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Section 1: 10-Q (BODY OF FORM 10-Q)

unb-20200930
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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: September 30, 2020

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. (Check one):
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 October 30, 2020.
Common Stock, $2 par value 4,475,314 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
September 30, 2020December 31, 2019
(Unaudited)
Assets(Dollars in thousands)
Cash and due from banks$5,100 $5,405 
Federal funds sold and overnight deposits59,377 45,729 
Cash and cash equivalents64,477 51,134 
Interest bearing deposits in banks8,964 6,565 
Investment securities available-for-sale88,120 87,393 
Other investments874 690 
Total investments88,994 88,083 
Loans held for sale32,803 7,442 
Loans766,050 670,244 
Allowance for loan losses(7,691)(6,122)
Net deferred loan (fees) costs(536)1,043 
Net loans757,823 665,165 
Premises and equipment, net20,452 20,923 
Goodwill2,223 2,223 
Company-owned life insurance12,562 12,322 
Other assets20,837 19,055 
Total assets$1,009,135 $872,912 
Liabilities and Stockholders’ Equity
Liabilities 
Deposits 
Noninterest bearing$204,555 $136,434 
Interest bearing562,970 458,940 
Time142,554 148,653 
Total deposits910,079 744,027 
Borrowed funds9,497 47,164 
Accrued interest and other liabilities11,135 9,878 
Total liabilities930,711 801,069 
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,950,430 shares
  issued at September 30, 2020 and 4,948,245 shares issued at December 31, 2019
9,901 9,897 
Additional paid-in capital1,368 1,124 
Retained earnings68,735 64,019 
Treasury stock at cost; 475,124 shares at September 30, 2020
  and 476,268 shares at December 31, 2019
(4,173)(4,183)
Accumulated other comprehensive income2,593 986 
Total stockholders' equity78,424 71,843 
Total liabilities and stockholders' equity$1,009,135 $872,912 

See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 1


UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 Three Months Ended
September 30,
Nine Months Ended
September 30,
 2020201920202019
 (Dollars in thousands, except per share data)
Interest and dividend income  
Interest and fees on loans$8,803 $8,502 $25,659 $24,604 
Interest on debt securities:
Taxable305 409 1,029 1,271 
Tax exempt160 131 477 373 
Dividends27 33 87 105 
Interest on federal funds sold and overnight deposits7 19 71 130 
Interest on interest bearing deposits in banks41 46 122 153 
Total interest and dividend income9,343 9,140 27,445 26,636 
Interest expense
Interest on deposits1,101 1,198 3,662 3,439 
Interest on borrowed funds57 295 314 678 
Total interest expense1,158 1,493 3,976 4,117 
    Net interest income8,185 7,647 23,469 22,519 
Provision for loan losses800 150 1,600 350 
    Net interest income after provision for loan losses7,385 7,497 21,869 22,169 
Noninterest income
Trust income173 168 524 519 
Service fees1,539 1,617 4,320 4,547 
Net gains on sales of investment securities available-for-sale  11 8 
Net gains on sales of loans held for sale3,315 824 5,354 1,881 
Net gain (loss) on other investments76 (9)114 72 
Other income405 123 691 399 
Total noninterest income5,508 2,723 11,014 7,426 
Noninterest expenses
Salaries and wages3,718 3,072 9,668 8,773 
Employee benefits1,204 1,047 3,417 3,108 
Occupancy expense, net420 428 1,411 1,287 
Equipment expense770 625 2,266 1,764 
Other expenses1,883 1,833 5,516 5,400 
Total noninterest expenses7,995 7,005 22,278 20,332 
        Income before provision for income taxes4,898 3,215 10,605 9,263 
Provision for income taxes751 477 1,594 1,374 
        Net income$4,147 $2,738 $9,011 $7,889 
Earnings per common share$0.92 $0.62 $2.01 $1.77 
Weighted average number of common shares outstanding4,475,145 4,468,400 4,474,061 4,467,845 
Dividends per common share$0.32 $0.31 $0.96 $0.93 

See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 2


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

Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(Dollars in thousands)
Net income$4,147 $2,738 $9,011 $7,889 
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(124)441 1,616 2,192 
Reclassification adjustment for net gains on sales of investment securities available-for-sale realized in net income  (9)(6)
Total other comprehensive (loss) income(124)441 1,607 2,186 
Total comprehensive income$4,023 $3,179 $10,618 $10,075 

