UNION BANKSHARES INC - Quarter Report: 2022 June (Form 10-Q)

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

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2022

Commission file number: 001-15985

UNION BANKSHARES, INC.

03-0283552

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 value

UNB

Nasdaq 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 29, 2022.

Common Stock, $2 par value

4,494,814

UNION BANKSHARES, INC.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION


Item 1. Financial Statements.
Unaudited Interim Consolidated Financial Statements of Union Bankshares, Inc. and Subsidiary
Consolidated Balance Sheets			1
Consolidated Statements of Income			2
Consolidated Statements of Comprehensive Income			3
Consolidated Statements of Changes in Stockholders' Equity			4
Consolidated Statements of Cash Flows			5
Notes to Unaudited Interim Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			43
Item 4. Controls and Procedures.			43

PART II OTHER INFORMATION

Item 1. Legal Proceedings.			44
Item 1A. Risk Factors.			44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			44
Item 6. Exhibits.			44

Signatures			45

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


	June 30, 2022		December 31, 2021
	(Unaudited)
Assets	(Dollars in thousands)
Cash and due from banks	$	4,411	$	4,659
Federal funds sold and overnight deposits	20,885		61,263
Cash and cash equivalents	25,296		65,922
Interest bearing deposits in banks	13,943		13,196
Investment securities available-for-sale	261,665		267,819

Other investments	1,162		1,132
Total investments	262,827		268,951
Loans held for sale	3,820		13,829
Loans	817,953		787,050
Allowance for loan losses	(8,340)		(8,336)
Net deferred loan costs	1,193		705
Net loans	810,806		779,419

Premises and equipment, net	20,983		21,615



Company-owned life insurance	18,298		18,764
Other assets	35,940		23,677
Total assets	$	1,191,913	$	1,205,373
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	337,140	$	264,888
Interest bearing	662,778		723,479
Time	103,135		106,715
Total deposits	1,103,053		1,095,082

Subordinated notes	16,188		16,171
Accrued interest and other liabilities	12,726		9,779
Total liabilities	1,131,967		1,121,032
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,969,972 shares issued at June 30, 2022 and 4,967,093 shares issued at December 31, 2021	9,940		9,934
Additional paid-in capital	2,019		1,769
Retained earnings	80,617		78,350
Treasury stock at cost; 475,160 shares at June 30, 2022 and 473,438 shares at December 31, 2021	(4,231)		(4,160)
Accumulated other comprehensive loss	(28,399)		(1,552)
Total stockholders' equity	59,946		84,341
Total liabilities and stockholders' equity	$	1,191,913	$	1,205,373

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,
	2022		2021		2022		2021
Interest and dividend income	(Dollars in thousands, except per share data)
Interest and fees on loans	$	9,010	$	9,236	$	17,484	$	18,121
Interest on debt securities:
Taxable	1,038		456		2,010		860
Tax exempt	221		154		443		305
Dividends	4		4		10		8
Interest on federal funds sold and overnight deposits	94		14		113		33
Interest on interest bearing deposits in banks	37		34		70		71
Total interest and dividend income	10,404		9,898		20,130		19,398
Interest expense
Interest on deposits	591		924		1,212		1,971
Interest on borrowed funds	—		55		—		109
Interest on subordinated notes	142		—		284		—
Total interest expense	733		979		1,496		2,080
Net interest income	9,671		8,919		18,634		17,318
Provision for loan losses	—		75		—		225
Net interest income after provision for loan losses	9,671		8,844		18,634		17,093
Noninterest income
Trust income	217		198		426		383
Service fees	1,738		1,581		3,373		3,104
Net gains on sales of investment securities available-for-sale	5		—		31		—
Net gains on sales of loans held for sale	286		1,151		300		2,045
Net (losses) gains on other investments	(142)		15		(60)		59
Other income	61		194		150		169
Total noninterest income	2,165		3,139		4,220		5,760
Noninterest expenses
Salaries and wages	3,520		3,553		6,930		6,636
Employee benefits	1,295		1,203		2,600		2,372
Occupancy expense, net	462		527		989		1,004
Equipment expense	934		872		1,850		1,670
Other expenses	2,084		2,234		4,040		4,160
Total noninterest expenses	8,295		8,389		16,409		15,842
Income before provision for income taxes	3,541		3,594		6,445		7,011
Provision for income taxes	610		603		1,032		1,144
Net income	$	2,931	$	2,991	$	5,413	$	5,867
Basic earnings per common share	$	0.65	$	0.67	$	1.20	$	1.31
Diluted earnings per common share	$	0.65	$	0.66	$	1.20	$	1.30
Weighted average number of common shares outstanding	4,494,027		4,482,597		4,494,447		4,481,475
Weighted average common and potential common shares for diluted EPS	4,513,411		4,511,169		4,510,106		4,506,150
Dividends per common share	$	0.35	$	0.33	$	0.70	$	0.66

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,
	2022		2021		2022		2021
	(Dollars in thousands)
Net income	$	2,931	$	2,991	$	5,413	$	5,867
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	(10,969)		920		(26,822)		(1,635)
Reclassification adjustment for net gains on sales of investment securities available-for-sale realized in net income	(4)		—		(25)		—





Total other comprehensive (loss) income	(10,973)		920		(26,847)		(1,635)
Total comprehensive (loss) income	$	(8,042)	$	3,911	$	(21,434)	$	4,232

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, 2022 and 2021
	Common Stock									Accumulated other comprehensive (loss) income
	Shares, net of treasury	Amount		Additional paid-in capital		Retained earnings		Treasury stock				Total stockholders’ equity
	(Dollars in thousands, except per share data)
Balances March 31, 2022	4,493,170	$	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 plan	512	—		11		—		4		—		15
Cash dividends declared ($0.35 per share)	—	—		—		(1,573)		—		—		(1,573)
Stock based compensation expense	1,280	3		130		—		—		—		133

Purchase of treasury stock	(150)	—		—		—		(4)		—		(4)
Balances, June 30, 2022	4,494,812	$	9,940	$	2,019	$	80,617	$	(4,231)	$	(28,399)	$	59,946

Balances March 31, 2021	4,480,954	$	9,911	$	1,504	$	72,494	$	(4,167)	$	81	$	79,823
Net income	—	—		—		2,991		—		—		2,991
Other comprehensive income	—	—		—		—		—		920		920
Dividend reinvestment plan	267	—		7		—		2		—		9
Cash dividends declared ($0.33 per share)	—	—		—		(1,479)		—		—		(1,479)
Stock based compensation expense	2,152	4		87		—		—		—		91
Exercise of stock options	500	1		11		—		—		—		12

Balances, June 30, 2021	4,483,873	$	9,916	$	1,609	$	74,006	$	(4,165)	$	1,001	$	82,367


	Six Month Periods Ended June 30, 2022 and 2021
	Common Stock									Accumulated other comprehensive (loss) income
	Shares, net of treasury	Amount		Additional paid-in capital		Retained earnings		Treasury stock				Total stockholders’ equity
	(Dollars in thousands, except per share data)
Balances, December 31, 2021	4,493,655	$	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 plan	928	—		20		—		8		—		28
Cash dividends declared ($0.70 per share)	—	—		—		(3,146)		—		—		(3,146)
Stock based compensation expense	2,879	6		230		—		—		—		236

Purchase of treasury stock	(2,650)	—		—		—		(79)		—		(79)
Balances, June 30, 2022	4,494,812	$	9,940	$	2,019	$	80,617	$	(4,231)	$	(28,399)	$	59,946

Balances, December 31, 2020	4,480,100	$	9,910	$	1,393	$	71,097	$	(4,169)	$	2,636	$	80,867
Net income	—	—		—		5,867		—		—		5,867
Other comprehensive loss	—	—		—		—		—		(1,635)		(1,635)
Dividend reinvestment plan	718	—		15		—		6		—		21
Cash dividends declared ($0.66 per share)	—	—		—		(2,958)		—		—		(2,958)
Stock based compensation expense	2,152	4		179		—		—		—		183
Exercise of stock options	1,000	2		22		—		—		—		24
Purchase of treasury stock	(97)	—		—		—		(2)		—		(2)
Balances, June 30, 2021	4,483,873	$	9,916	$	1,609	$	74,006	$	(4,165)	$	1,001	$	82,367

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,
	2022		2021
Cash Flows From Operating Activities	(Dollars in thousands)
Net income	$	5,413	$	5,867
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation	922		925
Provision for loan losses	—		225
Deferred income tax provision	12		13
Net amortization of premiums on investment securities	324		323
Equity in losses of limited partnerships	548		501
Stock based compensation expense	236		183
Net (increase) decrease in unamortized loan costs	(488)		432
Proceeds from sales of loans held for sale	34,672		87,203
Origination of loans held for sale	(24,363)		(95,119)
Net gains on sales of loans held for sale	(300)		(2,045)
Net losses on disposals of premises and equipment	—		108
Net gains on sales of investment securities available-for-sale	(31)		—


Net gains on sales of other real estate owned	—		(11)
Net losses (gains) on other investments	60		(59)
Increase in accrued interest receivable	262		799
Amortization of core deposit intangible	—		71
Amortization of debt issuance costs	17		—
Increase in other assets	(1,184)		(1,041)

Increase (decrease) in other liabilities	246		(993)
Net cash provided by (used in) operating activities	16,346		(2,618)
Cash Flows From Investing Activities
Interest bearing deposits in banks
Proceeds from maturities and redemptions	5,229		2,490
Purchases	(5,976)		(2,739)



Investment securities available-for-sale
Proceeds from sales	6,827		—
Proceeds from maturities, calls and paydowns	13,650		15,656
Purchases	(48,599)		(70,387)
Net purchases of other investments	(90)		(68)
Net decrease (increase) in nonmarketable stock	276		(13)

Net (increase) decrease in loans	(30,905)		29,695
Recoveries of loans charged off	6		9
Net purchases of premises and equipment	(290)		(2,631)



Investments in limited partnerships	(1,874)		(1,458)

Proceeds from sales of other real estate owned	—		61

Net cash used in investing activities	(61,746)		(29,385)

Union Bankshares, Inc. Page 5


	Six Months Ended June 30,
	2022		2021

Cash Flows From Financing Activities	(Dollars in thousands)



Net increase in noninterest bearing deposits	72,252		28,328
Net decrease in interest bearing deposits	(60,701)		(26,829)
Net decrease in time deposits	(3,580)		(28,121)

Exercise of stock options	—		24
Purchase of treasury stock	(79)		(2)
Dividends paid	(3,118)		(2,937)
Net cash provided by (used in) financing activities	4,774		(29,537)
Net decrease in cash and cash equivalents	(40,626)		(61,540)
Cash and cash equivalents
Beginning of period	65,922		122,771
End of period	$	25,296	$	61,231
Supplemental Disclosures of Cash Flow Information
Interest paid	$	1,510	$	2,122
Income taxes paid	$	200	$	1,300

Supplemental Schedule of Noncash Investing Activities



Investment in limited partnerships acquired by capital contributions payable	$	3,494	$	—



Dividends paid on Common Stock:
Dividends declared	$	3,146	$	2,958
Dividends reinvested	(28)		(21)
	$	3,118	$	2,937

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, 2022, and for the three and six months ended June 30, 2022 and 2021, 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, 2021, as amended by Amendment No. 1 on Form 10-K/A (2021 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 2021 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, 2022, 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 2021 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.


AFS:	Available-for-sale	ICS:	Insured Cash Sweeps of the Promontory Interfinancial Network
ALCO:	Asset Liability Committee	IRS:	Internal Revenue Service
ALL:	Allowance for loan losses	MBS:	Mortgage-backed security
ASC:	Accounting Standards Codification	MSRs:	Mortgage servicing rights
ASU:	Accounting Standards Update	OAO:	Other assets owned
Board:	Board of Directors	OCI:	Other comprehensive income (loss)
bp or bps:	Basis point(s)	OFAC:	U.S. Office of Foreign Assets Control
CARES Act:	Coronavirus Aid, Relief and Economic Security Act	OREO:	Other real estate owned
CDARS:	Certificate of Deposit Accounts Registry Service of the Promontory Interfinancial Network	OTTI:	Other-than-temporary impairment
Company:	Union Bankshares, Inc. and Subsidiary	OTT:	Other-than-temporary
COVID-19:	Novel Coronavirus	PPP:	Paycheck Protection Program
Dodd-Frank Act:	The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010	RD:	USDA Rural Development
DRIP:	Dividend Reinvestment Plan	RSU:	Restricted Stock Unit
FASB:	Financial Accounting Standards Board	SBA:	U.S. Small Business Administration
FDIC:	Federal Deposit Insurance Corporation	SEC:	U.S. Securities and Exchange Commission
FHA:	U.S. Federal Housing Administration	TDR:	Troubled-debt restructuring
FHLB:	Federal Home Loan Bank of Boston	Union:	Union Bank, the sole subsidiary of Union Bankshares, Inc
FRB:	Federal Reserve Board	USDA:	U.S. Department of Agriculture
FHLMC/Freddie Mac:	Federal Home Loan Mortgage Corporation	VA:	U.S. Veterans Administration
GAAP:	Generally Accepted Accounting Principles in the United States	2014 Equity Plan:	2014 Equity Incentive Plan, as amended
HTM:	Held-to-maturity	2021 Annual Report:	Annual Report on Form 10-K for the year ended December 31, 2021, as amended by Amendment No. 1 on Form 10-K/A
HUD:	U.S. Department of Housing and Urban Development

Union Bankshares, Inc. Page 7

Note 2. Legal Contingencies

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

Note 3. Per Share Information

The following table presents the reconciliation between the calculation of basic EPS and diluted EPS for the three and six months ended June 30, 2022 and 2021:



	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
	(Dollars in thousands, except per share data)
Net income	$	2,931	$	2,991	$	5,413	$	5,867
Weighted average common shares outstanding for basic EPS	4,494,027		4,482,597		4,494,447		4,481,475
Dilutive effect of stock-based awards (1)	19,384		28,572		15,659		24,675
Weighted average common and potential common shares for diluted EPS	4,513,411		4,511,169		4,510,106		4,506,150
Earnings per common share:
Basic EPS	$	0.65	$	0.67	$	1.20	$	1.31
Diluted EPS	$	0.65	$	0.66	$	1.20	$	1.30

____________________

(1)Dilutive effect of stock based awards represents the effect of the assumed exercise of stock options (2021 only) and vesting 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. Under this 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 guidance in the ASU, which is referred to as the current expected credit loss model ("CECL"), requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as AFS. 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. The Company did not choose to early adopt the ASU. As the Company is a smaller reporting company, the ASU will become effective for the Company beginning with the 2023 fiscal year. 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 continues to be collected and training is ongoing surrounding CECL implementation and methodologies. In addition, the Company is conducting parallel calculations under the existing incurred loss model and the CECL model throughout 2022. The measures 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 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, 2022. The transition away from LIBOR is not expected to have a material impact on the Company's consolidated financial statements.

