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: September 30, 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 [ ]	Smaller reporting company [ X ]
	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 October 29, 2018.



Common Stock, $2 par value	4,465,951	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 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	Page 47
Item 4. Controls and Procedures.	Page 47

PART II OTHER INFORMATION

Item 1. Legal Proceedings.	Page 47
Item 1A. Risk Factors.	Page 47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	Page 47
Item 6. Exhibits.	Page 48

Signatures	Page 48

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS



	September 30, 2018			December 31, 2017
	(Unaudited)
Assets	(Dollars in thousands)
Cash and due from banks	$	4,063		$	3,857
Federal funds sold and overnight deposits	9,837			34,651
Cash and cash equivalents	13,900			38,508
Interest bearing deposits in banks	9,747			9,352
Investment securities available-for-sale	71,536			65,439
Investment securities held-to-maturity (fair value $999 thousand at December 31, 2017)	—			1,000
Other investments	597			—
Total investments	72,133			66,439
Loans held for sale	7,457			7,947
Loans	636,239			586,615
Allowance for loan losses	(5,610		)	(5,408		)
Net deferred loan costs	891			795
Net loans	631,520			582,002
Accrued interest receivable	2,570			2,500
Premises and equipment, net	15,747			14,255
Core deposit intangible	454			583
Goodwill	2,223			2,223
Investment in real estate limited partnerships	4,208			3,166
Company-owned life insurance	8,984			8,861
Other assets	10,715			9,995
Total assets	$	779,658		$	745,831
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	126,596		$	127,824
Interest bearing	407,965			418,621
Time	133,162			101,129
Total deposits	667,723			647,574
Borrowed funds	41,990			31,581
Accrued interest and other liabilities	9,168			8,015
Total liabilities	718,881			687,170
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,940,961 shares issued at September 30, 2018 and December 31, 2017	9,882			9,882
Additional paid-in capital	897			755
Retained earnings	60,686			57,197
Treasury stock at cost; 475,015 shares at September 30, 2018 and 475,385 shares at December 31, 2017	(4,076		)	(4,077		)
Accumulated other comprehensive loss	(6,612		)	(5,096		)
Total stockholders' equity	60,777			58,661
Total liabilities and stockholders' equity	$	779,658		$	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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
	(Dollars in thousands, except per share data)
Interest and dividend income
Interest and fees on loans	$	7,482	$	6,893	$	21,855	$	19,823
Interest on debt securities:
Taxable	321		250		918		741
Tax exempt	145		159		436		486
Dividends	65		42		160		114
Interest on federal funds sold and overnight deposits	26		15		88		64
Interest on interest bearing deposits in banks	56		38		152		109
Total interest and dividend income	8,095		7,397		23,609		21,337
Interest expense
Interest on deposits	842		453		1,949		1,271
Interest on borrowed funds	244		134		515		369
Total interest expense	1,086		587		2,464		1,640
Net interest income	7,009		6,810		21,145		19,697
Provision for loan losses	150		150		300		150
Net interest income after provision for loan losses	6,859		6,660		20,845		19,547
Noninterest income
Trust income	195		179		579		548
Service fees	1,568		1,553		4,538		4,444
Net gains on sales of investment securities available-for-sale	—		24		—		33
Net gains on sales of loans held for sale	596		657		1,322		1,762
Other income	93		93		636		285
Total noninterest income	2,452		2,506		7,075		7,072
Noninterest expenses
Salaries and wages	2,745		2,570		8,008		7,642
Pension and employee benefits	1,144		954		3,299		2,784
Occupancy expense, net	338		320		1,069		1,073
Equipment expense	528		532		1,574		1,589
Other expenses	1,792		1,565		5,050		4,665
Total noninterest expenses	6,547		5,941		19,000		17,753
Income before provision for income taxes	2,764		3,225		8,920		8,866
Provision for income taxes	453		855		1,412		2,339
Net income	$	2,311	$	2,370	$	7,508	$	6,527
Earnings per common share	$	0.52	$	0.53	$	1.68	$	1.46
Weighted average number of common shares outstanding	4,465,882		4,462,414		4,465,741		4,462,113
Dividends per common share	$	0.30	$	0.29	$	0.90	$	0.87

