Company Quick10K Filing
Quick10K
Union Bankshares
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$37.25 4 $166
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-07-17 Earnings, Other Events, Exhibits
8-K 2019-05-15 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2019-05-09 Earnings, Exhibits
8-K 2019-04-17 Earnings, Other Events, Exhibits
8-K 2019-02-07 Earnings, Exhibits
8-K 2018-12-19 Earnings, Other Events, Exhibits
8-K 2018-10-17 Earnings, Other Events, Exhibits
8-K 2018-08-09 Earnings, Exhibits
8-K 2018-07-18 Earnings, Other Events, Exhibits
8-K 2018-05-16 Shareholder Vote
8-K 2018-04-18 Earnings, Other Events, Exhibits
8-K 2018-02-08 Earnings, Exhibits
8-K 2018-01-17 Earnings, Other Events, Exhibits
8-K 2017-10-18 Leave Agreement, Earnings, Exhibits
AMT American Tower 85,100
SPR Spirit Aerosystems Holdings 8,900
CSII Cardiovascular Systems 1,380
STAA Staar Surgical 1,210
PGNX Progenics Pharmaceuticals 424
HOFT Hooker Furniture 342
FRSH Papa Murphy's Holdings 110
FUTU Future Healthcare of America 0
TLSRP Telos 0
MIST Milestone Pharmaceuticals 0
UNB 2019-03-31
Part I Financial Information
Item 1. Financial Statements
Note 1. Basis of Presentation
Note 2. Legal Contingencies
Note 3. per Share Information
Note 4. Recent Accounting Pronouncements
Note 5. Goodwill and Other Intangible Assets
Note 6. Investment Securities
Note 7. Loans
Note 8. Allowance for Loan Losses and Credit Quality
Note 9. Leases
Note 10. Stock Based Compensation
Note 11. Other Comprehensive Income (Loss)
Note 12. Fair Value Measurement
Note 13. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part II Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 6. Exhibits.
EX-31.1 a33119exhibit311.htm
EX-31.2 a33119exhibit312.htm
EX-32.1 a33119exhibit321.htm
EX-32.2 a33119exhibit322.htm

Union Bankshares Earnings 2019-03-31

UNB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2019unb10-qx1stquarter.htm BODY OF FORM 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

OR

(  ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 2019

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 every Interactive Data File required to be submitted 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 April 30, 2019.
 
Common Stock, $2 par value
 
4,467,631

shares
 





UNION BANKSHARES, INC.
TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
 
 
 
 
 
 
PART II OTHER INFORMATION
 
 
 
 
 





PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
 
March 31, 2019
December 31, 2018
 
(Unaudited)
 
Assets
(Dollars in thousands)
Cash and due from banks
$
3,706

$
4,045

Federal funds sold and overnight deposits
22,886

33,244

Cash and cash equivalents
26,592

37,289

Interest bearing deposits in banks
8,553

9,300

Investment securities available-for-sale
79,514

73,405

Other investments
621

556

Total investments
80,135

73,961

Loans held for sale
5,647

2,899

Loans
649,818

642,461

Allowance for loan losses
(5,572
)
(5,739
)
Net deferred loan costs
951

938

Net loans
645,197

637,660

Premises and equipment, net
18,767

16,073

Company-owned life insurance
9,096

9,040

Other assets
19,345

19,115

Total assets
$
813,332

$
805,337

Liabilities and Stockholders’ Equity
 
 
Liabilities
 
 
Deposits
 
 
Noninterest bearing
$
127,838

$
132,971

Interest bearing
425,897

444,722

Time
146,638

129,077

Total deposits
700,373

706,770

Borrowed funds
37,784

27,821

Accrued interest and other liabilities
8,444

6,255

Total liabilities
746,601

740,846

Commitments and Contingencies


Stockholders’ Equity
 
 
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,944,689 shares
  issued at March 31, 2019 and 4,943,690 shares issued at December 31, 2018
9,890

9,888

Additional paid-in capital
967

894

Retained earnings
60,147

58,911

Treasury stock at cost; 477,064 shares at March 31, 2019
  and 477,011 shares at December 31, 2018
(4,190
)
(4,179
)
Accumulated other comprehensive loss
(83
)
(1,023
)
Total stockholders' equity
66,731