Union Bankshares, Inc. Page 8

In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures which eliminates the accounting guidance for TDRs, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The ASU also requires disclosure of current period charge offs by year of origination for loans and leases. ASU No. 2022-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. ASU No. 2022-02 is not expected to have a material impact on the Company’s consolidated financial statements.

Note 5. Investment Securities

Debt securities AFS as of the balance sheet dates consisted of the following:


June 30, 2022	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)


U.S. Government-sponsored enterprises	$	45,631	$	1	$	(3,988)	$	41,644
Agency mortgage-backed	202,132		5		(25,318)		176,819
State and political subdivisions	43,513		65		(6,610)		36,968
Corporate	6,336		6		(108)		6,234
Total	$	297,612	$	77	$	(36,024)	$	261,665


December 31, 2021	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars in thousands)


U.S. Government-sponsored enterprises	$	37,176	$	55	$	(593)	$	36,638
Agency mortgage-backed	181,216		574		(3,540)		178,250
State and political subdivisions	44,068		1,293		(107)		45,254
Corporate	7,323		381		(27)		7,677
Total	$	269,783	$	2,303	$	(4,267)	$	267,819

There were no investment securities HTM at June 30, 2022 or December 31, 2021. Investment securities AFS with carrying amounts of $479 thousand and $608 thousand were pledged as collateral for public unit deposits or for other purposes as required or permitted by law at June 30, 2022 and December 31, 2021, respectively.

The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of June 30, 2022 were as follows:


	Amortized Cost		Fair Value
Available-for-sale	(Dollars in thousands)

Due from one to five years	$	16,635	$	15,665
Due from five to ten years	33,131		30,450
Due after ten years	45,714		38,731
	95,480		84,846
Agency mortgage-backed	202,132		176,819
Total debt securities available-for-sale	$	297,612	$	261,665

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.

Union Bankshares, Inc. Page 9

Information pertaining to all debt securities AFS 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:


June 30, 2022	Less Than 12 Months					12 Months and over					Total
	Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses
		(Dollars in thousands)

U.S. Government- sponsored enterprises	24	$	33,726	$	(3,241)	10	$	4,582	$	(747)	34	$	38,308	$	(3,988)
Agency mortgage-backed	66	128,356		(16,779)		26	43,474		(8,539)		92	171,830		(25,318)
State and political subdivisions	64	34,130		(6,610)		—	—		—		64	34,130		(6,610)
Corporate	9	4,289		(70)		1	462		(38)		10	4,751		(108)


Total	163	$	200,501	$	(26,700)	37	$	48,518	$	(9,324)	200	$	249,019	$	(36,024)


December 31, 2021	Less Than 12 Months					12 Months and over					Total
	Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses		Number of Securities	Fair Value		Gross Unrealized Losses
		(Dollars in thousands)

U.S. Government- sponsored enterprises	18	$	29,754	$	(464)	14	$	3,885	$	(129)	32	$	33,639	$	(593)
Agency mortgage-backed	41	130,742		(2,252)		17	32,955		(1,288)		58	163,697		(3,540)
State and political subdivisions	17	17,483		(107)		—	—		—		17	17,483		(107)
Corporate	2	985		(15)		1	488		(12)		3	1,473		(27)


Total	78	$	178,964	$	(2,838)	32	$	37,328	$	(1,429)	110	$	216,292	$	(4,267)

The Company evaluates all investment securities on a quarterly basis, and more frequently when economic conditions warrant, to determine if an OTTI exists. A security is considered impaired if the fair value is lower than its amortized cost basis at the report date. If impaired, management then assesses whether the unrealized loss is OTT.

An unrealized loss on a debt security is generally deemed to be OTT and a credit loss is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the debt security. The credit loss component of OTTI write-down is recorded, net of tax effect, through net income as a component of net OTTI losses in the consolidated statements of income, while the remaining portion of the impairment loss is recognized in OCI, provided the Company does not intend to sell the underlying debt security and it is "more likely than not" that the Company will not have to sell the debt security prior to recovery.

Management considers the following factors in determining whether OTTI exists and the period over which the security is expected to recover:

•The length of time, and extent to which, the fair value has been less than the amortized cost;

•Adverse conditions specifically related to the security, industry, or geographic area;

•The historical and implied volatility of the fair value of the security;

•The payment structure of the debt security and the likelihood of the issuer being able to make payments that may increase in the future;

•Failure of the issuer of the security to make scheduled interest or principal payments;

•Any changes to the rating of the security by a rating agency;

•Recoveries or additional declines in fair value subsequent to the balance sheet date; and

•The nature of the issuer, including whether it is a private company, public entity or government-sponsored enterprise, and the existence or likelihood of any government or third party guaranty.

The Company has the ability to hold the investment securities that had unrealized losses at June 30, 2022 and December 31, 2021 for the foreseeable future. The decline in value is the result of market conditions and not attributable to credit quality in the investment securities and no declines were deemed by management to be OTT.

Union Bankshares, Inc. Page 10

There were no sales of AFS securities during the three and six months ended June 30, 2021. The following table presents the proceeds from sales and calls 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, 2022		For The Six Months Ended June 30, 2022

	(Dollars in thousands)
Proceeds from sales	$	—	$	6,827
Proceeds from calls	$	502	$	502

Gross gains	5		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 ALL, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

Loan interest income is accrued daily on outstanding balances. The following accounting policies, related to accrual and nonaccrual loans, apply to all portfolio segments and loan classes, which the Company considers to be the same. The accrual of interest is normally discontinued when a loan is specifically determined to be impaired and/or management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. Generally, any unpaid interest previously accrued on those loans is reversed against current period interest income. A loan may be restored to accrual status when its financial status has significantly improved and there is no principal or interest past due. A loan may also be restored to accrual status if the borrower makes six consecutive monthly payments or the lump sum equivalent. Income on nonaccrual loans is generally not recognized unless a loan is returned to accrual status or after all principal has been collected. Interest income generally is not recognized on impaired loans unless the likelihood of further loss is remote. Interest payments received on such loans are generally applied as a reduction of the loan principal balance. Delinquency status is determined based on contractual terms for all portfolio segments and loan classes. Loans past due 30 days or more are considered delinquent. Loans are considered in process of foreclosure when a judgment of foreclosure has been issued by the court.

Loan origination fees and direct loan origination costs are deferred and amortized as an adjustment of the related loan's yield using methods that approximate the interest method. The Company generally amortizes these amounts over the estimated average life of the related loans.

The composition of Net loans as of the balance sheet dates was as follows:


	June 30, 2022		December 31, 2021
	(Dollars in thousands)
Residential real estate	$	304,135	$	246,827
Construction real estate	81,929		65,149
Commercial real estate	365,430		344,816
Commercial	44,514		49,788
Consumer	2,207		2,376
Municipal	19,738		78,094
Gross loans	817,953		787,050
Allowance for loan losses	(8,340)		(8,336)
Net deferred loan costs	1,193		705
Net loans	$	810,806	$	779,419

There were 43 and 154 PPP loans totaling $3.3 million and $13.6 million classified as commercial loans as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022 and December 31, 2021, there were PPP deferred origination fees of $129 thousand and $558 thousand, respectively, remaining to be amortized into interest income in future periods, over the lives

Union Bankshares, Inc. Page 11

of the respective loans. PPP loan origination fees of $141 thousand and $428 thousand were recognized in earnings during the three and six months ended June 30, 2022, respectively and $715 thousand and $1.4 million were recognized during the three and six months ended June 30, 2021, respectively.

Qualifying residential first mortgage loans and certain commercial real estate loans with an aggregate carrying value of $280.0 million and $224.4 million were pledged as collateral for borrowings from the FHLB under a blanket lien at June 30, 2022 and December 31, 2021, respectively.

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


June 30, 2022	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)
Residential real estate	$	303,437	$	113	$	370	$	109	$	106	$	304,135
Construction real estate	81,914		1		—		—		14		81,929
Commercial real estate	364,114		20		—		—		1,296		365,430
Commercial	44,169		345		—		—		—		44,514
Consumer	2,207		—		—		—		—		2,207
Municipal	19,738		—		—		—		—		19,738
Total	$	815,579	$	479	$	370	$	109	$	1,416	$	817,953


December 31, 2021	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)
Residential real estate	$	245,169	$	1,328	$	130	$	53	$	147	$	246,827
Construction real estate	64,939		72		—		—		138		65,149
Commercial real estate	340,209		242		—		—		4,365		344,816
Commercial	49,699		36		8		45		—		49,788
Consumer	2,376		—		—		—		—		2,376
Municipal	78,094		—		—		—		—		78,094
Total	$	780,486	$	1,678	$	138	$	98	$	4,650	$	787,050

There was one residential real estate loan totaling $28 thousand in process of foreclosure at June 30, 2022 and no loans in process of foreclosure at December 31, 2021. Aggregate interest on nonaccrual loans not recognized was $437 thousand as of June 30, 2022 and $504 thousand as of December 31, 2021.

Note 7. Allowance for Loan Losses and Credit Quality

The ALL is established for estimated losses in the loan portfolio through a provision for loan losses charged to earnings. For all loan classes, loan losses are charged against the ALL when management believes the loan balance is uncollectible or in accordance with federal guidelines. Subsequent recoveries, if any, are credited to the ALL.

The ALL is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio as of the balance sheet date. The amount of the ALL is based on management's periodic evaluation of the collectability of the loan portfolio, including the nature, volume and risk characteristics of the portfolio, credit concentrations, trends in historical loss experience, estimated value of any underlying collateral, specific impaired loans and economic conditions. There was no change to the methodology used to estimate the ALL during the second quarter of 2022. While management uses available information to recognize losses on loans, future additions to the ALL may be necessary based on changes in economic conditions or other relevant factors.

In addition, various regulatory agencies, as an integral part of their examination process, regularly review the Company's ALL. Such agencies may require the Company to recognize additions to the ALL, with a corresponding charge to earnings, based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

Union Bankshares, Inc. Page 12

The ALL consists of specific, general and unallocated components. The specific component relates to the loans that are classified as impaired. Loans are evaluated for impairment and may be classified as impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans may also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that would otherwise not be granted. A TDR classification may result from the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a loan's terms (such as reduction of stated interest rates below market rates, extension of maturity that does not conform to the Company's policies, reduction of the face amount of the loan, reduction of accrued interest, or reduction or deferment of loan payments), or a combination. A specific reserve amount is allocated to the ALL for individual loans that have been classified as impaired based on management's estimate of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. The Company accounts for the change in present value attributable to the passage of time in the loan loss reserve. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship. Based on an evaluation of the Company's historical loss experience on substandard commercial loans, management has established the commercial loan threshold for individual impairment evaluation as commercial loan relationships with aggregate balances greater than $500 thousand.

The general component represents the level of ALL allocable to each loan portfolio segment with similar risk characteristics and is determined based on historical loss experience, adjusted for qualitative factors, for each class of loan. Management deems a five year average to be an appropriate time frame on which to base historical losses for each portfolio segment. Qualitative factors considered include underwriting, economic and market conditions, portfolio composition, collateral values, delinquencies, lender experience and legal issues. The qualitative factors are determined based on the various risk characteristics of each portfolio segment. Risk characteristics relevant to each portfolio segment are as follows:

•Residential real estate - Loans in this segment are collateralized by owner-occupied 1-4 family residential real estate, second and vacation homes, 1-4 family investment properties, home equity and second mortgage loans. Repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, could have an effect on the credit quality of this segment.

•Construction real estate - Loans in this segment include residential and commercial construction properties, commercial real estate development loans (while in the construction phase of the projects), land and land development loans. Repayment is dependent on the credit quality of the individual borrower and/or the underlying cash flows generated by the properties being constructed. The overall health of the economy, including unemployment rates, housing prices, vacancy rates and material costs, could have an effect on the credit quality of this segment.

•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.

Management increased certain economic qualitative factors utilized to estimate the ALL during 2020 at the onset of the COVID-19 pandemic. During 2021, the economic qualitative reserve factor assigned to each loan portfolio in the ALL estimate was decreased due to continued indications of economic improvement. COVID-19 restrictions were lifted in June 2021 and the majority of borrowers that had executed loan modifications due to COVID-19 were no longer subject to modified terms. Based on these continued improving economic trends, the economic qualitative reserve factor assigned to all loan portfolios, except the municipal loan portfolio, was decreased 5 bps during both the first and second quarters of 2022.

Union Bankshares, Inc. Page 13

An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the ALL reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

All evaluations are inherently subjective as they require estimates that are susceptible to significant revision as more information becomes available or as changes occur in economic conditions or other relevant factors. Despite the allocation shown in the tables below, the ALL is general in nature and is available to absorb losses from any class of loan.

Changes in the ALL, by class of loans, for the three and six months ended June 30, 2022 and 2021 were as follows:



For The Three Months Ended June 30, 2022	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Balance, March 31, 2022	$	2,224	$	843	$	3,997	$	289	$	10	$	88	$	885	$	8,336
Provision (credit) for loan losses	15		114		7		28		(3)		(61)		(100)		—
Recoveries of amounts charged off	—		—		—		2		3		—		—		5
	2,239		957		4,004		319		10		27		785		8,341
Amounts charged off	—		—		—		(1)		—		—		—		(1)
Balance, June 30, 2022	$	2,239	$	957	$	4,004	$	318	$	10	$	27	$	785	$	8,340



For The Three Months Ended June 30, 2021	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Balance, March 31, 2021	$	1,996	$	881	$	4,133	$	443	$	13	$	199	$	764	$	8,429
Provision (credit) for loan losses	86		143		(22)		(18)		(2)		(118)		6		75
Recoveries of amounts charged off	—		—		—		—		1		—		—		1
	2,082		1,024		4,111		425		12		81		770		8,505
Amounts charged off	—		—		—		—		—		—		—		—
Balance, June 30, 2021	$	2,082	$	1,024	$	4,111	$	425	$	12	$	81	$	770	$	8,505



For The Six Months Ended June 30, 2022	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Balance, December 31, 2021	$	2,068	$	837	$	4,122	$	275	$	11	$	86	$	937	$	8,336
Provision (credit) for loan losses	171		120		(118)		42		(4)		(59)		(152)		—
Recoveries of amounts charged off	—		—		—		2		4		—		—		6
	2,239		957		4,004		319		11		27		785		8,342
Amounts charged off	—		—		—		(1)		(1)		—		—		(2)
Balance, June 30, 2022	$	2,239	$	957	$	4,004	$	318	$	10	$	27	$	785	$	8,340

Union Bankshares, Inc. Page 14



For The Six Months Ended June 30, 2021	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Balance, December 31, 2020	$	1,776	$	763	$	4,199	$	458	$	15	$	214	$	846	$	8,271
Provision (credit) for loan losses	298		261		(88)		(33)		(4)		(133)		(76)		225
Recoveries of amounts charged off	8		—		—		—		1		—		—		9
	2,082		1,024		4,111		425		12		81		770		8,505
Amounts charged off	—		—		—		—		—		—		—		—
Balance, June 30, 2021	$	2,082	$	1,024	$	4,111	$	425	$	12	$	81	$	770	$	8,505

The allocation of the ALL, summarized on the basis of the Company's impairment methodology by class of loan, as of the balance sheet dates, was as follows:


June 30, 2022	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	23	$	—	$	—	$	—	$	—	$	—	$	—	$	23
Collectively evaluated for impairment	2,216		957		4,004		318		10		27		785		8,317
Total allocated	$	2,239	$	957	$	4,004	$	318	$	10	$	27	$	785	$	8,340


December 31, 2021	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	26	$	—	$	20	$	—	$	—	$	—	$	—	$	46
Collectively evaluated for impairment	2,042		837		4,102		275		11		86		937		8,290
Total allocated	$	2,068	$	837	$	4,122	$	275	$	11	$	86	$	937	$	8,336

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


June 30, 2022	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	1,539	$	69	$	3,736	$	8	$	—	$	—	$	5,352
Collectively evaluated for impairment	302,596		81,860		361,694		44,506		2,207		19,738		812,601


Total	$	304,135	$	81,929	$	365,430	$	44,514	$	2,207	$	19,738	$	817,953


December 31, 2021	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Individually evaluated for impairment	$	1,750	$	198	$	4,819	$	9	$	—	$	—	$	6,776
Collectively evaluated for impairment	245,077		64,951		339,997		49,779		2,376		78,094		780,274


Total	$	246,827	$	65,149	$	344,816	$	49,788	$	2,376	$	78,094	$	787,050

Union Bankshares, Inc. Page 15

Risk and collateral ratings are assigned to loans and are subject to ongoing monitoring by lending and credit personnel with such ratings updated annually or more frequently if warranted. The following is an overview of the Company's loan rating system:

1-3 Rating - Pass

Risk-rating grades "1" through "3" comprise those loans ranging from those with lower than average credit risk, defined as borrowers with high liquidity, excellent financial condition, strong management, favorable industry trends or loans secured by highly liquid assets, through those with marginal credit risk, defined as borrowers that, while creditworthy, exhibit some characteristics requiring special attention by the account officer.