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,
	2018			2017			2018			2017
	(Dollars in thousands)
Net income	$	2,311		$	2,370		$	7,508		$	6,527
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	(352		)	46			(1,516		)	609
Reclassification adjustment for net gains on sales of investment securities available-for-sale realized in net income	—			(16		)	—			(22		)
Total other comprehensive (loss) income	(352		)	30			(1,516		)	587
Total comprehensive income	$	1,959		$	2,400		$	5,992		$	7,114

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

Nine Months Ended September 30, 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	—		—		—		7,508			—			—			7,508
Other comprehensive loss	—		—		—		—			—			(1,516		)	(1,516		)
Dividend reinvestment plan	430		—		19		—			4			—			23
Cash dividends declared ($0.90 per share)	—		—		—		(4,019		)	—			—			(4,019		)
Stock based compensation expense	—		—		123		—			—			—			123
Purchase of treasury stock	(60	)	—		—		—			(3		)	—			(3		)
Balances September 30, 2018	4,465,946		$	9,882	$	897	$	60,686		$	(4,076	)	$	(6,612	)	$	60,777

Balances, December 31, 2016	4,462,135		$	9,874	$	620	$	53,086		$	(4,022	)	$	(3,279	)	$	56,279
Net income	—		—		—		6,527			—			—			6,527
Other comprehensive income	—		—		—		—			—			587			587
Dividend reinvestment plan	422		—		14		—			4			—			18
Cash dividends declared ($0.87 per share)	—		—		—		(3,882		)	—			—			(3,882		)
Stock based compensation expense	—		—		102		—			—			—			102
Exercise of stock options	1,000		2		17		—			—			—			19
Purchase of treasury stock	(1,040	)	—		—		—			(43		)	—			(43		)
Balances, September 30, 2017	4,462,517		$	9,876	$	753	$	55,731		$	(4,061	)	$	(2,692	)	$	59,607

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,
	2018			2017
Cash Flows From Operating Activities	(Dollars in thousands)
Net income	$	7,508		$	6,527
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	886			914
Provision for loan losses	300			150
Deferred income tax (credit) provision	(57		)	226
Net amortization of investment securities	294			314
Equity in losses of limited partnerships	428			471
Stock based compensation expense	123			102
Net increase in unamortized loan costs	(96		)	(100		)
Proceeds from sales of loans held for sale	84,541			92,231
Origination of loans held for sale	(82,729		)	(88,341		)
Net gain on sales of loans held for sale	(1,322		)	(1,762		)
Net (gain) loss on disposals of premises and equipment	(191		)	13
Net gain on sales of investment securities available-for-sale	—			(33		)
Net gain on sales of other real estate owned	(11		)	—
(Increase) decrease in accrued interest receivable	(70		)	63
Amortization of core deposit intangible	129			129
Increase in other assets	(258		)	(490		)
Contribution to defined benefit pension plan	(850		)	(750		)
Increase in other liabilities	1,228			926
Net cash provided by operating activities	9,853			10,590
Cash Flows From Investing Activities
Interest bearing deposits in banks
Proceeds from maturities and redemptions	1,843			4,384
Purchases	(2,238		)	(3,236		)
Investment securities held-to-maturity
Proceeds from maturities, calls and paydowns	1,000			—
Investment securities available-for-sale
Proceeds from sales	—			3,962
Proceeds from maturities, calls and paydowns	4,222			5,310
Purchases	(13,053		)	(7,078		)
Other investments
Proceeds from sales	44			—
Purchases	(120		)	—
Purchase of nonmarketable stock	(2,844		)	(518		)
Redemption of nonmarketable stock	2,376			541
Net increase in loans	(49,739		)	(45,803		)
Recoveries of loans charged off	17			53
Purchases of premises and equipment	(2,391		)	(646		)
Proceeds from Company-owned life insurance death benefit	307			—
Investments in limited partnerships	(695		)	(438		)
Proceeds from sales of premises and equipment	204			—
Proceeds from sales of other real estate owned	47			—
Net cash used in investing activities	(61,020		)	(43,469		)