64,491

Total liabilities and stockholders' equity
$
813,332

$
805,337


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,
 
2019
2018
 
(Dollars in thousands, except per share data)
Interest and dividend income
 
 
Interest and fees on loans
$
7,902

$
6,999

Interest on debt securities:
 
 
Taxable
401

289

Tax exempt
131

145

Dividends
104

40

Interest on federal funds sold and overnight deposits
61

53

Interest on interest bearing deposits in banks
55

45

Total interest and dividend income
8,654

7,571

Interest expense
 
 
Interest on deposits
1,065

533

Interest on borrowed funds
165

114

Total interest expense
1,230

647

    Net interest income
7,424

6,924

Provision for loan losses
50


    Net interest income after provision for loan losses
7,374

6,924

Noninterest income
 
 
Trust income
168

193

Service fees
1,426

1,487

Net gains on sales of investment securities available-for-sale
4


Net gains on sales of loans held for sale
374

295

Other income
198

496

Total noninterest income
2,170

2,471

Noninterest expenses
 
 
Salaries and wages
2,798

2,649

Employee benefits
996

958

Occupancy expense, net
438

395

Equipment expense
565

535

Other expenses
1,727

1,598

Total noninterest expenses
6,524

6,135

        Income before provision for income taxes
3,020

3,260

Provision for income taxes
399

513

        Net income
$
2,621

$
2,747

Earnings per common share
$
0.59

$
0.62

Weighted average number of common shares outstanding
4,467,376

4,465,600

Dividends per common share
$
0.31

$
0.30

 
 
 

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,
 
2019
2018
 
(Dollars in thousands)
Net income
$
2,621

$
2,747

Other comprehensive income (loss), net of tax:
 
 
Investment securities available-for-sale:
 
 
Net unrealized holding gains (losses) arising during the period on investment securities available-for-sale
943

(950
)
Reclassification adjustment for net gains on sales of investment securities available-for-sale realized in net income
(3
)

Total other comprehensive income (loss)
940

(950
)
Total comprehensive income
$
3,561

$
1,797


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, 2019 and 2018 (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, 2018
4,466,679

$
9,888

$
894

$
58,911

$
(4,179
)
$
(1,023
)
$
64,491

   Net income



2,621



2,621

   Other comprehensive income





940

940

   Dividend reinvestment plan
246


10


2


12

   Cash dividends declared
       ($0.31 per share)



(1,385
)


(1,385
)
   Stock based compensation
  expense


43




43

   Exercise of stock options
1,000

2

20




22

   Purchase of treasury stock
(300
)



(13
)

(13
)
Balances March 31, 2019
4,467,625

$
9,890

$
967

$
60,147

$
(4,190
)
$
(83
)
$
66,731

 
 
 
 
 
 
 
 
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


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,
 
2019
2018
Cash Flows From Operating Activities
(Dollars in thousands)
Net income
$
2,621

$
2,747

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation
337

301

Provision for loan losses
50


Deferred income tax provision
8

41

Net amortization of investment securities
87

93

Equity in losses of limited partnerships
162

140

Stock based compensation expense
43

41

Net increase in unamortized loan costs
(13
)
(2
)
Proceeds from sales of loans held for sale
21,779

23,384

Origination of loans held for sale
(24,153
)
(18,080
)
Net gains on sales of loans held for sale
(374
)
(295
)
Net gain on disposals of premises and equipment

(191
)
Net gains on sales of investment securities available-for-sale
(4
)

Net gain on sales of other real estate owned

(11
)
(Increase) decrease in accrued interest receivable
(248
)
32

Amortization of core deposit intangible
43

43

Decrease in other assets
281

403

Increase in other liabilities
492

474

Net cash provided by operating activities
1,111

9,120

Cash Flows From Investing Activities
 
 
Interest bearing deposits in banks
 
 
Proceeds from maturities and redemptions
996

996

Purchases
(249
)
(1,245
)
Investment securities held-to-maturity
 
 
Proceeds from maturities, calls and paydowns

1,000

Investment securities available-for-sale
 
 
Proceeds from sales
6,510


Proceeds from maturities, calls and paydowns
1,580

1,539

Purchases
(13,092
)
(6,358
)
Other investments
 
 
Proceeds from sales

44

Purchases
(65
)
(24
)
Net increase in nonmarketable stock
(213
)
(105
)
Net increase in loans
(7,578
)
(5,051
)
Recoveries of loans charged off
4

