UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2022

Commission file number: 001-15985

UNION BANKSHARES, INC.

VT

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 April 29, 2022.

Common Stock, $2 par value

4,495,672

shares

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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.			23
Item 3. Quantitative and Qualitative Disclosures About Market Risk.			41
Item 4. Controls and Procedures.			41
PART II OTHER INFORMATION
Item 1. Legal Proceedings.			41
Item 1A. Risk Factors.			41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.			42
Item 6. Exhibits.			42
Signatures			43

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

			March 31, 2022			December 31, 2021
			(Unaudited)
Assets			(Dollars in thousands)
Cash and due from banks			$	5,047		$	4,659
Federal funds sold and overnight deposits			45,755			61,263
Cash and cash equivalents			50,802			65,922
Interest bearing deposits in banks			14,192			13,196
Investment securities available-for-sale			272,151			267,819
Other investments			1,273			1,132
Total investments			273,424			268,951
Loans held for sale			2,349			13,829
Loans			827,607			787,050
Allowance for loan losses			(8,336)			(8,336)
Net deferred loan costs			1,007			705
Net loans			820,278			779,419
Premises and equipment, net			21,320			21,615
Company-owned life insurance			18,192			18,764
Other assets			32,986			23,677
Total assets			$	1,233,543		$	1,205,373
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing			$	303,077		$	264,888
Interest bearing			726,864			723,479
Time			104,303			106,715
Total deposits			1,134,244			1,095,082
Subordinated notes			16,179			16,171
Accrued interest and other liabilities			13,703			9,779
Total liabilities			1,164,126			1,121,032
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,968,692 shares   issued at March 31, 2022 and 4,967,093 shares issued at December 31, 2021			9,937			9,934
Additional paid-in capital			1,878			1,769
Retained earnings			79,259			78,350
Treasury stock at cost; 475,522 shares at March 31, 2022   and 473,438 shares at December 31, 2021			(4,231)			(4,160)
Accumulated other comprehensive loss			(17,426)			(1,552)
Total stockholders' equity			69,417			84,341
Total liabilities and stockholders' equity			$	1,233,543		$	1,205,373

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 1

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UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

			Three Months Ended March 31,
			2022			2021
			(Dollars in thousands, except per share data)
Interest and dividend income
Interest and fees on loans			$	8,474		$	8,885
Interest on debt securities:
Taxable			972			404
Tax exempt			222			151
Dividends			6			4
Interest on federal funds sold and overnight deposits			19			19
Interest on interest bearing deposits in banks			33			37
Total interest and dividend income			9,726			9,500
Interest expense
Interest on deposits			621			1,047
Interest on borrowed funds			—			54
Interest on subordinated notes			142			—
Total interest expense			763			1,101
Net interest income			8,963			8,399
Provision for loan losses			—			150
Net interest income after provision for loan losses			8,963			8,249
Noninterest income
Trust income			209			185
Service fees			1,635			1,523
Net gains on sales of investment securities available-for-sale			26			—
Net gains on sales of loans held for sale			14			894
Net gains on other investments			82			44
Other income (loss)			89			(25)
Total noninterest income			2,055			2,621
Noninterest expenses
Salaries and wages			3,410			3,083
Employee benefits			1,305			1,169
Occupancy expense, net			527			477
Equipment expense			916			798
Other expenses			1,956			1,926
Total noninterest expenses			8,114			7,453
Income before provision for income taxes			2,904			3,417
Provision for income taxes			422			541
Net income			$	2,482		$	2,876
Basic earnings per common share			$	0.55		$	0.64
Weighted average number of common shares outstanding			4,494,871			4,480,339
Dividends per common share			$	0.35		$	0.33

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 2

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UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

			Three Months Ended March 31,
			2022			2021
			(Dollars in thousands)
Net income			$	2,482		$	2,876
Other comprehensive loss, net of tax:
Investment securities available-for-sale:
Net unrealized holding losses arising during the period on investment securities available-for-sale			(15,853)			(2,555)
Reclassification adjustment for net gains on sales of investment securities available-for-sale realized in net income			(21)			—
Total other comprehensive loss			(15,874)			(2,555)
Total comprehensive (loss) income			$	(13,392)		$	321

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 3

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UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)

			Three Month Periods Ended March 31, 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			—			—			—			2,482			—			—			2,482
Other comprehensive loss			—			—			—			—			—			(15,874)			(15,874)
Dividend reinvestment plan			416			—			9			—			4			—			13
Cash dividends declared        ($0.35 per share)			—			—			—			(1,573)			—			—			(1,573)
Stock based compensation expense			1,599			3			100			—			—			—			103
Purchase of treasury stock			(2,500)			—			—			—			(75)			—			(75)
Balances, March 31, 2022			4,493,170			$	9,937		$	1,878		$	79,259		$	(4,231)		$	(17,426)		$	69,417
Balances, December 31, 2020			4,480,100			$	9,910		$	1,393		$	71,097		$	(4,169)		$	2,636		$	80,867
Net income			—			—			—			2,876			—			—			2,876
Other comprehensive loss			—			—			—			—			—			(2,555)			(2,555)
Dividend reinvestment plan			451			—			8			—			4			—			12
Cash dividends declared   ($0.33 per share)			—			—			—			(1,479)			—			—			(1,479)
Stock based compensation expense			—			—			92			—			—			—			92
Exercise of stock options			500			1			11			—			—			—			12
Purchase of treasury stock			(97)			—			—			—			(2)			—			(2)
Balances, March 31, 2021			4,480,954			$	9,911		$	1,504		$	72,494		$	(4,167)		$	81		$	79,823

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 4

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UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

			Three Months Ended March 31,
			2022			2021
Cash Flows From Operating Activities			(Dollars in thousands)
Net income			$	2,482		$	2,876
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation			459			459
Provision for loan losses			—			150
Deferred income tax provision			11			14
Net amortization of premiums on investment securities			160			168
Equity in losses of limited partnerships			256			262
Stock based compensation expense			103			92
Net (increase) decrease in unamortized loan costs			(302)			619
Proceeds from sales of loans held for sale			16,430			30,574
Origination of loans held for sale			(4,936)			(37,704)
Net gains on sales of loans held for sale			(14)			(894)
Net gains on sales of investment securities available-for-sale			(26)			—
Net gains on sales of other real estate owned			—			(11)
Net gains on other investments			(82)			(44)
Increase in accrued interest receivable			(49)			(95)
Amortization of core deposit intangible			—			43
Amortization of debt issuance costs			8			—
Increase in other assets			(436)			(412)
Increase (decrease) in other liabilities			704			(873)
Net cash provided by (used in) operating activities			14,768			(4,776)
Cash Flows From Investing Activities
Interest bearing deposits in banks
Proceeds from maturities and redemptions			1,992			498
Purchases			(2,988)			(2,490)
Investment securities available-for-sale
Proceeds from sales			6,827			—
Proceeds from maturities, calls and paydowns			7,304			7,310
Purchases			(38,691)			(46,880)
Net purchases of other investments			(59)			(41)
Net decrease in nonmarketable stock			276			—
Net increase in loans			(40,558)			(31,085)
Recoveries of loans charged off			1			8
Net purchases of premises and equipment			(164)			(302)
Investments in limited partnerships			(1,355)			(700)
Proceeds from sales of other real estate owned			—			61
Net cash used in investing activities			(67,415)			(73,621)

Union Bankshares, Inc. Page 5

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			Three Months Ended March 31,
			2022			2021
Cash Flows From Financing Activities			(Dollars in thousands)
Net increase in noninterest bearing deposits			38,189			16,747
Net increase in interest bearing deposits			3,385			11,591
Net decrease in time deposits			(2,412)			(14,749)
Exercise of stock options			—			12
Purchase of treasury stock			(75)			(2)
Dividends paid			(1,560)			(1,467)
Net cash provided by financing activities			37,527			12,132
Net decrease in cash and cash equivalents			(15,120)			(66,265)
Cash and cash equivalents
Beginning of period			65,922			122,771
End of period			$	50,802		$	56,506
Supplemental Disclosures of Cash Flow Information
Interest paid			$	911		$	1,122
Supplemental Schedule of Noncash Investing Activities
Investment in limited partnerships acquired by capital contributions payable			$	3,494		$	—
Dividends paid on Common Stock:
Dividends declared			$	1,573		$	1,479
Dividends reinvested			(13)			(12)
			$	1,560		$	1,467

See accompanying notes to unaudited interim consolidated financial statements.

