Edgar Filing: UNION BANKSHARES INC

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, 2018

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 [ ]
	Emerging growth 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 April 30, 2018.



Common Stock, $2 par value	4,465,661	shares

UNION BANKSHARES, INC.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION



Item 1. Financial Statements.
Unaudited Interim Consolidated Financial Statements of 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 25
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 1A. Risk Factors.	Page 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	Page 41
Item 6. Exhibits.	Page 42

Signatures	Page 42

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



	March 31, 2018			December 31, 2017
	(Unaudited)
Assets	(Dollars in thousands)
Cash and due from banks	$	3,328		$	3,857
Federal funds sold and overnight deposits	9,918			34,651
Cash and cash equivalents	13,246			38,508
Interest bearing deposits in banks	9,601			9,352
Investment securities available-for-sale	68,440			65,439
Investment securities held-to-maturity (fair value $999 thousand at December 31, 2017)	—			1,000
Other investments	502			—
Total investments	68,942			66,439
Loans held for sale	2,938			7,947
Loans	591,660			586,615
Allowance for loan losses	(5,405		)	(5,408		)
Net deferred loan costs	797			795
Net loans	587,052			582,002
Accrued interest receivable	2,468			2,500
Premises and equipment, net	14,298			14,255
Core deposit intangible	540			583
Goodwill	2,223			2,223
Investment in real estate limited partnerships	3,028			3,166
Company-owned life insurance	8,865			8,861
Other assets	9,530			9,995
Total assets	$	722,731		$	745,831
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	128,951		$	127,824
Interest bearing	392,027			418,621
Time	102,865			101,129
Total deposits	623,843			647,574
Borrowed funds	31,265			31,581
Accrued interest and other liabilities	8,459			8,015
Total liabilities	663,567			687,170
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,940,961 shares issued at March 31, 2018 and December 31, 2017	9,882			9,882
Additional paid-in capital	803			755
Retained earnings	58,604			57,197
Treasury stock at cost; 475,304 shares at March 31, 2018 and 475,385 shares at December 31, 2017	(4,079		)	(4,077		)
Accumulated other comprehensive loss	(6,046		)	(5,096		)
Total stockholders' equity	59,164			58,661
Total liabilities and stockholders' equity	$	722,731		$	745,831

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,
	2018		2017
	(Dollars in thousands, except per share data)
Interest and dividend income
Interest and fees on loans	$	6,999	$	6,322
Interest on debt securities:
Taxable	289		242
Tax exempt	145		165
Dividends	40		45
Interest on federal funds sold and overnight deposits	53		30
Interest on interest bearing deposits in banks	45		35
Total interest and dividend income	7,571		6,839
Interest expense
Interest on deposits	533		422
Interest on borrowed funds	114		115
Total interest expense	647		537
Net interest income	6,924		6,302
Provision for loan losses	—		—
Net interest income after provision for loan losses	6,924		6,302
Noninterest income
Trust income	193		178
Service fees	1,487		1,440
Net gains on sales of loans held for sale	295		508
Other income	496		107
Total noninterest income	2,471		2,233
Noninterest expenses
Salaries and wages	2,649		2,568
Pension and employee benefits	958		879
Occupancy expense, net	395		390
Equipment expense	535		534
Other expenses	1,598		1,570
Total noninterest expenses	6,135		5,941
Income before provision for income taxes	3,260		2,594
Provision for income taxes	513		664
Net income	$	2,747	$	1,930
Earnings per common share	$	0.62	$	0.43
Weighted average number of common shares outstanding	4,465,600		4,462,057
Dividends per common share	$	0.30	$	0.29

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,
	2018			2017
	(Dollars in thousands)
Net income	$	2,747		$	1,930
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	(950		)	225
Total other comprehensive (loss) income	(950		)	225
Total comprehensive income	$	1,797		$	2,155