Union Bankshares, Inc. Page 5



Cash Flows From Financing Activities
Advances on long-term borrowings	164,175			10,000
Repayment of long-term debt	(156,940		)	(10,208		)
Net increase in short-term borrowings outstanding	3,174			1,133
Net (decrease) increase in noninterest bearing deposits	(1,228		)	6,819
Net (decrease) increase in interest bearing deposits	(10,656		)	5,624
Net increase (decrease) in time deposits	32,033			(3,479		)
Issuance of common stock	—			19
Purchase of treasury stock	(3		)	(43		)
Dividends paid	(3,996		)	(3,864		)
Net cash provided by financing activities	26,559			6,001
Net decrease in cash and cash equivalents	(24,608		)	(26,878		)
Cash and cash equivalents
Beginning of period	38,508			39,275
End of period	$	13,900		$	12,397
Supplemental Disclosures of Cash Flow Information
Interest paid	$	2,440		$	1,648
Income taxes paid	$	1,350		$	1,020

Dividends paid on Common Stock:
Dividends declared	$	4,019		$	3,882
Dividends reinvested	(23		)	(18		)
	$	3,996		$	3,864

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, 2018, and for the three and nine months ended September 30, 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 future 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

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. The Company's assessment determined that no cumulative-effect adjustment to beginning stockholders' equity would be required under the modified retrospective transition method within the consolidated financial statements as there was no change in revenue recognition upon adoption of ASU No. 2014-09.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU was issued to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU changes how entities account for equity investments that do not result in consolidation and are not accounted for under the equity method of accounting. The ASU also changes certain disclosure requirements and other aspects of GAAP, including a requirement for public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. The ASU became effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of the ASU did not have a material effect on the Company's 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. In July 2018, the FASB provided additional guidance on implementation of Topic 842 as well as an additional transition method. The ASU, including the updated guidance, 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 the Company has entered into an agreement with Sageworks. Historical data has been compiled and training on utilizing the software for the existing incurred loss model has been completed. Training is ongoing during 2018 surrounding CECL implementation and methodologies, including the running of parallel calculations throughout the year. This will facilitate the implementation process and management's evaluation of the potential impact of the ASU on the Company's consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU was issued to reduce the cost and complexity of the goodwill impairment test. To simplify the subsequent measurement of goodwill, step two of the goodwill impairment test was eliminated. Instead, a company will recognize an impairment of goodwill should the carrying value of a reporting unit exceed its fair value (i.e. step one). The ASU will be effective for the Company on January 1, 2020 and will be applied prospectively. The Company does not expect the implementation to have a material effect on the Company's consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Loss). This ASU was issued to allow a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the 2017 Tax Act. Consequently, the amendments eliminate the stranded tax effects resulting from the 2017 Tax Act and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the 2017 Tax Act, the underlying guidance that requires that the effect of a change in

Union Bankshares, Inc. Page 8

tax laws or rates be included in income from continuing operations is not affected. The ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted for financial statements which have not yet been issued. The Company adopted the ASU for the December 31, 2017 consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This guidance, which is a part of the FASB’s disclosure framework project to improve disclosure effectiveness, eliminates certain disclosure requirements for fair value measurements regarding the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities regarding changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. In addition, this guidance modifies certain requirements regarding the disclosure of transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, and information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company does not expect the adoption of the ASU to have a material impact on the Company’s 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 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 September 30, 2018 and 2017 and $129 thousand for the nine months ended September 30, 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 September 30, 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	$	42
2019	171
2020	171
2021	70
Total	$	454

Union Bankshares, Inc. Page 9

Note 6. Investment Securities

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



September 30, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	6,826	$	—	$	(265	)	$	6,561
Agency mortgage-backed	37,884		—		(1,263		)	36,621
State and political subdivisions	24,715		93		(734		)	24,074
Corporate	4,411		12		(143		)	4,280
Total	$	73,836	$	105	$	(2,405	)	$	71,536



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 No. 2016-01.

There were no investment securities HTM at September 30, 2018. Investment securities AFS with a carrying amount of $3.7 million and $4.6 million at September 30, 2018 and December 31, 2017, respectively, were pledged as collateral for public deposits and for other purposes as required or permitted by law.