Union Bankshares, Inc. Page 6

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UNION BANKSHARES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Note 1.    Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Union Bankshares, Inc. and Subsidiary (together, the Company) as of March 31, 2022, and for the three months ended March 31, 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.

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			PPPLF:			PPP Liquidity Facility of the FRB
DRIP:			Dividend Reinvestment Plan			RD:			USDA Rural Development
FASB:			Financial Accounting Standards Board			RSU:			Restricted Stock Unit
FDIC:			Federal Deposit Insurance Corporation			SBA:			U.S. Small Business Administration
FHA:			U.S. Federal Housing Administration			SEC:			U.S. Securities and Exchange Commission
FHLB:			Federal Home Loan Bank of Boston			TDR:			Troubled-debt restructuring
FRB:			Federal Reserve Board			Union:			Union Bank, the sole subsidiary of Union Bankshares, Inc
FHLMC/Freddie Mac:			Federal Home Loan Mortgage Corporation			USDA:			U.S. Department of Agriculture
GAAP:			Generally Accepted Accounting Principles in the United States			VA:			U.S. Veterans Administration
HTM:			Held-to-maturity			2014 Equity Plan:			2014 Equity Incentive Plan
HUD:			U.S. Department of Housing and Urban Development			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

Union Bankshares, Inc. Page 7

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Note 2. Legal Contingencies

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

Note 3. Per Share Information

Earnings per common share are computed based on the weighted average number of shares of common stock outstanding during the period and reduced for shares held in treasury. The dilutive effect of outstanding stock-based awards, consisting of RSUs with respect to 11,893 shares for the three months ended March 31, 2022, and both RSUs and stock options with respect to 17,697 shares for the same period last year, did not result in material dilution and is not included in the calculation.

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 the new guidance, which will replace the existing incurred loss model for recognizing credit losses, banks and other lending institutions will be required to recognize the full amount of expected credit losses. The new guidance, which is referred to as the current expected credit loss model ("CECL"), requires that expected credit losses for financial assets held at the reporting date that are accounted for at amortized cost be measured and recognized based on historical experience and current and reasonably supportable forecasted conditions to reflect the full amount of expected credit losses. A modified version of these requirements also applies to debt securities classified as AFS. 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 training on utilizing the software for the existing incurred loss model has been completed. The Company continues the collection of historical data and training is ongoing surrounding CECL implementation and methodologies. 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.

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.

Union Bankshares, Inc. Page 8

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Note 5. Investment Securities

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

March 31, 2022			Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value
			(Dollars in thousands)
U.S. Government-sponsored enterprises			$	45,993		$	—		$	(2,683)		$	43,310
Agency mortgage-backed			197,776			38			(16,214)			181,600
State and political subdivisions			43,611			148			(3,427)			40,332
Corporate			6,829			114			(34)			6,909
Total			$	294,209		$	300		$	(22,358)		$	272,151

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 March 31, 2022 or December 31, 2021. Investment securities AFS with a carrying amount of $551 thousand and $589 thousand were pledged as collateral for public unit deposits or for other purposes as required or permitted by law at March 31, 2022 and December 31, 2021, respectively.

The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of March 31, 2022 were as follows:

			Amortized Cost			Fair Value
Available-for-sale			(Dollars in thousands)
Due from one to five years			$	10,246		$	10,008
Due from five to ten years			39,883			37,834
Due after ten years			46,304			42,709
			96,433			90,551
Agency mortgage-backed			197,776			181,600
Total debt securities available-for-sale			$	294,209		$	272,151

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

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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:

March 31, 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			26			$	38,477		$	(2,146)		10			$	4,833		$	(537)		36			$	43,310		$	(2,683)
Agency mortgage-backed			61			132,852			(10,717)			25			44,787			(5,497)			86			177,639			(16,214)
State and political   subdivisions			56			34,049			(3,427)			—			—			—			56			34,049			(3,427)
Corporate			4			1,980			(20)			1			486			(14)			5			2,466			(34)
Total			147			$	207,358		$	(16,310)		36			$	50,106		$	(6,048)		183			$	257,464		$	(22,358)

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 March 31, 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

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The following table presents the proceeds, gross realized gains and gross realized losses from the sales of AFS securities for the three months ended March 31, 2022:

						For The Three Months Ended March 31, 2022
									(Dollars in thousands)
Proceeds									$	6,827
Gross gains									76
Gross losses									(50)
Net gains on sales of investment securities AFS									$	26

There were no sales of AFS securities during the three months ended March 31, 2021.

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:

			March 31, 2022			December 31, 2021
			(Dollars in thousands)
Residential real estate			$	282,662		$	246,827
Construction real estate			68,730			65,149
Commercial real estate			348,378			344,816
Commercial			44,808			49,788
Consumer			2,241			2,376
Municipal			80,788			78,094
Gross loans			827,607			787,050
Allowance for loan losses			(8,336)			(8,336)
Net deferred loan costs			1,007			705
Net loans			$	820,278		$	779,419

There were 80 and 154 PPP loans totaling $6.8 million and $13.6 million classified as commercial loans as of March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, remaining PPP deferred origination fees of $271 thousand and $558 thousand, respectively, will be amortized into interest income over the lives of the respective loans.

Union Bankshares, Inc. Page 11

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PPP loan origination fees of $287 thousand and $668 thousand were recognized in earnings during the three months ended March 31, 2022 and 2021, respectively.

Qualifying residential first mortgage loans and certain commercial real estate loans with an aggregate carrying value of $172.5 million and $224.4 million were pledged as collateral for borrowings from the FHLB under a blanket lien at March 31, 2022 and December 31, 2021, respectively.

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

March 31, 2022			Current			30-59 Days			60-89 Days			90 Days and Over and Accruing			Nonaccrual			Total
			(Dollars in thousands)
Residential real estate			$	281,011		$	1,361		$	88		$	80		$	122		$	282,662
Construction real estate			68,550			45			—			—			135			68,730
Commercial real estate			344,137			93			—			—			4,148			348,378
Commercial			44,644			13			2			149			—			44,808
Consumer			2,223			18			—			—			—			2,241
Municipal			80,788			—			—			—			—			80,788
Total			$	821,353		$	1,530		$	90		$	229		$	4,405		$	827,607

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 $118 thousand in process of foreclosure at March 31, 2022 and no loans in process of foreclosure at December 31, 2021. Aggregate interest on nonaccrual loans not recognized was $527 thousand as of March 31, 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 first 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

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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 the first quarter of 2022.