3

Purchases of premises and equipment
(1,545
)
(357
)
Proceeds from Company-owned life insurance death benefit

307

Investments in limited partnerships
(358
)

Proceeds from sales of premises and equipment

204

Proceeds from sales of other real estate owned

47

Net cash used in investing activities
(14,010
)
(9,000
)
 
 
 

Union Bankshares, Inc. Page 5



Cash Flows From Financing Activities
 
 
Advances on long-term borrowings
45,000

7,000

Repayment of long-term debt
(35,000
)
(6,072
)
Net decrease in short-term borrowings outstanding
(37
)
(1,244
)
Net (decrease) increase in noninterest bearing deposits
(5,133
)
1,127

Net decrease in interest bearing deposits
(18,825
)
(26,594
)
Net increase in time deposits
17,561

1,736

Issuance of common stock
22


Purchase of treasury stock
(13
)
(3
)
Dividends paid
(1,373
)
(1,332
)
Net cash provided by (used in) financing activities
2,202

(25,382
)
Net decrease in cash and cash equivalents
(10,697
)
(25,262
)
Cash and cash equivalents
 
 
Beginning of period
37,289

38,508

End of period
$
26,592

$
13,246

Supplemental Disclosures of Cash Flow Information
 
 
Interest paid
$
1,174

$
647

Income taxes paid
$

$

 
 
 
Supplemental Schedule of Noncash Investing Activities
 
 
Right-of-use operating lease assets obtained in exchange for operating lease liabilities
$
516

$

Right-of-use finance lease assets obtained in exchange for finance lease liabilities
$
1,486

$

 
 
 
Dividends paid on Common Stock:
 
 
Dividends declared
$
1,385

$
1,340

Dividends reinvested
(12
)
(8
)
 
$
1,373

$
1,332

 
 
 

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, 2019, and for the three months ended March 31, 2019 and 2018, 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, 2018 (2018 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 2018 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, 2019, or any future interim period.
Certain amounts in the 2018 consolidated financial statements have been reclassified to conform to the 2019 presentation.
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
2018 Annual Report
Annual Report of Form 10-K for the year ended December 31, 2018
 
 
2017 Tax Act:
Tax Cut and Jobs Act of 2017


Union Bankshares, Inc. Page 7



Note 2. Legal Contingencies
In the normal course of business, the Company is involved in various legal and other proceedings. In the opinion of management, any liability resulting from such proceedings is not expected to have a material adverse effect on the Company’s consolidated financial condition or results of operations.

Note 3. Per Share Information
Earnings per common share are computed based on the weighted average number of shares of common stock outstanding during the period and reduced for shares held in treasury. The assumed 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. 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. The Company adopted this guidance in the first quarter of 2019. The guidance did not significantly change lease accounting requirements applicable to lessors and did not significantly impact the consolidated financial statements in relation to contracts whereby the Company acts as a lessor. Implementation of the guidance resulted in the recording of right-of-use assets and lease liabilities on the consolidated balance sheet, however, it did not have a material impact on the consolidated statements of income. See Note 9 for additional disclosures relating to the Company's lease assets and liabilities.
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 2019 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 August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The ASU was issued to make certain specific improvements to hedge accounting to better align hedge accounting with risk management activities, eliminate the separate measurement and recording of hedge ineffectiveness, improve presentation and disclosure, and other simplifications. The ASU became effective for the Company on January 1, 2019. All transition requirements and elections are to be applied to existing hedging relationships upon adoption. Adoption of the ASU did not have a material effect on the Company's 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

Union Bankshares, Inc. Page 8



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 which is included in Other assets on the consolidated balance sheets. 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. The net core deposit intangible balance of $370 thousand and $412 thousand at March 31, 2019 and December 31, 2018, respectively, is included in Other assets on the consolidated balance sheets. 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, 2019 and 2018. The amortization expense is included in other expenses on the consolidated statements of income and is deductible for tax purposes. As of March 31, 2019, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:
 