Union Bankshares, Inc. Page 10

The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of September 30, 2018 were as follows:



	Amortized Cost		Fair Value
Available-for-sale	(Dollars in thousands)
Due in one year or less	$	111	$	112
Due from one to five years	5,293		5,289
Due from five to ten years	16,348		15,865
Due after ten years	14,200		13,649
	35,952		34,915
Agency mortgage-backed	37,884		36,621
Total debt securities available-for-sale	$	73,836	$	71,536

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 September 30, 2018, other investments consisted of mutual funds with a fair value of $597 thousand, a cost basis of $477 thousand and unrealized gains of $120 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:



September 30, 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	4	$	2,144	$	(33	)	11	$	4,417	$	(232	)	15	$	6,561	$	(265	)
Agency mortgage-backed	39	29,164		(856		)	13	7,457		(407		)	52	36,621		(1,263		)
State and political subdivisions	25	8,974		(137		)	25	10,901		(597		)	50	19,875		(734		)
Corporate	5	2,463		(47		)	3	1,305		(96		)	8	3,768		(143		)
Total	73	$	42,745	$	(1,073	)	52	$	24,080	$	(1,332	)	125	$	66,825	$	(2,405	)



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	)

Union Bankshares, Inc. Page 11

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;


•	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, 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 during the three and nine months ended September 30, 2018. The following table presents the proceeds, gross realized gains and gross realized losses from the sale of AFS securities for the three and nine months ended September 30, 2017.



	For The Three Months Ended September 30, 2017		For The Nine Months Ended September 30, 2017
	(Dollars in thousands)
Proceeds	$	2,517	$	3,962

Gross gains	24		56
Gross losses	—		(23		)
Net gains on sales of investment securities AFS	$	24	$	33

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

Union Bankshares, Inc. Page 12

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:



	September 30, 2018			December 31, 2017
	(Dollars in thousands)
Residential real estate	$	185,620		$	178,999
Construction real estate	54,076			42,935
Commercial real estate	272,266			254,291
Commercial	47,382			50,719
Consumer	3,367			3,894
Municipal	73,528			55,777
Gross loans	636,239			586,615
Allowance for loan losses	(5,610		)	(5,408		)
Net deferred loan costs	891			795
Net loans	$	631,520		$	582,002

Qualifying residential first mortgage loans and certain commercial real estate loans with a carrying value of $165.9 million and $164.5 million were pledged as collateral for borrowings from the FHLB under a blanket lien at September 30, 2018 and December 31, 2017, respectively.

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



September 30, 2018	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)
Residential real estate	$	183,758	$	23	$	823	$	314	$	702	$	185,620
Construction real estate	53,186		422		386		36		46		54,076
Commercial real estate	271,269		—		713		—		284		272,266
Commercial	47,329		9		7		—		37		47,382
Consumer	3,344		16		5		2		—		3,367
Municipal	73,528		—		—		—		—		73,528
Total	$	632,414	$	470	$	1,934	$	352	$	1,069	$	636,239



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

Union Bankshares, Inc. Page 13

There was one residential real estate loan totaling $131 thousand in process of foreclosure at September 30, 2018. Aggregate interest on nonaccrual loans not recognized was $1.3 million as of September 30, 2018 and 2017, 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 third 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 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. Based on an evaluation of the Company's historical loss experience on substandard commercial loans, management has established the commercial loan threshold for individual impairment evaluation as commercial loan relationships with aggregate balances greater than $500 thousand.

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.

Union Bankshares, Inc. Page 14

•

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.

Changes in the ALL, by class of loans, for the three and nine months ended September 30, 2018 and 2017 were as follows:



For The Three Months Ended September 30, 2018	Residential Real Estate			Construction Real Estate		Commercial Real Estate		Commercial			Consumer			Municipal		Unallocated			Total
	(Dollars in thousands)
Balance, June 30, 2018	$	1,375		$	556	$	2,855	$	374		$	26		$	30	$	337		$	5,553
Provision (credit) for loan losses	133			46		21		(10		)	(10		)	51		(81		)	150
Recoveries of amounts charged off	—			—		—		—			13			—		—			13
	1,508			602		2,876		364			29			81		256			5,716
Amounts charged off	(100		)	—		—		—			(6		)	—		—			(106		)
Balance, September 30, 2018	$	1,408		$	602	$	2,876	$	364		$	23		$	81	$	256		$	5,610