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

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

Changes in the ALL, by class of loans, for the three months ended March 31, 2022 and 2021 were as follows:

For The Three Months Ended March 31, 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			156			6			(125)			14			(1)			2			(52)			—
Recoveries of amounts charged off			—			—			—			—			1			—			—			1
			2,224			843			3,997			289			11			88			885			8,337
Amounts charged off			—			—			—			—			(1)			—			—			(1)
Balance, March 31, 2022			$	2,224		$	843		$	3,997		$	289		$	10		$	88		$	885		$	8,336

For The Three Months Ended March 31, 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			212			118			(66)			(15)			(2)			(15)			(82)			150
Recoveries of amounts charged off			8			—			—			—			—			—			—			8
			1,996			881			4,133			443			13			199			764			8,429
Amounts charged off			—			—			—			—			—			—			—			—
Balance, March 31, 2021			$	1,996		$	881		$	4,133		$	443		$	13		$	199		$	764		$	8,429

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

March 31, 2022			Residential Real Estate			Construction Real Estate			Commercial Real Estate			Commercial			Consumer			Municipal			Unallocated			Total
			(Dollars in thousands)
Individually evaluated    for impairment			$	24		$	—		$	20		$	—		$	—		$	—		$	—		$	44
Collectively evaluated    for impairment			2,200			843			3,977			289			10			88			885			8,292
Total allocated			$	2,224		$	843		$	3,997		$	289		$	10		$	88		$	885		$	8,336

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

Union Bankshares, Inc. Page 14

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

March 31, 2022			Residential Real Estate			Construction Real Estate			Commercial Real Estate			Commercial			Consumer			Municipal			Total
			(Dollars in thousands)
Individually evaluated    for impairment			$	1,728		$	193		$	4,601		$	8		$	—		$	—		$	6,530
Collectively evaluated    for impairment			280,934			68,537			343,777			44,800			2,241			80,788			821,077
Total			$	282,662		$	68,730		$	348,378		$	44,808		$	2,241		$	80,788		$	827,607

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

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:

March 31, 2022			Residential Real Estate			Construction Real Estate			Commercial Real Estate			Commercial			Consumer			Municipal			Total
			(Dollars in thousands)
Pass			$	263,222		$	39,536		$	214,846		$	40,217		$	2,236		$	80,788		$	640,845
Satisfactory/Monitor			17,115			29,001			128,492			4,524			5			—			179,137
Substandard			2,325			193			5,040			67			—			—			7,625
Total			$	282,662		$	68,730		$	348,378		$	44,808		$	2,241		$	80,788		$	827,607

Union Bankshares, Inc. Page 15

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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

The following tables provide information with respect to impaired loans by class of loan as of and for the three months ended March 31, 2022 and March 31, 2021:

			As of March 31, 2022									For The Three Months Ended March 31, 2022
			Recorded Investment (1)			Principal Balance (1)			Related Allowance			Average Recorded Investment			Interest Income Recognized
			(Dollars in thousands)
Residential real estate			$	197		$	207		$	24
Commercial real estate			1,587			1,762			20
With an allowance recorded			1,784			1,969			44
Residential real estate			1,531			2,028			—
Construction real estate			193			216			—
Commercial real estate			3,014			3,120			—
Commercial			8			8			—
With no allowance recorded			4,746			5,372			—
Residential real estate			1,728			2,235			24			$	1,739		$	30
Construction real estate			193			216			—			195			1
Commercial real estate			4,601			4,882			20			4,710			7
Commercial			8			8			—			9			—
Total			$	6,530		$	7,341		$	44		$	6,653		$	38

____________________

(1)Does not reflect government guaranties on impaired loans as of March 31, 2022 totaling $420 thousand.

			As of March 31, 2021									For The Three Months Ended March 31, 2021
			Recorded Investment (1)			Principal Balance (1)			Related Allowance			Average Recorded Investment			Interest Income Recognized
			(Dollars in thousands)
Residential real estate			$	1,740		$	2,333		$	27		$	1,761		$	55
Construction real estate			210			230			—			210			1
Commercial real estate			5,275			5,532			31			3,849			13
Commercial			170			173			—			184			5
Total			$	7,395		$	8,268		$	58		$	6,004		$	74

____________________

(1)Does not reflect government guaranties on impaired loans as of March 31, 2021 totaling $489 thousand.

Union Bankshares, Inc. Page 16

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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:

			March 31, 2022						December 31, 2021
			Number of Loans			Principal Balance			Number of Loans			Principal Balance
			(Dollars in thousands)
Residential real estate			29			$	1,728		29			$	1,750
Construction real estate			2			75			2			81
Commercial real estate			3			370			3			375
Commercial			1			8			1			9
Total			35			$	2,181		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 months ended March 31, 2022 or 2021.

There were no TDR loans modified within the previous twelve months that subsequently defaulted during the three months ended March 31, 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 March 31, 2022, four loans with outstanding loan balances of $545 thousand remained subject to modified terms and carried accrued interest of $10 thousand.

At March 31, 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 17

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Note 8.  Stock Based Compensation

Under the Union Bankshares, Inc. 2014 Equity Incentive Plan, 50,000 shares of the Company’s common stock were 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 March 31, 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 March 31, 2022:

			Number of RSUs Granted			Weighted Average Grant Date Fair Value			Number of Unvested RSUs
2020 Award			8,918			$	36.26		1,355
2021 Award			17,685			26.73			10,051
2022 Award			1,407			31.99			1,407
Total			28,010						12,813

Unrecognized compensation expense related to the unvested RSUs as of March 31, 2022 was $288 thousand and was $317 thousand as of December 31, 2021.

On May 19, 2021, the Company's board of directors, as a component of total director compensation, granted an aggregate of 1,220 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 2022, 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 March 31, 2022 was $7 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 $321 thousand and $329 thousand at March 31, 2022 and December 31, 2021, respectively. For the three months ended March 31, 2022, $8 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.

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

			March 31, 2022			December 31, 2021
			(Dollars in thousands)
Net unrealized losses on investment securities AFS			$	(17,426)		$	(1,552)

The following tables disclose the tax effects allocated to each component of OCI for the three months ended March 31:

			Three Months Ended
			March 31, 2022									March 31, 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			$	(20,067)		$	4,214		$	(15,853)		$	(3,234)		$	679		$	(2,555)
Reclassification adjustment for net gains on investment securities AFS realized in net income			(26)			5			(21)			—			—			—
Total other comprehensive loss			$	(20,093)		$	4,219		$	(15,874)		$	(3,234)		$	679		$	(2,555)

The following table discloses information concerning reclassification adjustments from OCI for the three months ended March 31, 2022 and 2021:

Three Months Ended

Reclassification Adjustment Description

March 31, 2022

March 31, 2021

Affected Line Item in Consolidated Statement of Income

(Dollars in thousands)

Investment securities AFS:

Net gains on investment securities AFS

(26)

—

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

Tax benefit

5

—

Provision for income taxes

Total reclassifications

$

(21)

$

—

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.

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

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been valued utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include market maker bids, quotes and pricing models. Inputs to the pricing models include recent trades, benchmark interest rates, spreads and actual and projected cash flows.

