UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

OF THE SECURITIES EXCHANGE ACT OF 1934

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: ~~September 30, 2017~~March 31, 2018

Commission file number: 001-15985

UNION BANKSHARES, INC.



	VERMONT		03-0283552

P.O. BOX 667

20 LOWER MAIN STREET

MORRISVILLE, VT 05661

Registrant’s telephone number: 802-888-6600

Former name, former address and former fiscal year, if changed since last report: Not applicable

Securities registered pursuant to section 12(b) of the Act:



	Common Stock, $2.00 par value		Nasdaq Stock Market
	(Title of class)		(Exchanges registered on)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” ”accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer [ ]	Accelerated filer [ X ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company)	Smaller reporting company [ ]
	Emerging growth company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes [ ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of ~~October 28, 2017.~~April 30, 2018.



Common Stock, $2 par value	~~4,462,522~~4,465,661	shares

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	Page 1
Consolidated Statements of Income	Page 2
Consolidated Statements of Comprehensive Income	Page 3
Consolidated Statements of Changes in Stockholders' Equity	Page 4
Consolidated Statements of Cash Flows	Page 5
Notes to Unaudited Interim Consolidated Financial Statements	Page 7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.	Page 2725
Item 3. Quantitative and Qualitative Disclosures About Market Risk.	Page 4640
Item 4. Controls and Procedures.	Page 4641

PART II OTHER INFORMATION

Item 1. Legal Proceedings.	Page 4641
Item 1A. Risk Factors.	Page 4641
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.	Page 4641
Item 6. Exhibits.	Page 4742

Signatures	Page 4742

PART I FINANCIAL INFORMATION

Item 1. Financial Statements

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
	(Unaudited)						(Unaudited)
Assets	(Dollars in thousands)						(Dollars in thousands)
Cash and due from banks	$	3,512		$	4,272		$	3,328		$	3,857
Federal funds sold and overnight deposits	8,885			35,003			9,918			34,651
Cash and cash equivalents	12,397			39,275			13,246			38,508
Interest bearing deposits in banks	8,356			9,504			9,601			9,352
Investment securities available-for-sale	63,970			65,556			68,440			65,439
Investment securities held-to-maturity (fair value $999 thousand at September 30, 2017 and December 31, 2016)	1,000			999
Investment securities held-to-maturity (fair value $999 thousand at December 31, 2017)							—			1,000
Other investments							502			—
Total investments							68,942			66,439
Loans held for sale	5,675			7,803			2,938			7,947
Loans	578,902			533,290			591,660			586,615
Allowance for loan losses	(5,259		)	(5,247		)	(5,405		)	(5,408		)
Net deferred loan costs	749			649			797			795
Net loans	574,392			528,692			587,052			582,002
Accrued interest receivable	2,196			2,259			2,468			2,500
Premises and equipment, net	13,244			13,525			14,298			14,255
Core deposit intangible	625			754			540			583
Goodwill	2,223			2,223			2,223			2,223
Investment in real estate limited partnerships	3,323			2,783			3,028			3,166
Company-owned life insurance	8,802			8,617			8,865			8,861
Other assets	9,143			9,391			9,530			9,995
Total assets	$	705,346		$	691,381		$	722,731		$	745,831
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Noninterest bearing	$	119,203		$	112,384		$	128,951		$	127,824
Interest bearing	387,707			382,083			392,027			418,621
Time	99,714			103,193			102,865			101,129
Total deposits	606,624			597,660			623,843			647,574
Borrowed funds	32,520			31,595			31,265			31,581
Accrued interest and other liabilities	6,595			5,847			8,459			8,015
Total liabilities	645,739			635,102			663,567			687,170
Commitments and Contingencies
Stockholders’ Equity
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,937,652 shares issued at September 30, 2017 and 4,936,652 shares issued at December 31, 2016	9,876			9,874
Common stock, $2.00 par value; 7,500,000 shares authorized; 4,940,961 shares issued at March 31, 2018 and December 31, 2017							9,882			9,882
Additional paid-in capital	753			620			803			755
Retained earnings	55,731			53,086			58,604			57,197
Treasury stock at cost; 475,135 shares at September 30, 2017 and 474,517 shares at December 31, 2016	(4,061		)	(4,022		)
Treasury stock at cost; 475,304 shares at March 31, 2018 and 475,385 shares at December 31, 2017							(4,079		)	(4,077		)
Accumulated other comprehensive loss	(2,692		)	(3,279		)	(6,046		)	(5,096		)
Total stockholders' equity	59,607			56,279			59,164			58,661
Total liabilities and stockholders' equity	$	705,346		$	691,381		$	722,731		$	745,831

See accompanying notes to unaudited interim consolidated financial statements.

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME (Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
	(Dollars in thousands, except per share data)								(Dollars in thousands, except per share data)
Interest and dividend income
Interest and fees on loans	$	6,893	$	6,355	$	19,823	$	18,604	$	6,999	$	6,322
Interest on debt securities:
Taxable	250		211		741		683		289		242
Tax exempt	159		144		486		427		145		165
Dividends	42		27		114		62		40		45
Interest on federal funds sold and overnight deposits	15		12		64		23		53		30
Interest on interest bearing deposits in banks	38		37		109		123		45		35
Total interest and dividend income	7,397		6,786		21,337		19,922		7,571		6,839
Interest expense
Interest on deposits	453		363		1,271		1,200		533		422
Interest on borrowed funds	134		108		369		303		114		115
Total interest expense	587		471		1,640		1,503		647		537
Net interest income	6,810		6,315		19,697		18,419		6,924		6,302
Provision for loan losses	150		—		150		150		—		—
Net interest income after provision for loan losses	6,660		6,315		19,547		18,269		6,924		6,302
Noninterest income
Trust income	179		171		548		523		193		178
Service fees	1,553		1,538		4,444		4,377		1,487		1,440
Net gains on sales of investment securities available-for-sale	24		53		33		71
Net gains on sales of loans held for sale	657		921		1,762		2,196		295		508
Other income	93		121		285		420		496		107
Total noninterest income	2,506		2,804		7,072		7,587		2,471		2,233
Noninterest expenses
Salaries and wages	2,570		2,622		7,642		7,522		2,649		2,568
Pension and employee benefits	954		865		2,784		2,659		958		879
Occupancy expense, net	320		297		1,073		923		395		390
Equipment expense	532		553		1,589		1,603		535		534
Other expenses	1,565		1,687		4,665		4,828		1,598		1,570
Total noninterest expenses	5,941		6,024		17,753		17,535		6,135		5,941
Income before provision for income taxes	3,225		3,095		8,866		8,321		3,260		2,594
Provision for income taxes	855		827		2,339		2,155		513		664
Net income	$	2,370	$	2,268	$	6,527	$	6,166	$	2,747	$	1,930
Earnings per common share	$	0.53	$	0.51	$	1.46	$	1.38	$	0.62	$	0.43
Weighted average number of common shares outstanding	4,462,414		4,459,602		4,462,113		4,458,755		4,465,600		4,462,057
Dividends per common share	$	0.29	$	0.28	$	0.87	$	0.83	$	0.30	$	0.29

See accompanying notes to unaudited interim consolidated financial statements.