4-4.5 Rating - Satisfactory/Monitor

Borrowers exhibit potential credit weaknesses or downward trends warranting management's attention. While potentially weak, these borrowers are currently marginally acceptable; no loss of principal or interest is envisioned. When warranted, these credits may be monitored on the watch list.

5-7 Rating - Substandard

Borrowers exhibit well defined weaknesses that jeopardize the orderly liquidation of debt. The loan may be inadequately protected by the net worth and paying capacity of the obligor and/or the underlying collateral is inadequate.

The following tables summarize the loan ratings applied by management to the Company's loans by class as of the balance sheet dates:


June 30, 2022	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Pass	$	280,441	$	40,026	$	248,878	$	39,775	$	2,204	$	19,738	$	631,062
Satisfactory/Monitor	21,619		41,834		112,388		4,680		3		—		180,524
Substandard	2,075		69		4,164		59		—		—		6,367


Total	$	304,135	$	81,929	$	365,430	$	44,514	$	2,207	$	19,738	$	817,953


December 31, 2021	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)
Pass	$	227,684	$	39,135	$	191,902	$	45,407	$	2,371	$	78,094	$	584,593
Satisfactory/Monitor	16,820		25,816		147,645		4,301		5		—		194,587
Substandard	2,323		198		5,269		80		—		—		7,870


Total	$	246,827	$	65,149	$	344,816	$	49,788	$	2,376	$	78,094	$	787,050

Union Bankshares, Inc. Page 16

The following tables provide information with respect to impaired loans by class of loan as of and for the three and six months ended June 30, 2022 and June 30, 2021:


	As of June 30, 2022						For The Three Months Ended June 30, 2022				For the Six Months Ended June 30, 2022
	Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Residential real estate	$	194	$	204	$	23



With an allowance recorded	194		204		23

Residential real estate	1,345		1,832		—
Construction real estate	69		94		—
Commercial real estate	3,736		4,104		—
Commercial	8		8		—
With no allowance recorded	5,158		6,038		—

Residential real estate	1,539		2,036		23		$	1,633	$	30	$	1,672	$	60
Construction real estate	69		94		—		131		24		153		25
Commercial real estate	3,736		4,104		—		4,169		27		4,386		34
Commercial	8		8		—		8		—		8		—
Total	$	5,352	$	6,242	$	23	$	5,941	$	81	$	6,219	$	119

____________________

(1)Does not reflect government guaranties on impaired loans as of June 30, 2022 totaling $347 thousand.


	As of June 30, 2021						For The Three Months Ended June 30, 2021				For the Six Months Ended June 30, 2021
	Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)
Residential real estate	$	1,691	$	2,293	$	28	$	1,715	$	22	$	1,738	$	77
Construction real estate	208		229		—		209		1		209		2
Commercial real estate	5,266		5,528		30		5,271		25		4,321		38
Commercial	12		14		—		91		1		130		6
Total	$	7,177	$	8,064	$	58	$	7,286	$	49	$	6,398	$	123

____________________

(1)Does not reflect government guaranties on impaired loans as of June 30, 2021 totaling $354 thousand.

Union Bankshares, Inc. Page 17

The following table provides information with respect to impaired loans by class of loan as of December 31, 2021:


	December 31, 2021
	Recorded Investment (1)		Principal Balance (1)		Related Allowance
	(Dollars in thousands)
Residential real estate	$	199	$	209	$	26

Commercial real estate	1,591		1,764		20

With an allowance recorded	1,790		1,973		46

Residential real estate	1,551		2,043		—
Construction real estate	198		218		—
Commercial real estate	3,228		3,274		—
Commercial	9		9		—
With no allowance recorded	4,986		5,544		—

Residential real estate	1,750		2,252		26
Construction real estate	198		218		—
Commercial real estate	4,819		5,038		20
Commercial	9		9		—
Total	$	6,776	$	7,517	$	46

____________________

(1)Does not reflect government guaranties on impaired loans as of December 31, 2021 totaling $423 thousand.

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


	June 30, 2022			December 31, 2021
	Number of Loans	Principal Balance		Number of Loans	Principal Balance
	(Dollars in thousands)
Residential real estate	25	$	1,538	29	$	1,750
Construction real estate	2	70		2	81
Commercial real estate	2	272		3	375
Commercial	1	8		1	9
Total	30	$	1,888	35	$	2,215

The TDR loans above represent loan modifications in which a concession was provided to the borrower, including due date extensions, maturity date extensions, interest rate reductions or the forgiveness of accrued interest. Troubled loans that are restructured and meet established thresholds are classified as impaired and a specific reserve amount is allocated to the ALL on the basis of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows.

There was no new TDR activity for the three and six months ended June 30, 2022 or 2021.

There were no TDR loans modified within the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2022 or 2021. TDR loans are considered defaulted at 90 days past due.

In March 2020, the federal banking agencies issued guidance, confirmed by the FASB, that certain short-term modifications made to loans to borrowers affected by the COVID-19 pandemic and government shutdown orders would not be considered TDRs under specified circumstances. As of June 30, 2022, one loan with an outstanding loan balance of $137 thousand remained subject to modified terms and carried accrued interest of $1 thousand.

At June 30, 2022 and December 31, 2021, the Company was not committed to lend any additional funds to borrowers whose loans were nonperforming, impaired or restructured.

Union Bankshares, Inc. Page 18

Note 8. Stock Based Compensation

Under the Union Bankshares, Inc. 2014 Equity Incentive Plan, as amended in May 2022, a total of 150,000 shares of the Company’s common stock have been reserved for equity awards of incentive stock options, nonqualified stock options, restricted stock and RSUs to eligible officers and (except for awards of incentive stock options) nonemployee directors. Shares available for issuance of awards under the 2014 Equity Plan consist of unissued shares of the Company’s common stock and/or shares held in treasury. As of June 30, 2022, there were outstanding grants of RSUs under the 2014 Equity Plan as noted in the table below.

RSUs. Each outstanding RSU represents the right to receive one share of the Company's common stock upon satisfaction of applicable vesting conditions. The general terms of the awards are described in the Company's 2021 Annual Report. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights.

The following table summarizes the RSUs awarded to Company executives in 2020, 2021 and 2022, and the number of such RSUs remaining unvested as of June 30, 2022:


	Number of RSUs Granted	Weighted Average Grant Date Fair Value		Number of Unvested RSUs
2020 Award	8,918	$	36.26	1,067
2021 Award	17,685	26.73		7,631
2022 Award	15,705	31.99		15,705
Total	42,308			24,403

Unrecognized compensation expense related to the unvested RSUs as of June 30, 2022 and 2021 was $745 thousand and $396 thousand, respectively, and $317 thousand as of December 31, 2021.

On May 18, 2022, the Company's board of directors, as a component of total director compensation, granted an aggregate of 1,323 RSUs to the Company's non-employee directors. Each RSU represents the right to receive one share of the Company's common stock upon satisfaction of applicable vesting conditions. The RSUs will vest in May 2023, subject to continued board service through the vesting date, other than in the case of the director's death or disability. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights. Unrecognized director compensation expense related to the unvested RSUs as of June 30, 2022 was $35 thousand.

Note 9. Subordinated Notes

In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 (the "Notes") to certain qualified institutional buyers and accredited investors. The Notes initially bear interest, payable semi-annually, at the rate of 3.25% per annum, until September 1, 2026. From and including September 1, 2026, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month secured overnight financing rate (SOFR) plus 263 basis points. The Company may, at its option, beginning with the interest payment date of September 1, 2026 but not generally prior thereto, and on any scheduled interest payment date thereafter, redeem the Notes, in whole or in part. The Notes qualify as Tier 2 capital instruments for the Company under bank regulatory guidelines.

The Company used the proceeds to provide additional capital support to the Company's wholly-owned subsidiary, Union Bank, to support growth and for other general corporate purposes.

The unamortized issuance costs of the Notes were $312 thousand and $329 thousand at June 30, 2022 and December 31, 2021, respectively. For the three and six months ended June 30, 2022, $9 thousand and $17 thousand in issuance costs were recorded in interest expense. The Notes are presented net of unamortized issuance costs in the consolidated balance sheets.

Note 10. Other Comprehensive Loss

Accounting principles generally require recognized revenue, expenses, gains and losses be included in net income or loss. Certain changes in assets and liabilities, such as the after tax effect of unrealized gains and losses on investment securities AFS that are not OTTI, are not reflected in the consolidated statements of income. The cumulative effect of such items, net of tax effect, is reported as a separate component of the equity section of the consolidated balance sheets (Accumulated OCI). OCI, along with net income, comprises the Company's total comprehensive income or loss.

Union Bankshares, Inc. Page 19

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


	June 30, 2022		December 31, 2021
	(Dollars in thousands)
Net unrealized losses on investment securities AFS	$	(28,399)	$	(1,552)

The following tables disclose the tax effects allocated to each component of OCI for the three and six months ended June 30:


	Three Months Ended
	June 30, 2022						June 30, 2021
	Before-Tax Amount		Tax Benefit		Net-of-Tax Amount		Before-Tax Amount		Tax Expense		Net-of-Tax Amount
Investment securities AFS:	(Dollars in thousands)
Net unrealized holding (losses) gains arising during the period on investment securities AFS	$	(13,885)	$	2,916	$	(10,969)	$	1,165	$	(245)	$	920
Reclassification adjustment for net gains on investment securities AFS realized in net income	(5)		1		(4)		—		—		—






Total other comprehensive (loss) income	$	(13,890)	$	2,917	$	(10,973)	$	1,165	$	(245)	$	920



	Six Months Ended
	June 30, 2022						June 30, 2021
	Before-Tax Amount		Tax Benefit		Net-of-Tax Amount		Before-Tax Amount		Tax Benefit		Net-of-Tax Amount
Investment securities AFS:	(Dollars in thousands)
Net unrealized holding losses arising during the period on investment securities AFS	$	(33,952)	$	7,130	$	(26,822)	$	(2,069)	$	434	$	(1,635)
Reclassification adjustment for net gains on investment securities AFS realized in net income	(31)		6		(25)		—		—		—






Total other comprehensive loss	$	(33,983)	$	7,136	$	(26,847)	$	(2,069)	$	434	$	(1,635)

The following table discloses information concerning reclassification adjustments from OCI for the three and six months ended June 30, 2022 and 2021:



	Three Months Ended				Six Months Ended
Reclassification Adjustment Description	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021		Affected Line Item in Consolidated Statement of Income
	(Dollars in thousands)
Investment securities AFS:
Net gains on investment securities AFS	(5)		—		$	(31)	$	—	Net gains on sales of investment securities available-for-sale
Tax benefit	1		—		6		—		Provision for income taxes







Total reclassifications	$	(4)	$	—	$	(25)	$	—	Net income

Note 11. Fair Value Measurement

The Company utilizes FASB ASC Topic 820, Fair Value Measurement, as guidance for accounting for assets and liabilities carried at fair value. This standard defines fair value as the price that would be received, without adjustment for transaction costs, to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The guidance in FASB ASC Topic 820 establishes a three-level fair value hierarchy, which prioritizes the inputs used in measuring fair value. A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

Union Bankshares, Inc. Page 20

The three levels of the fair value hierarchy are:

•Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

•Level 2 - Quoted prices for similar assets or liabilities in active markets, quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;

•Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

The following is a description of the valuation methodologies used for the Company’s assets that are measured on a recurring basis at estimated fair value:

Investment securities AFS: Certain U.S. Treasury notes have been valued using unadjusted quoted prices from active markets and therefore have been classified as Level 1. However, the majority of the Company’s AFS securities have been valued utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

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

Assets measured at fair value on a recurring basis at June 30, 2022 and December 31, 2021, segregated by fair value hierarchy level, are summarized below:


	Fair Value Measurements
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
June 30, 2022:	(Dollars in thousands)
Debt securities AFS:
U.S. Government-sponsored enterprises	$	41,644	$	2,639	$	39,005	$	—
Agency mortgage-backed	176,819		—		176,819		—
State and political subdivisions	36,968		—		36,968		—
Corporate	6,234		—		6,234		—
Total debt securities	$	261,665	$	2,639	$	259,026	$	—


Other investments:
Mutual funds	$	1,162	$	1,162	$	—	$	—


December 31, 2021:
Debt securities AFS:
U.S. Government-sponsored enterprises	$	36,638	$	2,875	$	33,763	$	—
Agency mortgage-backed	178,250		—		178,250		—
State and political subdivisions	45,254		—		45,254		—
Corporate	7,677		—		7,677		—
Total debt securities	$	267,819	$	2,875	$	264,944	$	—


Other investments:
Mutual funds	$	1,132	$	1,132	$	—	$	—

There were no transfers in or out of Levels 1 and 2 during the three and six months ended June 30, 2022 or the year ended December 31, 2021, nor were there any Level 3 assets at any time during either period. Certain other assets and liabilities are measured at fair value on a nonrecurring basis, that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Assets and liabilities measured at fair value on a nonrecurring basis in periods after initial recognition, such as collateral-dependent

Union Bankshares, Inc. Page 21

impaired loans, MSRs and OREO, were not considered material at June 30, 2022 or December 31, 2021. The Company has not elected to apply the fair value method to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.