For The Three Months Ended September 30, 2017	Residential Real Estate			Construction Real Estate			Commercial Real Estate		Commercial			Consumer			Municipal		Unallocated		Total
	(Dollars in thousands)
Balance, June 30, 2017	$	1,387		$	481		$	2,753	$	362		$	24		$	26	$	135	$	5,168
Provision (credit) for loan losses	56			(76		)	37		(6		)	3			39		97		150
Recoveries of amounts charged off	36			3			—		3			1			—		—		43
	1,479			408			2,790		359			28			65		232		5,361
Amounts charged off	(100		)	—			—		—			(2		)	—		—		(102		)
Balance, September 30, 2017	$	1,379		$	408		$	2,790	$	359		$	26		$	65	$	232	$	5,259

Union Bankshares, Inc. Page 15



For The Nine Months Ended September 30, 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	147			114		169		(29		)	(11		)	17		(107		)	300
Recoveries of amounts charged off	—			—		—		—			17			—		—			17
	1,508			602		2,876		366			36			81		256			5,725
Amounts charged off	(100		)	—		—		(2		)	(13		)	—		—			(115		)
Balance, September 30, 2018	$	1,408		$	602	$	2,876	$	364		$	23		$	81	$	256		$	5,610



For The Nine Months Ended September 30, 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	124			8		103		13		7			25		(130		)	150
Recoveries of amounts charged off	38			9		—		4		2			—		—			53
	1,561			408		2,790		359		35			65		232			5,450
Amounts charged off	(182		)	—		—		—		(9		)	—		—			(191		)
Balance, September 30, 2017	$	1,379		$	408	$	2,790	$	359	$	26		$	65	$	232		$	5,259

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, was as follows:



September 30, 2018	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	49	$	—	$	9	$	—	$	—	$	—	$	—	$	58
Collectively evaluated for impairment	1,359		602		2,867		364		23		81		256		5,552
Total allocated	$	1,408	$	602	$	2,876	$	364	$	23	$	81	$	256	$	5,610



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

The recorded investment in loans, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates, was as follows:



September 30, 2018	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	1,688	$	78	$	2,318	$	370	$	—	$	—	$	4,454
Collectively evaluated for impairment	183,932		53,998		269,948		47,012		3,367		73,528		631,785
Total	$	185,620	$	54,076	$	272,266	$	47,382	$	3,367	$	73,528	$	636,239

Union Bankshares, Inc. Page 16



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 by management to the Company's loans by class as of the balance sheet dates:



September 30, 2018	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Pass	$	170,256	$	42,065	$	175,757	$	33,609	$	3,333	$	73,528	$	498,548
Satisfactory/Monitor	12,606		11,886		93,125		12,946		33		—		130,596
Substandard	2,758		125		3,384		827		1		—		7,095
Total	$	185,620	$	54,076	$	272,266	$	47,382	$	3,367	$	73,528	$	636,239



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

Union Bankshares, Inc. Page 17

The following tables provide information with respect to impaired loans by class of loan as of and for the three and nine months ended September 30, 2018 and September 30, 2017:



	As of September 30, 2018						For The Three Months Ended September 30, 2018				For The Nine Months Ended September 30, 2018
	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	$	231	$	240	$	49
Commercial real estate	196		196		9
With an allowance recorded	427		436		58

Residential real estate	1,457		2,028		—
Construction real estate	78		78		—
Commercial real estate	2,122		2,210		—
Commercial	370		370		—
With no allowance recorded	4,027		4,686		—

Residential real estate	1,688		2,268		49		$	1,743	$	17	$	1,749	$	46
Construction real estate	78		78		—		79		1		80		3
Commercial real estate	2,318		2,406		9		2,045		21		1,555		52
Commercial	370		370		—		365		9		371		23
Total	$	4,454	$	5,122	$	58	$	4,232	$	48	$	3,755	$	124

____________________


(1)	Does not reflect government guaranties on impaired loans as of September 30, 2018 totaling $656 thousand.



	As of September 30, 2017						For The Three Months Ended September 30, 2017				For The Nine Months Ended September 30, 2017
	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	$	1,939	$	2,478	$	57	$	1,855	$	23	$	1,684	$	54
Construction real estate	84		84		—		84		1		86		3
Commercial real estate	1,484		1,560		4		1,626		18		2,200		72
Commercial	393		393		—		400		7		412		19
Total	$	3,900	$	4,515	$	61	$	3,965	$	49	$	4,382	$	148

____________________


(1)	Does not reflect government guaranties on impaired loans as of September 30, 2017 totaling $564 thousand.