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

Three Months Ended
September 30, Nine Months Ended
September 30,
2017 2016 2017 2016
(Dollars in thousands)
Net income $ 2,370
$ 2,268
$ 6,527
$ 6,166
Other comprehensive income (loss), net of tax:
Investment securities available-for-sale:
Net unrealized holding gains (losses) arising during the period on investment securities available-for-sale 46
(182 ) 609
714
Reclassification adjustment for net gains on sales of investment securities available-for-sale realized in net income (16 ) (35 ) (22 ) (47 )
Total other comprehensive income (loss) 30
(217 ) 587
667
Total comprehensive income $ 2,400
$ 2,051
$ 7,114
$ 6,833



	Three Months Ended March 31,
	2018			2017
	(Dollars in thousands)
Net income	$	2,747		$	1,930
Other comprehensive (loss) income, net of tax:
Investment securities available-for-sale:
Net unrealized holding (losses) gains arising during the period on investment securities available-for-sale	(950		)	225
Total other comprehensive (loss) income	(950		)	225
Total comprehensive income	$	1,797		$	2,155

See accompanying notes to unaudited interim consolidated financial statements.

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017 (Unaudited)


	Common Stock																		Common Stock
	Shares, net of treasury		Amount		Additional paid-in capital		Retained earnings			Treasury stock			Accumulated other comprehensive loss			Total stockholders’ equity			Shares, net of treasury		Amount		Additional paid-in capital		Retained earnings			Treasury stock			Accumulated other comprehensive loss			Total stockholders’ equity
	(Dollars in thousands, except per share data)																		(Dollars in thousands, except per share data)
Balances December 31, 2016	4,462,135		$	9,874	$	620	$	53,086		$	(4,022	)	$	(3,279	)	$	56,279
Balances December 31, 2017																			4,465,576		$	9,882	$	755	$	57,197		$	(4,077	)	$	(5,096	)	$	58,661
Net income																			—		—		—		2,747			—			—			2,747
Other comprehensive loss																			—		—		—		—			—			(950		)	(950		)
Dividend reinvestment plan																			141		—		7		—			1			—			8
Cash dividends declared ($0.30 per share)																			—		—		—		(1,340		)	—			—			(1,340		)
Stock based compensation expense																			—		—		41		—			—			—			41
Purchase of treasury stock																			(60	)	—		—		—			(3		)	—			(3		)
Balances March 31, 2018																			4,465,657		$	9,882	$	803	$	58,604		$	(4,079	)	$	(6,046	)	$	59,164

Balances, December 31, 2016																			4,462,135		$	9,874	$	620	$	53,086		$	(4,022	)	$	(3,279	)	$	56,279
Net income	—		—		—		6,527			—			—			6,527			—		—		—		1,930			—			—			1,930
Other comprehensive income	—		—		—		—			—			587			587			—		—		—		—			—			225			225
Dividend reinvestment plan	422		—		14		—			4			—			18			117		—		4		—			1			—			5
Cash dividends declared ($0.87 per share)	—		—		—		(3,882		)	—			—			(3,882		)
Cash dividends declared ($0.29 per share)																			—		—		—		(1,294		)	—			—			(1,294		)
Stock based compensation expense	—		—		102		—			—			—			102			—		—		34		—			—			—			34
Exercise of stock options	1,000		2		17		—			—			—			19
Purchase of treasury stock	(1,040	)	—		—		—			(43		)	—			(43		)	(225	)	—		—		—			(9		)	—			(9		)
Balances September 30, 2017	4,462,517		$	9,876	$	753	$	55,731		$	(4,061	)	$	(2,692	)	$	59,607

Balances, December 31, 2015	4,457,177		$	9,864	$	501	$	49,524		$	(4,019	)	$	(2,302	)	$	53,568
Net income	—		—		—		6,166			—			—			6,166
Other comprehensive income	—		—		—		—			—			667			667
Dividend reinvestment plan	190		—		4		—			2			—			6
Cash dividends declared ($0.83 per share)	—		—		—		(3,701		)	—			—			(3,701		)
Stock based compensation expense	—		—		49		—			—			—			49
Exercise of stock options	2,500		5		51		—			—			—			56
Purchase of treasury stock	(213	)	—		—		—			(6		)	—			(6		)
Balances, September 30, 2016	4,459,654		$	9,869	$	605	$	51,989		$	(4,023	)	$	(1,635	)	$	56,805
Balances, March 31, 2017																			4,462,027		$	9,874	$	658	$	53,722		$	(4,030	)	$	(3,054	)	$	57,170

See accompanying notes to unaudited interim consolidated financial statements.

UNION BANKSHARES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)


	Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2018			2017
	(Dollars in thousands)						(Dollars in thousands)
Cash Flows From Operating Activities
Net income	$	6,527		$	6,166		$	2,747		$	1,930
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	914			967			301			307
Provision for loan losses	150			150
Deferred income tax provision	226			259			41			333
Net amortization of investment securities	314			261			93			113
Equity in losses of limited partnerships	471			391			140			157
Stock based compensation expense	102			49			41			34
Net increase in unamortized loan costs	(100		)	(134		)
Net (increase) decrease in unamortized loan costs							(2		)	5
Proceeds from sales of loans held for sale	92,231			101,213			23,384			29,041
Origination of loans held for sale	(88,341		)	(103,596		)	(18,080		)	(23,577		)
Net gains on sales of loans held for sale	(1,762		)	(2,196		)	(295		)	(508		)
Net loss on disposals of premises and equipment	13			—
Net gains on sales of investment securities available-for-sale	(33		)	(71		)
Decrease (increase) in accrued interest receivable	63			(130		)
Net (gain) loss on disposals of premises and equipment							(191		)	13
Net gain on sales of other real estate owned							(11		)	—
Decrease in accrued interest receivable							32			217
Amortization of core deposit intangible	129			129			43			43
Increase in other assets	(490		)	(403		)	403			80
Contribution to defined benefit pension plan	(750		)	(750		)	—			(750		)
Increase in other liabilities	926			1,486			474			419
Net cash provided by operating activities	10,590			3,791			9,120			7,857
Cash Flows From Investing Activities
Interest bearing deposits in banks
Proceeds from maturities and redemptions	4,384			3,995			996			2,988
Purchases	(3,236		)	(996		)	(1,245		)	(1,992		)
Investment securities held-to-maturity
Proceeds from maturities, calls and paydowns	—			4,220			1,000			—
Investment securities available-for-sale
Proceeds from sales	3,962			6,617
Proceeds from maturities, calls and paydowns	5,310			8,403			1,539			1,696
Purchases	(7,078		)	(19,761		)	(6,358		)	(3,551		)
Other Investments
Proceeds from sales							44			—
Purchases							(24		)	—
Purchase of nonmarketable stock	(518		)	(1,110		)	(105		)	—
Redemption of nonmarketable stock	541			543
Net increase in loans	(45,803		)	(22,015		)	(5,051		)	(4,298		)
Recoveries of loans charged off	53			35			3			6
Purchases of premises and equipment	(646		)	(1,289		)	(357		)	(67		)
Proceeds from Company-owned life insurance death benefit	—			73			307			—
Investments in limited partnerships	(438		)	(975		)	—			(186		)
Proceeds from sales of premises and equipment							204			—
Proceeds from sales of other real estate owned							47			—
Net cash used in investing activities	(43,469		)	(22,260		)	(9,000		)	(5,404		)