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 Period Ended September 30, 2020 and 2019
 Common Stock   Accumulated
other
comprehensive income (loss)
 
 Shares,
net of
treasury
AmountAdditional
paid-in
capital
Retained
earnings
Treasury
stock
Total
stockholders’
equity
 (Dollars in thousands, except per share data)
Balances June 30, 20204,474,899 $9,901 $1,306 $66,020 $(4,177)$2,717 $75,767 
   Net income— — — 4,147 — — 4,147 
   Other comprehensive loss— — — — — (124)(124)
   Dividend reinvestment plan407 — 4 — 4 — 8 
   Cash dividends declared
       ($0.32 per share)
— — — (1,432)— — (1,432)
   Stock based compensation expense  58 — — — 58 
Balances, September 30, 20204,475,306 $9,901 $1,368 $68,735 $(4,173)$2,593 $78,424 
Balances June 30, 20194,467,845 $9,890 $1,020 $61,292 $(4,188)$722 $68,736 
   Net income— — — 2,738 — — 2,738 
   Other comprehensive income— — — — — 441 441 
   Dividend reinvestment plan198 — 5 — 2 — 7 
   Cash dividends declared
  ($0.31 per share)
— — — (1,385)— — (1,385)
   Stock based compensation expense— — 54 — — — 54 
   Exercise of stock options1,000 2 20 — — — 22 
Balances, September 30, 20194,469,043 $9,892 $1,099 $62,645 $(4,186)$1,163 $70,613 
Nine Month Period Ended September 30, 2020 and 2019
 Common Stock   Accumulated
other
comprehensive income (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, 20194,471,977 $9,897 $1,124 $64,019 $(4,183)$986 $71,843 
   Net income— — — 9,011 — — 9,011 
   Other comprehensive income— — — — — 1,607 1,607 
   Dividend reinvestment plan1,144 — 17 — 10 — 27 
   Cash dividends declared
       ($0.96 per share)
— — — (4,295)— — (4,295)
   Stock based compensation expense1,185 2 207 — — — 209 
   Exercise of stock options1,000 2 20 — — — 22 
Balances, September 30, 20204,475,306 $9,901 $1,368 $68,735 $(4,173)$2,593 $78,424 
Balances, December 31, 20184,466,679 $9,888 $894 $58,911 $(4,179)$(1,023)$64,491 
   Net income— — — 7,889 — — 7,889 
   Other comprehensive income— — — — — 2,186 2,186 
   Dividend reinvestment plan664 — 21 — 6 — 27 
   Cash dividends declared
  $0.93 per share)
— — — (4,155)— — (4,155)
   Stock based compensation expense— — 144 — — — 144 
   Exercise of stock options2,000 4 40 — — — 44 
   Purchase of treasury stock(300)— — — (13)— (13)
Balances, September 30, 20194,469,043 $9,892 $1,099 $62,645 $(4,186)$1,163 $70,613 
See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 4


UNION BANKSHARES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 Nine Months Ended
September 30,
 20202019
Cash Flows From Operating Activities(Dollars in thousands)
Net income$9,011 $7,889 
Adjustments to reconcile net income to net cash (used in) provided by operating activities: 
Depreciation1,408 1,122 
Provision for loan losses1,600 350 
Deferred income tax provision (benefit)20 (26)
Net amortization of premiums on investment securities389 305 
Equity in losses of limited partnerships679 534 
Stock based compensation expense209 144 
Net decrease (increase) in unamortized loan costs1,579 (50)
Proceeds from sales of loans held for sale193,016 103,207 
Origination of loans held for sale(213,023)(111,988)
Net gains on sales of loans held for sale(5,354)(1,881)
Net gains on sales of investment securities available-for-sale(11)(8)
Net gain on other investments(114)(72)
(Increase) decrease in accrued interest receivable(1,167)110 
Amortization of core deposit intangible129 129 
Increase in other assets(5)(851)
(Decrease) increase in other liabilities(48)2,478 
Net cash (used in) provided by operating activities(11,682)1,392 
Cash Flows From Investing Activities 
Interest bearing deposits in banks 
Proceeds from maturities and redemptions1,336 2,487 
Purchases(3,735)(249)
Investment securities available-for-sale
Proceeds from sales3,076 8,785 
Proceeds from maturities, calls and paydowns14,528 6,567 
Purchases(16,675)(24,752)
Net (purchases) sales of other investments(70)16 
Net decrease (increase) in nonmarketable stock1,457 (231)
Net increase in loans(95,866)(15,746)
Recoveries of loans charged off29 10 
Purchases of premises and equipment(937)(6,070)
Purchase of Company-owned life insurance (3,000)
Investments in limited partnerships(2,257)(1,803)
Net cash used in investing activities(99,114)(33,986)
Union Bankshares, Inc. Page 5