(Dollars in thousands)
2019
$
129

2020
171

2021
70

Total
$
370


Note 6. Investment Securities
AFS securities as of the balance sheet dates consisted of the following:
March 31, 2019
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 
(Dollars in thousands)
Available-for-sale
 
 
 
 
Debt securities:
 
 
 
 
U.S. Government-sponsored enterprises
$
7,264

$
5

$
(136
)
$
7,133

Agency mortgage-backed
45,623

187

(332
)
45,478

State and political subdivisions
18,936

220

(132
)
19,024

Corporate
7,795

177

(93
)
7,879

Total
$
79,618

$
589

$
(693
)
$
79,514


Union Bankshares, Inc. Page 9



December 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
$
6,528

$
1

$
(208
)
$
6,321

Agency mortgage-backed
36,851

84

(683
)
36,252

State and political subdivisions
23,527

130

(486
)
23,171

Corporate
7,792

18

(149
)
7,661

Total
$
74,698

$
233

$
(1,526
)
$
73,405


There were no investment securities HTM at March 31, 2019 or December 31, 2018. Investment securities AFS with a carrying amount of $3.1 million and $2.5 million at March 31, 2019 and December 31, 2018, 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, 2019 were as follows:
 
Amortized
Cost
Fair
Value
Available-for-sale
(Dollars in thousands)
Due in one year or less
$
200

$
201

Due from one to five years
2,708

2,761

Due from five to ten years
20,582

20,633

Due after ten years
10,505

10,441

 
33,995

34,036

Agency mortgage-backed
45,623

45,478

Total debt securities available-for-sale
$
79,618

$
79,514


Actual maturities may differ for certain debt securities that may be called by the issuer prior to the contractual maturity. Actual maturities usually differ from contractual maturities on agency MBS because the mortgages underlying the securities may be prepaid, usually without any penalties. Therefore, these agency MBS are shown separately and are not included in the contractual maturity categories in the above maturity summary.

Information pertaining to all investment securities with gross unrealized losses as of the balance sheet dates, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
March 31, 2019
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
1

$
507

$
(1
)
13

$
5,381

$
(135
)
14

$
5,888

$
(136
)
Agency mortgage-backed
2

3,914

(13
)
37

23,857

(319
)
39

27,771

(332
)
State and political
  subdivisions
1

359

(1
)
18

7,431

(131
)
19

7,790

(132
)
Corporate
2

991

(9
)
5

2,317

(84
)
7

3,308

(93
)
Total
6

$
5,771

$
(24
)
73

$
38,986

$
(669
)
79

$
44,757

$
(693
)

Union Bankshares, Inc. Page 10



December 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
2

$
1,184

$
(11
)
12

$
4,854

$
(197
)
14

$
6,038

$
(208
)
Agency mortgage-backed
5

3,516

(21
)
40

26,198

(662
)
45

29,714

(683
)
State and political
  subdivisions
4

1,301

(16
)
36

15,067

(470
)
40

16,368

(486
)
Corporate
5

2,424

(12
)
5

2,285

(137
)
10

4,709

(149
)
Total
16

$
8,425

$
(60
)
93

$
48,404

$
(1,466
)
109

$
56,829

$
(1,526
)
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.

Management considers the following factors in determining whether OTTI exists and the period over which the security is expected to recover:
The length of time, and extent to which, the fair value has been less than the amortized cost;
Adverse conditions specifically related to the security, industry, or geographic area;
The historical and implied volatility of the fair value of the security;
The payment structure of the debt security and the likelihood of the issuer being able to make payments that may increase in the future;
Failure of the issuer of the security to make scheduled interest or principal payments;
Any changes to the rating of the security by a rating agency;
Recoveries or additional declines in fair value subsequent to the balance sheet date; and
The nature of the issuer, including whether it is a private company, public entity or government-sponsored enterprise, and the existence or likelihood of any government or third party guaranty.

The Company has the ability to hold the investment securities that had unrealized losses at March 31, 2019 and December 31, 2018 for the foreseeable future and no declines were deemed by management to be OTT.