Cash Flows From Financing Activities
Advances on long-term borrowings	10,000			25,452			7,000			—
Repayment of long-term debt	(10,208		)	(229		)	(6,072		)	(70		)
Net increase in short-term borrowings outstanding	1,133			2,726
Net increase in noninterest bearing deposits	6,819			16,555
Net increase in interest bearing deposits	5,624			40,173
Net decrease in time deposits	(3,479		)	(44,950		)
Issuance of common stock	19			56
Net (decrease) increase in short-term borrowings outstanding							(1,244		)	202
Net increase (decrease) in noninterest bearing deposits							1,127			(2,297		)
Net decrease in interest bearing deposits							(26,594		)	(12,632		)
Net increase (decrease) in time deposits							1,736			(666		)
Purchase of treasury stock	(43		)	(6		)	(3		)	(9		)
Dividends paid	(3,864		)	(3,695		)	(1,332		)	(1,289		)
Net cash provided by financing activities	6,001			36,082
Net (decrease) increase in cash and cash equivalents	(26,878		)	17,613
Net cash used in financing activities							(25,382		)	(16,761		)
Net decrease in cash and cash equivalents							(25,262		)	(14,308		)
Cash and cash equivalents
Beginning of period	39,275			17,961			38,508			39,275
End of period	$	12,397		$	35,574		$	13,246		$	24,967
Supplemental Disclosures of Cash Flow Information
Interest paid	$	1,648		$	1,674		$	647		$	540
Income taxes paid	$	1,020		$	975

Dividends paid on Common Stock:
Dividends declared	$	3,882		$	3,701		$	1,340		$	1,294
Dividends reinvested	(18		)	(6		)	(8		)	(5		)
	$	3,864		$	3,695		$	1,332		$	1,289

See accompanying notes to unaudited interim consolidated financial statements.

UNION BANKSHARES, INC. AND SUBSIDIARY

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


Note 1.	Basis of Presentation

The accompanying unaudited interim consolidated financial statements of Union Bankshares, Inc. and Subsidiary (together, the Company) as of ~~September 30, 2017,~~March 31, 2018, and for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017, 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, ~~2016~~2017~~, as amended ("2016~~ (2017 Annual ~~Report on Form 10-K")~~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 ~~2016~~2017 Annual ~~Report on Form 10-K.~~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, ~~2017,~~2018, or any interim period.

~~Certain amounts in the~~ ~~2016~~ ~~consolidated financial statements have been reclassified to conform to the~~ ~~2017~~ ~~presentation.~~

In addition to the definitions set forth elsewhere in this report, the acronyms, abbreviations and capitalized terms identified below are used throughout this Form 10-Q, including Part I. "Financial Information" and Part II. "Other Information". The following is provided to aid the reader and provide a reference page when reviewing this Form 10-Q.



AFS:	Available-for-sale	IRS:	Internal Revenue Service
ALCO:	Asset Liability Committee	MBS:	Mortgage-backed security
ALL:	Allowance for loan losses	MSRs:	Mortgage servicing rights
ASC:	Accounting Standards Codification	OAO:	Other assets owned
ASU:	Accounting Standards Update	OCI:	Other comprehensive income (loss)
Board:	Board of Directors	OFAC:	U.S. Office of Foreign Assets Control
bp or bps:	Basis point(s)	OREO:	Other real estate owned
Branch Acquisition:	The acquisition of three New Hampshire branches in May 2011	OTTI:	Other-than-temporary impairment
CDARS:	Certificate of Deposit Accounts Registry Service of the Promontory Interfinancial Network	OTT:	Other-than-temporary
Company:	Union Bankshares, Inc. and Subsidiary	Plan:	The Union Bank Pension Plan
DRIP:	Dividend Reinvestment Plan	RD:	USDA Rural Development
FASB:	Financial Accounting Standards Board	RSU:	Restricted Stock Unit
FDIC:	Federal Deposit Insurance Corporation	SBA:	U.S. Small Business Administration
FHA:	U.S. Federal Housing Administration	SEC:	U.S. Securities and Exchange Commission
FHLB:	Federal Home Loan Bank of Boston	TDR:	Troubled-debt restructuring
FRB:	Federal Reserve Board	Union:	Union Bank, the sole subsidiary of Union Bankshares, Inc
FHLMC/Freddie Mac:	Federal Home Loan Mortgage Corporation	USDA:	U.S. Department of Agriculture
GAAP:	Generally Accepted Accounting Principles in the United States	VA:	U.S. Veterans Administration
HTM:	Held-to-maturity	2008 ISO Plan:	2008 Incentive Stock Option Plan of the Company
HUD:	U.S. Department of Housing and Urban Development	2014 Equity Plan:	2014 Equity Incentive Plan
ICS:	Insured Cash Sweeps of the Promontory Interfinancial Network	2017 Annual Report	Annual Report of Form 10-K for the year ended December 31, 2017
		2017 Tax Act:	Tax Cut and Jobs Act of 2017

Note 2. Legal Contingencies

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

Note 3. Per Share Information

Earnings per common share are computed based on the weighted average number of shares of common stock outstanding during the period and reduced for shares held in treasury. The assumed exercise of outstanding exercisable stock options and vesting of ~~restricted stock units~~RSUs does not result in material dilution and is not included in the calculation.

Note 4. Recent Accounting Pronouncements

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation - Stock Compensation , Scope of Modification Accounting (Topic 718).~~ The ASU was issued to provide clarity and reduce both 1) diversity in practice and 2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change to the terms or conditions of a share-based payment award. The ASU includes guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The ASU is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a prospective basis to an award modified on or after the adoption date. The ASU will not have a material effect on the Company's consolidated financial statements.

~~In May 2014, the FASB issued ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606).~~ The ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Company will adopt the guidance as of January 1, 2018 using a modified retrospective method with a cumulative-effect adjustment to opening retained earnings. While the guidance will replace most existing revenue recognition guidance in GAAP, the ASU is not applicable to financial instruments and, therefore, will not impact a majority of the Company’s revenues, including net interest income. While in scope of the new guidance, the Company does not expect a material change in the timing or measurement of revenues related to deposit fees. Mortgage servicing fees have been concluded to be out of scope of the standard and therefore will not be impacted by the issuance of this guidance. The Company continues to evaluate the effect that the guidance will have on other revenue streams within its scope, as well as changes in disclosures required by the new guidance. Based on the Company’s current interpretations of the new guidance, the overall impact to net income is expected to be immaterial.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU was issued to increase transparency and comparability among organizations by recognizing lease assets and liabilities (including operating leases) on the balance sheet and disclosing key information about leasing arrangements. Previous lease accounting did not require the inclusion of operating leases in the balance sheet. The ASU is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company is evaluating the potential impact of the ASU on its consolidated financial ~~statements.~~statements by reviewing its lease contracts.

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 ~~available for sale.~~AFS. The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 15, 2018, including interim periods within such years. The Company has established a CECL implementation team and developed a transition project plan. ~~Team~~The team members have evaluated CECL implementation software providers and have selected Sageworks. The Company has entered into an agreement with Sageworks and has been ~~assigned specific tasks~~compiling data to run parallel calculations during 2018. This will facilitate the implementation process and management's evaluation of the potential impact of the ASU on the Company's consolidated financial statements.

