10-Q 1 unb-20230630.htm BODY OF FORM 10-Q unb-20230630
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

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: June 30, 2023

Commission file number: 001-15985

UNION BANKSHARES, INC.
VT03-0283552
20 LOWER MAIN STREET, P.O. BOX 667
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 valueUNBNasdaq Stock Market
(Title of class)(Trading Symbol)(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      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      No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes      No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of July 28, 2023.
Common Stock, $2 par value 4,507,098 shares



 
UNION BANKSHARES, INC.
TABLE OF CONTENTS

PART I FINANCIAL INFORMATION




PART I FINANCIAL INFORMATION
Item 1. Financial Statements
UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2023December 31, 2022
(Unaudited)
Assets(Dollars in thousands)
Cash and due from banks$4,351 $4,504 
Federal funds sold and overnight deposits31,452 33,381 
Cash and cash equivalents35,803 37,885 
Interest bearing deposits in banks15,183 16,428 
Investment securities available-for-sale267,537 250,267 
Other investments1,378 1,264 
Total investments268,915 251,531 
Loans held for sale3,145 1,178 
Loans935,536 958,157 
Allowance for credit losses on loans(6,780)(8,339)
Net deferred loan costs1,556 1,336 
Net loans930,312 951,154 
Premises and equipment, net20,054 20,479 
Company-owned life insurance18,733 18,518 
Other assets42,599 39,316 
Total assets$1,334,744 $1,336,489 
Liabilities and Stockholders’ Equity
Liabilities 
Deposits 
Noninterest bearing$238,636 $286,145 
Interest bearing633,019 762,722 
Time252,031 153,045 
Total deposits1,123,686 1,201,912 
Borrowed funds120,549 50,000 
Subordinated notes16,222 16,205 
Accrued interest and other liabilities15,233 13,152 
Total liabilities1,275,690 1,281,269 
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,984,311 shares
  issued at June 30, 2023 and 4,982,523 shares issued at December 31, 2022
9,969 9,965 
Additional paid-in capital2,465 2,225 
Retained earnings87,136 84,669 
Treasury stock at cost; 474,738 shares at June 30, 2023
  and 473,936 shares at December 31, 2022
(4,265)(4,220)
Accumulated other comprehensive loss(36,251)(37,419)
Total stockholders' equity59,054 55,220 
Total liabilities and stockholders' equity$1,334,744 $1,336,489 

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
June 30,
Six Months Ended
June 30,
 2023202220232022
Interest and dividend income(Dollars in thousands, except per share data)
Interest and fees on loans$11,876 $9,010 $23,081 $17,484 
Interest on debt securities:
Taxable1,154 1,038 2,328 2,010 
Tax exempt514 221 927 443 
Dividends47 4 88 10 
Interest on federal funds sold and overnight deposits110 94 214 113 
Interest on interest bearing deposits in banks102 37 209 70 
Total interest and dividend income13,803 10,404 26,847 20,130 
Interest expense
Interest on deposits3,299 591 5,742 1,212 
Interest on borrowed funds743  1,227  
Interest on subordinated notes143 142 285 284 
Total interest expense4,185 733 7,254 1,496 
    Net interest income9,618 9,671 19,593 18,634 
Credit loss benefit, net(96) (22) 
    Net interest income after credit loss benefit9,714 9,671 19,615 18,634 
Noninterest income
Wealth management income240 217 451 426 
Service fees1,740 1,738 3,434 3,373 
Net gains on sales of investment securities available-for-sale 5  31 
Net gains on sales of loans held for sale306 286 500 300 
Net gains (losses) on other investments56 (142)102 (60)
Other income141 175 281 439 
Total noninterest income2,483 2,279 4,768 4,509 
Noninterest expenses
Salaries and wages3,673 3,520 7,175 6,930 
Employee benefits1,471 1,295 2,848 2,600 
Occupancy expense, net482 462 1,060 989 
Equipment expense882 934 1,779 1,850 
Other expenses2,555 2,198 4,951 4,329 
Total noninterest expenses9,063 8,409 17,813 16,698 
        Income before provision for income taxes3,134 3,541 6,570 6,445 
Provision for income taxes435 610 894 1,032 
        Net income$2,699 $2,931 $5,676 $5,413 
Basic earnings per common share$0.60 $0.65 $1.26 $1.20 
Diluted earnings per common share$0.60 $0.65 $1.26 $1.20 
Weighted average number of common shares outstanding4,508,593 4,494,027 4,508,845 4,494,447 
Weighted average common and potential common shares for diluted EPS4,539,288 4,513,411 4,521,091 4,510,106 
Dividends per common share$0.36 $0.35 $0.72 $0.70 
See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 2


UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

Three Months Ended
June 30,
Six Months Ended
June 30,
2023202220232022
(Dollars in thousands)
Net income$2,699 $2,931 $5,676 $5,413 
Other comprehensive (loss) income, net of tax:
Investment securities available-for-sale:
Net unrealized holding (losses) gains arising during the period on investment securities available-for-sale(2,737)(10,969)1,168 (26,822)
Reclassification adjustment for net gains on sales of investment securities available-for-sale realized in net income (4) (25)
Total other comprehensive (loss) income(2,737)(10,973)1,168 (26,847)
Total comprehensive (loss) income$(38)$(8,042)$6,844 $(21,434)

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 (Unaudited)
Three Month Periods Ended June 30, 2023 and 2022
 Common Stock   Accumulated
other
comprehensive loss
 
 Shares,
net of
treasury
AmountAdditional
paid-in
capital
Retained
earnings
Treasury
stock
Total
stockholders’
equity
 (Dollars in thousands, except per share data)
Balances March 31, 20234,506,950 $9,965 $2,353 $86,060 $(4,272)$(33,514)$60,592 
   Net income— — — 2,699 — — 2,699 
   Other comprehensive loss— — — — — (2,737)(2,737)
   Dividend reinvestment plan835 — 11 — 7 — 18 
   Cash dividends declared
       ($0.36 per share)
— — — (1,623)— — (1,623)
   Stock based compensation expense1,788 4 101 — — — 105 
Balances, June 30, 20234,509,573 $9,969 $2,465 $87,136 $(4,265)$(36,251)$59,054 
Balances March 31, 20224,493,170 $9,937 $1,878 $79,259 $(4,231)$(17,426)$69,417 
   Net income— — — 2,931 — — 2,931 
   Other comprehensive loss— — — — — (10,973)(10,973)
   Dividend reinvestment plan512 — 11 — 4 — 15 
   Cash dividends declared
  ($0.35 per share)
— — — (1,573)— — (1,573)
   Stock based compensation expense1,280 3 130 — — — 133 
   Purchase of treasury stock(150)— — — (4)— (4)
Balances, June 30, 20224,494,812 $9,940 $2,019 $80,617 $(4,231)$(28,399)$59,946 
Six Month Periods Ended June 30, 2023 and 2022
 Common Stock   Accumulated
other
comprehensive loss
 
 Shares,
net of
treasury
AmountAdditional
paid-in
capital
Retained
earnings
Treasury
stock
Total
stockholders’
equity
 (Dollars in thousands, except per share data)
Balances, December 31, 20224,508,587 $9,965 $2,225 $84,669 $(4,220)$(37,419)$55,220 
  Impact of adoption of ASU No.
      2016-13
— — — 37 — — 37 
  Net income— — — 5,676 — — 5,676 
  Other comprehensive income— — — — — 1,168 1,168 
  Dividend reinvestment plan1,728 — 26 — 15 — 41 
  Cash dividends declared
      ($0.72 per share)
— — — (3,246)— — (3,246)
  Stock based compensation expense1,788 4 214 — — — 218 
  Purchase of treasury stock(2,530)— — — (60)— (60)
Balances, June 30, 20234,509,573 $9,969 $2,465 $87,136 $(4,265)$(36,251)$59,054 
Balances, December 31, 20214,493,655 $9,934 $1,769 $78,350 $(4,160)$(1,552)$84,341 
  Net income— — — 5,413 — — 5,413 
  Other comprehensive loss— — — — — (26,847)(26,847)
  Dividend reinvestment plan928 — 20 — 8 — 28 
  Cash dividends declared
  ($0.70 per share)
— — — (3,146)— — (3,146)
  Stock based compensation expense2,879 6 230 — — — 236 
  Purchase of treasury stock(2,650)— — — (79)— (79)
Balances, June 30, 20224,494,812 $9,940 $2,019 $80,617 $(4,231)$(28,399)$59,946 
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)
 Six Months Ended
June 30,
 20232022
Cash Flows From Operating Activities(Dollars in thousands)
Net income$5,676 $5,413 
Adjustments to reconcile net income to net cash provided by operating activities: 
Depreciation812 922 
Credit loss benefit(22) 
Deferred income tax provision30 12 
Net amortization of premiums on investment securities259 324 
Equity in losses of limited partnerships661 548 
Stock based compensation expense218 236 
Net increase in unamortized loan costs(220)(488)
Proceeds from sales of loans held for sale30,084 34,672 
Origination of loans held for sale(31,551)(24,363)
Net gains on sales of loans held for sale(500)(300)
Net gains on disposals of premises and equipment(1) 
Net gains on sales of investment securities available-for-sale (31)
Net (gains) losses on other investments(102)60 
Decrease in accrued interest receivable363 262 
Amortization of debt issuance costs17 17 
Increase in other assets(1,415)(1,184)
Increase in other liabilities1,436 246 
Net cash provided by operating activities5,745 16,346 
Cash Flows From Investing Activities 
Interest bearing deposits in banks 
Proceeds from maturities and redemptions2,490 5,229 
Purchases(1,245)(5,976)
Investment securities available-for-sale
Proceeds from sales 6,827 
Proceeds from maturities, calls and paydowns8,303 13,650 
Purchases(24,923)(48,599)
Net purchases of other investments(12)(90)
Net (increase) decrease in nonmarketable stock(2,878)276 
Net decrease (increase) in loans22,618 (30,905)
Recoveries of loans charged off1 6 
Net purchases of premises and equipment(402)(290)
Investments in limited partnerships(853)(1,874)
Proceeds from sales of premises and equipment16  
Net cash provided by (used in) investing activities3,115 (61,746)