FASB ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of financial instruments. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Management’s estimates and assumptions are inherently subjective and involve uncertainties and matters of significant judgment. Changes in assumptions could dramatically affect the estimated fair values.

Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments may be excluded from disclosure requirements. Thus, the aggregate fair value amounts presented may not necessarily represent the actual underlying fair value of such instruments of the Company.

As of the balance sheet dates, the estimated fair values and related carrying amounts of the Company's significant financial instruments were as follows:


	June 30, 2022
	Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	25,296	$	25,296	$	25,296	$	—	$	—
Interest bearing deposits in banks	13,943		13,943		—		13,943		—
Investment securities	262,827		262,827		3,801		259,026		—
Loans held for sale	3,820		3,892		—		3,892		—
Loans, net
Residential real estate	302,340		279,692		—		—		279,692
Construction real estate	81,091		80,877		—		—		80,877
Commercial real estate	361,174		365,084		—		—		365,084
Commercial	44,261		43,821		—		—		43,821
Consumer	2,200		2,179		—		—		2,179
Municipal	19,740		20,757		—		—		20,757
Accrued interest receivable	2,986		2,986		—		936		2,050
Nonmarketable equity securities	888		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	337,140	$	337,140	$	337,140	$	—	$	—
Interest bearing	662,778		662,778		662,778		—		—
Time	103,135		101,022		—		101,022		—



Subordinated notes	16,188		12,997		—		12,997		—
Accrued interest payable	210		210		—		210		—

Union Bankshares, Inc. Page 22


	December 31, 2021
	Fair Value Measurements
	Carrying Amount		Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	65,922	$	65,922	$	65,922	$	—	$	—
Interest bearing deposits in banks	13,196		13,196		—		13,196		—
Investment securities	268,951		268,951		4,007		264,944		—
Loans held for sale	13,829		14,088		—		14,088		—
Loans, net
Residential real estate	244,980		246,573		—		—		246,573
Construction real estate	64,370		64,539		—		—		64,539
Commercial real estate	340,066		341,451		—		—		341,451
Commercial	49,558		48,682		—		—		48,682
Consumer	2,367		2,350		—		—		2,350
Municipal	78,078		78,748		—		—		78,748
Accrued interest receivable	3,248		3,248		—		734		2,514
Nonmarketable equity securities	1,164		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	264,888	$	264,888	$	264,888	$	—	$	—
Interest bearing	723,479		723,479		723,479		—		—
Time	106,715		106,588		—		106,588		—



Subordinated notes	16,171		16,179		—		16,179		—
Accrued interest payable	225		225		—		225		—

The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions. Accrued interest receivable and nonmarketable equity securities are included in Other assets in the consolidated balance sheets.

Note 12. Subsequent Events

Subsequent events represent events or transactions occurring after the balance sheet date but before the financial statements are issued. Financial statements are considered “issued” when they are widely distributed to shareholders and others for general use and reliance in a form and format that complies with GAAP. Events occurring subsequent to June 30, 2022 have been evaluated as to their potential impact to the consolidated financial statements.

On July 20, 2022, the Company declared a regular quarterly cash dividend of $0.35 per share, payable August 4, 2022, to stockholders of record on July 30, 2022.

Union Bankshares, Inc. Page 23

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

GENERAL

The following discussion and analysis focuses on those factors that, in management's view, had a material effect on the financial position of the Company as of June 30, 2022 and December 31, 2021, and its results of operations for the three and six months ended June 30, 2022 and 2021. This discussion is being presented to provide a narrative explanation of the consolidated financial statements and should be read in conjunction with the consolidated financial statements and related notes and with other financial data appearing elsewhere in this filing and with the Company's 2021 Annual Report. In the opinion of the Company's management, the interim unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments and disclosures necessary to fairly present the Company's consolidated financial position and results of operations for the interim periods presented. Management is not aware of the occurrence of any events after June 30, 2022 which would materially affect the information presented.

Please refer to Note 1 in the Company's unaudited interim consolidated financial statements at Part I, Item 1 of this Report for definitions of acronyms, abbreviations and capitalized terms used throughout the following discussion and analysis.

CAUTIONARY ADVICE ABOUT FORWARD LOOKING STATEMENTS

The Company, "we," "us," "our," may from time to time make written or oral statements that are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include financial projections, statements of plans and objectives for future operations, estimates of future economic performance or conditions and assumptions relating thereto. The Company may include forward-looking statements in its filings with the SEC, in its reports to stockholders, including this quarterly report, in press releases, other written materials, and in statements made by senior management to analysts, rating agencies, institutional investors, representatives of the media and others.

Forward-looking statements are based on the current assumptions underlying the statements and other information with respect to the beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and the financial condition, results of operations, future performance and business are only expectations of future results. Although the Company believes that the expectations reflected in the Company’s forward-looking statements are reasonable, the Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, changes in interest rates; competitive pressures from other financial institutions; general economic conditions on a national basis or in the local markets in which the Company operates; changes in consumer behavior due to changing political, business and economic conditions, including concerns about inflation, or legislative or regulatory initiatives; changes in the value of securities and other assets in the Company’s investment portfolio; increases in loan and lease default and charge-off rates; the adequacy of allowances for loan and lease losses; decreases in deposit levels that necessitate increases in borrowing to fund loans and investments; operational risks including, but not limited to, cybersecurity incidents, fraud, natural disasters and future pandemics; changes in regulation, war, terrorism, civil unrest; due to changes in economic assumptions and adverse economic developments; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; and changes in assumptions used in making such forward-looking statements; and the other risks and uncertainties detailed in the Company’s 2021 Annual Report.

In addition, statements about the continuing and potential future effects of the COVID-19 pandemic, including emergence of virus variants, on the Company's financial position and results of operations reflect inherent uncertainties and may constitute forward-looking statements. Such statements may include, but are not limited to, statements concerning:

•the continuing ability of our employees to work remotely;

•our ability to staff our branches and keep our branches open;

•the continuing strength of our capital and liquidity positions;

•our continued ability to access sources of contingent liquidity;

•the continuing strength of the asset quality in our lending portfolios; and

•the effectiveness of relief measures and programs for customers affected by COVID-19.

When evaluating forward-looking statements to make decisions about the Company and our stock, investors and others are cautioned to consider these and other risks and uncertainties, and are reminded not to place undue reliance on such statements. Investors should not consider the foregoing list of factors to be a complete list of risks or uncertainties. Forward-looking statements speak only as of the date they are made and the Company undertakes no obligation to update them to reflect new or changed information or events, except as may be required by federal securities laws.

Union Bankshares, Inc. Page 24

Non-GAAP Financial Measures

Under SEC Regulation G, public companies making disclosures containing financial measures that are not in accordance with GAAP must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure, as well as a statement of the company’s reasons for utilizing the non-GAAP financial measure. The SEC has exempted from the definition of non-GAAP financial measures certain commonly used financial measures that are not based on GAAP. However, two non-GAAP financial measures commonly used by financial institutions, namely tax-equivalent net interest income and tax-equivalent net interest margin (as presented in the tables in the section labeled Yields Earned and Rates Paid), have not been specifically exempted by the SEC, and may therefore constitute non-GAAP financial measures under Regulation G. We are unable to state with certainty whether the SEC would regard those measures as subject to Regulation G. Management believes that these non-GAAP financial measures are useful in evaluating the Company’s financial performance and facilitate comparisons with the performance of other financial institutions. However, that information should be considered supplemental in nature and not as a substitute for related financial information prepared in accordance with GAAP.

CRITICAL ACCOUNTING POLICIES

The Company has established various accounting policies which govern the application of GAAP in the preparation of the Company's consolidated financial statements. Certain accounting policies involve significant judgments and assumptions by management which have a material impact on the reported amount of assets, liabilities, capital, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company's critical accounting policies as the ones that are most important to the portrayal of the company's financial condition and results of operations, and which require management to make its most difficult and subjective judgments, often as a result of the need to make estimates on matters that are inherently uncertain. Based on this definition, management has identified the accounting policies and judgments most critical to the Company. They include establishing the amount of ALL, evaluating our investment securities for OTTI, and valuing our intangible assets. The judgments and assumptions used by management are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions made by management, actual results could differ from estimates and have a material impact on the carrying value of assets, liabilities, or capital, and/or the results of operations of the Company.

Please refer to the Company's 2021 Annual Report for a more in-depth discussion of the Company's critical accounting policies. There have been no changes to the Company's critical accounting policies since the filing of that report.

OVERVIEW

Several global conditions have created uncertainty about the future environment that will continue to evolve and impact our business and the businesses of our customers in future periods. U.S. economic activity slowed during the first half of 2022 with U.S. Gross Domestic Product ("GDP") contracting at an estimated annual rate of 0.9 percent in the second quarter of 2022. Repercussions from the Russia-Ukraine war along with the economic impacts that continue to result from the COVID-19 pandemic have disrupted supply chains and increased energy prices. There has also been a significant rise in inflation, which reached a 40-year high in June. The personal consumption expenditures price index increased to an estimated annual rate of 6.8 percent in the second quarter of 2022, well above the FRB's target inflation rate. The FRB increased short-term interest rates in 2022 by a total of 225 bps through July and has announced that it will likely increase short-term interest rates further during the remaining months of 2022 in order to fight inflation.

Concerns over interest rate levels, energy prices, domestic and global policy issues, trade policy in the U.S. and geopolitical events, as well as the implications of those events on the markets in general, further add to the global uncertainty. There is also a risk that interest rate increases to fight inflation could lead to a prolonged recession. Interest rate levels and energy prices, in combination with global economic conditions, fiscal and monetary policy and the level of regulatory and government scrutiny of financial institutions will continue to impact our results in 2022 and beyond.

Consolidated net income decreased $60 thousand, or 2.0%, to $2.9 million for the second quarter of 2022 compared to $3.0 million for the second quarter of 2021 due to the combined effects of a decrease in noninterest income of $974 thousand, partially offset by an increase in net interest income of $752 thousand, and decreases in the provision for loan losses of $75 thousand and noninterest expenses of $94 thousand.

Consolidated net income decreased $454 thousand, or 7.7%, to $5.4 million for the the six months ended June 30, 2022 compared to $5.9 million for the six months ended June 30, 2021 due to the combined effects of an increase in net interest income of $1.3 million and decreases in the provision for loan losses of $225 thousand and income tax expense of $112 thousand, which were more than offset by a decrease in noninterest income of $1.5 million and an increase in noninterest expenses of $567 thousand.

Union Bankshares, Inc. Page 25

Net interest income increased $1.3 million, or 7.6%, to $18.6 million for the six months ended June 30, 2022, compared to $17.3 million for the six months ended June 30, 2021. Interest income increased $732 thousand primarily due to higher volumes of earning assets despite lower yields and $955 thousand less in PPP fee income between periods. Interest expense was $1.5 million for the six months ended June 30, 2022 compared to $2.1 million for the six months ended June 30, 2021, reflecting lower rates paid on deposits despite an increase in average interest bearing liabilities between periods of $52.5 million. Total interest expense for the six months ended June 30, 2022 also includes $284 thousand related to the issuance of subordinated notes that were issued in August of 2021.

The was no provision for loan losses for the six months ended June 30, 2022 compared to a provision of $225 thousand for the same period in 2021. There were no changes to the methodology for calculating the allowance for loan losses during either of the six month comparison periods.

Total noninterest income amounted to $4.2 million for the six months ended June 30, 2022 compared to $5.8 million for the six months ended June 30, 2021, a decrease of $1.5 million, or 26.7%. The decrease is primarily due to a decrease in sales of qualifying residential loans. There were $34.4 million in residential loan sales with net gains of $300 thousand for the six months ended June 30, 2022, compared to residential loan sales of $85.2 million with net gains of $2 million for the same period in 2021. The decrease in loan sales for the comparison periods was due to the combination of management's intent of increasing the in house residential mortgage loan portfolio balances and the rapid increase in interest rates reducing the premium able to be obtained on sales.

Total noninterest expenses were $16.4 million for the six months ended June 30, 2022, compared to $15.8 million for the same period in 2021. Increases of $294 thousand in salaries and wages, $228 thousand in employee benefits, $180 thousand in equipment expenses, partially offset by decreases of $15 thousand in occupancy expenses and $120 thousand in other expenses, occurred between the six month comparison periods of 2022 and 2021.

At June 30, 2022, the Company had total consolidated assets of $1.19 billion, including gross loans and loans held for sale (total loans) of $821.8 million, deposits of $1.10 billion, subordinated debt of $16.2 million and stockholders' equity of $59.9 million.

The Company's total capital decreased from $84.3 million at December 31, 2021 to $59.9 million at June 30, 2022. This decrease primarily reflects an increase of $26.8 million in accumulated other comprehensive loss and regular cash dividends declared of $3.1 million offset by net income of $5.4 million for the first six months of 2022. (See Capital Resources on page 42.) These changes also resulted in a decrease in the Company's book value per share to $13.34 from $18.77 as of December 31, 2021.

Return on average assets is a financial metric often utilized as an indicator of a financial institution's performance. The Company's return on average assets decreased 12 bps and 17 bps for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 primarily due to an increase in average assets of $114.2 million and $116.8 million for the three and six months ended June 30, 2022, respectively.

Union Bankshares, Inc. Page 26

The following unaudited per share information and key ratios depict several measurements of performance or financial condition at or for the three and six months ended June 30, 2022 and 2021, respectively:


	Three Months Ended or At June 30,						Six Months Ended or At June 30,
	2022			2021			2022			2021
Return on average assets (1)	0.94		%	1.06		%	0.88		%	1.05		%
Return on average equity (1)	18.30		%	14.76		%	15.01		%	14.51		%
Net interest margin (1)(2)	3.28		%	3.40		%	3.23		%	3.36		%
Efficiency ratio (3)	69.48		%	68.89		%	71.21		%	67.94		%
Net interest spread (4)	3.18		%	3.28		%	3.13		%	3.24		%
Loan to deposit ratio	74.50		%	80.98		%	74.50		%	80.98		%
Net loan charge-offs to average loans not held for sale (1)	—		%	—		%	—		%	—		%
Allowance for loan losses to loans not held for sale	1.02		%	1.15		%	1.02		%	1.15		%
Nonperforming assets to total assets (5)	0.13		%	0.56		%	0.13		%	0.56		%
Equity to assets	5.03		%	7.73		%	5.03		%	7.73		%
Total capital to risk weighted assets	14.33		%	13.47		%	14.33		%	13.47		%
Book value per share	$	13.34		$	18.37		$	13.34		$	18.37
Basic earnings per share	$	0.65		$	0.67		$	1.20		$	1.31
Diluted earnings per share	$	0.65		$	0.66		$	1.20		$	1.30
Dividends paid per share	$	0.35		$	0.33		$	0.70		$	0.66
Dividend payout ratio (6)	53.85		%	49.25		%	58.33		%	50.38		%

__________________

(1)Annualized.