The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) using a modified-retrospective transition method, as of January 1, 2018. The ASU requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. While the guidance replaces most existing revenue recognition guidance in GAAP, the ASU is not applicable to financial instruments and, therefore, did not impact a majority of the Company’s revenues, including net interest income. Through the Company's assessment, it was determined that there will be no cumulative-effect adjustment to beginning stockholders' equity under the modified retrospective transition method within the consolidated financial statements as there was no change in revenue recognition upon adoption of ASU2014-09.

Note 5. Goodwill and Other Intangible Assets

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

The Company also initially recorded ~~$1.7~~$1.7 million of acquired identifiable intangible assets in connection with the 2011 Branch Acquisition, representing the core deposit intangible which is subject to straight-line amortization over the estimated 10 year average life of the core deposit base, absent any future impairment. Management will evaluate the core deposit intangible for impairment if conditions warrant.

Amortization expense for the core deposit intangible was $43 thousand for the three months ended ~~September 30, 2017~~March 31, 2018 and ~~2016 and $129 thousand for the nine months ended September 30, 2017 and 2016.~~2017. The amortization expense is included in other expenses on the consolidated statements of income and is deductible for tax purposes. As of ~~September 30, 2017~~March 31, 2018, the remaining amortization expense related to the core deposit intangible, absent any future impairment, is expected to be as follows:


	(Dollars in thousands)		(Dollars in thousands)
2017	$	42
2018	171		$	128
2019	171		171
2020	171		171
2021	70		70
Total	$	625	$	540

Note 6. Investment Securities

~~Investment~~AFS and HTM investment securities as of the balance sheet dates consisted of the following:

September 30, 2017
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises $ 9,535
$ 18
$ (143 ) $ 9,410
Agency mortgage-backed 18,820
47
(126 ) 18,741
State and political subdivisions 25,304
259
(249 ) 25,314
Corporate 9,927
150
(72 ) 10,005
Total debt securities 63,586
474
(590 ) 63,470
Mutual funds 500
—
—
500
Total $ 64,086
$ 474
$ (590 ) $ 63,970
Held-to-maturity
U.S. Government-sponsored enterprises $ 1,000
$ —
$ (1 ) $ 999



March 31, 2018	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	7,437	$	2	$	(178	)	$	7,261
Agency mortgage-backed	33,356		—		(796		)	32,560
State and political subdivisions	24,820		126		(624		)	24,322
Corporate	4,411		1		(115		)	4,297
Total	$	70,024	$	129	$	(1,713	)	$	68,440


December 31, 2016	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2017										Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)									(Dollars in thousands)
Available-for-sale
Debt securities:
U.S. Government-sponsored enterprises	$	10,221	$	15	$	(196	)	$	10,040	$	7,805	$	12	$	(122	)	$	7,695
Agency mortgage-backed	18,283		27		(269		)	18,041		28,378		12		(274		)	28,116
State and political subdivisions	27,909		113		(650		)	27,372		24,704		249		(239		)	24,714
Corporate	9,745		84		(129		)	9,700		4,412		48		(67		)	4,393
Total debt securities	66,158		239		(1,244		)	65,153		65,299		321		(702		)	64,918
Mutual funds(1)	403		—		—			403		521		—		—			521
Total	$	66,561	$	239	$	(1,244	)	$	65,556	$	65,820	$	321	$	(702	)	$	65,439
Held-to-maturity
U.S. Government-sponsored enterprises	$	999	$	—	$	—		$	999	$	1,000	$	—	$	(1	)	$	999

____________________


(1)	As of December 31, 2017, mutual funds were classified as AFS investment securities. Effective January 1, 2018, these investments were reclassified to other investments on the consolidated balance sheets as they are no longer eligible to be classified as AFS upon adoption of ASU 2016-01.

There were no investment securities HTM at March 31, 2018. Investment securities AFS with a carrying amount of ~~$4.9~~$2.7 million and ~~$8.4~~$4.6 million at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively, were pledged as collateral for public deposits and for other purposes as required or permitted by law.

The amortized cost and estimated fair value of debt securities by contractual scheduled maturity as of ~~September 30, 2017~~March 31, 2018 were as follows:


	Amortized Cost		Fair Value
	(Dollars in thousands)				Amortized Cost		Fair Value
Available-for-sale					(Dollars in thousands)
Due in one year or less	$	250	$	251
Due from one to five years	5,470		5,561		$	4,302	$	4,325
Due from five to ten years	22,143		22,178		16,319		15,978
Due after ten years	16,903		16,739		16,047		15,577
	44,766		44,729		36,668		35,880
Agency mortgage-backed	18,820		18,741		33,356		32,560
Total debt securities available-for-sale	$	63,586	$	63,470	$	70,024	$	68,440
Held-to-maturity
Due in one year or less	$	1,000	$	999
Total debt securities held-to-maturity	$	1,000	$	999

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.

As of March 31, 2018, other investments consisted of mutual funds with a fair value of $502 thousand, a cost basis of $459 thousand and unrealized gains of $43 thousand.

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


September 30, 2017	Less Than 12 Months						12 Months and over						Total
March 31, 2018																			Less Than 12 Months						12 Months and over						Total
	Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses			Number of Securities	Fair Value		Gross Unrealized Losses			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)																		(Dollars in thousands)
Debt securities:
U.S. Government- sponsored enterprises	8	$	4,855	$	(47	)	8	$	3,801	$	(97	)	16	$	8,656	$	(144	)	5	$	2,381	$	(19	)	9	$	4,216	$	(159	)	14	$	6,597	$	(178	)
Agency mortgage-backed	11	6,448		(43		)	6	4,332		(83		)	17	10,780		(126		)	38	27,583		(580		)	7	4,977		(216		)	45	32,560		(796		)
State and political subdivisions	15	6,541		(44		)	15	6,312		(205		)	30	12,853		(249		)	25	9,982		(189		)	18	7,657		(435		)	43	17,639		(624		)
Corporate	1	478		(22		)	4	1,948		(50		)	5	2,426		(72		)	6	2,826		(86		)	2	971		(29		)	8	3,797		(115		)
Total	35	$	18,322	$	(156	)	33	$	16,393	$	(435	)	68	$	34,715	$	(591	)	74	$	42,772	$	(874	)	36	$	17,821	$	(839	)	110	$	60,593	$	(1,713	)


December 31, 2016	Less Than 12 Months						12 Months and over						Total
December 31, 2017																			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			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)																		(Dollars in thousands)
Debt securities:
U.S. Government- sponsored enterprises	13	$	8,351	$	(180	)	3	$	1,172	$	(16	)	16	$	9,523	$	(196	)	3	$	1,824	$	(7	)	9	$	4,374	$	(116	)	12	$	6,198	$	(123	)
Agency mortgage-backed	22	15,141		(261		)	1	344		(8		)	23	15,485		(269		)	26	19,315		(143		)	7	5,222		(131		)	33	24,537		(274		)
State and political subdivisions	40	16,481		(650		)	—	—		—			40	16,481		(650		)	8	3,803		(22		)	18	7,899		(217		)	26	11,702		(239		)
Corporate	8	3,973		(56		)	4	1,627		(73		)	12	5,600		(129		)	2	870		(31		)	2	964		(36		)	4	1,834		(67		)
Total	83	$	43,946	$	(1,147	)	8	$	3,143	$	(97	)	91	$	47,089	$	(1,244	)	39	$	25,812	$	(203	)	36	$	18,459	$	(500	)	75	$	44,271	$	(703	)

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. Declines in the fair values of individual equity securities that are deemed by management to be OTT are reflected in noninterest income when identified.