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 3

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

Three Months Ended March 31, 2018 and 2017 (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, 2017	4,465,576		$	9,882	$	755	$	57,197		$	(4,077	)	$	(5,096	)	$	58,661
Net income	—		—		—		2,747			—			—			2,747
Other comprehensive loss	—		—		—		—			—			(950		)	(950		)
Dividend reinvestment plan	141		—		7		—			1			—			8
Cash dividends declared ($0.30 per share)	—		—		—		(1,340		)	—			—			(1,340		)
Stock based compensation expense	—		—		41		—			—			—			41
Purchase of treasury stock	(60	)	—		—		—			(3		)	—			(3		)
Balances March 31, 2018	4,465,657		$	9,882	$	803	$	58,604		$	(4,079	)	$	(6,046	)	$	59,164

Balances, December 31, 2016	4,462,135		$	9,874	$	620	$	53,086		$	(4,022	)	$	(3,279	)	$	56,279
Net income	—		—		—		1,930			—			—			1,930
Other comprehensive income	—		—		—		—			—			225			225
Dividend reinvestment plan	117		—		4		—			1			—			5
Cash dividends declared ($0.29 per share)	—		—		—		(1,294		)	—			—			(1,294		)
Stock based compensation expense	—		—		34		—			—			—			34
Purchase of treasury stock	(225	)	—		—		—			(9		)	—			(9		)
Balances, March 31, 2017	4,462,027		$	9,874	$	658	$	53,722		$	(4,030	)	$	(3,054	)	$	57,170

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,
	2018			2017
	(Dollars in thousands)
Cash Flows From Operating Activities
Net income	$	2,747		$	1,930
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	301			307
Deferred income tax provision	41			333
Net amortization of investment securities	93			113
Equity in losses of limited partnerships	140			157
Stock based compensation expense	41			34
Net (increase) decrease in unamortized loan costs	(2		)	5
Proceeds from sales of loans held for sale	23,384			29,041
Origination of loans held for sale	(18,080		)	(23,577		)
Net gains on sales of loans held for sale	(295		)	(508		)
Net (gain) loss on disposals of premises and equipment	(191		)	13
Net gain on sales of other real estate owned	(11		)	—
Decrease in accrued interest receivable	32			217
Amortization of core deposit intangible	43			43
Increase in other assets	403			80
Contribution to defined benefit pension plan	—			(750		)
Increase in other liabilities	474			419
Net cash provided by operating activities	9,120			7,857
Cash Flows From Investing Activities
Interest bearing deposits in banks
Proceeds from maturities and redemptions	996			2,988
Purchases	(1,245		)	(1,992		)
Investment securities held-to-maturity
Proceeds from maturities, calls and paydowns	1,000			—
Investment securities available-for-sale
Proceeds from maturities, calls and paydowns	1,539			1,696
Purchases	(6,358		)	(3,551		)
Other Investments
Proceeds from sales	44			—
Purchases	(24		)	—
Purchase of nonmarketable stock	(105		)	—
Net increase in loans	(5,051		)	(4,298		)
Recoveries of loans charged off	3			6
Purchases of premises and equipment	(357		)	(67		)
Proceeds from Company-owned life insurance death benefit	307			—
Investments in limited partnerships	—			(186		)
Proceeds from sales of premises and equipment	204			—
Proceeds from sales of other real estate owned	47			—
Net cash used in investing activities	(9,000		)	(5,404		)

Union Bankshares, Inc. Page 5



Cash Flows From Financing Activities
Advances on long-term borrowings	7,000			—
Repayment of long-term debt	(6,072		)	(70		)
Net (decrease) increase in short-term borrowings outstanding	(1,244		)	202
Net increase (decrease) in noninterest bearing deposits	1,127			(2,297		)
Net decrease in interest bearing deposits	(26,594		)	(12,632		)
Net increase (decrease) in time deposits	1,736			(666		)
Purchase of treasury stock	(3		)	(9		)
Dividends paid	(1,332		)	(1,289		)
Net cash used in financing activities	(25,382		)	(16,761		)
Net decrease in cash and cash equivalents	(25,262		)	(14,308		)
Cash and cash equivalents
Beginning of period	38,508			39,275
End of period	$	13,246		$	24,967
Supplemental Disclosures of Cash Flow Information
Interest paid	$	647		$	540

Dividends paid on Common Stock:
Dividends declared	$	1,340		$	1,294
Dividends reinvested	(8		)	(5		)
	$	1,332		$	1,289

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, 2018, and for the three months ended March 31, 2018 and 2017, 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, 2017 (2017 Annual Report). 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 2017 Annual Report. 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, 2018, or any interim period.

