30, 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
$
43

2017
171

2018
171

2019
171

2020
171

Thereafter
70

Total
$
797


Note 6. Investment Securities
Investment securities as of the balance sheet dates consisted of the following:
September 30, 2016
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
(Dollars in thousands)
Available-for-sale
 
 
 
 
Debt securities:
 
 
 
 
U.S. Government-sponsored enterprises
$
7,263

$
55

$
(26
)
$
7,292

Agency mortgage-backed
16,331

235

(16
)
16,550

State and political subdivisions
25,004

486

(38
)
25,452

Corporate
9,748

342

(69
)
10,021

Total debt securities
58,346

1,118

(149
)
59,315

Mutual funds
356

—

—

356

Total
$
58,702

$
1,118

$
(149
)
$
59,671

Held-to-maturity
 
 
 
 
U.S. Government-sponsored enterprises
$
999

$
2

$
—

$
1,001


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


Investment securities with a carrying amount of $12.6 million and $25.7 million at September 30, 2016 and December 31, 2015, respectively, were pledged as collateral for public deposits and for other purposes as required or permitted by law.


Union Bankshares, Inc. Page 9


The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of September 30, 2016 were as follows:
 
Amortized
Cost
Fair
Value
 
(Dollars in thousands)
Available-for-sale
 
 
Due in one year or less
$
378

$
384

Due from one to five years
4,127

4,256

Due from five to ten years
22,391

22,896

Due after ten years
15,119

15,229

 
42,015

42,765

Agency mortgage-backed
16,331

16,550

Total debt securities available-for-sale
$
58,346

$
59,315

Held-to-maturity
 
 
Due from one to five years
$
999

$
1,001

Total debt securities held-to-maturity
$
999

$
1,001


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:
September 30, 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
3

$
1,238

$
(11
)
2

$
952

$
(15
)
5

$
2,190

$
(26
)
Agency mortgage-backed
2

2,047

(9
)
1

384

(7
)
3

2,431

(16
)
State and political
  subdivisions
9

3,689

(38
)
—

—

—

9

3,689

(38
)
Corporate
2

975

(25
)
2

655

(44
)
4

1,630

(69
)
Total
16

$
7,949

$
(83
)
5

$
1,991

$
(66
)
21

$
9,940

$
(149
)
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
)

Union Bankshares, Inc. Page 10


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 September 30, 2016 for the foreseeable future and no declines were deemed by management to be OTT.

The following table presents the proceeds, gross realized gains and gross realized losses from the sale of AFS securities:
 
For The Three Months Ended September 30,
For The Nine Months Ended September 30,
 
2016
2015
2016
2015
 
(Dollars in thousands)
Proceeds
$
3,944

$
11,040

$
6,617

$
11,040

 
 
 
 
 
Gross gains
112

54

131

54

Gross losses
(59
)
(13
)
(60
)
(13
)
Net gains on sales of investment securities AFS
$
53

$
41

$
71

$
41


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 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.

Union Bankshares, Inc. Page 11


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 September 30, 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 September 30, 2016 or December 31, 2015.
The following table summarizes activity in the accretable loan premium component for the acquired loan portfolio during the three and nine month comparison periods:
 
For The Three Months Ended September 30,
For The Nine Months Ended September 30,
 
2016
2015
2016
2015
 
(Dollars in thousands)
Balance at beginning of period
$
—

$
256

$
—

$
292

Loan premium amortization
—

(26
)
—

(62
)
Balance at end of period
$
—

$
230

$
—

$
230

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:
 
September 30,
2016
December 31,
2015
 
(Dollars in thousands)
Residential real estate
$
166,602

$
165,396

Construction real estate
35,531

42,889

Commercial real estate
245,642

230,442

Commercial
32,884

21,397

Consumer
3,914

3,963

Municipal
37,788

36,419

    Gross loans
522,361

500,506

Allowance for loan losses
(5,226
)
(5,201
)
Net deferred loan costs
649

515

    Net loans
$
517,784

$
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 September 30, 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:
September 30, 2016
Current
30-59 Days
60-89 Days
90 Days and Over and Accruing
Nonaccrual
Total
 
(Dollars in thousands)
Residential real estate
$
163,439

$
63

$
545

$
694

$
1,861

$
166,602

Construction real estate
35,494

12

—

—

25

35,531

Commercial real estate
244,523

—

299

308

512

245,642

Commercial
32,833

35

—

—

16

32,884

Consumer
3,898

15

1

—

—

3,914

Municipal
37,788

—

—

—

—

37,788

Total
$
517,975

$
125

$
845

$
1,002

$
2,414

$
522,361


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 was one residential real estate loan totaling $50 thousand in process of foreclosure at September 30, 2016. Aggregate interest on nonaccrual loans not recognized was $1.3 million and $1.2 million as of September 30, 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 third 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 and nine months ended September 30, 2016 and 2015 were as follows:
For The Three Months Ended September 30, 2016
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Balance, June 30, 2016
$
1,382