There were no sales of AFS securities during the three months ended March 31, 2018. The following table presents the proceeds, gross realized gains and gross realized losses from the sale of AFS securities for the three months ended March 31, 2019:
 
For The Three Months Ended March 31, 2019
 
(Dollars in thousands)
Proceeds
$
6,510

 
 
Gross gains
38

Gross losses
(34
)
Net gains on sales of investment securities AFS
$
4


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.

Union Bankshares, Inc. Page 11



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,
2019
December 31,
2018
 
(Dollars in thousands)
Residential real estate
$
191,245

$
187,320

Construction real estate
57,813

55,322

Commercial real estate
269,531

276,500

Commercial
44,995

47,228

Consumer
3,183

3,241

Municipal
83,051

72,850

    Gross loans
649,818

642,461

Allowance for loan losses
(5,572
)
(5,739
)
Net deferred loan costs
951

938

    Net loans
$
645,197

$
637,660

Qualifying residential first mortgage loans and certain commercial real estate loans with a carrying value of $195.9 million and $167.7 million were pledged as collateral for borrowings from the FHLB under a blanket lien at March 31, 2019 and December 31, 2018, respectively.
A summary of current, past due and nonaccrual loans as of the balance sheet dates follows:
March 31, 2019
Current
30-59 Days
60-89 Days
90 Days and Over and Accruing
Nonaccrual
Total
 
(Dollars in thousands)
Residential real estate
$
187,022

$
3,196

$
286

$
169

$
572

$
191,245

Construction real estate
56,166

585


1,023

39

57,813

Commercial real estate
268,101

977

11

300

142

269,531

Commercial
44,933

15

17


30

44,995

Consumer
3,161

9

13



3,183

Municipal
82,584

467




83,051

Total
$
641,967

$
5,249

$
327

$
1,492

$
783

$
649,818



Union Bankshares, Inc. Page 12



December 31, 2018
Current
30-59 Days
60-89 Days
90 Days and Over and Accruing
Nonaccrual
Total
 
(Dollars in thousands)
Residential real estate
$
183,624

$
1,984

$
696

$
422

$
594

$
187,320

Construction real estate
52,807

1,451

1,023


41

55,322

Commercial real estate
273,778

1,703

153

718

148

276,500

Commercial
47,163

24

8


33

47,228

Consumer
3,215

21

5



3,241

Municipal
72,789

61




72,850

Total
$
633,376

$
5,244

$
1,885

$
1,140

$
816

$
642,461

There were five residential real estate loans totaling $307 thousand in process of foreclosure at March 31, 2019 and three residential real estate loans totaling $255 thousand and one commercial real estate loan totaling $146 thousand in process of foreclosure at December 31, 2018. Aggregate interest on nonaccrual loans not recognized was $1.3 million and $1.2 million as of March 31, 2019 and 2018, respectively, and $1.3 million as of December 31, 2018.

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 2019. 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

Union Bankshares, Inc. Page 13



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.

Changes in the ALL, by class of loans, for the three months ended March 31, 2019 and 2018 were as follows:
For The Three Months Ended March 31, 2019
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Balance, December 31, 2018
$
1,368

$
617

$
2,933

$
354

$
23

$
82

$
362

$
5,739

Provision (credit) for loan losses
37

26

(70
)
177

2

10

(132
)
50

Recoveries of amounts charged off



1

3



4

 
1,405

643

2,863

532

28

92

230

5,793

Amounts charged off
(16
)


(200
)
(5
)


(221
)
Balance, March 31, 2019
$
1,389

$
643

$
2,863

$
332

$
23

$
92

$
230

$
5,572


Union Bankshares, Inc. Page 14



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

66

(26
)
(4
)
(1
)
(55
)

Recoveries of amounts charged off




3



3

 
1,375

494

2,773

369

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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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:
March 31, 2019
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
46

$

$
11

$
10

$

$

$

$
67

Collectively evaluated
   for impairment
1,343

643

2,852

322

23

92

230

5,505

Total allocated
$
1,389

$
643

$
2,863

$
332

$
23

$
92

$
230

$
5,572

December 31, 2018
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Unallocated
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
47

$

$
9

$
10

$

$

$

$
66

Collectively evaluated
   for impairment
1,321

617

2,924

344

23

82

362

5,673

Total allocated
$
1,368

$
617

$
2,933

$
354

$
23

$
82

$
362

$
5,739


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:
March 31, 2019
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
1,720