(2)The ratio of tax equivalent net interest income to average earning assets. See pages 29 and 30 for more information.

(3)The ratio of noninterest expense to tax equivalent net interest income and noninterest income, excluding securities gains (losses).

(4)The difference between the average yield on earning assets and the average rate paid on interest bearing liabilities. See pages 29 and 30 for more information.

(5)Nonperforming assets are loans or investment securities that are in nonaccrual or 90 or more days past due as well as OREO or OAO.

(6)Cash dividends declared and paid per share divided by consolidated net income per share.

RESULTS OF OPERATIONS

Net Interest Income. The largest component of the Company’s operating income is net interest income, which is the difference between interest and dividend income received from earning assets and interest expense paid on interest bearing liabilities. Net interest income is affected by various factors including, but not limited to changes in interest rates, loan and deposit pricing strategies, the volume and mix of interest earning assets and interest bearing liabilities, and the level of nonperforming assets. Net interest margin is calculated as the net interest income on a fully tax equivalent basis as a percentage of average earning assets.

As mentioned above, the FRB has increased short term interest rates 150 bps during the first half of 2022 and another 75 bps in July with additional increases likely for the the remaining months of 2022. Also, the 10-year treasury rate increased from 1.512% at the beginning of the year to 2.972% at the end of June, to 2.889% at the end of July. These increases in interest rates have not yet significantly impacted asset yields or rates paid on interest bearing liabilities. However, competitive pressures and further increases in short term rates by the FRB may result in increases in interest rates paid on customer deposit accounts which may impact future earnings of the Company.

The average yield on average earning assets was 3.53% for the three months ended June 30, 2022 compared to 3.77% for the three months ended June 30, 2021, a decrease of 24 bps despite an increase in average earning assets of $129.3 million. Although interest rates have been increasing during 2022, the prolonged low interest rate environment which prevailed throughout the first quarter of 2022 continued to put downward pressure on asset yields for the three months ended June 30, 2022. Interest income on investment securities increased $649 thousand between the three month comparison periods due to an increase in the average balances of $146.0 million, and an increase of 4 bps in the average yield. The average balance of PPP loans was $4.9 million for the three months ended June 30, 2022 with an average yield of 12.63%, which takes into account the

Union Bankshares, Inc. Page 27

1.0% interest charged on PPP loans and related fee income recognized during the three months ended June 30, 2022. Interest income on loans, excluding PPP loans, increased $508 thousand between the three month comparison periods due to an increase in the average volume of loans outstanding of $54.9 million, partially offset by a decrease of 6 bps in the average yield.

Interest expense for the second quarter of 2022 decreased $246 thousand compared to the second quarter of 2021 due to lower rates paid on customer deposit accounts, despite increases in average deposit balances of $37 million, partially offset by the addition of $142 thousand of interest expense on subordinated notes with an average balance of $16.2 million. The increase in average customer deposit balances is due to an increase in the money supply from proceeds of PPP loans, government stimulus payments, and other economic recovery payments. The average rate paid on interest bearing liabilities decreased 14 bps to 0.35% for the second quarter of 2022 compared to 0.49% for the second quarter of 2021. The average rates paid on interest bearing checking accounts and savings and money market accounts decreased 3 bps and 18 bps, respectively, between the second quarter comparison periods. The Company decreased interest rates paid on deposit accounts early in 2021 and again in June of 2021 and implemented a tiered rate structure in these accounts which remained in place as of June 30, 2022. The decreases in these interest rates resulted in a decrease in interest expense of $183 thousand on savings and money market accounts between the three month comparison periods. Interest expense on time deposits decreased $148 thousand due to decreases in the average volume of $16.6 million and 44 bps in the average rate paid during the second quarter of 2022 compared to the same period in 2021. Management believes that the decrease in the average volume is primarily due to customers transferring proceeds from matured CDs into non-maturity deposits in hopes of obtaining higher yields in future periods as well as some funds leaving Union to seek a higher return. Higher customer deposit balances reduced reliance on wholesale funding, as evidenced by decreases between the three month comparison periods of $7.2 million in the average outstanding balance of borrowed funds and $55 thousand in related interest expense. The issuance of subordinated debt during the third quarter of 2021 resulted in an average balance of $16.2 million for the second quarter of 2022 and an average rate of 3.52% and interest expense of $142 thousand.

The net interest spread decreased 10 bps to 3.18% for the second quarter of 2022, from 3.28% for the same period last year, reflecting the net effect of the 14 bps decrease in the average rate paid on interest bearing liabilities and the 24 bps decrease in the average yield earned on interest earning assets between periods. The net interest margin decreased 12 bps during the second quarter of 2022 compared to the same period last year as a result of the changes discussed above.

Net interest income was $18.6 million, on a fully tax equivalent basis for the six months ended June 30, 2022 compared to $17.3 million for the six months ended June 30, 2021, an increase of $1.3 million, or 7.6%. The average volume of earning assets increased $124.5 million and the average yield on earning assets decreased 28 bps to 3.49% compared to 3.77% for the comparison period. Interest income on investment securities increased $1.3 million between the six month comparison periods due to an increase in the average balances of $152.9 million, despite a decrease of 3 bps in the average yield. Average loans, excluding PPP loans, increased $55.8 million, or 7.36%, to $813.4 million for the six months ended June 30, 2022. The increase in the average loan volume resulted in $641 thousand increase in interest income on loans between periods, despite a decrease in the average yield. As discussed above, the current interest rate environment and competition for quality loans put downward pressure on loan yields. Management expects loan yields to improve over the next quarter as new loans are being booked at higher rates. The average balance of PPP loans for the six months ended June 30, 2022 was $7.1 million with an average yield of 13.16%, compared to $70.9 million with an average yield of 4.96% for the six months ended June 30, 2021. As mentioned above, the average yield on PPP loans includes the interest earned at 1.0% on the loan as well as origination fee income recognized during the respective periods.

The average cost of funds, which is tied primarily to customer deposit accounts, decreased 17 bps to 0.36% for the six months ended June 30, 2022 compared to 0.53% for the six months ended June 30, 2021. Interest expense decreased $584 thousand, to $1.5 million for the six months ended June 30, 2022 compared to $2.1 million for the six months ended June 30, 2021. The decrease in interest expense was primarily due to lower rates paid on interest bearing liabilities despite an increase in average balances of $52.5 million between periods. Management expects the average cost of funds to increase over the next quarter as customers may expect higher rates on their deposit accounts prompted by the increase in interest rates executed by the Fed. The issuance of subordinated debt during the third quarter of 2021 resulted in an average balance of $16.2 million for the six months ended June 30, 2022 and an average rate of 3.54% and interest expense of $284 thousand.

The net interest spread decreased 11 bps to 3.13% for the six months ended June 30, 2022, from 3.24% for the same period last year, reflecting the net effect of the 17 bps decrease in the average rate paid on interest bearing liabilities and the 28 bps decrease in the average yield earned on interest earning assets between periods. The net interest margin decreased 13 bps for the six months ended June 30, 2022 compared to the same period last year as a result of the changes discussed above.

Union Bankshares, Inc. Page 28

The following tables show for the periods indicated the total amount of tax equivalent interest income recorded from average interest earning assets, the related average tax equivalent yields, the tax equivalent interest expense associated with average interest bearing liabilities, the related tax equivalent average rates paid, and the resulting tax equivalent net interest spread and margin.



	Three Months Ended June 30,
	2022						2021
	Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate		Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Average Assets:
Federal funds sold and overnight deposits	$	51,835	$	94	0.72	%	$	59,892	$	14	0.09	%
Interest bearing deposits in banks	13,705		37		1.07	%	13,594		34		1.01	%
Investment securities (2), (3)	292,483		1,259		1.79	%	146,463		610		1.75	%
PPP loans, net (4)	4,884		154		12.63	%	68,223		888		5.22	%
Loans, net (2), (5)	830,876		8,856		4.30	%	776,010		8,348		4.36	%
Nonmarketable equity securities	888		4		2.00	%	1,156		4		1.48	%
Total interest earning assets (2)	1,194,671		10,404		3.53	%	1,065,338		9,898		3.77	%
Cash and due from banks	4,321						4,676
Premises and equipment	21,200						21,825
Other assets	22,763						36,915
Total assets	$	1,242,955					$	1,128,754
Average Liabilities and Stockholders' Equity:
Interest bearing checking accounts	$	282,679	154		0.22	%	$	248,878	156		0.25	%
Savings/money market accounts	442,304		326		0.30	%	422,592		509		0.48	%
Time deposits	103,386		111		0.43	%	119,941		259		0.87	%
Borrowed funds and other liabilities	6		—		0.47	%	7,166		55		3.02	%
Subordinated notes	16,184		142		3.52	%	—		—		—	%
Total interest bearing liabilities	844,559		733		0.35	%	798,577		979		0.49	%
Noninterest bearing deposits	320,828						239,971
Other liabilities	13,491						9,124
Total liabilities	1,178,878						1,047,672
Stockholders' equity	64,077						81,082
Total liabilities and stockholders’ equity	$	1,242,955					$	1,128,754
Net interest income			$	9,671					$	8,919
Net interest spread (2)					3.18	%					3.28	%
Net interest margin (2)					3.28	%					3.40	%

Union Bankshares, Inc. Page 29



	Six Months Ended June 30,
	2022						2021
	Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate		Average Balance (1)		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Average Assets:
Federal funds sold and overnight deposits	$	51,493	$	113	0.44	%	$	71,310	$	33	0.09	%
Interest bearing deposits in banks	13,532		70		1.04	%	13,779		71		1.04	%
Investment securities (2), (3)	289,764		2,453		1.76	%	136,901		1,165		1.79	%
PPP loans, net (4)	7,120		465		13.16	%	70,906		1,743		4.96	%
Loans, net (2), (5)	813,382		17,019		4.25	%	757,612		16,378		4.41	%
Nonmarketable equity securities	891		10		2.24	%	1,153		8		1.47	%
Total interest earning assets (2)	1,176,182		20,130		3.49	%	1,051,661		19,398		3.77	%
Cash and due from banks	4,506						4,884
Premises and equipment	21,358						20,916
Other assets	29,329						37,163
Total assets	$	1,231,375					$	1,114,624
Average Liabilities and Stockholders' Equity:
Interest bearing checking accounts	$	281,256	302		0.22	%	$	241,649	303		0.25	%
Savings/money market accounts	443,664		680		0.31	%	417,956		1,058		0.51	%
Time deposits	104,869		230		0.44	%	126,741		610		0.97	%
Borrowed funds and other liabilities	3		—		0.47	%	7,165		109		3.02	%
Subordinated debentures and notes	16,179		284		3.54	%	—		—		—	%
Total interest bearing liabilities	845,971		1,496		0.36	%	793,511		2,080		0.53	%
Noninterest bearing deposits	301,123						230,651
Other liabilities	12,162						9,599
Total liabilities	1,159,256						1,033,761
Stockholders' equity	72,119						80,863
Total liabilities and stockholders’ equity	$	1,231,375					$	1,114,624
Net interest income			$	18,634					$	17,318
Net interest spread (2)					3.13	%					3.24	%
Net interest margin (2)					3.23	%					3.36	%

__________________

(1)Average balances are calculated based on a daily averaging method.

(2)Average yields reported on a tax equivalent basis using a marginal federal corporate income tax rate of 21%.

(3)Average balances of investment securities are calculated on the amortized cost basis and include nonaccrual securities, if applicable.

(4)Includes unamortized costs and unamortized premiums.

(5)Includes loans held for sale as well as nonaccrual loans, unamortized costs and unamortized premiums and is net of the allowance for loan losses.

Union Bankshares, Inc. Page 30

Tax exempt interest income amounted to $493 thousand and $597 thousand for the three months ended June 30, 2022 and 2021, respectively, and $995 thousand and $1.2 million for the six months ended June 30, 2022 and 2021, respectively. The following table presents the effect of tax exempt income on the calculation of net interest income, using a marginal federal corporate income tax rate of 21% for the 2022 and 2021 three and six month comparison periods:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
	(Dollars in thousands)
Net interest income, as presented	$	9,671	$	8,919	$	18,634	$	17,318
Effect of tax-exempt interest
Investment securities	49		31		98		61
Loans	60		89		122		180
Net interest income, tax equivalent	$	9,780	$	9,039	$	18,854	$	17,559

Rate/Volume Analysis. The following table describes the extent to which changes in average interest rates earned and paid (on a fully tax-equivalent basis) and changes in volume of average interest earning assets and interest bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to:

•changes in volume (change in volume multiplied by prior rate);

•changes in rate (change in rate multiplied by prior volume); and

•total change in rate and volume.

Changes attributable to both rate and volume have been allocated proportionately to the change due to volume and the change due to rate.


	Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Increase/(Decrease) Due to Change In						Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 Increase/(Decrease) Due to Change In
	Volume		Rate		Net		Volume		Rate		Net
	(Dollars in thousands)
Interest earning assets:
Federal funds sold and overnight deposits	$	(3)	$	83	$	80	$	(11)	$	91	$	80
Interest bearing deposits in banks	1		2		3		(1)		—		(1)
Investment securities	635		14		649		1,309		(21)		1,288
PPP loans, net	(1,287)		553		(734)		(2,478)		1,200		(1,278)
Loans (excluding PPP loans), net	604		(96)		508		1,218		(577)		641
Nonmarketable equity securities	(1)		1		—		(2)		4		2
Total interest earning assets	$	(51)	$	557	$	506	$	35	$	697	$	732
Interest bearing liabilities:
Interest bearing checking accounts	$	19	$	(21)	$	(2)	$	45	$	(46)	$	(1)
Savings/money market accounts	23		(206)		(183)		61		(439)		(378)
Time deposits	(32)		(116)		(148)		(91)		(289)		(380)
Borrowed funds	(29)		(26)		(55)		(59)		(50)		(109)
Subordinated notes	142		—		142		284		—		284
Total interest bearing liabilities	$	123	$	(369)	$	(246)	$	240	$	(824)	$	(584)
Net change in net interest income	$	(174)	$	926	$	752	$	(205)	$	1,521	$	1,316

Provision for Loan Losses. There was no provision for loan losses recorded for the three and six months ended June 30, 2022. A provision of $75 thousand and $225 thousand was recorded for the three and six months ended June 30, 2021, respectively. No provision for the three and six months ended June 30, 2022 was deemed appropriate by management based on the size and mix of the loan portfolio, the level of nonperforming loans, the results of the qualitative factor review and prevailing economic conditions. For further details, see FINANCIAL CONDITION- Allowance for Loan Losses and Asset Quality below.