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

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

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

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

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

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

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

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

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

The Company has the ability to hold the investment securities that had unrealized losses at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 for the foreseeable future and no declines were deemed by management to be OTT.

~~The following table presents the proceeds, gross realized gains and gross realized losses from the sale~~There were no sales of AFS ~~securities:~~securities for the three months ended March 31, 2018 and March 31, 2017.

For the Three Months
Ended September 30, For The Nine Months
Ended September 30,
2017 2016 2017 2016
(Dollars in thousands)
Proceeds $ 2,517
$ 3,944
$ 3,962
$ 6,617

Gross gains 24
112
56
131
Gross losses —
(59 ) (23 ) (60 )
Net gains on sales of investment securities AFS $ 24
$ 53
$ 33
$ 71

Note 7. Loans

Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their unpaid principal balances, adjusted for any charge-offs, the ALL, and any deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

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

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

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


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
	(Dollars in thousands)						(Dollars in thousands)
Residential real estate	$	176,399		$	172,727		$	181,850		$	178,999
Construction real estate	36,796			34,189			43,379			42,935
Commercial real estate	257,192			249,063			260,695			254,291
Commercial	48,166			41,999			46,885			50,719
Consumer	3,832			3,962			3,525			3,894
Municipal	56,517			31,350			55,326			55,777
Gross loans	578,902			533,290			591,660			586,615
Allowance for loan losses	(5,259		)	(5,247		)	(5,405		)	(5,408		)
Net deferred loan costs	749			649			797			795
Net loans	$	574,392		$	528,692		$	587,052		$	582,002

~~There were~~ no ~~loans pledged as collateral on deposits of municipalities at September 30, 2017 and~~ ~~December 31, 2016~~. Qualifying residential first mortgage loans and certain commercial real estate loans ~~held by Union may be~~with a carrying value of $165.0 million and $164.5 million were pledged as collateral for borrowings from the FHLB under a blanket ~~lien.~~lien at March 31, 2018 and December 31, 2017, respectively.

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


September 30, 2017	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
March 31, 2018													Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)												(Dollars in thousands)
Residential real estate	$	173,964	$	231	$	748	$	207	$	1,249	$	176,399	$	177,929	$	2,453	$	358	$	293	$	817	$	181,850
Construction real estate	36,572		—		142		22		60		36,796		42,919		352		55		—		53		43,379
Commercial real estate	256,186		266		32		—		708		257,192		258,127		2,267		—		—		301		260,695
Commercial	48,141		2		11		—		12		48,166		46,625		20		10		1		229		46,885
Consumer	3,760		68		4		—		—		3,832		3,485		39		1		—		—		3,525
Municipal	56,517		—		—		—		—		56,517		55,326		—		—		—		—		55,326
Total	$	575,140	$	567	$	937	$	229	$	2,029	$	578,902	$	584,411	$	5,131	$	424	$	294	$	1,400	$	591,660


December 31, 2016	Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
December 31, 2017													Current		30-59 Days		60-89 Days		90 Days and Over and Accruing		Nonaccrual		Total
	(Dollars in thousands)												(Dollars in thousands)
Residential real estate	$	168,125	$	1,661	$	472	$	672	$	1,797	$	172,727	$	173,914	$	3,047	$	750	$	472	$	816	$	178,999
Construction real estate	34,148		17		—		—		24		34,189		42,857		—		—		22		56		42,935
Commercial real estate	245,402		1,642		153		157		1,709		249,063		253,266		357		361		—		307		254,291
Commercial	41,920		12		42		10		15		41,999		50,675		21		11		—		12		50,719
Consumer	3,946		12		3		1		—		3,962		3,884		7		3		—		—		3,894
Municipal	31,350		—		—		—		—		31,350		55,777		—		—		—		—		55,777
Total	$	524,891	$	3,344	$	670	$	840	$	3,545	$	533,290	$	580,373	$	3,432	$	1,125	$	494	$	1,191	$	586,615

There ~~were three~~was one residential real estate ~~loans~~loan totaling ~~$373~~$131 thousand in process of foreclosure at ~~September 30, 2017.~~March 31, 2018. Aggregate interest on nonaccrual loans not recognized was ~~$1.3~~$1.2 million ~~as of~~ ~~September 30, 2017~~ ~~and~~ ~~2016~~ and $1.3 million as of March 31, 2018 and 2017, respectively, and $1.2 million as of December 31, ~~2016~~2017.

Note 8. Allowance for Loan Losses and Credit Quality

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

The ALL is maintained at a level believed by management to be appropriate to absorb probable credit losses inherent in the loan portfolio as of the balance sheet date. The amount of the ALL is based on management's periodic evaluation of the collectability of the loan portfolio, including the nature, volume and risk characteristics of the portfolio, credit concentrations, trends in historical loss experience, estimated value of any underlying collateral, specific impaired loans and economic conditions. There ~~has been~~was no change to the methodology used to estimate the ALL during the ~~third~~first quarter of ~~2017~~2018. While management uses available information to recognize losses on loans, future additions to the ALL may be necessary based on changes in economic conditions or other relevant factors.

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

The ALL consists of specific, general and unallocated components. The specific component relates to the loans that are classified as impaired. Loans are evaluated for impairment and may be classified as impaired when management believes it is probable that the Company will not collect all the contractual interest and principal payments as scheduled in the loan agreement. Impaired loans may also include troubled loans that are restructured. A TDR occurs when the Company, for economic or legal reasons related to the borrower's financial difficulties, grants a concession to the borrower that would otherwise not be granted. A TDR classification may result from the transfer of assets to the Company in partial satisfaction of a troubled loan, a modification of a

loan's terms (such as reduction of stated interest rates below market rates, extension of maturity that does not conform to the Company's policies, reduction of the face amount of the loan, reduction of accrued interest, or reduction or deferment of loan payments), or a combination. A specific reserve amount is allocated to the ALL for individual loans that have been classified as impaired based on management's estimate of the fair value of the collateral for collateral dependent loans, an observable market price, or the present value of anticipated future cash flows. The Company accounts for the change in present value attributable to the passage of time in the loan loss reserve. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer, real estate or small balance commercial loans for impairment evaluation, unless such loans are subject to a restructuring agreement or have been identified as impaired as part of a larger customer relationship. Management has established the threshold for individual impairment evaluation for commercial loans with balances greater than $500 thousand, based on an evaluation of the Company's historical loss experience on substandard commercial loans.

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.