Union Bankshares, Inc. Page 5


 Six Months Ended
June 30,
 20232022
Cash Flows From Financing Activities(Dollars in thousands)
Advances on long-term borrowings95,349  
Net decrease in short-term borrowings outstanding(24,800) 
Net (decrease) increase in noninterest bearing deposits(47,509)72,252 
Net decrease in interest bearing deposits(129,703)(60,701)
Net increase (decrease) in time deposits98,986 (3,580)
Purchase of treasury stock(60)(79)
Dividends paid(3,205)(3,118)
Net cash (used in) provided by financing activities(10,942)4,774 
Net decrease in cash and cash equivalents(2,082)(40,626)
Cash and cash equivalents
Beginning of period37,885 65,922 
End of period$35,803 $25,296 
Supplemental Disclosures of Cash Flow Information 
Interest paid$6,631 $1,510 
Income taxes paid$725 $200 
Supplemental Schedule of Noncash Investing Activities
Investment in limited partnerships acquired by capital contributions payable$ $3,494 
Dividends paid on Common Stock:
Dividends declared$3,246 $3,146 
Dividends reinvested(41)(28)
$3,205 $3,118 

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 June 30, 2023, and for the three and six months ended June 30, 2023 and 2022, 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, 2022 (2022 Annual Report), except as disclosed in the Summary of Significant Accounting Policies below. 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 2022 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, 2023, or any future interim period.
The Company is a “smaller reporting company” and as permitted under the rules and regulations of the SEC, has elected to provide its consolidated statements of income, comprehensive income, cash flows and changes in stockholders’ equity for a two year, rather than three year, period. The Company has also elected to provide certain other scaled disclosures in this report, as permitted for smaller reporting companies. Certain amounts in the 2022 consolidated financial statements have been reclassified to conform to the current year 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.
ACL:Allowance for credit lossesHUD:U.S. Department of Housing and Urban Development
AFS:Available-for-saleICS:Insured Cash Sweeps of IntraFi
ASC:Accounting Standards CodificationIntraFi:IntraFi Network LLC
ASU:Accounting Standards UpdateMBS:Mortgage-backed security
Board:Board of DirectorsMSRs:Mortgage servicing rights
bp or bps:Basis point(s)OAO:Other assets owned
CDARS:Certificate of Deposit Accounts Registry Service of IntraFiOCI:Other comprehensive income (loss)
Company:Union Bankshares, Inc. and SubsidiaryOREO:Other real estate owned
CECL:Current Expected Credit LossesRD:USDA Rural Development
DCF:Discounted cash flowRSU:Restricted Stock Unit
DRIP:Dividend Reinvestment PlanSBA:U.S. Small Business Administration
FASB:Financial Accounting Standards BoardSEC:U.S. Securities and Exchange Commission
FDIC:Federal Deposit Insurance CorporationTDR:Troubled-debt restructuring
FHA:U.S. Federal Housing AdministrationUnion:Union Bank, the sole subsidiary of Union Bankshares, Inc
FHLB:Federal Home Loan Bank of BostonUSDA:U.S. Department of Agriculture
FRB:Federal Reserve BoardVA:U.S. Veterans Administration
FHLMC/Freddie Mac:Federal Home Loan Mortgage Corporation2014 Equity Plan:2014 Equity Incentive Plan, as amended
GAAP:Generally Accepted Accounting Principles in the United States2022 Annual Report:Annual Report on Form 10-K for the year ended December 31, 2022
HTM:Held-to-maturity
Summary of Significant Accounting Policies
The disclosures below supplement and update the accounting policies previously disclosed in Note 1. Significant Accounting Policies in the Company’s 2022 Annual Report. The updates reflect the adoption of the FASB ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, more commonly referred to as Current Expected Credit Losses (CECL), effective January 1, 2023.