In addition to the definitions set forth elsewhere in this report, 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	2017 Annual Report	Annual Report of Form 10-K for the year ended December 31, 2017
		2017 Tax Act:	Tax Cut and Jobs Act of 2017

Note 2. Legal Contingencies

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

Union Bankshares, Inc. Page 7

Note 3. Per Share Information

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

Note 4. Recent Accounting Pronouncements

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 by reviewing its lease contracts.

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 AFS. 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 has established a CECL implementation team and developed a transition project plan. The team members have evaluated CECL implementation software providers and have selected Sageworks. The Company has entered into an agreement with Sageworks and has been compiling data to run parallel calculations during 2018. This will facilitate the implementation process and management's evaluation of the potential impact of the ASU on the Company's consolidated financial statements.

The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) using a modified-retrospective transition method, as of January 1, 2018. The ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. While the guidance replaces most existing revenue recognition guidance in GAAP, the ASU is not applicable to financial instruments and, therefore, did not impact a majority of the Company’s revenues, including net interest income. Through the Company's assessment, it was determined that there will be no cumulative-effect adjustment to beginning stockholders' equity under the modified retrospective transition method within the consolidated financial statements as there was no change in revenue recognition upon adoption of ASU2014-09.

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 initially 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 March 31, 2018 and 2017. The amortization expense is included in other expenses on the consolidated statements of income and is deductible for tax purposes. As of March 31, 2018, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:



	(Dollars in thousands)
2018	$	128
2019	171
2020	171
2021	70
Total	$	540

Union Bankshares, Inc. Page 8

Note 6. Investment Securities

AFS and HTM investment securities as of the balance sheet dates consisted of the following:



March 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	7,437	$	2	$	(178	)	$	7,261
Agency mortgage-backed	33,356		—		(796		)	32,560
State and political subdivisions	24,820		126		(624		)	24,322
Corporate	4,411		1		(115		)	4,297
Total	$	70,024	$	129	$	(1,713	)	$	68,440



December 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	7,805	$	12	$	(122	)	$	7,695
Agency mortgage-backed	28,378		12		(274		)	28,116
State and political subdivisions	24,704		249		(239		)	24,714
Corporate	4,412		48		(67		)	4,393
Total debt securities	65,299		321		(702		)	64,918
Mutual funds (1)	521		—		—			521
Total	$	65,820	$	321	$	(702	)	$	65,439
Held-to-maturity
U.S. Government-sponsored enterprises	$	1,000	$	—	$	(1	)	$	999

____________________


(1)	As of December 31, 2017, mutual funds were classified as AFS investment securities. Effective January 1, 2018, these investments were reclassified to other investments on the consolidated balance sheets as they are no longer eligible to be classified as AFS upon adoption of ASU 2016-01.

There were no investment securities HTM at March 31, 2018. Investment securities AFS with a carrying amount of $2.7 million and $4.6 million at March 31, 2018 and December 31, 2017, respectively, were pledged as collateral for public deposits and for other purposes as required or permitted by law.

The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of March 31, 2018 were as follows:



	Amortized Cost		Fair Value
Available-for-sale	(Dollars in thousands)
Due from one to five years	$	4,302	$	4,325
Due from five to ten years	16,319		15,978
Due after ten years	16,047		15,577
	36,668		35,880
Agency mortgage-backed	33,356		32,560
Total debt securities available-for-sale	$	70,024	$	68,440

Union Bankshares, Inc. Page 9

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.

As of March 31, 2018, other investments consisted of mutual funds with a fair value of $502 thousand, a cost basis of $459 thousand and unrealized gains of $43 thousand.