Union Bankshares, Inc. Page 31

Noninterest Income. The following table sets forth the components of noninterest income and changes between the three and six month comparison periods of 2022 and 2021:


	For The Three Months Ended June 30,							For the Six Months Ended June 30,
	2022		2021		$ Variance		% Variance	2022		2021		$ Variance		% Variance
	(Dollars in thousands)
Trust income	$	217	$	198	$	19	9.6	$	426	$	383	$	43	11.2
Service fees	1,738		1,581		157		9.9	3,373		3,104		269		8.7
Net gains on sales of loans held for sale	286		1,151		(865)		(75.2)	300		2,045		(1,745)		(85.3)
Income from Company-owned life insurance	106		70		36		51.4	289		138		151		109.4
Expense from MSRs, net	(114)		79		(193)		(244.3)	(289)		(46)		(243)		(201.7)
Other income	69		45		24		53.3	150		77		73		94.8

Net (losses) gains on other investments	(142)		15		(157)		(1,046.7)	(60)		59		(119)		(201.7)
Net gains on sales of investment securities AFS	5		—		5		—	31		—		31		—
Total noninterest income	$	2,165	$	3,139	$	(974)	(31.0)	$	4,220	$	5,760	$	(1,540)	(26.7)

The significant changes in noninterest income for the three and six months ended June 30, 2022 compared to the same periods of 2021 are described below:

•Trust income. Trust income increased as dollars in managed fiduciary accounts grew between June 30, 2022 and 2021.

•Service fees. Service fees increased $157 thousand for the three months ended June 30, 2022, compared to the same period in 2021 primarily due to increases of $88 thousand in overdraft fee income, $48 thousand in loan servicing fee income, and $12 thousand in ATM network fees. Service fees increased $269 thousand for the six months ended June 30, 2022 primarily due to increases of $140 thousand in overdraft fee income, $66 thousand in loan servicing fee income, $42 thousand in merchant program fee income, and $35 thousand in ATM network fees.

•Net gains on sales of loans held for sale. The Company mitigates long-term interest rate risk by selling qualifying residential loans to the secondary market. In an effort to utilize some excess liquidity along with the rapid increase in the 10-year treasury rate in 2022 and the related impact on the pricing of loans held for sale, management reduced the volume of loan sales in 2022 compared to 2021. Residential mortgage loans totaling $18.0 million and $34.4 million were sold during the three and six months ended June 30, 2022, respectively, compared to sales of $55.5 million and $85.2 million during the same periods in 2021, respectively. The decrease of $865 thousand and $1.7 million in net gains on sales of loans held for sale for the three and six months ended June 30, 2022, respectively, reflects the lower sales volumes and lower premiums obtained on those sales.

•Income from Company-owned life insurance. The Company purchased $5.8 million of Company owned life insurance covering select officers of Union during the fourth quarter of 2021. In addition, $77 thousand was received in proceeds from a death benefit, resulting in increased income for the six months ended June 30, 2022, compared to the same period in 2021.

•Expense from MSRs, net. Income from MSRs is derived from servicing rights acquired through the sale of loans where servicing is retained. Capitalized servicing rights are initially recorded at fair value and amortized in proportion to, and over the period of, the future estimate of servicing the underlying mortgages. The amortization of MSRs exceeded new capitalized MSRs for the three and six months ended June 30, 2022 which resulted in expense of $114 thousand and $289 thousand, respectively.

•Other income. The increase in Other income during the three and six month comparison periods primarily reflects prepayment penalties received from the early payoff of loans. The Company received $42 thousand and $86 thousand in prepayment penalties for the three and six months ended June 30, 2022 compared to $19 thousand for the three and six months ended June 30, 2021.

•Net (losses) gains on other investments. Participants in the 2020 Amended and Restated Nonqualified Excess Plan elect to defer receipt of current compensation from the Company or its subsidiary and select designated reference investments consisting of investment funds. The performance of those funds, over which the Company has no control, resulted in net losses of $142 thousand and $60 thousand for the three and six months ended June 30, 2022, compared to net gains of $15 thousand and $59 thousand for the same periods in 2021, respectively.

Union Bankshares, Inc. Page 32

Noninterest Expense. The following table sets forth the components of noninterest expense and changes between the three and six month comparison periods ended June 30, 2022 and 2021:


	For The Three Months Ended June 30,							For the Six Months Ended June 30,
	2022		2021		$ Variance		% Variance	2022		2021		$ Variance		% Variance
	(Dollars in thousands)
Salaries and wages	$	3,520	$	3,553	$	(33)	(0.9)	$	6,930	$	6,636	$	294	4.4
Employee benefits	1,295		1,203		92		7.6	2,600		2,372		228		9.6
Occupancy expense, net	462		527		(65)		(12.3)	989		1,004		(15)		(1.5)
Equipment expense	934		872		62		7.1	1,850		1,670		180		10.8
Professional fees	217		322		(105)		(32.6)	433		518		(85)		(16.4)
FDIC insurance assessment	146		200		(54)		(27.0)	273		356		(83)		(23.3)
Other loan related expenses	97		124		(27)		(21.8)	170		208		(38)		(18.3)
Vermont franchise tax	268		240		28		11.7	529		463		66		14.3
Donations	63		48		15		31.3	102		72		30		41.7


Travel and entertainment	30		19		11		57.9	63		36		27		75.0
Amortization of core deposit intangible	—		28		(28)		(100.0)	—		71		(71)		(100.0)


Other expenses	1,263		1,253		10		0.8	2,470		2,436		34		1.4
Total noninterest expense	$	8,295	$	8,389	$	(94)	(1.1)	$	16,409	$	15,842	$	567	3.6

The significant changes in noninterest expense for the three and six months ended June 30, 2022 compared to the same period in 2021 are described below:

•Salaries and wages. Salaries and wages decreased $33 thousand for the three months ended June 30, 2022 compared to the same period in 2021 primarily due to employee turnover and the increased number of open positions that resulted during the second quarter of 2022, a reduction in commissions earned by mortgage loan originators and the deferral of loan origination costs, partially offset by annual salary adjustments. The increase of $294 thousand for the six months ended June 30, 2022 compared to the same period in 2021 was primarily due to annual increases in employee salaries and the deferral of loan origination costs, partially offset by a reduction in commissions earned by mortgage loan originators. Salaries and wages are reduced by deferred loan origination costs at the time of origination. Deferred loan origination costs reduced salaries and wages by $49 thousand and $83 thousand for the three and six months ended June 30, 2022, respectively, compared to $22 thousand and $207 thousand for the same periods in 2021, respectively. The variance in deferred loan origination costs for 2022 compared to 2021 is primarily attributable to the timing of origination and forgiveness of PPP loans during 2021 and 2022.

•Employee benefits. Employee benefit expense increased $92 thousand and $228 thousand for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021 primarily due to increases of $252 thousand and $289 thousand in the Company's medical and dental plans for the three and six month comparison periods, respectively, partially offset by decreases of $158 thousand and $93 thousand in employee benefits related to the Company's deferred compensation plans for the three and six month comparison periods, respectively.

•Occupancy expense, net. The decrease in occupancy expense primarily relates to a $108 thousand loss recognized due to the disposition of a branch location during the second quarter of 2021. This decrease was partially offset by increases in depreciation, utilities, and repair and maintenance expenses during the three and six month comparison periods due in part to the opening of a new full service branch location in the fourth quarter of 2021.

•Equipment expense. Equipment expenses increased between periods primarily due to increases of $69 thousand and $183 thousand in software license and maintenance costs and computer operations expense for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

•Professional fees. During the first six months of 2021, additional consultants were engaged to assist with employment searches and other advisory services that were not utilized in 2022, resulting in decreases of $105 thousand and $85 thousand for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

•FDIC insurance assessment. The FDIC assessment rate decreased resulting in a decrease in expense for the three and six months ended June 30, 2022 compared to the same periods in 2021.

Union Bankshares, Inc. Page 33

•Other loan related expenses. Other loan related expenses consist of other costs incurred for originating and servicing loans such as insurance and property tax tracking expenses, credit report fees, and other real estate closing costs. These expenses decreased for the three and six months ended June 30, 2022 compared to the same periods in 2021 due to lower real estate mortgage loan originations between the three and six month comparison periods.

•Vermont franchise tax. The increase in expense between the three and six month comparison periods of 2021 and 2022 is due to the increase in average deposit balances for customer accounts allocated to Vermont.

•Donations. Charitable donations are made as part of the Company's commitment to continually help enhance the economic vitality and social welfare of our communities. Donations increased by $15 thousand and $30 thousand for the three and six month comparison periods, respectively.

•Travel and entertainment. The Company has resumed business travel, intercompany travel and events that were suspended due to the economic disruption caused by COVID-19, resulting in increased expense of $11 thousand and $27 thousand for the three and six months ended June 30, 2022, respectively, compared to the same periods in 2021.

•Amortization of core deposit intangible. The core deposit intangible was fully amortized in 2021 resulting in no amortization expense in 2022.

Provision for Income Taxes. The Company has provided for current and deferred federal income taxes for the three and six months ended June 30, 2022 and 2021. The Company's net provision for income taxes was $610 thousand and $1.0 million, for the three and six months ended June 30, 2022, respectively, compared to $603 thousand and $1.1 million for the same period in 2021. The Company's effective federal corporate income tax rate was 16.5% and 15.7% for the three and six months ended June 30, 2022, respectively, compared to 16.0% and 15.6% for the same period in 2021.

Amortization expense related to limited partnership investments is included as a component of tax expense and amounted to $292 and $548 thousand for the three and six months ended June 30, 2022, respectively, $239 thousand and $501 thousand for the same period in 2021. These investments provide tax benefits, including tax credits. Low income housing and rehabilitation tax credits with respect to limited partnership investments are also included as a component of income tax expense and amounted to $272 thousand and $523 thousand for the three and six months ended June 30, 2022, respectively, and $241 thousand and $482 thousand for the three and six months ended June 30, 2021, respectively.

FINANCIAL CONDITION

At June 30, 2022, the Company had total consolidated assets of $1.19 billion, including gross loans and loans held for sale (total loans) of $821.8 million, investment securities AFS of $261.7 million, deposits of $1.10 billion, subordinated notes of $16.2 million and stockholders' equity of $59.9 million. The Company’s total assets at June 30, 2022 decreased $13.5 million, or 1.1%, from $1.21 billion at December 31, 2021, attributable to the seasonal reduction in municipal loans discussed below, and increased $125.8 million, or 11.8%, compared to June 30, 2021.

June 30th marks the end of the fiscal year for the majority of municipal customers, including school districts, and several customers are required to reduce their outstanding short term debts to zero for one day during their fiscal year. The one day requirement traditionally occurs annually on June 30th and as a result the Company experiences a decrease in outstanding loan balances. In many cases monies are transferred from corresponding deposit accounts to pay off these debts so the Company experiences a corresponding decrease in deposit balances as well. These decreases are short term in nature as the loans and deposits for the next municipal fiscal year are recorded within the first few days of July. In July 2022, the Company recorded $70.2 million in new municipal loans.

Net loans and loans held for sale increased $21.4 million, or 2.7%, to $814.6 million, representing 68.3% of total assets at June 30, 2022, compared to $793.2 million, or 65.8% of total assets at December 31, 2021. (See Loans Held for Sale and Loan Portfolio below.)

Total deposits increased $8.0 million, or 0.7%, to $1.103 billion at June 30, 2022, from $1.095 billion at December 31, 2021, despite the seasonal decline in municipal deposits discussed above. There were increases in noninterest bearing deposits of $72.3 million, or 27.3%, which were partially offset by decreases in interest bearing deposits of $60.7 million, or 8.4%, primarily attributable to the seasonality of municipal deposits, and time deposits of $3.6 million, or 3.4%. (See average balances and rates in the Yields Earned and Rates Paid table on pages 29 and 30.)

Union Bankshares, Inc. Page 34

Stockholders’ equity decreased from $84.3 million at December 31, 2021 to $59.9 million at June 30, 2022, reflecting an increase of $26.8 million in accumulated other comprehensive loss due to a decrease in the fair market value of the Company's AFS investment securities, cash dividends declared of $3.1 million and stock repurchases of $79 thousand during the six months ended June 30, 2022. These decreases were partially offset by net income of $5.4 million for the first six months of 2022, an increase of $236 thousand from stock based compensation and a $28 thousand increase due to the issuance of common stock under the DRIP. (See Capital Resources on page 42.)

Loans Held for Sale and Loan Portfolio. Total loans (including loans held for sale) increased $20.9 million, or 2.6%, to $821.8 million, representing 68.9% of assets at June 30, 2022, from $800.9 million, representing 66.4% of assets at December 31, 2021. The total loan portfolio at June 30, 2022 increased $38.2 million compared to the June 30, 2021 level of $783.6 million, which represented 73.5% of assets, when the amount of PPP loans was at a higher level. The Company’s loans consist primarily of adjustable-rate and fixed-rate mortgage loans secured by one-to-four family, multi-family residential or commercial real estate. Real estate secured loans represented $755.3 million, or 91.9% of total loans at June 30, 2022 and $670.6 million, or 83.7% of total loans at December 31, 2021. The Company had 43 and 154 PPP loans totaling $3.3 million and $13.6 million classified as commercial loans as of June 30, 2022 and December 31, 2021, respectively. Changes in the Company's loan portfolio from December 31, 2021 (see table below) resulted primarily from an increase in the volume of residential, construction and commercial real estate loans originated, partially offset by a seasonal decrease in the municipal portfolio discussed above, and a decrease in the commercial portfolio related to PPP loan forgiveness.

The composition of the Company's loan portfolio, including loans held for sale, as of June 30, 2022 and December 31, 2021 was as follows:


	June 30, 2022			December 31, 2021
Loan Class	Amount		Percent	Amount		Percent
	(Dollars in thousands)
Residential real estate	$	304,135	37.0	$	246,827	30.8
Construction real estate	81,929		10.0	65,149		8.1
Commercial real estate	365,430		44.5	344,816		43.1
Commercial	44,514		5.4	49,788		6.2
Consumer	2,207		0.3	2,376		0.3
Municipal	19,738		2.4	78,094		9.8
Loans held for sale	3,820		0.4	13,829		1.7
Total loans	821,773		100.0	800,879		100.0
Allowance for loan losses	(8,340)			(8,336)
Unamortized net loan costs	1,193			705
Net loans and loans held for sale	$	814,626		$	793,248

The Company originates and sells qualified residential mortgage loans in various secondary market avenues to mitigate long-term interest rate risk and generate fee income, with a majority of sales made to the FHLMC/Freddie Mac, generally with servicing rights retained. At June 30, 2022, the Company serviced a $936.0 million residential real estate mortgage portfolio, of which $3.8 million was held for sale and approximately $628.0 million of which was serviced for unaffiliated third parties.