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

Assets measured at fair value on a recurring basis at March 31, 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)
March 31, 2022:			(Dollars in thousands)
Debt securities AFS:
U.S. Government-sponsored enterprises			$	43,310		$	2,711		$	40,599		$	—
Agency mortgage-backed			181,600			—			181,600			—
State and political subdivisions			40,332			—			40,332			—
Corporate			6,909			—			6,909			—
Total debt securities			$	272,151		$	2,711		$	269,440		$	—
Other investments:
Mutual funds			$	1,273		$	1,273		$	—		$	—
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 months ended March 31, 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 impaired loans, MSRs and OREO, were not considered material at March 31, 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.

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

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

			March 31, 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			$	50,802		$	50,802		$	50,802		$	—		$	—
Interest bearing deposits in banks			14,192			14,192			—			14,192			—
Investment securities			273,424			273,424			3,984			269,440			—
Loans held for sale			2,349			2,398			—			2,398			—
Loans, net
Residential real estate			280,781			271,384			—			—			271,384
Construction real estate			67,971			68,104			—			—			68,104
Commercial real estate			343,920			345,769			—			—			345,769
Commercial			44,574			43,754			—			—			43,754
Consumer			2,234			2,222			—			—			2,222
Municipal			80,798			81,782			—			—			81,782
Accrued interest receivable			3,248			3,248			—			837			2,411
Nonmarketable equity securities			1,164			N/A			N/A			N/A			N/A
Financial liabilities
Deposits
Noninterest bearing			$	303,077		$	303,077		$	303,077		$	—		$	—
Interest bearing			726,864			726,864			726,864			—			—
Time			104,303			103,028			—			103,028			—
Subordinated notes			16,179			15,448			—			15,448			—
Accrued interest payable			76			76			—			76			—

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			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 March 31, 2022 have been evaluated as to their potential impact to the consolidated financial statements.

On April 20, 2022, the Company declared a regular quarterly cash dividend of $0.35 per share, payable May 5, 2022, to stockholders of record on April 30, 2022.

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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 March 31, 2022 and December 31, 2021, and its results of operations for the three months ended March 31, 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 March 31, 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 reflect management's current expectations and are subject to uncertainties, both general and specific, and risk exists that actual results will differ from those predictions, forecasts, projections and other estimates contained in forward-looking statements. These risks cannot be readily quantified. When management uses any of the words “believes,” “expects,” “predicts,” “anticipates,” “intends,” “projects,” “plans,” “seeks,” “estimates,” “targets,” “goals,” “may,” “might,” “could,” “would,” “should,” or similar expressions, they are making forward-looking statements. Many possible events or factors, including those beyond the control of management, could affect the future financial results and performance of the Company.

Factors that may cause results or performance to differ materially from those expressed in forward-looking statements include, but are not limited to:

•General economic conditions and financial instability, either nationally, internationally, regionally or locally;

•Increased competitive pressures, including those from tax-advantaged credit unions and other financial service providers in our northern Vermont and New Hampshire market area or in the financial services industry generally, from increasing consolidation and integration of financial service providers, and from changes in technology and delivery systems;

•Interest rates change in a way that puts pressure on the Company's margins, or that results in lower fee income and lower gain on sale of real estate loans, or that increases our interest costs;

•Changes in laws or government rules, or the way in which courts or government agencies interpret or implement those laws or rules, that increase our costs of doing business or otherwise adversely affect our business;

•Further changes in federal or state tax policy;

•Changes in our level of nonperforming assets and charge-offs;

•Changes in depositor behavior resulting in movement of funds out of bank deposits and into the stock market or other higher-yielding investments;

•Changes in estimates of future reserve requirements based upon relevant regulatory and accounting requirements;

•Changes in information technology that require increased capital spending or that result in new or increased risks;

•Changes in consumer and business spending, borrowing and savings habits;

•Changes in accounting principles, including those governing the manner of estimating our credit risk and calculating our loan loss reserve;

•Further changes to the regulations governing the calculation of the Company’s regulatory capital ratios;

•Increased competitive pressures affecting the ability of the Company to attract, develop and retain employees;

•Increased inflationary pressures on our customers;

•Increased cybersecurity threats; and

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•The effect of and changes in the United States monetary and fiscal policies, including interest rate policies and regulation of the money supply by the FRB.

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.

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 on Form 10-K 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

The Federal Reserve initiated its planned short term interest rate increases by increasing the federal funds target rate 25 bps to 50 bps in March and by another 50 bps to one percent in May. This also resulted in an increase in the Prime Rate to 4.0%. In addition to these increases in interest rates, the 10-year treasury rate began 2022 at 1.512%, increased to 2.327% at the end of March, to 2.885% at the end of April and continued to rise in May. Mortgage rates and investment yields for mortgage-backed securities are primarily driven by the 10-year treasury index. The rapid increase in the 10-year treasury rate has impacted the fair market value of the investment portfolio, pricing on loans held for sale, and mortgage rates offered to customers which have

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increased approximately 200 bps since the beginning of the year. However, asset yields have not yet increased as a result of these increases nor have interest rates on interest bearing liabilities.

Consolidated net income decreased $394 thousand, or 13.7%, to $2.5 million for the first quarter of 2022 compared to $2.9 million for the first quarter of 2021 due to the combined effect of a decrease in noninterest income of $566 thousand and an increase of $661 thousand in noninterest expenses, partially offset by an increase in net interest income of $564 thousand and decreases of $150 thousand in the provision for loan losses and $119 thousand in income tax expense.

Net interest income increased $564 thousand, or 6.7%, to $9.0 million for the three months ended March 31, 2022, compared to $8.4 million for the three months ended March 31, 2021. Interest income increased $226 thousand primarily due to higher volumes of earning assets despite lower yields; and despite recognition of $411 thousand less in fee income between periods, primarily due to lower fee income recognized from PPP loans. Interest expense was $763 thousand for the three months ended March 31, 2022 compared to $1.1 million for the three months ended March 31, 2021, reflecting lower rates paid on deposits despite an increase in average interest bearing liabilities between periods of $59.0 million.

The was no provision for loan losses for the three months ended March 31, 2022 compared to a provision of $150 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 three month comparison periods.

Total noninterest income amounted to $2.1 million for the three months ended March 31, 2022 compared to $2.6 million for the three months ended March 31, 2021, a decrease of $566 thousand, or 21.6%. The decrease is primarily due to a decrease in sales of qualifying residential loans. There were $16.4 million in residential loan sales with net gains of $14 thousand for the three months ended March 31, 2022, compared to residential loan sales of $29.7 million with net gains of $894 thousand for the same period in 2021. The decrease in the volume of loan sales reflects management's decision to slow sales in the first quarter of 2022 to utilize some excess liquidity and increase interest income on loans.

Total noninterest expenses were $8.1 million for the three months ended March 31, 2022, compared to $7.5 million for the same period in 2021. Increases of $327 thousand in salaries and wages, $136 thousand in employee benefits, $118 thousand in equipment expenses, $50 thousand in occupancy expenses and $30 thousand in other expenses, occurred between the three month comparison period of 2022 and 2021.

At March 31, 2022, the Company had total consolidated assets of $1.23 billion, including gross loans and loans held for sale (total loans) of $830.0 million, deposits of $1.13 billion, subordinated debt of $16.2 million and stockholders' equity of $69.4 million.

The Company's total capital decreased from $84.3 million at December 31, 2021 to $69.4 million at March 31, 2022. This decrease primarily reflects an increase of $15.9 million in accumulated other comprehensive loss and regular cash dividends declared of $1.6 million offset by net income of $2.5 million for the first three months of 2022. (See Capital Resources on page 40.)