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, 2018	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	5	$	2,381	$	(19	)	9	$	4,216	$	(159	)	14	$	6,597	$	(178	)
Agency mortgage-backed	38	27,583		(580		)	7	4,977		(216		)	45	32,560		(796		)
State and political subdivisions	25	9,982		(189		)	18	7,657		(435		)	43	17,639		(624		)
Corporate	6	2,826		(86		)	2	971		(29		)	8	3,797		(115		)
Total	74	$	42,772	$	(874	)	36	$	17,821	$	(839	)	110	$	60,593	$	(1,713	)



December 31, 2017	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	$	1,824	$	(7	)	9	$	4,374	$	(116	)	12	$	6,198	$	(123	)
Agency mortgage-backed	26	19,315		(143		)	7	5,222		(131		)	33	24,537		(274		)
State and political subdivisions	8	3,803		(22		)	18	7,899		(217		)	26	11,702		(239		)
Corporate	2	870		(31		)	2	964		(36		)	4	1,834		(67		)
Total	39	$	25,812	$	(203	)	36	$	18,459	$	(500	)	75	$	44,271	$	(703	)

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 statements 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;

Union Bankshares, Inc. Page 10


•	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, 2018 and December 31, 2017 for the foreseeable future and no declines were deemed by management to be OTT.

There were no sales of AFS securities for the three months ended March 31, 2018 and March 31, 2017.

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.

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



	March 31, 2018			December 31, 2017
	(Dollars in thousands)
Residential real estate	$	181,850		$	178,999
Construction real estate	43,379			42,935
Commercial real estate	260,695			254,291
Commercial	46,885			50,719
Consumer	3,525			3,894
Municipal	55,326			55,777
Gross loans	591,660			586,615
Allowance for loan losses	(5,405		)	(5,408		)
Net deferred loan costs	797			795
Net loans	$	587,052		$	582,002

Qualifying residential first mortgage loans and certain commercial real estate loans with a carrying value of $165.0 million and $164.5 million were pledged as collateral for borrowings from the FHLB under a blanket lien at March 31, 2018 and December 31, 2017, respectively.

Union Bankshares, Inc. Page 11

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



March 31, 2018	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)
Residential real estate	$	177,929	$	2,453	$	358	$	293	$	817	$	181,850
Construction real estate	42,919		352		55		—		53		43,379
Commercial real estate	258,127		2,267		—		—		301		260,695
Commercial	46,625		20		10		1		229		46,885
Consumer	3,485		39		1		—		—		3,525
Municipal	55,326		—		—		—		—		55,326
Total	$	584,411	$	5,131	$	424	$	294	$	1,400	$	591,660



December 31, 2017	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)
Residential real estate	$	173,914	$	3,047	$	750	$	472	$	816	$	178,999
Construction real estate	42,857		—		—		22		56		42,935
Commercial real estate	253,266		357		361		—		307		254,291
Commercial	50,675		21		11		—		12		50,719
Consumer	3,884		7		3		—		—		3,894
Municipal	55,777		—		—		—		—		55,777
Total	$	580,373	$	3,432	$	1,125	$	494	$	1,191	$	586,615

There was one residential real estate loan totaling $131 thousand in process of foreclosure at March 31, 2018. Aggregate interest on nonaccrual loans not recognized was $1.2 million and $1.3 million as of March 31, 2018 and 2017, respectively, and $1.2 million as of December 31, 2017.