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

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

Changes in the ALL, by class of loans, for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017 were as follows:


For The Three Months Ended September 30, 2017	Residential Real Estate			Construction Real Estate			Commercial Real Estate		Commercial			Consumer			Municipal		Unallocated		Total
For The Three Months Ended March 31, 2018																						Residential Real Estate		Construction Real Estate		Commercial Real Estate			Commercial			Consumer			Municipal			Unallocated			Total
	(Dollars in thousands)																					(Dollars in thousands)
Balance, June 30, 2017	$	1,387		$	481		$	2,753	$	362		$	24		$	26	$	135	$	5,168
Balance, December 31, 2017																						$	1,361	$	488	$	2,707		$	395		$	30		$	64		$	363		$	5,408
Provision (credit) for loan losses	56			(76		)	37		(6		)	3			39		97		150			14		6		68			(28		)	(4		)	(1		)	(55		)	—
Recoveries of amounts charged off	36			3			—		3			1			—		—		43			—		—		—			—			3			—			—			3
	1,479			408			2,790		359			28			65		232		5,361			1,375		494		2,775			367			29			63			308			5,411
Amounts charged off	(100		)	—			—		—			(2		)	—		—		(102		)	—		—		(2		)	—			(4		)	—			—			(6		)
Balance, September 30, 2017	$	1,379		$	408		$	2,790	$	359		$	26		$	65	$	232	$	5,259
Balance, March 31, 2018																						$	1,375	$	494	$	2,773		$	367		$	25		$	63		$	308		$	5,405


For The Three Months Ended September 30, 2016	Residential Real Estate		Construction Real Estate		Commercial Real Estate			Commercial		Consumer			Municipal		Unallocated			Total
For The Three Months Ended March 31, 2017																					Residential Real Estate			Construction Real Estate		Commercial Real Estate			Commercial		Consumer			Municipal		Unallocated			Total
	(Dollars in thousands)																				(Dollars in thousands)
Balance, June 30, 2016	$	1,382	$	373	$	2,837		$	240	$	27		$	26	$	341		$	5,226
Balance, December 31, 2016																					$	1,399		$	391	$	2,687		$	342	$	26		$	40	$	362		$	5,247
Provision (credit) for loan losses	11		28		(64		)	5		4			20		(4		)	—			29			48		(26		)	4		—			2		(57		)	—
Recoveries of amounts charged off	—		3		—			1		—			—		—			4			2			3		—			—		1			—		—			6
	1,393		404		2,773			246		31			46		337			5,230			1,430			442		2,661			346		27			42		305			5,253
Amounts charged off	—		—		—			—		(4		)	—		—			(4		)	(58		)	—		—			—		(3		)	—		—			(61		)
Balance, September 30, 2016	$	1,393	$	404	$	2,773		$	246	$	27		$	46	$	337		$	5,226
Balance, March 31, 2017																					$	1,372		$	442	$	2,661		$	346	$	24		$	42	$	305		$	5,192

For The Nine Months Ended September 30, 2017 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Unallocated Total
(Dollars in thousands)
Balance, December 31, 2016 $ 1,399
$ 391
$ 2,687
$ 342
$ 26
$ 40
$ 362
$ 5,247
Provision (credit) for loan
losses
124
8
103
13
7
25
(130 ) 150
Recoveries of amounts
charged off
38
9
—
4
2
—
—
53
1,561
408
2,790
359
35
65
232
5,450
Amounts charged off (182 ) —
—
—
(9 ) —
—
(191 )
Balance, September 30, 2017 $ 1,379
$ 408
$ 2,790
$ 359
$ 26
$ 65
$ 232
$ 5,259

For The Nine Months Ended September 30, 2016 Residential Real Estate Construction Real Estate Commercial Real Estate Commercial Consumer Municipal Unallocated Total
(Dollars in thousands)
Balance, December 31, 2015 $ 1,419
$ 514
$ 2,792
$ 209
$ 28
$ 38
$ 201
$ 5,201
Provision (credit) for loan
losses
79
(119 ) (19 ) 62
3
8
136
150
Recoveries of amounts
charged off
15
9
—
8
3
—
—
35
1,513
404
2,773
279
34
46
337
5,386
Amounts charged off (120 ) —
—
(33 ) (7 ) —
—
(160 )
Balance, September 30, 2016 $ 1,393
$ 404
$ 2,773
$ 246
$ 27
$ 46
$ 337
$ 5,226

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 were as follows:


September 30, 2017	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
March 31, 2018																	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)																(Dollars in thousands)
Individually evaluated for impairment	$	57	$	—	$	4	$	—	$	—	$	—	$	—	$	61	$	44	$	—	$	—	$	6	$	—	$	—	$	—	$	50
Collectively evaluated for impairment	1,322		408		2,786		359		26		65		232		5,198		1,331		494		2,773		361		25		63		308		5,355
Total allocated	$	1,379	$	408	$	2,790	$	359	$	26	$	65	$	232	$	5,259	$	1,375	$	494	$	2,773	$	367	$	25	$	63	$	308	$	5,405


December 31, 2016	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
December 31, 2017																	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Unallocated		Total
	(Dollars in thousands)																(Dollars in thousands)
Individually evaluated for impairment	$	63	$	—	$	40	$	—	$	—	$	—	$	—	$	103	$	47	$	—	$	1	$	—	$	—	$	—	$	—	$	48
Collectively evaluated for impairment	1,336		391		2,647		342		26		40		362		5,144		1,314		488		2,706		395		30		64		363		5,360
Total allocated	$	1,399	$	391	$	2,687	$	342	$	26	$	40	$	362	$	5,247	$	1,361	$	488	$	2,707	$	395	$	30	$	64	$	363	$	5,408

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 were as follows:


September 30, 2017	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
March 31, 2018															Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)														(Dollars in thousands)
Individually evaluated for impairment	$	1,939	$	84	$	1,484	$	393	$	—	$	—	$	3,900	$	1,793	$	81	$	1,056	$	374	$	—	$	—	$	3,304
Collectively evaluated for impairment	174,460		36,712		255,708		47,773		3,832		56,517		575,002		180,057		43,298		259,639		46,511		3,525		55,326		588,356
Total	$	176,399	$	36,796	$	257,192	$	48,166	$	3,832	$	56,517	$	578,902	$	181,850	$	43,379	$	260,695	$	46,885	$	3,525	$	55,326	$	591,660


December 31, 2016	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
December 31, 2017															Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)														(Dollars in thousands)
Individually evaluated for impairment	$	1,448	$	88	$	3,328	$	432	$	—	$	—	$	5,296	$	1,718	$	82	$	1,074	$	378	$	—	$	—	$	3,252
Collectively evaluated for impairment	171,279		34,101		245,735		41,567		3,962		31,350		527,994		177,281		42,853		253,217		50,341		3,894		55,777		583,363
Total	$	172,727	$	34,189	$	249,063	$	41,999	$	3,962	$	31,350	$	533,290	$	178,999	$	42,935	$	254,291	$	50,719	$	3,894	$	55,777	$	586,615

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

1-3 Rating - Pass

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

4/M Rating - Satisfactory/Monitor

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

5-7 Rating - Substandard

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

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


September 30, 2017	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
March 31, 2018															Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)														(Dollars in thousands)
Pass	$	163,064	$	29,466	$	166,776	$	43,323	$	3,797	$	56,517	$	462,943	$	167,824	$	35,795	$	173,160	$	35,525	$	3,495	$	55,326	$	471,125
Satisfactory/Monitor	9,921		7,164		86,809		4,181		32		—		108,107		11,099		7,429		84,478		10,515		28		—		113,549
Substandard	3,414		166		3,607		662		3		—		7,852		2,927		155		3,057		845		2		—		6,986
Total	$	176,399	$	36,796	$	257,192	$	48,166	$	3,832	$	56,517	$	578,902	$	181,850	$	43,379	$	260,695	$	46,885	$	3,525	$	55,326	$	591,660