 Nine Months Ended
September 30,
 20202019
Cash Flows From Financing Activities(Dollars in thousands)
Repayment of long-term debt (20,070)
Net (decrease) increase in short-term borrowings outstanding(37,667)39,413 
Net increase in noninterest bearing deposits68,121 4,268 
Net increase (decrease) in interest bearing deposits104,030 (25,076)
Net (decrease) increase in time deposits(6,099)30,767 
Issuance of common stock22 44 
Purchase of treasury stock (13)
Dividends paid(4,268)(4,128)
Net cash provided by financing activities124,139 25,205 
Net increase (decrease) in cash and cash equivalents13,343 (7,389)
Cash and cash equivalents
Beginning of period51,134 37,289 
End of period$64,477 $29,900 
Supplemental Disclosures of Cash Flow Information 
Interest paid$4,498 $3,787 
Income taxes paid$400 $575 
Supplemental Schedule of Noncash Investing Activities
Investment in limited partnerships acquired by capital contributions payable$2,722 $619 
Right-of-use operating lease assets obtained in exchange for operating lease liabilities$ $2,002 
Dividends paid on Common Stock:
Dividends declared$4,295 $4,155 
Dividends reinvested(27)(27)
$4,268 $4,128 

See accompanying notes to unaudited interim consolidated financial statements.
Union Bankshares, Inc. Page 6


UNION BANKSHARES, INC. AND SUBSIDIARY
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Union Bankshares, Inc. and Subsidiary (together, the Company) as of September 30, 2020, and for the three and nine months ended September 30, 2020 and 2019, 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, 2019 (2019 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 2019 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, 2020, 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 2019 consolidated financial statements have been reclassified to conform to the 2020 presentation.

Union Bankshares, Inc. Page 7


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-saleMBS:Mortgage-backed security
ALCO:Asset Liability CommitteeMSRs:Mortgage servicing rights
ALL:Allowance for loan lossesOAO:Other assets owned
ASC:Accounting Standards CodificationOCI:Other comprehensive income (loss)
ASU:Accounting Standards UpdateOFAC:U.S. Office of Foreign Assets Control
Board:Board of DirectorsOREO:Other real estate owned
bp or bps:Basis point(s)OTTI:Other-than-temporary impairment
Branch Acquisition:The acquisition of three New Hampshire branches in May 2011OTT:Other-than-temporary
CARES Act:Coronavirus Aid, Relief and Economic Security ActPlan:The Union Bank Pension Plan
CDARS:Certificate of Deposit Accounts Registry Service of the Promontory Interfinancial NetworkPPP:Paycheck Protection Program
Company:Union Bankshares, Inc. and SubsidiaryPPPLF:PPP Liquidity Facility of the FRB
COVID-19:Novel CoronavirusRD:USDA Rural Development
DRIP:Dividend Reinvestment PlanRSU:Restricted Stock Unit
FASB:Financial Accounting Standards BoardSBA:U.S. Small Business Administration
FDIC:Federal Deposit Insurance CorporationSEC:U.S. Securities and Exchange Commission
FHA:U.S. Federal Housing AdministrationTDR:Troubled-debt restructuring
FHLB:Federal Home Loan Bank of BostonUnion:Union Bank, the sole subsidiary of Union Bankshares, Inc
FRB:Federal Reserve BoardUSDA:U.S. Department of Agriculture
FHLMC/Freddie Mac:Federal Home Loan Mortgage CorporationVA:U.S. Veterans Administration
GAAP:Generally Accepted Accounting Principles in the United StatesWHO:World Health Organization
HTM:Held-to-maturity2008 ISO Plan:2008 Incentive Stock Option Plan of the Company
HUD:U.S. Department of Housing and Urban Development2014 Equity Plan:2014 Equity Incentive Plan
ICS:Insured Cash Sweeps of the Promontory Interfinancial Network2019 Annual ReportAnnual Report of Form 10-K for the year ended December 31, 2019
IRS:Internal Revenue Service2017 Tax Act:Tax Cut and Jobs Act of 2017