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 was no change to the methodology used to estimate the ALL during the first quarter of 2018. 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 12

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 13

Changes in the ALL, by class of loans, for the three months ended March 31, 2018 and 2017 were as follows:



For The Three Months Ended March 31, 2018	Residential Real Estate		Construction Real Estate		Commercial Real Estate			Commercial			Consumer			Municipal			Unallocated			Total
	(Dollars in thousands)
Balance, December 31, 2017	$	1,361	$	488	$	2,707		$	395		$	30		$	64		$	363		$	5,408
Provision (credit) for loan losses	14		6		68			(28		)	(4		)	(1		)	(55		)	—
Recoveries of amounts charged off	—		—		—			—			3			—			—			3
	1,375		494		2,775			367			29			63			308			5,411
Amounts charged off	—		—		(2		)	—			(4		)	—			—			(6		)
Balance, March 31, 2018	$	1,375	$	494	$	2,773		$	367		$	25		$	63		$	308		$	5,405



For The Three Months Ended March 31, 2017	Residential Real Estate			Construction Real Estate		Commercial Real Estate			Commercial		Consumer			Municipal		Unallocated			Total
	(Dollars in thousands)
Balance, December 31, 2016	$	1,399		$	391	$	2,687		$	342	$	26		$	40	$	362		$	5,247
Provision (credit) for loan losses	29			48		(26		)	4		—			2		(57		)	—
Recoveries of amounts charged off	2			3		—			—		1			—		—			6
	1,430			442		2,661			346		27			42		305			5,253
Amounts charged off	(58		)	—		—			—		(3		)	—		—			(61		)
Balance, March 31, 2017	$	1,372		$	442	$	2,661		$	346	$	24		$	42	$	305		$	5,192

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, 2018	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	44	$	—	$	—	$	6	$	—	$	—	$	—	$	50
Collectively evaluated for impairment	1,331		494		2,773		361		25		63		308		5,355
Total allocated	$	1,375	$	494	$	2,773	$	367	$	25	$	63	$	308	$	5,405



December 31, 2017	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	47	$	—	$	1	$	—	$	—	$	—	$	—	$	48
Collectively evaluated for impairment	1,314		488		2,706		395		30		64		363		5,360
Total allocated	$	1,361	$	488	$	2,707	$	395	$	30	$	64	$	363	$	5,408

Union Bankshares, Inc. Page 14

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, 2018	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	1,793	$	81	$	1,056	$	374	$	—	$	—	$	3,304
Collectively evaluated for impairment	180,057		43,298		259,639		46,511		3,525		55,326		588,356
Total	$	181,850	$	43,379	$	260,695	$	46,885	$	3,525	$	55,326	$	591,660



December 31, 2017	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	1,718	$	82	$	1,074	$	378	$	—	$	—	$	3,252
Collectively evaluated for impairment	177,281		42,853		253,217		50,341		3,894		55,777		583,363
Total	$	178,999	$	42,935	$	254,291	$	50,719	$	3,894	$	55,777	$	586,615

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, 2018	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Pass	$	167,824	$	35,795	$	173,160	$	35,525	$	3,495	$	55,326	$	471,125
Satisfactory/Monitor	11,099		7,429		84,478		10,515		28		—		113,549
Substandard	2,927		155		3,057		845		2		—		6,986
Total	$	181,850	$	43,379	$	260,695	$	46,885	$	3,525	$	55,326	$	591,660

Union Bankshares, Inc. Page 15



December 31, 2017	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Pass	$	164,733	$	33,401	$	177,388	$	38,877	$	3,859	$	55,777	$	474,035
Satisfactory/Monitor	11,296		9,374		73,772		11,165		30		—		105,637
Substandard	2,970		160		3,131		677		5		—		6,943
Total	$	178,999	$	42,935	$	254,291	$	50,719	$	3,894	$	55,777	$	586,615

The following tables provide information with respect to impaired loans by class of loan as of and for the three months ended March 31, 2018 and March 31, 2017:



	As of March 31, 2018						For The Three Months Ended March 31, 2018
	Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Residential real estate	$	235	$	244	$	44
Commercial	13		13		6
With an allowance recorded	248		257		50

Residential real estate	1,558		2,074		—
Construction real estate	81		81		—
Commercial real estate	1,056		1,137		—
Commercial	361		361		—
With no allowance recorded	3,056		3,653		—

Residential real estate	1,793		2,318		44		$	1,755	$	12
Construction real estate	81		81		—		82		1
Commercial real estate	1,056		1,137		—		1,065		16
Commercial	374		374		6		376		8
Total	$	3,304	$	3,910	$	50	$	3,278	$	37

____________________


(1)	Does not reflect government guaranties on impaired loans as of March 31, 2018 totaling $533 thousand.