December 31, 2016	Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
December 31, 2017															Residential Real Estate		Construction Real Estate		Commercial Real Estate		Commercial		Consumer		Municipal		Total
	(Dollars in thousands)														(Dollars in thousands)
Pass	$	158,140	$	29,248	$	182,247	$	38,219	$	3,928	$	31,350	$	443,132	$	164,733	$	33,401	$	177,388	$	38,877	$	3,859	$	55,777	$	474,035
Satisfactory/Monitor	10,641		4,830		62,193		3,109		34		—		80,807		11,296		9,374		73,772		11,165		30		—		105,637
Substandard	3,946		111		4,623		671		—		—		9,351		2,970		160		3,131		677		5		—		6,943
Total	$	172,727	$	34,189	$	249,063	$	41,999	$	3,962	$	31,350	$	533,290	$	178,999	$	42,935	$	254,291	$	50,719	$	3,894	$	55,777	$	586,615

The following tables provide information with respect to impaired loans by class of loan as of and for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~September 30, 2016:~~March 31, 2017:


	As of September 30, 2017						For The Three Months Ended September 30, 2017				For The Nine Months Ended September 30, 2017				As of March 31, 2018						For The Three Months Ended March 31, 2018
	Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)														(Dollars in thousands)
Residential real estate	$	300	$	310	$	57									$	235	$	244	$	44
Commercial real estate	140		143		4
Commercial															13		13		6
With an allowance recorded	440		453		61										248		257		50

Residential real estate	1,639		2,168		—										1,558		2,074		—
Construction real estate	84		84		—										81		81		—
Commercial real estate	1,344		1,417		—										1,056		1,137		—
Commercial	393		393		—										361		361		—
With no allowance recorded	3,460		4,062		—										3,056		3,653		—

Residential real estate	1,939		2,478		57		$	1,855	$	23	$	1,684	$	54	1,793		2,318		44		$	1,755	$	12
Construction real estate	84		84		—		84		1		86		3		81		81		—		82		1
Commercial real estate	1,484		1,560		4		1,626		18		2,200		72		1,056		1,137		—		1,065		16
Commercial	393		393		—		400		7		412		19		374		374		6		376		8
Total	$	3,900	$	4,515	$	61	$	3,965	$	49	$	4,382	$	148	$	3,304	$	3,910	$	50	$	3,278	$	37

____________________


(1)	Does not reflect government guaranties on impaired loans as of ~~September 30, 2017~~March 31, 2018 totaling ~~$564~~$533 thousand.


	As of September 30, 2016						For The Three Months Ended September 30, 2016				For The Nine Months Ended September 30, 2016				As of March 31, 2017						For The Three Months Ended March 31, 2017
	Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Recorded Investment (1)		Principal Balance (1)		Related Allowance		Average Recorded Investment		Interest Income Recognized
	(Dollars in thousands)														(Dollars in thousands)
Residential real estate	$	1,388	$	1,788	$	57	$	1,346	$	7	$	1,266	$	23	$	1,579	$	2,087	$	61	$	1,514	$	11
Construction real estate	89		89		—		89		1		91		3		87		87		—		87		1
Commercial real estate	2,883		2,981		61		3,018		28		3,059		59		2,220		2,291		21		2,774		32
Commercial	451		451		—		456		—		470		—		417		417		—		424		7
Total	$	4,811	$	5,309	$	118	$	4,909	$	36	$	4,886	$	85	$	4,303	$	4,882	$	82	$	4,799	$	51

____________________


(1)	Does not reflect government guaranties on impaired loans as of ~~September 30, 2016~~March 31, 2017 totaling ~~$654~~$623 thousand.

The following table provides information with respect to impaired loans as of December 31, ~~2016~~2017:


	December 31, 2016						December 31, 2017
	Recorded Investment (1)		Principal Balance (1)		Related Allowance		Recorded Investment (1)		Principal Balance (1)		Related Allowance
	(Dollars in thousands)						(Dollars in thousands)
Residential real estate	$	308	$	317	$	63	$	238	$	247	$	47
Commercial real estate	488		520		40		137		141		1
With an allowance recorded	796		837		103		375		388		48

Residential real estate	1,140		1,561		—		1,480		1,983		—
Construction real estate	88		88		—		82		82		—
Commercial real estate	2,840		2,910		—		937		1,011		—
Commercial	432		432		—		378		378		—
With no allowance recorded	4,500		4,991		—		2,877		3,454		—

Residential real estate	1,448		1,878		63		1,718		2,230		47
Construction real estate	88		88		—		82		82		—
Commercial real estate	3,328		3,430		40		1,074		1,152		1
Commercial	432		432		—		378		378		—
Total	$	5,296	$	5,828	$	103	$	3,252	$	3,842	$	48

____________________


(1)	Does not reflect government guaranties on impaired loans as of December 31, ~~2016~~2017 totaling $~~637~~550 thousand.

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


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
	Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance		Number of Loans	Principal Balance
	(Dollars in thousands)						(Dollars in thousands)
Residential real estate	28	$	1,939	20	$	1,448	25	$	1,793	24	$	1,718
Construction real estate	1	84		1	88		1	81		1	82
Commercial real estate	10	1,091		10	1,452		10	1,056		10	1,074
Commercial	2	393		2	431		3	374		2	378
Total	41	$	3,507	33	$	3,419	39	$	3,304	37	$	3,252

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.

The following tables provide new TDR activity for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~September 30, 2016:~~2017:


	New TDRs During the										New TDRs During the
	Three Months Ended September 30, 2017					Nine Months Ended September 30, 2017					Three Months Ended March 31, 2018					Three Months Ended March 31, 2017
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)										(Dollars in thousands)
Residential real estate	3	$	269	$	276	9	$	649	$	673	1	$	96	$	98	3	$	140	$	149
Commercial real estate	1	149		149		2	293		293
Commercial											1	13		13		—	—		—

New TDRs During the New TDRs During the
Three Months Ended September 30, 2016 Nine Months Ended September 30, 2016
Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
(Dollars in thousands)
Residential real estate 3
$ 89
$ 99
6
$ 278
$ 295
Commercial real estate 4
643
647
6
803
807

There were no TDR loans modified within the previous twelve months that had subsequently defaulted during the three ~~and nine~~ month periods ended ~~September 30, 2017~~March 31, 2018 or ~~September 30, 2016.~~March 31, 2017. TDR loans are considered defaulted at 90 days past due.

At ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017, the Company was not committed to lend any additional funds to borrowers whose loans were nonperforming, impaired or restructured.