In an effort to utilize some excess liquidity along with the rapid increase in the 10-year treasury rate in 2022 and the related impact on the pricing of loans held for sale, the Company elected to retain the majority of residential real estate loans originated in the first six months of 2022. The Company sold $34.4 million of qualified residential real estate loans to the secondary market during the first six months of 2022 compared to sales of $85.2 million during the first six months of 2021. Residential mortgage loan origination activity continued to be strong during the second quarter of 2022, consisting of both refinancing and purchase activity, although there has been a decline in refinancing activity with the increase in interest rates. Despite low housing inventory, purchase activity continues to be strong and construction loan activity is increasing as well. The Company originates and sells FHA, VA, and RD residential mortgage loans, and also has an Unconditional Direct Endorsement Approval from HUD which allows the Company to approve FHA loans originated in any of its Vermont or New Hampshire markets without needing prior HUD underwriting approval. The Company sells FHA, VA and RD loans as originated with servicing released. Some of the government backed loans qualify for zero down payments without geographic or income restrictions. These loan products increase the Company's ability to serve the borrowing needs of residents in the communities served, including low and moderate income borrowers, while the loan sales and government guaranty mitigate the Company's exposure to credit risk.

Union Bankshares, Inc. Page 35

The Company also originates commercial real estate and commercial loans under various SBA, USDA and State sponsored programs which provide a government agency guaranty for a portion of the loan amount. There was $6.7 million guaranteed under these various programs at June 30, 2022 on an aggregate balance of $7.9 million in subject loans. This includes $3.3 million of PPP loans that are guaranteed 100% by SBA, subject to borrower eligibility requirements. The Company occasionally sells the guaranteed portion of a loan to other financial institutions and retains servicing rights, which generates fee income. There were no commercial loans sold in the first six months of 2022 and 2021. The Company recognizes gains and losses on the sale of the principal portion of these loans as they occur.

The Company serviced $22.4 million of commercial and commercial real estate loans for unaffiliated third parties as of June 30, 2022. This included $21.0 million of commercial or commercial real estate loans the Company originated and participated out to other financial institutions. These loans were participated in the ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes.

The Company capitalizes MSRs for all loans sold with servicing retained. The unamortized balance of MSRs on loans sold with servicing retained was $2.2 million at June 30, 2022, with an estimated market value in excess of the carrying value as of such date. Management periodically evaluates and measures the servicing assets for impairment.

Qualifying residential first mortgage loans and certain commercial real estate loans with a carrying value of $280.0 million were pledged as collateral for borrowings from the FHLB under a blanket lien at June 30, 2022.

Asset Quality. The Company, like all financial institutions, is exposed to certain credit risks, including those related to the value of the collateral that secures its loans and the ability of borrowers to repay their loans. Consistent application of the Company’s conservative loan policies has helped to mitigate this risk and has been prudent for both the Company and its customers. Management closely monitors the Company’s loan and investment portfolios, OREO and OAO for potential problems and reports to the Company’s and Union’s Board at regularly scheduled meetings. Board approved policies set forth portfolio diversification levels to mitigate concentration risk and the Company participates large credits out to other financial institutions to further mitigate that risk.

The region's economic environment continues to see signs of improvement and the states of Vermont and New Hampshire have been fully opened since June 2021, after the COVID-19 pandemic closure of large segments of the economy. There is demand for leisure travel and dining out which is supporting the region's tourist and restaurant industries; however, the industry is also facing some staffing challenges as workforce participation continues to lag, supply chain delays and inflation. Demand for homes continues to be strong with the general safety and desirability of the region and the increased ability of working remotely. The Company’s management is focused on the lingering impact of COVID-19 on its borrowers and closely monitors industry and geographic concentrations, specifically the continuing impact on the region's tourist and restaurant industries. The Vermont unemployment rate was reported at 2.2% for June 2022 compared to 3.1% for June 2021 and the New Hampshire unemployment rate was 2.0% for June 2022 compared to 2.9% for June 2021. These rates compare favorably with the nationwide unemployment rate of 3.6% and 5.9%, respectively, for the comparable periods. Management will continue to monitor the national, regional and local economic environment in relation to COVID-19 and its impact on unemployment, business outlook and real estate values in the Company’s market area.

Repossessed assets, nonaccrual loans, and loans that are 90 days or more past due are considered to be nonperforming assets. The following table details the composition of the Company's nonperforming assets and amounts utilized to calculate certain asset quality ratios monitored by the Company's management as of the balance sheet dates and June 30, 2021:


	June 30, 2022		December 31, 2021		June 30, 2021
	(Dollars in thousands)
Nonaccrual loans	$	1,416	$	4,650	$	5,752
Loans past due 90 days or more and still accruing interest	109		98		176



Total nonperforming loans and total nonperforming assets	$	1,525	$	4,748	$	5,928

Guarantees of U.S. or state government agencies on the above nonperforming loans	$	59	$	113	$	165
TDR loans	$	1,888	$	2,215	$	2,766
Allowance for loan losses	$	8,340	$	8,336	$	8,505
Net recoveries	$	(4)	$	(65)	$	(9)
Total loans outstanding	$	821,773	$	800,879	$	783,623
Total average loans outstanding	$	820,502	$	808,894	$	828,518

Union Bankshares, Inc. Page 36

The following table shows trends of certain asset quality ratios monitored by the Company's management as of the balance sheet dates and June 30, 2021:


	June 30, 2022			December 31, 2021			June 30, 2021
	(Dollars in thousands)
Allowance for loan losses to total loans outstanding	1.01		%	1.04		%	1.09		%

Allowance for loan losses to nonperforming loans	546.89		%	175.57		%	143.47		%
Allowance for loan losses to nonaccrual loans	588.98		%	179.27		%	147.86		%
Nonperforming loans to total loans	0.19		%	0.59		%	0.76		%
Nonperforming assets to total assets	0.13		%	0.39		%	0.56		%
Nonaccrual loans to total loans	0.17		%	0.58		%	0.73		%
Delinquent loans (30 days to nonaccruing) to total loans	0.29		%	0.82		%	0.83		%
Net (recoveries) charge-offs to total average loans (annualized)	—		%	(0.01)		%	—		%
Residential real estate	—		%	(0.03)		%	(0.01)		%
Net (recoveries) charge-offs	$	—		$	(66)		$	(8)
Total average loans	$	280,287		$	243,212		$	239,111
Construction real estate	—		%	—		%	—		%
Net (recoveries) charge-offs	$	—		$	—		$	—
Total average loans	$	57,818		$	62,678		$	62,149
Commercial real estate	—		%	—		%	—		%
Net (recoveries) charge-offs	$	—		$	—		$	—
Total average loans	$	357,031		$	324,101		$	317,431
Commercial	—		%	—		%	—		%
Net (recoveries) charge-offs	$	(1)		$	—		$	—
Total average loans	$	45,280		$	88,626		$	111,983
Consumer	(0.26)		%	0.04		%	(0.08)		%
Net (recoveries) charge-offs	$	(3)		$	1		$	(1)
Total average loans	$	2,297		$	2,608		$	2,595
Municipal	—		%	—		%	—		%
Net (recoveries) charge-offs	$	—		$	—		$	—
Total average loans	$	77,789		$	87,669		$	95,249

There was one residential real estate loan totaling $28 thousand in process of foreclosure at June 30, 2022 and no loans in process of foreclosure at December 31, 2021. The aggregate interest income not recognized on nonaccrual loans approximated $437 thousand as of June 30, 2022 and $504 thousand as of December 31, 2021.

The Company had loans rated substandard that were on performing status totaling $744 thousand at June 30, 2022 compared to $769 thousand at December 31, 2021. In management's view, substandard loans represent a higher degree of risk of becoming nonperforming loans in the future.

Allowance for Loan Losses. Some of the Company’s loan customers ultimately do not make all of their contractually scheduled payments, whether due to the effects of the COVID-19 pandemic or otherwise, requiring the Company to charge off a portion or all of the remaining principal balance due. The Company maintains an ALL to absorb such losses. The ALL is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio as of the evaluation date; however, actual loan losses may vary from current estimates. The Company's policy and methodologies for establishing the ALL, described in the Company's 2021 Annual Report did not change during the first six months of 2022. The Company's ALL was $8.3 million at June 30, 2022 and December 31, 2021.

Union Bankshares, Inc. Page 37

Impaired loans, including $1.9 million of TDR loans, were $5.4 million at June 30, 2022, with government guaranties of $347 thousand and a specific reserve amount allocated of $23 thousand. Impaired loans, including $2.2 million of TDR loans, were $6.8 million at December 31, 2021, with government guaranties of $423 thousand and a specific reserve amount allocated of $46 thousand. Based on management's evaluation of the Company's historical loss experience on substandard commercial loans, commercial loan relationships with aggregate balances greater than $500 thousand are evaluated individually for impairment, with a specific reserve allocated when warranted. Commercial loans with balances under this threshold are collectively evaluated for impairment as a homogeneous pool of loans, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship. The specific reserve amount allocated to individually identified impaired loans decreased $23 thousand as a result of the June 30, 2022 impairment evaluation.

The following table reflects activity in the ALL for the three and six months ended June 30, 2022 and 2021:


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
	(Dollars in thousands)
Balance at beginning of period	$	8,336	$	8,429	$	8,336	$	8,271
Charge-offs	(1)		—		(2)		—
Recoveries	5		1		6		9
Net recoveries	4		1		4		9
Provision for loan losses	—		75		—		225
Balance at end of period	$	8,340	$	8,505	$	8,340	$	8,505

The following table (net of loans held for sale) shows the internal breakdown by risk component of the Company's ALL and the percentage of loans in each category to total loans in the respective portfolios at the dates indicated:


	June 30, 2022			December 31, 2021
	Amount		Percent	Amount		Percent
	(Dollars in thousands)
Residential real estate	$	2,239	37.2	$	2,068	31.4
Construction real estate	957		10.0	837		8.3
Commercial real estate	4,004		44.7	4,122		43.8
Commercial	318		5.4	275		6.3
Consumer	10		0.3	11		0.3
Municipal	27		2.4	86		9.9
Unallocated	785		—	937		—
Total	$	8,340	100.0	$	8,336	100.0

Notwithstanding the categories shown in the table above or any specific allocation under the Company's ALL methodology, all funds in the ALL are available to absorb loan losses in the portfolio, regardless of loan category or specific allocation.

Management believes, in its best estimate, that the ALL at June 30, 2022 is appropriate to cover probable credit losses inherent in the Company’s loan portfolio as of such date. However, there can be no assurance that the Company will not sustain losses in future periods which could be greater than the size of the ALL at June 30, 2022. In addition, our banking regulators, as an integral part of their examination process, periodically review our ALL. Such agencies may require us to recognize adjustments to the ALL based on their judgments about information available to them at the time of their examination. A large adjustment to the ALL for losses in future periods could require increased provisions to replenish the ALL, which could negatively affect earnings.

Union Bankshares, Inc. Page 38

Investment Activities. During the first six months of 2022, investment securities classified as AFS, which are carried at fair value, decreased $6.2 million to $261.7 million, comprising 22.0% of total assets, compared to $267.8 million, or 22.2% of total assets at December 31, 2021. Despite this decrease in the overall fair market value of the investment portfolio, the amortized cost of investment securities classified as AFS increased $27.8 million during the first six months of 2022. The Company used excess liquidity to increase the investment portfolio during 2021 and the first six months of 2022 to obtain higher yields than what would have been earned at the Federal Funds rate.

Net unrealized losses in the Company’s AFS investment securities portfolio were $35.9 million as of June 30, 2022, compared to net unrealized losses of $2.0 million as of December 31, 2021. The Company’s accumulated OCI component of stockholders’ equity at June 30, 2022 reflected cumulative net unrealized losses on investment securities of $28.4 million. There were no securities classified as HTM at June 30, 2022 or December 31, 2021. The rapid increase in the 10-year treasury rate in 2022 has negatively impacted the fair market value of the investment portfolio as this index is typically tied to mortgage-backed securities. No declines in value were deemed by management to be OTT at June 30, 2022. Deterioration in credit quality and/or imbalances in liquidity that may result from changes in financial market conditions might adversely affect the fair values of the Company’s investment portfolio and the amount of gains or losses ultimately realized on the sale of such securities and may also increase the potential that unrealized losses will be designated as OTT in future periods, resulting in write-downs and charges to earnings.

Investment securities AFS with a carrying amount of $479 thousand and $608 thousand were pledged as collateral for public unit deposits or for other purposes as required or permitted by law at June 30, 2022 and December 31, 2021, respectively.

Deposits. The following table shows information concerning the Company's average deposits by account type and weighted average nominal rates at which interest was paid on such deposits for the six months ended June 30, 2022 and 2021:


	Six Months Ended June 30, 2022					Six Months Ended June 30, 2021
	Average Amount		Percent of Total Deposits	Average Rate		Average Amount		Percent of Total Deposits	Average Rate
	(Dollars in thousands)
Nontime deposits:
Noninterest bearing deposits	$	301,123	26.6	—		$	230,651	22.7	—
Interest bearing checking accounts	281,256		24.9	0.22	%	241,649		23.8	0.25	%
Money market accounts	257,125		22.7	0.51	%	261,514		25.7	0.77	%
Savings accounts	186,539		16.5	0.04	%	156,442		15.4	0.07	%
Total nontime deposits	1,026,043		90.7	0.19	%	890,256		87.6	0.31	%



Total time deposits	104,869		9.3	0.44	%	126,741		12.4	0.97	%
Total deposits	$	1,130,912	100.0	0.22	%	$	1,016,997	100.0	0.39	%

During the first six months of 2022, average total deposits grew $113.9 million, or 11.2%, compared to the six months ended June 30, 2021, with growth in all categories except time deposits and money market accounts. The increase in average balances for nontime deposits was attributable to customer's receipt of government stimulus payments, and the general reduction in spending by customers due to COVID-19. The decrease in the average balance of money market accounts is related to the seasonality of municipal deposits as discussed above and the average balances of time deposits decreased due to the maturing of higher rate paying time deposit accounts, with customers primarily transferring those funds into other deposit accounts.

The Company participates in CDARS, which permits it to offer full deposit insurance coverage to its customers by exchanging deposit balances with other CDARS participants. CDARS also provides the Company with an additional source of funding and liquidity through the purchase of deposits. There were no purchased CDARS deposits as of June 30, 2022 or December 31, 2021. There were $13.6 million of time deposits of $250,000 or less on the balance sheet at June 30, 2022 and December 31, 2021, which were exchanged with other CDARS participants.

The Company also participates in the ICS program, a service through which it can offer its customers demand or savings products with access to unlimited FDIC insurance, while receiving reciprocal deposits from other FDIC-insured banks. Like the exchange of certificate of deposit accounts through CDARS, exchange of demand or savings deposits through ICS provides a depositor with full deposit insurance coverage of excess balances, thereby helping the Company retain the full amount of the deposit on its balance sheet. As with the CDARS program, in addition to reciprocal deposits, participating banks may also purchase one-way ICS deposits. There were $69.5 million and $155.3 million in exchanged ICS demand and money market

Union Bankshares, Inc. Page 39

deposits on the balance sheet at June 30, 2022 and December 31, 2021, respectively. There were no purchased ICS deposits at June 30, 2022 or December 31, 2021.