	As of March 31, 2017						For The Three Months Ended March 31, 2017
	Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Residential real estate	$	1,579	$	2,087	$	61	$	1,514	$	11
Construction real estate	87		87		—		87		1
Commercial real estate	2,220		2,291		21		2,774		32
Commercial	417		417		—		424		7
Total	$	4,303	$	4,882	$	82	$	4,799	$	51

____________________


(1)	Does not reflect government guaranties on impaired loans as of March 31, 2017 totaling $623 thousand.

Union Bankshares, Inc. Page 16

The following table provides information with respect to impaired loans as of December 31, 2017:



	December 31, 2017
	Recorded Investment (1)		Principal Balance (1)		Related Allowance
	(Dollars in thousands)
Residential real estate	$	238	$	247	$	47
Commercial real estate	137		141		1
With an allowance recorded	375		388		48

Residential real estate	1,480		1,983		—
Construction real estate	82		82		—
Commercial real estate	937		1,011		—
Commercial	378		378		—
With no allowance recorded	2,877		3,454		—

Residential real estate	1,718		2,230		47
Construction real estate	82		82		—
Commercial real estate	1,074		1,152		1
Commercial	378		378		—
Total	$	3,252	$	3,842	$	48

____________________


(1)	Does not reflect government guaranties on impaired loans as of December 31, 2017 totaling $550 thousand.

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



	March 31, 2018			December 31, 2017
	Number of Loans	Principal Balance		Number of Loans	Principal Balance
	(Dollars in thousands)
Residential real estate	25	$	1,793	24	$	1,718
Construction real estate	1	81		1	82
Commercial real estate	10	1,056		10	1,074
Commercial	3	374		2	378
Total	39	$	3,304	37	$	3,252

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 tables provide new TDR activity for the three months ended March 31, 2018 and 2017:



	New TDRs During the					New TDRs During the
	Three Months Ended March 31, 2018					Three Months Ended March 31, 2017
	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	1	$	96	$	98	3	$	140	$	149
Commercial	1	13		13		—	—		—

Union Bankshares, Inc. Page 17

There were no TDR loans modified within the previous twelve months that had subsequently defaulted during the three month periods ended March 31, 2018 or March 31, 2017. TDR loans are considered defaulted at 90 days past due.

At March 31, 2018 and December 31, 2017, 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

On October 18, 2017, the Company's Board of Directors voted to terminate Union Bank’s Defined Benefit Pension Plan. In order to settle the liabilities under the Plan, the Company will offer participants the option to receive an annuity purchased from an insurance carrier, a lump-sum cash payment, or a direct rollover into a qualifying retirement plan. An estimated $1.1 million will be contributed to the Plan by the Company in 2018 to cover the lump-sum payments and annuity purchases. The amount of the final contribution is subject to a number of factors, including changes in interest rates and the exact proportion of the participants electing a lump-sum distribution versus an annuity. At this time, the Company estimates that a $3.2 million reduction in net income will be recorded in the fourth quarter of 2018 as a result of the Plan termination and settlement of Plan assets and liabilities. The Company anticipates completing the transfer of all liabilities and administrative responsibilities under the Plan by December 31, 2018. Once the process is complete, the Company will no longer have any remaining defined benefit pension plan obligations and thus no periodic pension expense.

The Company's pension benefit obligation and net periodic benefit costs for the Plan are actuarially determined based on assumptions regarding the appropriate discount rate, current and expected future return on Plan assets, and anticipated mortality rates. Weighted average assumptions used to determine the net periodic pension cost (benefit) for the three months ended March 31, 2018 and 2017 have remained consistent with assumptions disclosed in the Company's 2017 Annual Report.