Union Bankshares, Inc. Page 7


The Company adopted CECL using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with the incurred loss methodology under previously applicable GAAP.
Allowance for Credit Losses on AFS Debt Securities: Upon adoption of CECL, effective January 1, 2023, for AFS debt securities in an unrealized loss position, management first assesses whether it intends to sell, or if it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For AFS debt securities that do not meet the above criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes.
A change in the ACL on AFS debt securities is recorded as expense (credit) within the Credit loss expense on the consolidated statement of income. Losses are charged against the ACL when management believes the uncollectibility of an AFS debt security is confirmed based on the above described analysis. As of June 30, 2023 and CECL adoption date of January 1, 2023, there was no ACL carried on the Company's AFS debt securities. Refer to Note 5 of the consolidated financial statements for further discussion.
Allowance for Credit Losses on Loans: The ACL on loans is a significant accounting estimate used in the preparation of the Company's consolidated financial statements. The level of the ACL on loans represents management's estimate of expected credit losses over the expected life of the loans at the balance sheet date. The expected life of the loans is based on the contractual term of the loans adjusted for estimated prepayments. The contractual life is calculated based on the maturity date and excludes expected extensions, renewals, and modifications.
Upon adoption of CECL on January 1, 2023, the Company replaced the incurred loss model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the ACL on loans when they are deemed uncollectible. The ACL on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.
The Company uses the DCF method to estimate expected credit losses for all loan pools. For each of the loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on historical benchmark data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment as a loss driver.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over four quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level that represents the sum of expected losses to determine the estimated ACL on loans.
The ACL on loans evaluation also considers various qualitative factors, including changes in policy and/or underwriting standards, actual or expected changes in economic trends and conditions, changes in the nature and volume of the portfolio, changes in credit and lending staff/administration, problem loan trends, credit risk concentrations, loan review results, changes in the value of underlying collateral for loans, and changes in the regulatory and business environment.

Union Bankshares, Inc. Page 8


Certain loans are individually evaluated for estimated credit losses, including those greater than $500,000 that are classified as substandard or doubtful and are on nonaccrual or that have other unique characteristics differing from the segment. Specific reserves are established when appropriate for such loans based on the present value of expected future cash flows of the loan or the estimated realizable value of the collateral, if any.
Management may also adjust its assumptions to account for differences between expected and actual losses from period-to-period. The variability of management's assumptions could alter the ACL on loans materially and impact future results of operations and financial condition. The loss estimation models and methods used to determine the ACL are continually refined and enhanced.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures: The ACL on off-balance sheet credit exposures is a component of Accrued interest and other liabilities on the Company's consolidated balance sheets and represents the estimate of probable credit losses inherent in unfunded commitments to extend credit as of the balance sheet date. Unfunded commitments to extend credit include unused portions of lines of credit, commitments to originate loans and standby and commercial letters of credit. The process used to determine the ACL for these exposures is consistent with the process for determining the ACL on loans, as adjusted for estimated funding probabilities or loan equivalency factors. A charge or credit to Credit loss expense on the consolidated statements of income is made to account for the change in the ACL on off-balance sheet exposures between reporting periods.
Accrued Interest: Upon adoption of CECL on January 1, 2023, the Company elected to present accrued interest receivable balances in Other assets on the consolidated balance sheets and exclude accrued interest from the ACL on loans and AFS debt securities. The Company will continue to write-off accrued interest receivable by reversing interest income when a security or loan is placed in nonaccrual, which is generally when payments on a security or loan are 90 days or more past due.