Note 2. Risks and Uncertainties
The outbreak of COVID-19 has adversely impacted a broad range of industries in which the Company’s customers operate and could impair their ability to fulfill their financial obligations to the Company. The spread of the outbreak has caused significant disruptions in the U.S. economy and has disrupted banking and other financial activity in the areas in which the Company operates. While there has been no material impact to the Company’s employees to date, COVID-19 could also potentially create widespread operating issues for the Company.
Congress, the President, and the FRB have taken several actions designed to cushion the economic fallout. Most notably, the CARES Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act was to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also included extensive emergency funding for small businesses, hospitals and health care providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on the Company’s operations in future periods.
Union Bankshares, Inc. Page 8


The Company’s business is dependent upon the willingness and ability of its employees and customers to conduct banking and other financial transactions. If the global, national or state response to contain COVID-19 escalates further or is unsuccessful, the Company could experience a material adverse effect on its business, financial condition, results of operations and cash flows. While it is not possible to know the full extent that the impact of COVID-19, and resulting measures to curtail its spread, will have on the Company’s operations, the Company is disclosing potentially material items of which it is aware.

Financial position and results of operations
The Company continues to work with COVID-19 affected customers to waive a variety of fees, including but not limited to, insufficient funds and overdraft fees, ATM fees and account maintenance fees. (See further discussion of fee income in Results of Operations beginning on page 31.) These reductions in fees are thought, at this time, to be temporary, while the COVID-19 related economic crisis persists. At this time, the Company is unable to project the duration or materiality of such an impact, but recognizes that the scope of the economic impact is likely to impact its fee income in future periods. Also, the Company has collected fee income from the SBA for participating in the PPP and processing PPP loans, which will offset the above mentioned reduction in fee income.
The Company’s interest income could be reduced due to COVID-19. The Company continues to actively work with COVID-19 affected borrowers to defer their loan payments, interest, and fees. While interest and fees will still accrue to income through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, the Company is unable to project the materiality of such an impact, but recognizes the scope of the economic impact may affect its borrowers’ ability to repay in future periods.

Capital and liquidity
While the Company believes that it has sufficient capital to withstand an extended economic recession brought about by COVID-19, its reported and regulatory capital ratios could be adversely impacted by credit losses. The Company relies on cash on hand as well as dividends from its subsidiary bank to pay dividends to shareholders. If the Company’s capital deteriorates such that its subsidiary bank is unable to pay dividends to it for an extended period of time, the Company may not be able to maintain its dividend to shareholders at the current level. Management continues to analyze the Company's current capital levels and its ability to maintain growth projections and absorb future credit losses while maintaining sufficient levels of capital.
The Company maintains access to multiple sources of liquidity. Wholesale funding markets have remained open to the Company. If funding costs are elevated for an extended period of time, it could have an adverse effect on the Company’s net interest margin. If an extended recession caused large numbers of the Company’s deposit customers to withdraw their funds, the Company might become more reliant on volatile or more expensive sources of funding. To date in 2020, primarily as a result of the deposit of PPP loan proceeds and government assistance payments under the CARES Act, the Company has experienced a significant increase in customer deposits, although that effect will likely be temporary as borrowers spend down their loan proceeds and government assistance payments.

Asset valuation
Currently, the Company does not expect COVID-19 to affect its ability to account timely for the assets on its balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, the Company does not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
COVID-19 could cause a further and sustained decline in the Company’s stock price or the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause the Company to perform a goodwill impairment test, an intangible asset impairment test, or both, resulting in an impairment charge being recorded for that period. In the event that the Company concludes that all or a portion of its goodwill or intangible assets are impaired, a non-cash charge for the amount of such impairment would be recorded to earnings. Such a charge would have no impact on tangible capital or regulatory capital.

Processes, controls and business continuity plan
The Company has implemented its Pandemic and Business Continuity Plans to address the operating risks associated with the global COVID-19 pandemic and has followed guidance as events evolved from the Centers for Disease Control & Prevention (CDC), the WHO, State Health Officials and other available resources. Since implementing the Pandemic and Business Continuity Plans, the Company has taken a series of actions to safeguard its employees and customers while continuing to provide essential banking services to its communities. At the onset of COVID-19, the Company developed and executed a plan to decentralize employees, including working remotely, to isolate certain personnel essential to critical business continuity
Union Bankshares, Inc. Page 9