$
114

$
1,669

$
340

$

$

$
3,843

Collectively evaluated
   for impairment
189,525

57,699

267,862

44,655

3,183

83,051

645,975

Total
$
191,245

$
57,813

$
269,531

$
44,995

$
3,183

$
83,051

$
649,818

December 31, 2018
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Individually evaluated
   for impairment
$
1,678

$
119

$
2,276

$
352

$

$

$
4,425

Collectively evaluated
   for impairment
185,642

55,203

274,224

46,876

3,241

72,850

638,036

Total
$
187,320

$
55,322

$
276,500

$
47,228

$
3,241

$
72,850

$
642,461



Union Bankshares, Inc. Page 15



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:
March 31, 2019
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Pass
$
171,119

$
39,796

$
168,657

$
32,460

$
3,141

$
83,051

$
498,224

Satisfactory/Monitor
17,435

17,894

98,049

11,350

42


144,770

Substandard
2,691

123

2,825

1,185



6,824

Total
$
191,245

$
57,813

$
269,531

$
44,995

$
3,183

$
83,051

$
649,818


December 31, 2018
Residential Real Estate
Construction Real Estate
Commercial Real Estate
Commercial
Consumer
Municipal
Total
 
(Dollars in thousands)
Pass
$
170,416

$
41,141

$
174,802

$
34,303

$
3,209

$
72,850

$
496,721

Satisfactory/Monitor
14,008

14,053

98,327

12,150

31


138,569

Substandard
2,896

128

3,371

775

1


7,171

Total
$
187,320

$
55,322

$
276,500

$
47,228

$
3,241

$
72,850

$
642,461



Union Bankshares, Inc. Page 16



The following tables provide information with respect to impaired loans by class of loan as of and for the three months ended March 31, 2019 and March 31, 2018:
 
As of March 31, 2019
For The Three Months Ended March 31, 2019
 
Recorded Investment
(1)
Principal Balance
(1)
Related Allowance
Average Recorded Investment
Interest Income Recognized
 
(Dollars in thousands)
Residential real estate
$
226

$
235

$
46

 
 
Commercial real estate
192

192

11

 
 
Commercial
12

13

10

 
 
With an allowance recorded
430

440

67

 
 
 
 
 
 
 
 
Residential real estate
1,494

2,109


 
 
Construction real estate
114

131


 
 
Commercial real estate
1,477

1,569


 
 
Commercial
328

329


 
 
With no allowance recorded
3,413

4,138


 
 
 
 
 
 
 
 
Residential real estate
1,720

2,344

46

$
1,699

$
19

Construction real estate
114

131


116

1

Commercial real estate
1,669

1,761

11

1,973

40

Commercial
340

342

10

346

5

Total
$
3,843

$
4,578

$
67

$
4,134

$
65

____________________
(1)
Does not reflect government guaranties on impaired loans as of March 31, 2019 totaling $630 thousand.

 
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
$
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.


Union Bankshares, Inc. Page 17



The following table provides information with respect to impaired loans by class of loan as of December 31, 2018:
 
December 31, 2018
 
 
 
Recorded Investment
(1)
Principal Balance
(1)
Related Allowance
 
 
 
(Dollars in thousands)
 
 
Residential real estate
$
228

$
238

$
47

 
 
Commercial real estate
193

193

9

 
 
Commercial
12

13

10

 
 
With an allowance recorded
433

444

66

 
 
 
 
 
 
 
 
Residential real estate
1,450

2,039


 
 
Construction real estate
119

135


 
 
Commercial real estate
2,083

2,174


 
 
Commercial
340

340


 
 
With no allowance recorded
3,992

4,688


 
 
 
 
 
 
 
 
Residential real estate
1,678

2,277

47

 
 
Construction real estate
119

135


 
 
Commercial real estate
2,276

2,367

9

 
 
Commercial
352

353

10

 
 
Total
$
4,425

$
5,132

$
66

 
 
____________________
(1)
Does not reflect government guaranties on impaired loans as of December 31, 2018 totaling $641 thousand.