Union Bankshares, Inc. Page 9


Impact of Adoption:
The following table illustrates the adoption of ASU No. 2013-16 on January 1, 2023. As noted above, there was no ACL on AFS debt securities required to be recorded upon adoption of the ASU.
Pre-CECL AdoptionReclassification to CECL Portfolio SegmentationPre-CECL Adoption Portfolio SegmentationPost-CECL AdoptionImpact of CECL Adoption
Assets(Dollars in thousands)
Loans
Residential real estate$352,433 $(352,433)$— $— $— 
Non-revolving residential real estate 335,470 335,470 335,470  
Revolving residential real estate 16,963 16,963 16,963  
Construction real estate96,620 (96,620)— — — 
Commercial construction real estate 56,501 56,501 56,501  
Residential construction real estate 40,119 40,119 40,119  
Commercial real estate377,947 (377,947)— — 
Non-residential commercial real estate282,397282,397 282,397 
Multi-family residential real estate95,55095,550 95,550 
Commercial40,973  40,973 40,973  
Consumer2,204  2,204 2,204  
Municipal87,980  87,980 87,980  
Total loans$958,157 $ $958,157 $958,157 $ 
ACL on loans
Residential real estate$2,417 $(2,417)$— $— $— 
Non-revolving residential real estate 2,294 2,294 2,024 (270)
Revolving residential real estate 123 123 148 25 
Construction real estate1,032 (1,032)— — — 
Commercial construction real estate 611 611 1,593 982 
Residential construction real estate 421 421 131 (290)
Commercial real estate3,935 (3,935)— — — 
Non-residential commercial real estate2,9312,931 2,174(757)
Multi-family residential real estate1,0041,004 224(780)
Commercial301  301 492 191 
Consumer10  10 5 (5)
Municipal95  95 53 (42)
Unallocated549  549  (549)
Total ACL on loans$8,339 $ $8,339 $6,844 $(1,495)
Liabilities
ACL on off-balance sheet credit exposures$ $1,458 $1,458 
Retained earnings
Decrease in ACL on loans$1,495 
Increase in ACL on off-balance sheet credit exposures(1,458)
Increase to retained earnings$37 



Union Bankshares, Inc. Page 10


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
The following table presents the reconciliation between the calculation of basic EPS and diluted EPS for the three and six months ended June 30, 2023 and 2022:
For the Three Months
Ended June 30,
For the Six Months
Ended June 30,
2023202220232022
(Dollars in thousands, except per share data)
Net income$2,699 $2,931 $5,676 $5,413 
Weighted average common shares outstanding for basic EPS4,508,593 4,494,027 4,508,845 4,494,447 
Dilutive effect of stock-based awards (1)30,695 19,384 12,246 15,659 
Weighted average common and potential common shares for diluted EPS4,539,288 4,513,411 4,521,091 4,510,106 
Earnings per common share:
Basic EPS$0.60 $0.65 $1.26 $1.20 
Diluted EPS$0.60 $0.65 $1.26 $1.20 
____________________
(1)Dilutive effect of stock based awards represents the effect of assumed vesting of all outstanding equity compensation awards, which currently consist solely of restricted stock units. Unvested awards do not have dividend or dividend equivalent rights.

Note 4. Recent Accounting Pronouncements
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance in the ASU 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 became effective for the Company beginning with the 2023 fiscal year. The impact of the ASU on the Company's consolidated financial statements is discussed in Note 1, Summary of Significant Accounting Policies.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and has issued subsequent amendments thereto, which provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2024. The transition away from LIBOR is not expected to have a material impact on the Company's consolidated financial statements.

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings (TDRs) and Vintage Disclosures. The guidance amends ASC 326 to eliminate the accounting guidance for TDRs by creditors, while enhancing disclosure requirements for certain loan refinancing and restructuring activities by creditors when a borrower is experiencing financial difficulty. Specifically, rather than applying TDR recognition and measurement guidance, creditors will determine whether a modification results in a new loan or continuation of an existing loan. These amendments are also intended to enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. Additionally, the amendments to ASC 326 require that an entity disclose current-period gross write-offs by year of origination within the vintage disclosures, which requires that an entity disclose the amortized cost basis of financing receivables by credit quality indicator and class of financing receivable by year of origination. The guidance is only for entities that have adopted the amendments in ASU No. 2016-13 for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. The Company

Union Bankshares, Inc. Page 11


adopted ASU No. 2022-02 effective January 1, 2023. The adoption of the provisions contained within ASU No. 2022-02 did not have a material impact on the consolidated financial statements.