operations, canceled business travel and outside vendor appointments, limit inter-branch visits, and increase the use of video conferencing to avoid large gatherings. Also, social distancing and enhanced hygiene practices were put into place as well as rigorous cleaning of all bank facilities. Throughout these changes, employees and customers have been kept informed with regular communications.
On May 27, 2020, branch lobby service was reopened to customers following guidance provided by state government as to occupancy limits and social distancing requirements. Branch lobbies had been closed to all customers, under state emergency orders since March 25, 2020. In addition to limited in branch capacity, Union's employees continue to work in a decentralized manner, including working remotely from home or at other banking facilities. Management continues to limit business travel and inter-branch visits.
Management continues to evaluate current events and put appropriate protocols in place to ensure the safety of staff and customers while continuing to provide essential banking services our customers rely on. No material operational or internal control challenges or risks related to COVID-19 have been identified to date. The Company does not anticipate significant challenges to its ability to maintain its systems and controls in light of the measures the Company has taken to prevent the spread of COVID-19. The Company does not currently face any material resource constraints through the implementation of its Pandemic and Business Continuity Plans.

Lending operations and accommodations to borrowers
In keeping with regulatory guidance to work with borrowers during this unprecedented situation and as outlined in the CARES Act, the Company is continuing to approve short-term payment deferrals for its borrowers that are adversely affected by the pandemic. Depending on the demonstrated need of the customer, the Company is deferring either the full loan payment or the principal component of the loan payment for up to 180 days for the majority of the deferral requests. As of June 30, 2020, the Company had executed 406 of these deferrals on outstanding loan balances of $173.3 million. As of September 30, 2020, 75 of these deferrals remained in effect on outstanding loan balances of $39.1 million. In accordance with interagency guidance issued in March 2020 and updated in April 2020, and confirmed by the FASB, these short term deferrals are not considered troubled debt restructurings. In August 2020, the federal banking regulators issued supplemental guidance for working with borrowers as their loans near the end of their accommodation period.
With the passage of the PPP, administered by the SBA, the Company assisted its customers with applications for resources through the program. PPP loans bear a mandated annual interest rate of 1.0%. The PPP was initially launched with loans having a two-year term, but subsequent revisions to the PPP currently allow the maximum term be extended to five years. The majority of the Company's PPP loans were originated with the two-year term and have not been extended to five years. The Company believes that a significant amount of these loans will ultimately be forgiven by the SBA during 2021 in accordance with the terms of the program. It is the Company’s understanding that loans funded through the PPP are fully guaranteed by the U.S. Government. Should those circumstances change, the Company could be required to establish additional allowance for credit losses through additional credit loss expense charged to earnings.
Further, in sensitivity and service to its communities during this unprecedented time, the Company is waiving late payment and overdraft fees on a case by case basis and has temporarily suspended collection and foreclosure efforts on past due loans in accordance with CARES Act guidance and state emergency orders.

Note 3. 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 4. 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 5. 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. 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
Union Bankshares, Inc. Page 10


losses. A modified version of these requirements also applies to debt securities classified as AFS. As initially proposed, the ASU was to become effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption was permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. In October 2019, the FASB approved amendments to delay the effective date of the ASU to fiscal years beginning after December 31, 2022, including interim periods within those fiscal years, for smaller reporting companies, as defined by the SEC, and other non-SEC reporting entities. As the Company is a smaller reporting company, the delay is applicable to the Company and the Company does not intend to early adopt the ASU at this time. The Company has established a CECL implementation team and developed a transition project plan. The Company utilizes a software package for its current calculation of the allowance for loan losses that will also be utilized for CECL implementation. Historical data has been compiled and training on utilizing the software for the existing incurred loss model has been completed. The Company continues the collection of historical data and training is ongoing surrounding CECL implementation and methodologies. This will facilitate the eventual 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 was effective for the Company on January 1, 2020 and did not have a material impact 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 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 ASU was effective for the Company on January 1, 2020 and did not have a material impact on the Company's financial statement disclosures.

In March 2020, various financial institution regulatory agencies, including the FRB and the FDIC (“the agencies”), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The guidance was subsequently amended following passage of the CARES Act, which included a provision for addressing certain COVID-19 related loan modifications. The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC No. 310-40, Receivables – Troubled Debt Restructurings by Creditors, a restructuring of debt constitutes a TDR if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months or less) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The agencies supplemented their interagency guidance on August 3, 2020 to provide prudent risk management and consumer protection principles for financial institutions to consider while working with borrowers near the end of their initial loan accommodation period. The interagency guidance is not expected to have a material impact on the Company’s financial statements.