$
373

$
2,837

$
240

$
27

$
26

$
341

$
5,226

Provision (credit) for loan
  losses
11

28

(64
)
5

4

20

(4
)
—

Recoveries of amounts
  charged off
—

3

—

1

—

—

—

4

 
1,393

404

2,773

246

31

46

337

5,230

Amounts charged off
—

—

—

—

(4
)
—

—

(4
)
Balance, September 30, 2016
$
1,393

$
404

$
2,773

$
246

$
27

$
46

$
337

$
5,226

For The Three Months Ended September 30, 2015
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Balance, June 30, 2015
$
1,322

$
397

$
2,819

$
192

$
26

$
25

$
138

$
4,919

Provision (credit) for loan
  losses
62

84

(80
)
21

(1
)
24

40

150

Recoveries of amounts
  charged off
10

3

—

6

—

—

—

19

 
1,394

484

2,739

219

25

49

178

5,088

Amounts charged off
(28
)
—

—

(16
)
—

—

—

(44
)
Balance, September 30, 2015
$
1,366

$
484

$
2,739

$
203

$
25

$
49

$
178

$
5,044

For The Nine Months Ended September 30, 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
79

(119
)
(19
)
62

3

8

136

150

Recoveries of amounts
  charged off
15

9

—

8

3

—

—

35

 
1,513

404

2,773

279

34

46

337

5,386

Amounts charged off
(120
)
—

—

(33
)
(7
)
—

—

(160
)
Balance, September 30, 2016
$
1,393

$
404

$
2,773

$
246

$
27

$
46

$
337

$
5,226

For The Nine Months Ended September 30, 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
77

20

322

50

9

7

(85
)
400

Recoveries of amounts
  charged off
10

25

—

6

3

—

—

44

 
1,417

484

2,739

232

39

49

178

5,138

Amounts charged off
(51
)
—

—

(29
)
(14
)
—

—

(94
)
Balance, September 30, 2015
$
1,366

$
484

$
2,739

$
203

$
25

$
49

$
178

$
5,044



Union Bankshares, Inc. Page 15


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:
September 30, 2016
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
57

$
—

$
61

$
—

$
—

$
—

$
—

$
118

Collectively evaluated
   for impairment
1,336

404

2,712

246

27

46

337

5,108

Total allocated
$
1,393

$
404

$
2,773

$
246

$
27

$
46

$
337

$
5,226

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


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:
September 30, 2016
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
1,388

$
89

$
2,883

$
451

$
—

$
—

$
4,811

Collectively evaluated
   for impairment
165,214

35,442

242,759

32,433

3,914

37,788

517,550

Total
$
166,602

$
35,531

$
245,642

$
32,884

$
3,914

$
37,788

$
522,361

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.



Union Bankshares, Inc. Page 16


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:
September 30, 2016
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Pass
$
152,180

$
31,198

$
171,007

$
29,626

$
3,880

$
37,788

$
425,679

Satisfactory/Monitor
10,316

4,219

70,428

2,589

33

—

87,585

Substandard
4,106

114

4,207

669

1

—

9,097

Total
$
166,602

$
35,531

$
245,642

$
32,884

$
3,914

$
37,788

$
522,361


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 and nine months ended September 30, 2016:
 
As of September 30, 2016
For The Three Months Ended September 30, 2016
For The Nine Months Ended September 30, 2016
 
Recorded Investment
(1)
Principal Balance
(1)
Related Allowance
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
 
(Dollars in thousands)
Residential real estate
$
258

$
267

$
57

 
 
 
 
Commercial real estate
501

530

61

 
 
 
 
With an allowance recorded
759

797

118

 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
1,130

1,521

—

 
 
 
 
Construction real estate
89

89

—

 
 
 
 
Commercial real estate
2,382

2,451

—

 
 
 
 
Commercial
451

451

—

 
 
 
 
With no allowance recorded
4,052

4,512

—

 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
1,388

1,788

57

$
1,346

$
7

$
1,266

$
23

Construction real estate
89

89

—

89

1

91

3

Commercial real estate
2,883

2,981

61

3,018

28

3,059

59

Commercial
451

451

—

456

—

470

—

Total
$
4,811

$
5,309

$
118

$
4,909

$
36

$
4,886

$
85

____________________
(1)
Does not reflect government guaranties on impaired loans as of September 30, 2016 totaling $654 thousand.