In March 2023, the FASB issued ASU No. 2023-02, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. ASU No. 2014-01, Investments-Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, previously introduced the option to apply the proportional amortization method to account for investments made primarily for the purpose of receiving income tax credits and other income tax benefits when certain requirements are met; however, this guidance limited the proportional amortization method to investments in low-income-housing tax credit (LIHTC) structures. The proportional amortization method results in the cost of the investment being amortized in proportion to the income tax credits and other income tax benefits received, with the amortization of the investment and the income tax credits being presented net in the income statement as a component of income tax expense (benefit). Equity investments in other tax credit structures are typically accounted for using the equity method, which results in investment income, gains and losses, and tax credits being presented gross on the income statement in their respective line items. The amendments in this update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The amendments in this update are effective for the Company for fiscal years beginning after December 31, 2023, including interim periods within those fiscal years. Early adoption is permitted in any interim period. If early adoption is elected, adoption must be as of the beginning of the fiscal year that includes the interim period of adoption. The amendments in this update must be applied on either a modified retrospective or a retrospective basis. The Company has not elected early adoption and is currently evaluating the impact of this standard for its tax equity investments and the impact to noninterest income, noninterest expense, and income tax expense within the consolidated financial statements.

Note 5. Investment Securities
Debt securities AFS as of the balance sheet dates consisted of the following:
June 30, 2023Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 (Dollars in thousands)
U.S. Government-sponsored enterprises$44,586 $ $(5,718)$38,868 
Agency mortgage-backed190,607 53 (33,320)157,340 
State and political subdivisions72,450 310 (7,531)65,229 
Corporate6,350  (250)6,100 
Total$313,993 $363 $(46,819)$267,537 
December 31, 2022Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 (Dollars in thousands)
U.S. Government-sponsored enterprises$45,090 $ $(5,845)$39,245 
Agency mortgage-backed198,478 104 (34,150)164,432 
State and political subdivisions47,722 281 (7,537)40,466 
Corporate6,343  (219)6,124 
Total$297,633 $385 $(47,751)$250,267 
There were no investment securities HTM at June 30, 2023 or December 31, 2022. Investment securities AFS with carrying amounts of $940 thousand and $433 thousand were pledged as collateral for public unit deposits or for other purposes as required or permitted by law at June 30, 2023 and December 31, 2022, respectively.



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The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of June 30, 2023 were as follows:
Amortized
Cost
Fair
Value
Available-for-sale(Dollars in thousands)
Due in one year or less$997 $981 
Due from one to five years24,428 22,052 
Due from five to ten years25,224 22,264 
Due after ten years72,737 64,900 
 123,386 110,197 
Agency mortgage-backed190,607 157,340 
Total debt securities available-for-sale$313,993 $267,537 

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 AFS debt securities with gross unrealized losses, for which an ACL has not been recorded, 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:
June 30, 2023Less Than 12 Months12 Months and overTotal
 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)
U.S. Government-
  sponsored enterprises
1 $2,934 $(3)34 $35,820 $(5,715)35 $38,754 $(5,718)
Agency mortgage-backed2 5,089 (247)91 146,810 (33,073)93 151,899 (33,320)
State and political
  subdivisions
18 26,312 (815)60 32,490 (6,716)78 58,802 (7,531)
Corporate7 3,229 (122)6 2,871 (128)13 6,100 (250)
Total28 $37,564 $(1,187)191 $217,991 $(45,632)219 $255,555 $(46,819)
December 31, 2022Less Than 12 Months12 Months and overTotal
 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)
U.S. Government-
  sponsored enterprises
4 $8,000 $(533)31 $31,103 $(5,312)35 $39,103 $(5,845)
Agency mortgage-backed31 24,306 (2,192)62 134,297 (31,958)93 158,603 (34,150)
State and political
  subdivisions
39 15,457 (1,846)27 18,613 (5,691)66 34,070 (7,537)
Corporate10 4,719 (124)3 1,405 (95)13 6,124 (219)
Total84 $52,482 $(4,695)123 $185,418 $(43,056)207 $237,900 $(47,751)

AFS debt securities in unrealized loss positions are evaluated for impairment related to credit losses at least quarterly. For AFS debt securities in an unrealized loss position, management first assesses whether it intends to sell, or it is more likely than not that the Company will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through earnings. For AFS debt securities that do not meet the above criteria, management evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the

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security and the issuer, among other factors. If this assessment indicates that a credit loss exists, management compares the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. For AFS debt securities, any decline in fair value that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes.