Union Bankshares, Inc. Page 18

The following table provides information with respect to impaired loans by class of loan 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:



	September 30, 2018			December 31, 2017
	Number of Loans	Principal Balance		Number of Loans	Principal Balance
	(Dollars in thousands)
Residential real estate	26	$	1,688	24	$	1,718
Construction real estate	1	78		1	82
Commercial real estate	9	1,191		10	1,074
Commercial	4	358		2	378
Total	40	$	3,315	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.

Union Bankshares, Inc. Page 19

The following tables provide new TDR activity for the three and nine months ended September 30, 2018 and 2017:



	New TDRs During the					New TDRs During the
	Three Months Ended September 30, 2018					Nine Months Ended September 30, 2018
	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	$	80	$	81	2	$	176	$	179
Commercial real estate	—	—		—		1	204		204
Commercial	1	18		18		2	31		31



	New TDRs During the					New TDRs During the
	Three Months Ended September 30, 2017					Nine Months Ended September 30, 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	3	$	269	$	276	9	$	649	$	673
Commercial real estate	1	149		149		2	293		293

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, 2018 or September 30, 2017. TDR loans are considered defaulted at 90 days past due.

At September 30, 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 offered 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. As of September 30, 2018, all participants had selected a payout option and as of October 11, 2018 an annuity provider had been selected. A cash contribution of $850 thousand was made to the Plan during the third quarter to cover lump-sum payments and annuity purchases. No additional contribution to the Plan is expected. The Company estimates that in addition to the net periodic pension cost of $507 thousand recognized as of September 30, 2018, an additional $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 and nine months ended September 30, 2018 and 2017 have remained consistent with assumptions disclosed in the Company's 2017 Annual Report.

Net periodic pension cost (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,
	2018			2017			2018			2017
	(Dollars in thousands)
Interest cost on projected benefit obligation	$	179		$	172		$	537		$	516
Expected return on plan assets	(161		)	(243		)	(483		)	(729		)
Amortization of net loss	151			51			453			153
Net periodic cost (benefit)	$	169		$	(20	)	$	507		$	(60	)

Union Bankshares, Inc. Page 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 September 30, 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.

The following table presents a summary of the RSUs awarded in accordance with the 2015, 2016, and 2017 Award Plan Summaries, as of September 30, 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 September 30, 2018 and September 30, 2017 was $71 thousand and $62 thousand, respectively.

During the nine months ended September 30, 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 annual Award Plan Summaries. As of September 30, 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 September 30, 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 those options as of September 30, 2018. The estimated intrinsic value of those options was $131 thousand as of September 30, 2018.

As of September 30, 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 those options as of September 30, 2018. The estimated intrinsic value of those options was $93 thousand as of September 30, 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.

Union Bankshares, Inc. Page 21

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



	September 30, 2018			December 31, 2017
	(Dollars in thousands)
Net unrealized loss on investment securities available-for-sale	$	(1,817	)	$	(301	)
Defined benefit pension plan net unrealized actuarial loss	(4,795		)	(4,795		)
Total	$	(6,612	)	$	(5,096	)

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, 2018								September 30, 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	$	(446	)	$	94	$	(352	)	$	70		$	(24	)	$	46
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income	—			—		—			(24		)	8			(16		)
Total other comprehensive (loss) income	$	(446	)	$	94	$	(352	)	$	46		$	(16	)	$	30



	Nine Months Ended
	September 30, 2018								September 30, 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	$	(1,920	)	$	404	$	(1,516	)	$	923		$	(314	)	$	609
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income	—			—		—			(33		)	11			(22		)
Total other comprehensive (loss) income	$	(1,920	)	$	404	$	(1,516	)	$	890		$	(303	)	$	587

__________________


(1)	Tax expense/benefit is calculated using a marginal tax rate of 21% and 34% for the three and nine months ended September 30, 2018 and 2017, respectively.

Union Bankshares, Inc. Page 22

The following table discloses information concerning reclassification adjustments from OCI for the three and nine months ended September 30, 2018 and 2017.

Three Months Ended

Nine Months Ended

Reclassification Adjustment Description

September 30, 2018

September 30, 2017

September 30, 2018

September 30, 2017

Affected Line Item in

Consolidated Statement of Income

(Dollars in thousands)