Note 6. Goodwill and Other Intangible Assets
As a result of the 2011 Branch Acquisition, the Company recorded goodwill amounting to $2.2 million. The goodwill is not amortizable. Goodwill is evaluated for impairment annually, in accordance with current authoritative accounting guidance. Management assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of the Company, in total, is less than its carrying amount. Management is not aware of any such events or circumstances that would cause it to conclude that the fair value of the Company is less than its carrying amount.
Union Bankshares, Inc. Page 11


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 $114 thousand and $242 thousand at September 30, 2020 and December 31, 2019, 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 September 30, 2020 and 2019 and $129 thousand for the nine months ended September 30, 2020 and 2019. The amortization expense is included in Other expenses on the consolidated statements of income and is deductible for tax purposes. As of September 30, 2020, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:
(Dollars in thousands)
2020$43 
202171 
Total$114 

Note 7. Investment Securities
AFS securities as of the balance sheet dates consisted of the following:
September 30, 2020Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 (Dollars in thousands)
Available-for-sale    
Debt securities:    
U.S. Government-sponsored enterprises$4,658 $139 $(39)$4,758 
Agency mortgage-backed44,357 1,434 (38)45,753 
State and political subdivisions28,008 1,229 (12)29,225 
Corporate7,814 647 (77)8,384 
Total$84,837 $3,449 $(166)$88,120 
December 31, 2019Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
 (Dollars in thousands)
Available-for-sale    
Debt securities:    
U.S. Government-sponsored enterprises$6,349 $19 $(76)$6,292 
Agency mortgage-backed45,503 602 (81)46,024 
State and political subdivisions26,489 515 (39)26,965 
Corporate7,804 378 (70)8,112 
Total$86,145 $1,514 $(266)$87,393 
There were no investment securities HTM at September 30, 2020 or December 31, 2019. There were no investment securities pledged as collateral at September 30, 2020 or December 31, 2019.


Union Bankshares, Inc. Page 12


The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of September 30, 2020 were as follows:
Amortized
Cost
Fair
Value
Available-for-sale(Dollars in thousands)
Due in one year or less$940 $943 
Due from one to five years4,823 5,142 
Due from five to ten years12,861 13,523 
Due after ten years21,856 22,759 
 40,480 42,367 
Agency mortgage-backed44,357 45,753 
Total debt securities available-for-sale$84,837 $88,120 

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

Information pertaining to all investment securities with gross unrealized losses as of the balance sheet dates, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
September 30, 2020Less 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)
Debt securities:      
U.S. Government-
sponsored enterprises
 $ $ 8 $1,787 $(39)8 $1,787 $(39)
Agency mortgage-backed10 9,900 (32)1 696 (6)11 10,596 (38)
State and political
subdivisions
1 569 (12)   1 569 (12)
Corporate   3 1,423 (77)3 1,423 (77)
Total11 $10,469 $(44)12 $3,906 $(122)23 $14,375 $(166)
December 31, 2019Less 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)
Debt securities:      
U.S. Government-
sponsored enterprises
4 $2,376 $(22)8 $2,772 $(54)12 $5,148 $(76)
Agency mortgage-backed8 6,193 (38)8 4,861 (43)16 11,054 (81)
State and political
subdivisions
9 3,813 (38)1 304 (1)10 4,117 (39)
Corporate   3 1,430 (70)3 1,430 (70)
Total21 $12,382 $(98)20 $9,367 $(168)41 $21,749 $(266)
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.

Union Bankshares, Inc. Page 13


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 September 30, 2020 and December 31, 2019 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 September 30, 2020 and 2019. The following table presents the proceeds, gross realized gains and gross realized losses from the sales of AFS securities for the nine months ended September 30, 2020 and 2019:
For The Nine Months
Ended September 30,
20202019
(Dollars in thousands)
Proceeds$3,076 $8,785 
Gross gains32 45 
Gross losses(21)(37)
Net gains on sales of investment securities AFS$11 $8 

Note 8.  Loans
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their unpaid principal balances, adjusted for any charge-offs, the ALL, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.
Loan interest income is accrued daily on outstanding balances. The following accounting policies, related to accrual and nonaccrual loans, apply to all portfolio segments and loan classes, which the Company considers to be the same. The accrual of interest is normally discontinued when a loan is specifically determined to be impaired and/or management believes, after considering collection efforts and other factors, that the borrower's financ