Net periodic pension cost (benefit) for the three months ended March 31 consisted of the following components:



	Three Months Ended March 31,
	2018			2017
	(Dollars in thousands)
Interest cost on projected benefit obligation	$	179		$	172
Expected return on plan assets	(161		)	(243		)
Amortization of net loss	151			51
Net periodic cost (benefit)	$	169		$	(20	)

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. As of March 31, 2018, there were outstanding grants under the plan of RSUs and incentive stock options.

RSUs. Each RSU represents the right to receive one share of the Company's common stock upon satisfaction of applicable vesting conditions. The general terms of the awards are described in the Company's 2017 Annual Report. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights.

Union Bankshares, Inc. Page 18

The following table presents a summary of the RSUs awarded in accordance with the 2015, 2016, and 2017 Award Plan Summaries, as of March 31, 2018:



	Number of RSUs Granted	Weighted-Average Grant Date Fair Value		Number of Unvested RSUs
2015 Award	5,445	$	27.91	730
2016 Award	3,569	45.45		2,026
2017 Award	3,225	$	52.95	3,225
Total	12,239			5,981

Unrecognized compensation expense related to the unvested RSUs as of March 31, 2018 and March 31, 2017 was $212 thousand and $186 thousand, respectively.

During the three months ended March 31, 2018, a total of 2,645 contingent RSUs were provisionally granted in accordance with a 2018 Award Plan Summary. The estimated number of contingent RSUs provisionally granted was based on target performance-based payout amounts detailed in the 2018 Award Plan Summary approved by the Board of Directors and on the closing market price of the Company's stock on the March 21, 2018 provisional grant date ($53.95 per share). As with the 2015, 2016, and 2017 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 Time-Based RSUs granted (if any) will be determined as of the earned date of December 31, 2018, based on the closing market price of the Company's stock on that date, while the actual number of Performance-Based RSUs granted (if any) will be determined during the first quarter of 2019, based on actual 2018 performance. The contingent RSUs were granted on substantially the same terms and conditions as the RSUs granted under the previous Award Plan Summaries. As of March 31, 2018, the estimated unrecognized compensation expense related to the provisionally granted RSUs, based on the closing market price of the Company's stock on the provisional grant date of March 21, 2018 was $143 thousand.

Stock options. As of March 31, 2018, 4,500 incentive stock 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 expense related to these options as of March 31, 2018. The estimated intrinsic value of these options was $121 thousand as of March 31, 2018.

As of March 31, 2018, 3,000 incentive stock 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 expense related to these options as of March 31, 2018. The estimated intrinsic value of these options was $86 thousand as of March 31, 2018.

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 sheets (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, 2018			December 31, 2017
	(Dollars in thousands)
Net unrealized loss on investment securities available-for-sale	$	(1,251	)	$	(301	)
Defined benefit pension plan net unrealized actuarial loss	(4,795		)	(4,795		)
Total	$	(6,046	)	$	(5,096	)

Union Bankshares, Inc. Page 19

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, 2018								March 31, 2017
	Before-Tax Amount			Tax (Expense) Benefit (1)		Net-of-Tax Amount			Before-Tax Amount		Tax (Expense) Benefit (1)			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	$	(1,203	)	$	253	$	(950	)	$	341	$	(116	)	$	225
Total other comprehensive (loss) income	$	(1,203	)	$	253	$	(950	)	$	341	$	(116	)	$	225

__________________


(1)	Tax expense/benefit is calculated using a marginal tax rate of 21% and 34% for the three months ended March 31, 2018 and 2017, respectively.

There were no reclassification adjustments from OCI for the three months ended March 31, 2018 and 2017.

Note 12. Fair Value Measurement

The Company utilizes FASB ASC Topic 820, Fair Value Measurement, 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.

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:

Investment securities AFS: 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.

Mutual funds: Mutual funds have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1.