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The following unaudited per share information and key ratios depict several measurements of performance or financial condition at or for the three months ended March 31, 2022 and 2021, respectively:

			Three Months Ended or At March 31,
			2022			2021
Return on average assets (1)			0.81		%	1.05		%
Return on average equity (1)			12.38		%	14.27		%
Net interest margin (1)(2)			3.17		%	3.32		%
Efficiency ratio (3)			73.08		%	66.90		%
Net interest spread (4)			3.08		%	3.19		%
Loan to deposit ratio			73.17		%	83.59		%
Net loan charge-offs to average loans not held for sale (1)			—		%	—		%
Allowance for loan losses to loans not held for sale			1.01		%	1.05		%
Nonperforming assets to total assets (5)			0.38		%	0.56		%
Equity to assets			5.63		%	7.23		%
Total capital to risk weighted assets			14.84		%	13.48		%
Book value per share			$	15.45		$	17.81
Basic earnings per share (6)			$	0.55		$	0.64
Dividends paid per share			$	0.35		$	0.33
Dividend payout ratio (7)			63.64		%	51.56		%

__________________

(1)Annualized.

(2)The ratio of tax equivalent net interest income to average earning assets. See page 28 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 page 28 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)The assumed vesting of RSUs, and for 2021 also the assumed exercise of stock options, does not result in a material dilution for the three months ended March 31, 2022 or 2021.

(7)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 discussed above, the Federal Reserve initiated its planned short term interest rate increases by increasing the federal funds target rate 25 bps to 50 bps in March and by another 50 bps to one percent in May. This also resulted in an increase in the Prime Rate to 4.0%. In addition, the 10-year treasury rate increased from 1.512% at the beginning of the year to 2.327% at the end of March, to 2.885% at the end of April and continued to rise in May. These increases in interest rates have not yet increased asset yields or rates paid on interest bearing liabilities. However, further increases in short term rates by the Federal Reserve 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 3.44% for the three months ended March 31, 2022 compared to 3.76% for the three months ended March 31, 2021, a decrease of 32 bps despite an increase in average earning assets of $119.7 million. The prolonged low interest rate environment which prevailed throughout the first quarter continued to put downward pressure on asset yields for the three months ended March 31, 2022. Interest income on investment securities increased $639 thousand between the three month comparison periods due to an increase in the average balances of $159.8 million, despite a decrease of 11 bps in the average yield. The average balance of PPP loans was $9.4 million for the three months ended March 31, 2022

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with an average yield of 13.43%, which takes into account the 1.0% interest charged on PPP loans and related fee income recognized during the three months ended March 31, 2022. Interest income on loans, excluding PPP loans, increased $133 thousand between the three month comparison periods due to an increase in the average volume of loans outstanding of $56.7 million, partially offset by a decrease of 27 bps in the average yield.

Interest expense for the first quarter of 2022 decreased $338 thousand compared to the first quarter of 2021 due to lower rates paid on customer deposit accounts, despite increases in average deposit balances of $50.0 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 21 bps to 0.36% for the first quarter of 2022 compared to 0.57% for the first quarter of 2021. The average rates paid on interest bearing checking accounts and savings and money market accounts decreased 3 bps and 22 bps, respectively, between the first 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 March 31, 2022. The decreases in these interest rates resulted in a decrease in interest expense of $195 thousand on savings and money market accounts between the three month comparison periods. Interest expense on time deposits decreased $233 thousand due to decreases in the average volume of $27.2 million and 61 bps in the average rate paid during the first 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 $54 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 first quarter of 2022 and an average rate of 3.55% and interest expense of $142 thousand.

The net interest spread decreased 11 bps to 3.08% for the first quarter of 2022, from 3.19% for the same period last year, reflecting the net effect of the 21 bps decrease in the average rate paid on interest bearing liabilities and the 32 bps decrease in the average yield earned on interest earning assets between periods. The net interest margin decreased 15 bps during the first quarter of 2022 compared to the same period last year as a result of the changes discussed above.

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The following table shows 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 March 31,
			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			$	51,148		$	19		0.15		%	$	82,856		$	19		0.09		%
Interest bearing deposits in banks			13,356			33			1.01		%	13,966			37			1.07		%
Investment securities (2), (3)			287,014			1,194			1.73		%	127,233			555			1.84		%
PPP loans, net (4)			9,380			311			13.43		%	73,619			855			4.71		%
Loans, net (2), (5)			795,694			8,163			4.19		%	739,009			8,030			4.46		%
Nonmarketable equity securities			894			6			2.48		%	1,150			4			1.47		%
Total interest earning assets (2)			1,157,486			9,726			3.44		%	1,037,833			9,500			3.76		%
Cash and due from banks			4,693									5,094
Premises and equipment			21,517									19,996
Other assets			35,978									37,420
Total assets			$	1,219,674								$	1,100,343
Average Liabilities and Stockholders' Equity:
Interest bearing checking accounts			$	279,817		149			0.22		%	$	234,339		147			0.25		%
Savings/money market accounts			445,038			354			0.32		%	413,269			549			0.54		%
Time deposits			106,369			118			0.45		%	133,616			351			1.06		%
Borrowed funds and other liabilities			—			—			—		%	7,164			54			3.02		%
Subordinated notes			16,175			142			3.55		%	—			—			—		%
Total interest bearing liabilities			847,399			763			0.36		%	788,388			1,101			0.57		%
Noninterest bearing deposits			281,367									221,344
Other liabilities			10,688									9,975
Total liabilities			1,139,454									1,019,707
Stockholders' equity			80,220									80,636
Total liabilities and stockholders’ equity			$	1,219,674								$	1,100,343
Net interest income						$	8,963								$	8,399
Net interest spread (2)									3.08		%							3.19		%
Net interest margin (2)									3.17		%							3.32		%

__________________

(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.

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Tax exempt interest income amounted to $502 thousand and $606 thousand for the three months ended March 31, 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 month comparison periods:

			For the Three Months Ended March 31,
			2022			2021
			(Dollars in thousands)
Net interest income, as presented			$	8,963		$	8,399
Effect of tax-exempt interest
Investment securities			49			30
Loans			62			91
Net interest income, tax equivalent			$	9,074		$	8,520

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 March 31, 2022 Compared to Three Months Ended March 31, 2021 Increase/(Decrease) Due to Change In
			Volume			Rate			Net
			(Dollars in thousands)
Interest earning assets:
Federal funds sold and overnight deposits			$	(8)		$	8		$	—
Interest bearing deposits in banks			(2)			(2)			(4)
Investment securities			684			(45)			639
PPP loans, net			(1,185)			641			(544)
Loans (excluding PPP loans), net			618			(485)			133
Nonmarketable equity securities			(1)			3			2
Total interest earning assets			$	106		$	120		$	226
Interest bearing liabilities:
Interest bearing checking accounts			$	27		$	(25)		$	2
Savings/money market accounts			39			(234)			(195)
Time deposits			(61)			(172)			(233)
Borrowed funds			(27)			(27)			(54)
Subordinated notes			142			—			142
Total interest bearing liabilities			$	120		$	(458)		$	(338)
Net change in net interest income			$	(14)		$	578		$	564

Provision for Loan Losses. There was no provision for loan losses recorded for the three months ended March 31, 2022. A $150 thousand provision was recorded for the three months ended March 31, 2021. No provision for the three months ended March 31, 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.