Retail brokered deposits are issued under a master certificate of deposit program with a deposit broker for the purpose of providing a supplemental source of funding and liquidity. There were no retail brokered deposits at June 30, 2022 or at December 31, 2021.

The following table provides a maturity distribution of the Company’s time deposits in amounts in excess of the $250 thousand FDIC insurance limit at June 30, 2022 and December 31, 2021:


	June 30, 2022		December 31, 2021
	(Dollars in thousands)
Within 3 months	$	3,350	$	4,249
3 to 6 months	5,448		5,576
6 to 12 months	4,323		4,536
Over 12 months	1,759		1,862
	$	14,880	$	16,223

A provision of the Dodd-Frank Act permanently raised FDIC deposit insurance coverage to $250 thousand per depositor per insured depository institution for each account ownership category. Uninsured deposits have been estimated to include deposits with balances greater than the FDIC insurance coverage limit of $250 thousand. This estimate is based on the same methodologies and assumptions used for regulatory reporting requirements. At June 30, 2022, the Company had estimated uninsured deposit accounts totaling $419.1 million, or 38.0% of total deposits. Uninsured deposits include $29.7 million of municipal deposits that were collateralized under applicable state regulations by investment securities or letters of credit issued by the FHLB at June 30, 2022, as described below under Borrowings.

Borrowings. Advances from the FHLB are another key source of funds to support earning assets. These funds are also used to manage the Bank's interest rate and liquidity risk exposures. The Company had no FHLB advances at June 30, 2022, and December 31, 2021.

The Company has the authority, up to its available borrowing capacity with the FHLB, to collateralize public unit deposits with letters of credit issued by the FHLB. FHLB letters of credit in the amount of $35.7 million and $37.5 million were utilized as collateral for these deposits at June 30, 2022 and December 31, 2021, respectively. Total fees paid by the Company in connection with the issuance of these letters of credit were $7 thousand and $15 thousand for the three and six months ended June 30, 2022 respectively, and $7 thousand and $16 thousand for the three and six months ended June 30, 2021, respectively.

In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 to certain qualified institutional buyers and accredited investors. The Notes initially bear interest, payable semi-annually, at the rate of 3.25% per annum, until September 1, 2026. From and including September 1, 2026, the interest rate applicable to the outstanding principal amount due will reset quarterly to the then current three-month secured overnight financing rate (SOFR) plus 263 basis points. The Notes are presented net of unamortized issuance costs of $312 thousand and $329 thousand at June 30, 2022 and December 31, 2021, respectively, in the consolidated balance sheets.

Commitments, Contingent Liabilities, and Off-Balance-Sheet Arrangements. The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, to reduce its own exposure to fluctuations in interest rates and to implement its strategic objectives. These financial instruments include commitments to extend credit, standby letters of credit, interest rate caps and floors written on adjustable-rate loans, commitments to participate in or sell loans, commitments to buy or sell securities, certificates of deposit or other investment instruments and risk-sharing commitments or guarantees on certain sold loans. Such instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the balance sheet. The contractual or notional amounts of these instruments reflect the extent of involvement the Company has in a particular class of financial instruments.

The Company's maximum exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. For interest rate caps and floors written on adjustable-rate loans, the contractual or notional amounts do not represent the Company’s exposure to credit loss. The Company controls the risk of interest rate cap agreements through credit approvals, limits, and monitoring procedures. The Company generally requires collateral or other security to support financial instruments with credit risk.

Union Bankshares, Inc. Page 40

The following table details the contractual or notional amount of financial instruments that represented credit risk at the balance sheet dates:


	June 30, 2022		December 31, 2021
	(Dollars in thousands)
Commitments to originate loans	$	131,665	$	48,910
Unused lines of credit	185,474		168,442
Standby and commercial letters of credit	1,805		2,158
Credit card arrangements	180		170
FHLB Mortgage Partnership Finance credit enhancement obligation, net	826		818


Commitment to purchase investment in a real estate limited partnership	—		4,574



Total	$	319,950	$	225,072

Commitments to originate loans are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Loan commitments generally have a fixed expiration date or other termination clause and may require payment of a fee. Since many of the loan commitments are expected to expire without being drawn upon and not all credit lines will be utilized, the total commitment amounts do not necessarily represent future cash requirements. Lines of credit incur seasonal volume fluctuations due to the nature of some customers' businesses, such as tourism. The large increase in commitments to originate loans at June 30, 2022 from December 31, 2021 is primarily the result of the fiscal cycle of local municipalities and school districts, with $70.2 million committed to them on June 30, 2022 for their fiscal year beginning July 1, 2022. In addition, commitments to originate residential construction loans increased $10.2 million over December 31, 2021. The increase in unused lines of credit at June 30, 2022 compared to December 31, 2021 is primarily related to an increase in unused residential construction lines of credit of $10.6 million and an increase in unused municipal lines of credit of $5.5 million.

The Company did not hold any derivative or hedging instruments at June 30, 2022 or December 31, 2021.

In addition to commitments arising from the Company’s financial instruments, in the normal course of business the Company enters into contractual commitments from time to time for the purchase or lease of property, including real property for its banking premises.

Liquidity. Liquidity is a measurement of the Company’s ability to meet potential cash requirements, including ongoing commitments to fund deposit withdrawals, repay borrowings, fund investment and lending activities, purchase and lease commitments, and for other general business purposes. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet our cash flow needs in the most economical and expedient manner. The Company’s principal sources of funds are deposits; whole-sale funding options including purchased deposits, amortization, prepayment and maturity of loans, investment securities, interest bearing deposits and other short-term investments; sales of securities and loans AFS; earnings; and funds provided from operations. Contractual principal repayments on loans have been a relatively predictable source of funds. Deposit flows and loan and investment prepayments are less predictable and can be significantly influenced by market interest rates, economic conditions, and rates offered by our competitors. Managing liquidity risk is essential to maintaining both depositor confidence and earnings stability.

As of June 30, 2022, Union, as a member of FHLB, had access to unused lines of credit up to $138.4 million over and above the $36.7 million in combined FHLB borrowings and other credit subject to collateralization and to the purchase of required FHLB Class B common stock and evaluation by the FHLB of the underlying collateral available. This line of credit can be used for either short-term or long-term liquidity or other funding needs.

Union also maintains an IDEAL Way Line of Credit with the FHLB. The total line available was $551 thousand at June 30, 2022. There were no borrowings against this line of credit as of such date. Interest on this line is chargeable at a rate determined by the FHLB and payable monthly. Should Union utilize this line of credit, qualified portions of the loan and investment portfolios would collateralize these borrowings.

In addition to its borrowing arrangements with the FHLB, Union maintains a pre-approved federal funds line of credit totaling $15.0 million with an upstream correspondent bank, a master brokered deposit agreement with a brokerage firm, and one-way buy options with CDARS and ICS. In addition to the funding sources available to Union, the Company maintains a $5.0 million revolving line of credit with a correspondent bank. At June 30, 2022, there were no purchased ICS or CDARS deposits, no retail brokered deposits, and no outstanding advances on the Union or Company correspondent lines.

Union's investment and residential loan portfolios also provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. Additional contingent liquidity sources are available with further access to the brokered deposit market. These sources are considered as liquidity alternatives in our contingent liquidity

Union Bankshares, Inc. Page 41

plan. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. However, any projections of future cash needs and flows are subject to substantial uncertainty, including factors outside the Company's control.

Capital Resources. Capital management is designed to maintain an optimum level of capital in a cost-effective structure that meets target regulatory ratios, supports management’s internal assessment of economic capital, funds the Company’s business strategies and builds long-term stockholder value. Dividends are generally in line with long-term trends in earnings per share and conservative earnings projections, while sufficient profits are retained to support anticipated business growth, fund strategic investments, maintain required regulatory capital levels and provide continued support for deposits. The Company continues to evaluate growth opportunities both through internal growth or potential acquisitions.

In August 2021, the Company completed the private placement of $16.5 million in aggregate principal amount of fixed-to-floating rate subordinated notes due 2031 to certain qualified institutional buyers and accredited investors. The Notes are structured to qualify as Tier 2 capital for the Company under bank regulatory guidelines. The proceeds from the sale of the Notes were utilized to provide additional capital to Union to support its growth and for other general corporate purposes.

The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of June 30, 2022, the Company had 4,969,972 shares issued, of which 4,494,812 were outstanding and 475,160 were held in treasury.

In January 2022, the Company's Board reauthorized for 2022 the limited stock repurchase plan that was initially established in May of 2010. The limited stock repurchase plan allows the repurchase of up to a fixed number of shares of the Company's common stock each calendar quarter in open market purchases or privately negotiated transactions, as management deems advisable and as market conditions may warrant. The repurchase authorization for a calendar quarter (currently 2,500 shares) expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The quarterly repurchase authorization expires on December 31, 2022, unless reauthorized. The Company repurchased 2,650 shares under this program during the first six months of 2022 at a total cost of $79 thousand.

The Company maintains a DRIP whereby registered stockholders may elect to reinvest cash dividends and make optional cash contributions to purchase additional shares of the Company's common stock. The Company has reserved 200,000 shares of its common stock for issuance and sale under the DRIP. As of June 30, 2022, 6,358 shares of stock had been issued from treasury stock under the DRIP.

The Company (on a consolidated basis) and Union are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's and Union's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Union must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and Union's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Under the standard regulatory capital guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier I risk-based capital ratio of 6.0%, a minimum common equity Tier I risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a 2.5% capital conservation buffer consisting of common Tier I equity, increasing the minimum required total risk-based capital, Tier I risk-based and common equity Tier I capital to risk-weighted assets they must maintain to avoid limits on capital distributions and certain bonus payments to executive officers and similar employees.

The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 directed the federal banking regulators to adopt rules providing for a simplified regulatory capital framework for qualifying community banking organizations. In September 2019, the banking regulators finalized a rule that introduced the community bank leverage ratio ("CBLR") framework as an optional simplified measure of capital adequacy for qualifying institutions. Beginning with the March 31, 2020 regulatory capital calculation, a banking organization with a Tier I leverage ratio greater than 9.0%, less than $10 billion in average consolidated assets, and limited amounts of off-balance sheet exposures and trading assets and liabilities may opt into the CBLR framework and will be deemed "well capitalized" and will not be required to report or calculate risk-based capital. A community banking organization that does not meet the requirements for use of the simplified CBLR framework will

Union Bankshares, Inc. Page 42

continue to calculate its regulatory capital ratios under standard guidelines. As of June 30, 2022, the Tier I leverage ratios for the Company and Union were 6.78% and 8.02%, respectively.

As shown in the table below, as of June 30, 2022, both the Company and Union met all capital adequacy requirements to which they are currently subject and Union exceeded the requirements for a "well capitalized" bank under the FDIC's Prompt Corrective Action framework. There were no conditions or events between June 30, 2022 and the date of this report that management believes have changed either Company’s regulatory capital category.


	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
As of June 30, 2022	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Company:
Total capital to risk weighted assets	$	110,648	14.33	%	$	61,771	8.00	%	N/A		N/A
Tier I capital to risk weighted assets	86,120		11.16	%	46,301		6.00	%	N/A		N/A
Common Equity Tier 1 to risk weighted assets	86,120		11.16	%	34,726		4.50	%	N/A		N/A
Tier I capital to average assets	86,120		6.78	%	50,808		4.00	%	N/A		N/A

Union:
Total capital to risk weighted assets	$	110,114	14.28	%	$	61,689	8.00	%	$	77,111	10.00	%
Tier I capital to risk weighted assets	101,774		13.20	%	46,261		6.00	%	61,681		8.00	%
Common Equity Tier 1 to risk weighted assets	101,774		13.20	%	34,696		4.50	%	50,116		6.50	%
Tier I capital to average assets	101,774		8.02	%	50,760		4.00	%	63,450		5.00	%

Dividends paid by Union are the primary source of funds available to the Company for payment of dividends to its stockholders. Union is subject to certain requirements imposed by federal banking laws and regulations, which among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by Union to the Company.

Cash dividends of $0.35 per share were paid during the second quarter of 2022 and were declared for the third quarter, payable on August 4, 2022 to stockholders of record on July 30, 2022.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Omitted, in accordance with the regulatory relief available to smaller reporting companies in SEC Release Nos. 33-10513 (effective September 10, 2018).

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer, with the assistance of the Disclosure Control Committee, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of June 30, 2022. Based on this evaluation they concluded that those disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files with the Commission is accumulated and communicated to the Company’s management, including its principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required information.

Changes in Internal Controls over Financial Reporting. There was no change in the Company's internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act, during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

Union Bankshares, Inc. Page 43

PART II OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors

There have been no material changes in the risk factors discussed in Part I-Item 1A, "Risk Factors" in the Company’s 2021 Annual Report since the date of the filing of that report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Company did not issue any unregistered shares during the quarter ended June 30, 2022.

The following table summarizes repurchases of the Company's equity securities during the quarter ended June 30, 2022.



Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased	Average Price Paid per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)	Maximum Number of Shares that May Yet be Purchased Under the Plans or Program (1)
April 2022	—	—	—	2,500
May 2022	150	$30.15	150	2,350
June 2022	—	—	—	—

__________________

(1)All repurchases shown in the table were made pursuant to a discretionary stock repurchase program under which the Company may repurchase up to 2,500 shares of its common stock each calendar quarter, in open market or privately negotiated transactions. The repurchase authorization for a calendar quarter expires at the end of that quarter to the extent it has not been exercised, and is not carried forward into future quarters. The program was initially authorized in 2010 and was reauthorized most recently in January 2022. The program will expire on December 31, 2022, unless reauthorized.

Item 6. Exhibits.


31.1			Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2			Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1			Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2			Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101			The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three and six months ended June 30, 2022 and 2021, (iii) the unaudited consolidated statements of comprehensive income for the three and six months ended June 30, 2022 and 2021, (iv) the unaudited consolidated statements of changes in stockholders' equity, (iv) the unaudited consolidated statements of cash flows and (v) related notes.
104			Cover page interactive data file (embedded within exhibit 101).

____________________

* This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Union Bankshares, Inc. Page 44

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


						Union Bankshares, Inc.

August 15, 2022						/s/ David S. Silverman
						David S. Silverman
						Director, President and Chief Executive Officer


August 15, 2022						/s/ Karyn J. Hale
						Karyn J. Hale
						Chief Financial Officer
						(Principal Financial Officer)

EXHIBIT INDEX


31.1			Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2			Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1			Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2			Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

101			The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 formatted in Inline eXtensible Business Reporting Language (iXBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three and six months ended June 30, 2022 and 2021, (iii) the unaudited consolidated statements of comprehensive income for the three and six months ended June 30, 2022 and 2021, (iv) the unaudited consolidated statements of changes in stockholders' equity, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

104			Cover page interactive data file (embedded within exhibit 101).

____________________

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