The following is a summary of TDR loans by class of loan as of the balance sheet dates:
 
March 31, 2019
December 31, 2018
 
Number of Loans
Principal Balance
Number of Loans
Principal Balance
 
(Dollars in thousands)
Residential real estate
28

$
1,720

27

$
1,678

Construction real estate
2

114

2

119

Commercial real estate
9

1,157

9

1,172

Commercial
4

329

4

340

Total
43

$
3,320

42

$
3,309

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 18



The following tables provide new TDR activity for the three months ended March 31, 2019 and 2018:
 
New TDRs During the
New TDRs During the
 
Three Months Ended March 31, 2019
Three Months Ended March 31, 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

$
77

$
79

1

$
96

$
98

Commercial



1

13

13

 
 
 
 
 
 
 
There were no TDR loans modified within the previous twelve months that had subsequently defaulted during the three month periods ended March 31, 2019 or March 31, 2018. TDR loans are considered defaulted at 90 days past due.

At March 31, 2019 and December 31, 2018, the Company was not committed to lend any additional funds to borrowers whose loans were nonperforming, impaired or restructured.

Note 9. Leases
Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of March 31, 2019, the Company had operating real estate leases for three branch locations, one loan production office and two ATM locations, as well as a finance real estate lease for land upon which a new branch location is being constructed. The lease agreements have maturity dates ranging from July 2020 to September 2047. As of March 31, 2019, the weighted average remaining life of the lease term for the operating leases and finance lease was 6.29 years and 28.5 years, respectively.
The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate as of January 2019 that corresponded to the remaining lease term for each of these leases at adoption of the ASU. As of March 31, 2019, the weighted average discount rate for operating leases and finance leases was 3.29% and 3.98%, respectively.
The total operating lease costs were $31 thousand for the three months ended March 31, 2019. Both the operating lease right-of-use assets, included in Other assets on the consolidated balance sheet, and the operating lease liabilities, included in Accrued interest and other liabilities on the consolidated balance sheet, were $490 thousand as of March 31, 2019.
The total finance lease costs were $28 thousand for the three months ended March 31, 2019, including depreciation expense of $13 thousand and interest expense of $15 thousand. Both the finance lease right-of-use assets, included in Premises and equipment, net on the consolidated balance sheet, and the finance lease liabilities, included in Accrued interest and other liabilities on the consolidated balance sheet, were $1.5 million as of March 31, 2019.
Total estimated rental commitments for operating and finance leases were as follows as of March 31, 2019:
 
Operating Leases
Finance Leases
 
(Dollars in thousands)
2019
$
91

$
47

2020
113

70

2021
99

72

2022
51

73

2023
39

76

Thereafter
154

2,288

Total
$
547

$
2,626


Union Bankshares, Inc. Page 19



A reconciliation of the undiscounted cash flows in the maturity analysis above and the lease liability recognized in the consolidated balance sheet as of March 31, 2019, is shown below:
 
Operating Leases
Finance Leases
 
(Dollars in thousands)
Undiscounted cash flows
$
547

$
2,626

Discount effect of cash flows
(57
)
(1,140
)
Lease liabilities
$
490

$
1,486


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, 2019, 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 2018 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 2016, 2017, and 2018 Award Plan Summaries, as of March 31, 2019:
 
Number of RSUs Granted
Weighted-Average Grant Date Fair Value
Number of Unvested RSUs
2016 Award
3,569

$
45.45

478

2017 Award
3,225

52.95

1,831

2018 Award
3,734
$
47.75

3,734

Total
10,528

6,043
Unrecognized compensation expense related to the unvested RSUs as of March 31, 2019 and March 31, 2018 was $254 thousand and $212 thousand, respectively.
During the three months ended March 31, 2019, a total of 6,183 contingent RSUs were provisionally granted in accordance with a 2019 Award Plan Summary. The estimated number of contingent RSUs provisionally granted was based on target performance-based payout amounts detailed in the 2019 Award Plan Summary approved by the Board of Directors and on the closing market price of the Company's stock on the February 6, 2019 provisional grant date ($47.60 per share). As with the 2016, 2017, and 2018 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, 2019, 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 2020, based on actual 2019 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 March 31, 2019, 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 February 6, 2019, was $294 thousand.

Stock options. As of March 31, 2019, 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 March 31, 2019. The estimated intrinsic value of those options was $96 thousand as of March 31, 2019.