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

			For The Three Months Ended March 31,
			2022			2021			$ Variance			% Variance
			(Dollars in thousands)
Trust income			$	209		$	185		$	24		13.0
Service fees			1,635			1,523			112			7.4
Net gains on sales of loans held for sale			14			894			(880)			(98.4)
Income from Company-owned life insurance			182			68			114			167.6
Expense from MSRs, net			(175)			(125)			(50)			40.0
Other income			82			32			50			156.3
Net gains on other investments			82			44			38			86.4
Net gains on sales of investment securities AFS			26			—			26			—
Total noninterest income			$	2,055		$	2,621		$	(566)		(21.6)

The significant changes in noninterest income for the three months ended March 31, 2022 compared to the same period of 2021 are described below:

•Trust income. Trust income increased as dollars in managed fiduciary accounts grew between March 31, 2022 and 2021.

•Service fees. Service fees increased $112 thousand for the three months ended March 31, 2022, compared to the same period in 2021 primarily due to increases of $52 thousand in overdraft fee income, $23 thousand in ATM network fees, $18 thousand in loan servicing fee income, and $28 thousand in merchant program fee income, partially offset by decreases of $2 thousand in safe deposit income and $7 thousand in other service charge 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 loans totaling $16.4 million were sold during the three months ended March 31, 2022 compared to sales of $29.7 million during the same period in 2021. The decrease of $880 thousand in net gains on sales of loans held for sale between periods is reflective of 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 three months ended March 31, 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 months ended March 31, 2022 and 2021 which resulted in expense of $175 thousand and $125 thousand, respectively.

•Other income. The increase in Other income during the comparison period is primarily reflective of $44 thousand in prepayment penalties received from the early payoff of loans during the three months ended March 31, 2022, in addition to an increase of $3 thousand in gains on the utilization of tax credits compared to the same period in 2021.

•Net 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 gains of $82 thousand for the three months ended March 31, 2022, compared to net gains of $44 thousand for the same period in 2021.

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Noninterest Expense. The following table sets forth the components of noninterest expense and changes between the three month comparison periods ended March 31, 2022 and 2021:

			For The Three Months Ended March 31,
			2022			2021			$ Variance			% Variance
			(Dollars in thousands)
Salaries and wages			$	3,410		$	3,083		$	327		10.6
Employee benefits			1,305			1,169			136			11.6
Occupancy expense, net			527			477			50			10.5
Equipment expense			916			798			118			14.8
Professional fees			216			196			20			10.2
FDIC insurance assessment			127			156			(29)			(18.6)
Other loan related expenses			73			84			(11)			(13.1)
Vermont franchise tax			261			223			38			17.0
Donations			39			24			15			62.5
Travel and entertainment			33			17			16			94.1
Amortization of core deposit intangible			—			43			(43)			(100.0)
Other expenses			1,207			1,183			24			2.0
Total noninterest expense			$	8,114		$	7,453		$	661		8.9

The significant changes in noninterest expense for the three months ended March 31, 2022 compared to the same period in 2021 are described below:

•Salaries and wages. The increase in salaries and wages of $327 thousand for the three months ended March 31, 2022 compared to the same period in 2021 was due to annual increases in employee's salaries, increases in accruals for annual incentive plan payments, and the deferral of loan origination costs. Also, the number of full time equivalent employees has increased from 195 at March 31, 2021 to 203 as of March 31, 2022. Salaries and wages are reduced by deferred loan origination costs at the time of origination. Deferred loan origination costs reduced salaries and wages by $35 thousand for the three months ended March 31, 2022, compared to $185 thousand for the same period in 2021. The lower 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 $136 thousand for the three months ended March 31, 2022, compared to the same period in 2021 due to increases of $21 thousand in the cost of payroll taxes, $37 thousand in group health insurance, $13 thousand in 401(k) plan contributions, and $65 thousand in employee benefits related to the Company's deferred compensation plans.

•Occupancy expense, net. The Company opened a new full service branch location during the fourth quarter of 2021. Increase in occupancy expense, net, was due to increases of $22 thousand in utilities, primarily fuel cost, $12 thousand in property taxes, and $14 thousand in repairs and maintenance.

•Equipment expense. Equipment expenses increased between periods primarily due to increases of $99 thousand in software license and maintenance costs and $19 thousand in computer operation expense for the three months ended March 31, 2022 compared to the same period in 2021.

•Professional fees. During the first three months of 2022, additional consultants were engaged to assist with advisory services that were not utilized in 2021, resulting in increases of $20 thousand compared to the same period in 2021.

•FDIC insurance assessment. The FDIC assessment rate decreased resulting in a decrease in expense for the three months ended March 31, 2022 compared to the same period in 2021.

•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 months ended March 31, 2022 compared to the same period in 2021 due to a decrease in real estate closing costs between the three month comparison periods.

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•Vermont franchise tax. The increase in expense between the three 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 between the three month comparison periods of 2021 and 2022.

•Travel and entertainment. The Company has resumed business travels, intercompany travel and events that were suspended due to the economic disruption caused by COVID-19, resulting in increased expense of $16 thousand for the three months ended March 31, 2022, compared to the same period 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 months ended March 31, 2022 and 2021. The Company's net provision for income taxes was $422 thousand for the three months ended March 31, 2022 compared to $541 thousand for the same period in 2021. The Company's effective federal corporate income tax rate was 14.7% for the three months ended March 31, 2022 compared to 15.2% for the same period in 2021.

Amortization expense related to limited partnership investments is included as a component of tax expense and amounted to $256 thousand for the three months ended March 31, 2022 and $262 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 $251 thousand and $241 thousand for the three months ended March 31, 2022 and 2021, respectively.

FINANCIAL CONDITION

At March 31, 2022, the Company had total consolidated assets of $1.23 billion, including gross loans and loans held for sale (total loans) of $830.0 million, deposits of $1.13 billion, subordinated notes of $16.2 million and stockholders' equity of $69.4 million. The Company’s total assets at March 31, 2022 increased $28.2 million, or 2.3%, from $1.21 billion at December 31, 2021, and increased $129.2 million, or 11.7%, compared to March 31, 2021.

Net loans and loans held for sale increased $29.4 million, or 3.7%, to $822.6 million, representing 66.7% of total assets at March 31, 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 $39.2 million, or 3.6%, to $1.13 billion at March 31, 2022, from $1.10 billion at December 31, 2021. There were increases in noninterest bearing deposits of $38.2 million, or 14.4%, and interest bearing deposits of $3.4 million, or 0.5%, which were partially offset by a decrease in time deposits of $2.4 million, or 2.3%. (See average balances and rates in the Yields Earned and Rates Paid table on page 28.)

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 are presented net of unamortized issuance costs of $321 thousand and $329 thousand at March 31, 2022 and December 31, 2021, respectively, in the consolidated balance sheets.

Stockholders’ equity decreased from $84.3 million at December 31, 2021 to $69.4 million at March 31, 2022, reflecting an increase of $15.9 million in accumulated other comprehensive loss due to a decrease in the fair market value of the Company's AFS securities, cash dividends declared of $1.6 million and stock repurchases of $75 thousand during the three months ended March 31, 2022. These decreases were partially offset by net income of $2.5 million for the first three months of 2022, an increase of $103 thousand from stock based compensation and a $13 thousand increase due to the issuance of common stock under the DRIP. (See Capital Resources on page 40.)