Union Bankshares, Inc. Page 17


The following table provides information with respect to impaired loans by class of loan as of and for the three and nine months ended September 30, 2015:
 
As of September 30, 2015
For The Three Months Ended September 30, 2015
For The Nine Months Ended September 30, 2015
 
Recorded Investment
(1)
Principal Balance
(1)
Related Allowance
Average Recorded Investment
Interest Income Recognized
Average Recorded Investment
Interest Income Recognized
 
(Dollars in thousands)
Residential real estate
$
1,185

$
1,346

$
63

$
935

$
10

$
878

$
24

Construction real estate
93

93

2

94

1

179

18

Commercial real estate
3,815

3,892

320

3,947

46

3,630

151

Commercial
—

—

—

—

—

31

—

Total
$
5,093

$
5,331

$
385

$
4,976

$
57

$
4,718

$
193

____________________
(1)
Does not reflect government guaranties on impaired loans as of September 30, 2015 totaling $238 thousand.

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.


Union Bankshares, Inc. Page 18


The following is a summary of TDR loans by class of loan as of the balance sheet dates:
 
September 30, 2016
December 31, 2015
 
Number of Loans
Principal Balance
Number of Loans
Principal Balance
 
(Dollars in thousands)
Residential real estate
17

$
1,388

11

$
1,197

Construction real estate
1

89

1

92

Commercial real estate
10

1,475

5

950

Commercial
2

451

2

493

Total
30

$
3,403

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.
The following table provides new TDR activity for the three and nine months ended September 30, 2016:
 
New TDRs During the
New TDRs During the
 
Three Months Ended September 30, 2016
Nine Months Ended September 30, 2016
 
Number of Loans
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
Number of Loans
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
 
(Dollars in thousands)
Residential real estate
3

$
89

$
99

6

$
278

$
295

Commercial real estate
4

643

647

6

803

807

The following table provides new TDR activity for the three and nine months ended September 30, 2015.
 
New TDRs During the
New TDRs During the
 
Three Months Ended September 30, 2015
Nine Months Ended September 30, 2015
 
Number of Loans
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
Number of Loans
Pre-Modification Outstanding Recorded Investment
Post-Modification Outstanding Recorded Investment
 
(Dollars in thousands)
Residential real estate
5

$
504

$
511

5

$
504

$
511

Commercial real estate
—

—

—

2

281

281


There were no TDR loans modified within the previous twelve months that had subsequently defaulted during the three and nine month periods ended September 30, 2016 or September 30, 2015. TDR loans are considered defaulted at 90 days past due.

At September 30, 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.


Union Bankshares, Inc. Page 19


Net periodic pension benefit for the three and nine months ended September 30 consisted of the following components:
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2016
2015
2016
2015
 
(Dollars in thousands)
Interest cost on projected benefit obligation
$
175

$
170

$
525

$
510

Expected return on plan assets
(259
)
(286
)
(777
)
(858
)
Amortization of net loss
41

14

123

42

Net periodic benefit
$
(43
)
$
(102
)
$
(129
)
$
(306
)

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 nine months ended September 30, 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 December 31, 2015, the earned date of the award. 50% of the RSUs awarded were 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 each of the next two anniversaries of the earned date. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights. The general terms of the awards were described in a 2015 Award Summary, with the final awards and related 2015 performance results and December 31, 2015 stock price, certified by the Board of Directors during the first quarter of 2016. Unrecognized compensation expense related to the unvested RSUs as of September 30, 2016 was $105 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 September 30, 2016 the estimated unrecognized compensation expense 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 September 30, 2016, 4,500 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 September 30, 2016 and all exercisable options were "in the money".

As of September 30, 2016, 36,436 shares remained available for future equity awards under the 2014 Equity Plan.

As of September 30, 2016, 4,000 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 September 30, 2016 and all exercisable options were "in the money".


Union Bankshares, Inc. Page 20


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:
 
September 30,
2016
December 31,
2015
 
(Dollars in thousands)
Net unrealized gain (loss) on investment securities available-for-sale
$
640

$
(27
)
Defined benefit pension plan net unrealized actuarial loss
(2,275
)
(2,275
)
Total
$
(1,635
)
$
(2,302
)

The following tables disclose the tax effects allocated to each component of OCI for the three and nine months ended September 30:
 
Three Months Ended
 
September 30, 2016
September 30, 2015
 
Before-Tax Amount
Tax 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 (losses) gains arising during the period on investment securities available-for-sale
$
(276
)
$
94

$
(182
)
$
453

$
(154
)
$
299

Reclassification adjustment for net gains on investment securities available-for-sale realized in net income
(53
)
18

(35
)
(41
)
14

(27
)
Total other comprehensive (loss) income
$
(329
)
$
112

$
(217
)
$
412

$
(140
)
$
272


 
Nine Months Ended
 
September 30, 2016
September 30, 2015
 
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 arising during the period on investment securities available-for-sale
$
1,082

$
(368
)
$
714

$
122

$
(41
)
$
81

Reclassification adjustment for net gains on investment securities available-for-sale realized in net income
(71
)
24

(47
)
(41
)
14

(27
)
Total other comprehensive income
$
1,011

$
(344
)
$
667

$
81

$
(27