As of March 31, 2019, 2,000 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 March 31, 2019. The estimated intrinsic value of those options was $46 thousand as of March 31, 2019.


Union Bankshares, Inc. Page 20



Note 11. Other Comprehensive Income (Loss)
Accounting principles generally require recognized revenue, expenses, gains and losses be included in net income or loss. Certain changes in assets and liabilities, such as the after tax effect of unrealized gains and losses on investment securities AFS that are not OTTI, 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, 2019
December 31, 2018
 
(Dollars in thousands)
Net unrealized loss on investment securities available-for-sale
$
(83
)
$
(1,023
)

The following tables disclose the tax effects allocated to each component of OCI for the three months ended March 31:
 
Three Months Ended
 
March 31, 2019
March 31, 2018
 
Before-Tax Amount
Tax (Expense) Benefit
Net-of-Tax Amount
Before-Tax Amount
Tax (Expense) Benefit
Net-of-Tax Amount
 
(Dollars in thousands)
Investment securities available-for-sale:
 
 
 
 
 
 
Net unrealized holding gains (losses) arising during the period on investment securities available-for-sale
$
1,194

$
(251
)
$
943

$
(1,203
)
$
253

$
(950
)
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income
(4
)
1

(3
)



Total other comprehensive income (loss)
$
1,190

$
(250
)
$
940

$
(1,203
)
$
253

$
(950
)
 
 
 
 
 
 
 
The following table discloses information concerning reclassification adjustments from OCI for the three months ended March 31, 2019 and 2018.
 
Three Months Ended
 
Reclassification Adjustment Description
March 31, 2019
March 31, 2018
Affected Line Item in
Consolidated Statement of Income
 
(Dollars in thousands)
 
Investment securities available-for-sale:
 
 
 
Net gains on investment securities available-for-sale
$
(4
)
$

Net gains on sales of investment securities available-for-sale
Tax expense
1


Provision for income taxes
Total reclassifications
$
(3
)
$

Net income

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.


Union Bankshares, Inc. Page 21



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.
Assets measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018, 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, 2019:
(Dollars in thousands)
Debt securities AFS:
 
 
 
 
U.S. Government-sponsored enterprises
$
7,133

$

$
7,133

$

Agency mortgage-backed
45,478


45,478


State and political subdivisions
19,024


19,024


Corporate
7,879


7,879


Total debt securities
$
79,514

$

$
79,514

$

 
 
 
 
 
Other investments:
 
 
 
 
Mutual funds
$
621

$
621

$

$

 
 
 
 
 
December 31, 2018:
 
 
 
 
Debt securities AFS:
 
 
 
 
U.S. Government-sponsored enterprises
$
6,321

$

$
6,321

$

Agency mortgage-backed
36,252


36,252


State and political subdivisions
23,171


23,171


Corporate
7,661


7,661


Total debt securities
$
73,405

$

$
73,405

$

 
 
 
 
 
Other investments:
 
 
 
 
Mutual funds
$
556

$
556

$

$

There were no transfers in or out of Levels 1 and 2 during the three months ended March 31, 2019, 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, MSRs and OREO, were not considered material at March 31, 2019 or December 31, 2018. 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.

Union Bankshares, Inc. Page 22




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.

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, 2019
 
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
$
26,592

$
26,592

$
26,592

$

$

Interest bearing deposits in banks
8,553

8,518


8,518


Investment securities
80,135

80,135

621

79,514


Loans held for sale
5,647

5,791


5,791


Loans, net
 
 
 
 
 
Residential real estate
190,136

189,180



189,180

Construction real estate
57,255

57,145



57,145

Commercial real estate
266,832

269,661



269,661

Commercial
44,729

43,456



43,456

Consumer
3,165

3,127



3,127

Municipal
83,080

82,457



82,457

Accrued interest receivable
3,060

3,060


439

2,621

Nonmarketable equity securities
2,376

N/A

N/A

N/A

N/A

Financial liabilities
 
 
 
 
 
Deposits
 
 
 
 
 
Noninterest bearing
$
127,838

$
127,838

$
127,838

$

$

Interest bearing
425,897

425,897

425,897



Time
146,638