Loans Held for Sale and Loan Portfolio. Total loans (including loans held for sale) increased $29.1 million, or 3.6%, to $830.0 million, representing 67.3% of assets at March 31, 2022, from $800.9 million, representing 66.4% of assets at December 31, 2021. The total loan portfolio at March 31, 2022 decreased $12.5 million compared to the March 31, 2021 level of $842.5 million, which represented 76.3% of assets, when the amount of PPP loans was at a high. 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 $702.1 million, or 84.6% of total loans at March 31, 2022 and $670.6 million, or 83.7% of total loans at December 31, 2021. The Company had 80 and 154 PPP loans totaling $6.8 million and $13.6 million classified as commercial loans as of March 31, 2022 and December 31, 2021, respectively. Changes in the composition of 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 decrease in the

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commercial portfolio related to PPP loan forgiveness. There was no material change in the Company’s lending programs or terms during the three months ended March 31, 2022.

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

			March 31, 2022						December 31, 2021
Loan Class			Amount			Percent			Amount			Percent
			(Dollars in thousands)
Residential real estate			$	282,662		34.0			$	246,827		30.8
Construction real estate			68,730			8.3			65,149			8.1
Commercial real estate			348,378			42.0			344,816			43.1
Commercial			44,808			5.4			49,788			6.2
Consumer			2,241			0.3			2,376			0.3
Municipal			80,788			9.7			78,094			9.8
Loans held for sale			2,349			0.3			13,829			1.7
Total loans			829,956			100.0			800,879			100.0
Allowance for loan losses			(8,336)						(8,336)
Unamortized net loan costs			1,007						705
Net loans and loans held for sale			$	822,627					$	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 March 31, 2022, the Company serviced a $914.6 million residential real estate mortgage portfolio, of which $2.3 million was held for sale and approximately $629.6 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 quarter of 2022. The Company sold $16.4 million of qualified residential real estate loans to the secondary market during the first three months of 2022 compared to sales of $29.7 million during the first three months of 2021. Residential mortgage loan origination activity continued to be strong during the first quarter of 2022, consisting of both refinancing and purchase activity. Customers continue to refinance existing mortgages and despite low housing inventory, purchase activity continues to be strong. 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.

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 $10.3 million guaranteed under these various programs at March 31, 2022 on an aggregate balance of $11.5 million in subject loans. This includes $6.8 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 three 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 $22.1 million of commercial and commercial real estate loans for unaffiliated third parties as of March 31, 2022. This included $20.6 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 $2.3 million at March 31, 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 $172.5 million were pledged as collateral for borrowings from the FHLB under a blanket lien at March 31, 2022.

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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 is lagging. Demand for homes has surged 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 2.5% for March 2022 compared to 2.9% for March 2021 and the New Hampshire unemployment rate was 2.6% for March 2022 compared to 3.0% for March 2021. These rates compare favorably with the nationwide unemployment rate of 3.9% and 6.0%, 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 March 31, 2021:

			March 31, 2022			December 31, 2021			March 31, 2021
			(Dollars in thousands)
Nonaccrual loans			$	4,405		$	4,650		$	5,878
Loans past due 90 days or more and still accruing interest			229			98			263
Total nonperforming loans			4,634			4,748			6,141
OREO			—			—			—
Total nonperforming assets			$	4,634		$	4,748		$	6,141
Guarantees of U.S. or state government agencies on the above nonperforming loans			$	177		$	113		$	168
TDR loans			$	2,181		$	2,215		$	2,766
Allowance for loan losses			$	8,336		$	8,336		$	8,429
Net recoveries			$	—		$	(65)		$	(8)
Total loans outstanding			$	829,956		$	800,879		$	842,466
Total average loans outstanding			$	805,074		$	808,894		$	812,628

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The following table shows trends of certain asset quality ratios monitored by the Company's management as of the balance sheet dates and March 31, 2021:

			March 31, 2022			December 31, 2021			March 31, 2021
			(Dollars in thousands)
Allowance for loan losses to total loans outstanding			1.00		%	1.04		%	1.00		%
Allowance for loan losses to nonperforming loans			179.89		%	175.57		%	137.26		%
Allowance for loan losses to nonaccrual loans			189.24		%	179.27		%	143.40		%
Nonperforming loans to total loans			0.56		%	0.59		%	0.73		%
Nonperforming assets to total assets			0.38		%	0.39		%	0.56		%
Nonaccrual loans to total loans			0.53		%	0.58		%	0.70		%
Delinquent loans (30 days to nonaccruing) to total loans			0.75		%	0.82		%	1.01		%
Net (recoveries) charge-offs (annualized) to total average loans			—		%	(0.01)		%	—		%
Residential real estate			—		%	(0.03)		%	(0.01)		%
Net (recoveries) charge-offs			$	—		$	(66)		$	(8)
Total average loans			$	266,089		$	243,212		$	222,766
Construction real estate			—		%	—		%	—		%
Net (recoveries) charge-offs			$	—		$	—		$	—
Total average loans			$	54,370		$	62,678		$	60,861
Commercial real estate			—		%	—		%	—		%
Net (recoveries) charge-offs			$	—		$	—		$	—
Total average loans			$	356,548		$	324,101		$	314,642
Commercial			—		%	—		%	—		%
Net (recoveries) charge-offs			$	—		$	—		$	—
Total average loans			$	46,275		$	88,626		$	114,911
Consumer			—		%	0.04		%	—		%
Net (recoveries) charge-offs			$	—		$	1		$	—
Total average loans			$	2,333		$	2,608		$	2,556
Municipal			—		%	—		%	—		%
Net (recoveries) charge-offs			$	—		$	—		$	—
Total average loans			$	79,459		$	87,669		$	96,892

There was one residential real estate loan totaling $118 thousand in process of foreclosure at March 31, 2022. The aggregate interest income not recognized on nonaccrual loans approximated $527 thousand as of March 31, 2022 and $504 thousand as of December 31, 2021.

The Company had loans rated substandard that were on performing status totaling $756 thousand at March 31, 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.

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 March 31, 2022, four loans with outstanding loan balances of $545 thousand remained subject to modified terms and carried accrued interest of $10 thousand.

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 three months of 2022. The Company's ALL was $8.3 million at March 31, 2022 and December 31, 2021.

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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 the first quarter of 2022.

Impaired loans, including $2.2 million of TDR loans, were $6.5 million at March 31, 2022, with government guaranties of $420 thousand and a specific reserve amount allocated of $44 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 $2 thousand as a result of the March 31, 2022 impairment evaluation.

The following table reflects activity in the ALL for the three months ended March 31, 2022 and 2021:

			For the Three Months Ended March 31,
			2022			2021
			(Dollars in thousands)
Balance at beginning of period			$	8,336		$	8,271
Charge-offs			(1)			—
Recoveries			1			8
Net recoveries			—			8
Provision for loan losses			—			150
Balance at end of period			$	8,336		8,429

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:

			March 31, 2022						December 31, 2021
			Amount			Percent			Amount			Percent
			(Dollars in thousands)
Residential real estate			$	2,224		34.1			$	2,068		31.4
Construction real estate			843			8.3			837			8.3
Commercial real estate			3,997			42.1			4,122			43.8
Commercial			289			5.4			275			6.3
Consumer			10			0.3			11			0.3
Municipal			88			9.8			86			9.9
Unallocated			885			—			937			—
Total			$	8,336		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 March 31, 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 March 31, 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.