No ACL for AFS debt securities was recorded at adoption of ASU No. 2016-13 or at June 30, 2023. Accrued interest receivable on AFS debt securities totaled $1.4 million and $984 thousand at June 30, 2023 and December 31, 2022, respectively, and is excluded from the estimate of credit losses. Under previously applicable GAAP, no ACL for AFS debt securities was required at December 31, 2022.

There were no sales or calls of securities for the three and six months ended June 30, 2023. The following table presents the proceeds from sales resulting in gross realized gains and gross realized losses from the disposition of AFS securities for the three and six months ended June 30, 2022:
For The Three Months Ended June 30,For The Six Months Ended June 30,
20222022
(Dollars in thousands)
Proceeds from sales$ $6,827 
Proceeds from calls502 502 
Gross gains5 81 
Gross losses (50)
Net gains on sales of investment securities AFS$5 $31 

Note 6.  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 ACL, 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. In general, loans that are 90 days or more past due are placed in nonaccrual, unless there are circumstances that cause management to believe the collection of interest is not 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 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.
Effective with the adoption of CECL on January 1, 2023, the Company evaluates the risk characteristics of its loans based on regulatory call report code with segmentation based on the underlying collateral or purpose for certain loan types. Prior to the adoption of CECL, under the incurred loss model, the Company evaluated the risk characteristics of its loans based on the underlying collateral securing the loans.


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The composition of Net loans as of the balance sheet dates, by regulatory call report code segmentation based on underlying collateral or purpose for certain loan types, was as follows:
June 30,
2023
December 31,
2022
(Dollars in thousands)
Residential real estate
Non-revolving residential real estate$363,891 $335,470 
Revolving residential real estate16,835 16,963 
Construction real estate
Commercial construction real estate53,884 56,501 
Residential construction real estate46,604 40,119 
Commercial real estate
Non-residential commercial real estate289,379 282,397 
Multi-family residential real estate99,014 95,550 
Commercial41,252 40,973 
Consumer2,572 2,204 
Municipal22,105 87,980 
    Gross loans935,536 958,157 
ACL on loans(6,780)(8,339)
Net deferred loan costs1,556 1,336 
    Net loans$930,312 $951,154 
Qualifying residential first mortgage loans and certain commercial real estate loans with an aggregate carrying value of $262.8 million and $272.9 million were pledged as collateral for borrowings from the FHLB under a blanket lien at June 30, 2023 and December 31, 2022, respectively.
Accrued interest receivable on loans totaled $2.4 million and $3.1 million at June 30, 2023 and December 31, 2022 and is excluded from the estimate of credit losses described in Note 7.

Note 7.  Allowance for Credit Losses on Loans and Off-Balance Sheet Credit Exposures
Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported under the incurred loss model in accordance with previously applicable GAAP as described in the 2022 Annual Report.
The level of the ACL on loans represents management's estimate of expected credit losses over the expected life of the loans at the balance sheet date. For all loan classes, loan losses are charged against the ACL on loans when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the ACL on loans.
Upon adoption of CECL on January 1, 2023, the Company replaced the incurred loss model that recognizes losses when it becomes probable that a credit loss will be incurred, with a requirement to recognize lifetime expected credit losses based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. The ACL on loans is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. The ACL on loans is comprised of reserves measured on a collective (pool) basis based on a lifetime loss-rate model when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated on an individual basis, generally larger non-accruing commercial loans.

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.

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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.

Changes in the ACL on loans, by class of loans, for the three and six months ended June 30, 2023 were as follows:
For The Three Months
Ended June 30, 2023
Balance, March 31, 2023Charge-OffsRecoveriesCredit Loss Expense (Benefit)Balance, June 30, 2023
(Dollars in thousands)
Non-revolving residential real estate$2,071 $ $ $121 $2,192 
Revolving residential real estate143   1 144 
Residential real estate2,214   122 2,336 
Commercial construction real estate1,713   (188)1,525 
Residential construction real estate148   1 149 
Construction real estate1,861   (187)1,674 
Non-residential commercial real estate2,186   (34)2,152 
Multi-family residential real estate221   11 232 
Commercial real estate2,407   (23)2,384 
Commercial368   (14)354 
Consumer5 (4)