Union Bankshares, Inc. Page 20

Assets measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017, 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)
March 31, 2018:	(Dollars in thousands)
Debt securities AFS:
U.S. Government-sponsored enterprises	$	7,261	$	—	$	7,261	$	—
Agency mortgage-backed	32,560		—		32,560		—
State and political subdivisions	24,322		—		24,322		—
Corporate	4,297		—		4,297		—
Total debt securities	$	68,440	$	—	$	68,440	$	—

Other investments:
Mutual funds	$	502	$	502	$	—	$	—

December 31, 2017:
Debt securities AFS:
U.S. Government-sponsored enterprises	$	7,695	$	—	$	7,695	$	—
Agency mortgage-backed	28,116		—		28,116		—
State and political subdivisions	24,714		—		24,714		—
Corporate	4,393		—		4,393		—
Total debt securities	64,918		—		64,918		—
Mutual funds	521		521		—		—
Total	$	65,439	$	521	$	64,918	$	—

There were no significant transfers in or out of Levels 1 and 2 during the three months ended March 31, 2018, nor were there any Level 3 assets at any time during either period. 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 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 collateral-dependent impaired loans, HTM securities, MSRs and OREO, were not considered material at March 31, 2018 or December 31, 2017. 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.

Union Bankshares, Inc. Page 21

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. Mutual funds have been valued using unadjusted quoted prices from active markets. 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. As of March 31, 2018, the Company implemented exit pricing valuation methodologies which incorporate a liquidity premium adjustment into the fair value estimate of all loan portfolios. This adjustment factors the costs/market inefficiencies associated with the sale of a financial instrument into the fair value estimate. 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 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.

Union Bankshares, Inc. Page 22

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, 2018
	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	$	13,246	$	13,246	$	13,246	$	—	$	—
Interest bearing deposits in banks	9,601		9,510		—		9,510		—
Investment securities	68,942		68,942		502		68,440		—
Loans held for sale	2,938		2,969		—		2,969		—
Loans, net
Residential real estate	180,720		179,098		—		—		179,098
Construction real estate	42,943		42,231		—		—		42,231
Commercial real estate	257,965		257,596		—		—		257,596
Commercial	46,581		45,339		—		—		45,339
Consumer	3,505		3,521		—		—		3,521
Municipal	55,338		55,143		—		—		55,143
Accrued interest receivable	2,468		2,468		—		393		2,075
Nonmarketable equity securities	2,331		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	128,951	$	128,951	$	128,951	$	—	$	—
Interest bearing	392,027		392,027		392,027		—		—
Time	102,865		101,406		—		101,406		—
Borrowed funds
Short-term	122		122		122		—		—
Long-term	31,143		30,951		—		30,951		—
Accrued interest payable	97		97		—		97		—

Union Bankshares, Inc. Page 23



	December 31, 2017
	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	$	38,508	$	38,508	$	38,508	$	—	$	—
Interest bearing deposits in banks	9,352		9,333		—		9,333		—
Investment securities	66,439		66,438		521		65,917		—
Loans held for sale	7,947		8,111		—		8,111		—
Loans, net
Residential real estate	177,880		178,818		—		—		178,818
Construction real estate	42,505		42,069		—		—		42,069
Commercial real estate	251,566		248,746		—		—		248,746
Commercial	50,393		49,132		—		—		49,132
Consumer	3,869		3,919		—		—		3,919
Municipal	55,789		55,778		—		—		55,778
Accrued interest receivable	2,500		2,500		—		395		2,105
Nonmarketable equity securities	2,331		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	127,824	$	127,824	$	127,824	$	—	$	—
Interest bearing	418,621		418,621		418,621		—		—
Time	101,129		99,967		—		99,967		—
Borrowed funds
Short-term	1,365		1,364		1,364		—		—
Long-term	30,216		29,039		—		29,039		—
Accrued interest payable	97		97		—		97		—

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, 2018 have been evaluated as to their potential impact to the consolidated financial statements.

On April 18, 2018, the Company declared a regular quarterly cash dividend of $0.30 per share, payable May 10, 2018, to stockholders of record on April 30, 2018.

Union Bankshares, Inc. Page 24

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, 2018 and December 31, 2017, and its results of operations for the three months ended March 31, 2018 and 2017. 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 2017 Annual Report In the o