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Investment Activities. During the first three months of 2022, investment securities classified as AFS increased $4.3 million to $272.2 million, comprising 22.1% of total assets, compared to $267.8 million, or 22.2% of total assets at December 31, 2021. The Company used excess liquidity to increase the investment portfolio during 2021 and the first quarter of 2022 to obtain higher yields than what would have been earned at the Federal Funds rate.

Net unrealized losses for the Company’s AFS investment securities portfolio were $22.1 million as of March 31, 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 March 31, 2022 reflected cumulative net unrealized losses on investment securities of $17.4 million. There were no securities classified as HTM at March 31, 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 March 31, 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 $551 thousand and $589 thousand were pledged as collateral for public unit deposits or for other purposes as required or permitted by law at March 31, 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 three months ended March 31, 2022 and 2021:

			Three Months Ended March 31, 2022									Three Months Ended March 31, 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			$	281,367		25.3			—			$	221,344		22.1			—
Interest bearing checking accounts			279,817			25.2			0.22		%	234,339			23.4			0.25		%
Money market accounts			259,670			23.3			0.53		%	264,499			26.4			0.80		%
Savings accounts			185,368			16.7			0.04		%	148,770			14.8			0.07		%
Total nontime deposits			1,006,222			90.5			0.20		%	868,952			86.7			0.32		%
Time deposits:
Less than $100,000			49,733			4.4			0.42		%	67,423			6.7			0.89		%
$100,000 and over			56,636			5.1			0.47		%	66,193			6.6			1.25		%
Total time deposits			106,369			9.5			0.45		%	133,616			13.3			1.06		%
Total deposits			$	1,112,591		100.0			0.23		%	$	1,002,568		100.0			0.42		%

During the first three months of 2022, average total deposits grew $110.0 million, or 11.0%, compared to the three months ended March 31, 2021, with growth in all categories except time deposits and money market accounts. The increase in average balances for nontime deposits was attributable to proceeds from PPP loans deposited into customer accounts at Union, customer's receipt of government stimulus payments, and the general reduction in spending by customers due to COVID-19. The average balances of time deposits decreased due to higher rate paying time deposit accounts that matured and customers primarily transferred those funds into other deposit accounts.

The Company participates in CDARS, which permits the Company 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 March 31, 2022 or December 31, 2021. There were $13.6 million of time deposits of $250,000 or less on the balance sheet at March 31, 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 $134.2 million and $155.3 million in exchanged ICS demand and money market

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deposits on the balance sheet at March 31, 2022 and December 31, 2021, respectively. There were no purchased ICS deposits at March 31, 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 March 31, 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 March 31, 2022 and December 31, 2021:

			March 31, 2022			December 31, 2021
			(Dollars in thousands)
Within 3 months			$	5,585		$	4,249
3 to 6 months			3,347			5,576
6 to 12 months			4,193			4,536
Over 12 months			1,832			1,862
			$	14,957		$	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 requirement. At March 31, 2022, the Company had uninsured deposit accounts totaling $449.1 million, or 39.6% of total deposits. Uninsured deposits include $28.3 million of municipal deposits that were collateralized under applicable state regulations by investment securities or letters of credit issued by the FHLB at March 31, 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 borrowed funds at March 31, 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 March 31, 2022 and December 31, 2021, respectively. Total fees paid by the Company in connection with the issuance of these letters of credit were $8 thousand and $9 thousand for the three months ended March 31, 2022 and 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 $321 thousand and $329 thousand at March 31, 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.

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

			March 31, 2022			December 31, 2021
			(Dollars in thousands)
Commitments to originate loans			$	62,248		$	48,910
Unused lines of credit			163,083			168,442
Standby and commercial letters of credit			2,143			2,158
Credit card arrangements			170			170
FHLB Mortgage Partnership Finance credit enhancement obligation, net			826			818
Commitment to purchase investment in a real estate limited partnership			—			4,574
Total			$	228,470		$	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 increase in commitments to originate loans at March 31, 2022 from December 31, 2021 is primarily the result of a $9.0 million increase in commitments to originate residential construction and commercial construction loans.

The Company did not hold any derivative or hedging instruments at March 31, 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 March 31, 2022, Union, as a member of FHLB, had access to unused lines of credit up to $69.1 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 March 31, 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 March 31, 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 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.

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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.

Stockholders’ equity decreased from $84.3 million at December 31, 2021 to $69.4 million at March 31, 2022, reflecting an increase of $15.9 million in accumulated other comprehensive loss due to a decrease in the fair market value of the Company's AFS securities, cash dividends declared of $1.6 million and stock repurchases of $75 thousand during the three months ended March 31, 2022. These decreases were partially offset by net income of $2.5 million for the first three months of 2022, an increase of $103 thousand from stock based compensation and a $13 thousand increase due to the issuance of common stock under the DRIP. The components of other comprehensive loss are illustrated in Note 10 of the unaudited consolidated financial statements.

The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of March 31, 2022, the Company had 4,968,692 shares issued, of which 4,493,170 were outstanding and 475,522 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 2,500 shares under this program during the first three months of 2022 at a total cost of $75 thousand.

The Company maintains a DRIP whereby registered stockholders may elect to reinvest cash dividends and 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 March 31, 2022, 5,846 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 continue to calculate its regulatory capital ratios under standard guidelines. As of March 31, 2022, the Tier I leverage ratios for the Company and Union were 6.91% and 8.19%, respectively.

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As shown in the table below, as of March 31, 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 March 31, 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 March 31, 2022			Amount			Ratio			Amount			Ratio			Amount			Ratio
			(Dollars in thousands)
Company:
Total capital to risk weighted assets			$	109,133		14.84		%	$	58,832		8.00		%	N/A			N/A
Tier I capital to risk weighted assets			84,618			11.50		%	44,149			6.00		%	N/A			N/A
Common Equity Tier 1 to risk weighted assets			84,618			11.50		%	33,111			4.50		%	N/A			N/A
Tier I capital to average assets			84,618			6.91		%	48,983			4.00		%	N/A			N/A
Union:
Total capital to risk weighted assets			$	108,642		14.79		%	$	58,765		8.00		%	$	73,456		10.00		%
Tier I capital to risk weighted assets			100,306			13.65		%	44,091			6.00		%	58,787			8.00		%
Common Equity Tier 1 to risk weighted assets			100,306			13.65		%	33,068			4.50		%	47,765			6.50		%
Tier I capital to average assets			100,306			8.19		%	48,989			4.00		%	61,237			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 first quarter of 2022 and were declared for the second quarter, payable on May 5, 2022 to stockholders of record on April 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 March 31, 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.

PART II  OTHER INFORMATION

Item 1. Legal Proceedings.

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

Union Bankshares, Inc. Page 41

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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 March 31, 2022.

The following table summarizes repurchases of the Company's equity securities during the quarter ended March 31, 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)
January 2022			—			—			—			2,500
February 2022			—			—			—			2,500
March 2022			2,500			$30.03			2,500			—

__________________

(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 March 31, 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 months ended March 31, 2022 and 2021, (iii) the unaudited consolidated statements of comprehensive income for the three months ended March 31, 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 42

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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.
May 13, 2022						/s/ David S. Silverman
						David S. Silverman
						Director, President and Chief Executive Officer
May 13, 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 March 31, 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 months ended March 31, 2022 and 2021, (iii) the unaudited consolidated statements of comprehensive income for the three months ended March 31, 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 43