Note 9. Defined Benefit Pension Plan

On October 18, 2017, the Company's Board of Directors voted to terminate Union Bank’s Defined Benefit Pension Plan. ~~Benefit accruals have been frozen and~~In order to settle the ~~Plan closed to new participants since October 5, 2012.~~

~~Based on the estimated value of assets held in the Plan, the Company currently estimates that a cash contribution of approximately $1.1 million will be required to fully fund the Plan's~~ liabilities at termination. In addition, the Company expects to record a charge to earnings of approximately $3.2 million at termination, which is expected to occur during the fourth quarter of 2018. Actual amounts may differ from these estimates.

~~Until the effective date of termination of~~under the Plan, the Company will ~~continue~~offer participants the option to ~~recognize~~receive an annuity purchased from an insurance carrier, a lump-sum cash payment, or a direct rollover into a qualifying retirement plan. An estimated $1.1 million will be contributed to the ~~pension benefit~~Plan by the Company in 2018 to cover the lump-sum payments and ~~cash funding obligations for~~annuity purchases. The amount of the ~~frozen benefits~~final contribution is subject to a number of factors, including changes in interest rates and the exact proportion of the participants electing a lump-sum distribution versus an annuity. At this time, the Company estimates that a $3.2 million reduction in net income will be recorded in the fourth quarter of 2018 as a result of the Plan termination and settlement of Plan assets and liabilities. The Company anticipates completing the transfer of all liabilities and administrative responsibilities under the ~~Plan. The~~ Plan ~~provides~~by December 31, 2018. Once the process is complete, the Company will no longer have any remaining defined ~~benefits based on years of service~~benefit pension plan obligations and ~~final average salary prior to October 5, 2012.~~

thus no periodic pension expense.

The Company's pension benefit obligation and net periodic benefit costs for the Plan are actuarially determined based on assumptions regarding the appropriate discount rate, current and expected future return on Plan assets, and anticipated mortality rates. Weighted average assumptions used to determine the net periodic pension ~~benefit~~cost (benefit) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017 ~~and 2016~~ have remained consistent with assumptions disclosed in the Company's ~~2016~~2017 Annual ~~Report on Form 10-K, except for the annual expected rate of return on Plan assets, which has been reduced in 2017 to 4.25% compared to 6.75% as disclosed in the 2016 Annual Report on Form 10-K.~~Report.

Net periodic pension ~~benefit~~cost (benefit) for the three ~~and nine~~ months ended ~~September 30~~March 31 consisted of the following components:


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(Dollars in thousands)												(Dollars in thousands)
Interest cost on projected benefit obligation	$	172		$	175		$	516		$	525		$	179		$	172
Expected return on plan assets	(243		)	(259		)	(729		)	(777		)	(161		)	(243		)
Amortization of net loss	51			41			153			123			151			51
Net periodic benefit	$	(20	)	$	(43	)	$	(60	)	$	(129	)
Net periodic cost (benefit)													$	169		$	(20	)

Note 10. Stock Based Compensation

The Company's current stock based compensation plan is the Union Bankshares, Inc. 2014 Equity Incentive Plan. Under the 2014 Equity Plan, 50,000 shares of the Company’s common stock are available for equity awards of incentive stock options, nonqualified stock options, restricted stock and RSUs to eligible officers and (except for awards of incentive stock options) nonemployee directors. Shares available for issuance of awards under the 2014 Equity Plan consist of unissued shares of the Company’s common stock and/or shares held in treasury. As of ~~September 30, 2017,~~March 31, 2018, there were outstanding grants under the plan of RSUs and incentive stock options.

RSUs. Each RSU represents the right to receive one share of the Company's common stock upon satisfaction of applicable vesting conditions. The general terms of the awards are described in the Company's ~~2016~~2017 Annual ~~Report on Form 10-K.~~Report. Prior to vesting, the RSUs do not earn dividends or dividend equivalents, nor do they bear any voting rights.

The following table presents a summary of the ~~unvested~~ RSUs ~~from~~awarded in accordance with the 2015, 2016, and ~~2016~~2017 Award Plan Summaries, as of ~~September 30, 2017:~~March 31, 2018:


	Number of Unvested RSUs	Weighted-Average Grant Date Fair Value		Number of RSUs Granted	Weighted-Average Grant Date Fair Value		Number of Unvested RSUs
2015 Award	3,089	$	27.91	5,445	$	27.91	730
2016 Award	3,569	45.45		3,569	45.45		2,026
2017 Award				3,225	$	52.95	3,225
Total	6,658	$	37.31	12,239			5,981

Unrecognized compensation expense related to the unvested RSUs as of ~~September 30,~~March 31, 2018 and March 31, 2017 ~~and September 30, 2016~~ was ~~$62~~$212 thousand and ~~$105~~$186 thousand, respectively.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2018, a total of ~~3,308~~2,645 contingent RSUs were provisionally ~~granted.~~granted in accordance with a 2018 Award Plan Summary. The estimated number of contingent RSUs provisionally granted was based on target performance-based payout amounts detailed in the ~~2017~~2018 Award Plan Summary approved by the Board of Directors and on the closing market price of the Company's stock on the March ~~15, 2017~~21, 2018 provisional grant date ($~~41.20~~53.95 per share). As with the 2015, 2016, and ~~2016~~2017 grants, one half is in the form of Time-Based RSUs and one-half is in the form of Performance-Based RSUs. The actual number of Time-Based RSUs granted (if any) will be determined as of the earned date of December 31, ~~2017,~~2018, based on the closing market price of the Company's stock on that date, while the actual number of Performance-Based RSUs granted (if any) will be determined during the first quarter of ~~2018,~~2019, based on actual ~~2017~~2018 performance. The contingent RSUs were granted on substantially the same terms and conditions as the RSUs granted under the ~~2016~~previous Award Plan ~~Summary.~~Summaries. As of ~~September 30, 2017,~~March 31, 2018, the estimated unrecognized compensation expense related to the provisionally granted RSUs, based on the closing market price of the Company's stock on the provisional grant date of March ~~15, 2017~~21, 2018 was ~~$136~~$143 thousand.

Stock options. As of ~~September 30, 2017,~~March 31, 2018, 4,500 incentive stock options granted in December 2014 under the 2014 Equity Plan remained outstanding and exercisable and will expire in December 2021. There was no unrecognized compensation ~~cost~~expense related to these options as of ~~September 30, 2017.~~March 31, 2018. The estimated intrinsic value of these options was ~~$110~~$121 thousand as of ~~September 30, 2017.~~March 31, 2018.

As of ~~September 30, 2017, 34,986 shares remained available for future equity awards under the 2014 Equity Plan.~~

~~As of September 30, 2017,~~March 31, 2018, 3,000 incentive stock options granted under the 2008 ISO Plan remained outstanding and exercisable, with the last of such options expiring in December 2020. There was no unrecognized compensation ~~cost~~expense related to these options as of ~~September 30, 2017.~~March 31, 2018. The estimated intrinsic value of these options was ~~$79~~$86 thousand as of ~~September 30, 2017.~~March 31, 2018.

Note 11. Other Comprehensive Income (Loss)

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

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


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
	(Dollars in thousands)						(Dollars in thousands)
Net unrealized loss on investment securities available-for-sale	$	(77	)	$	(664	)	$	(1,251	)	$	(301	)
Defined benefit pension plan net unrealized actuarial loss	(2,615		)	(2,615		)	(4,795		)	(4,795		)
Total	$	(2,692	)	$	(3,279	)	$	(6,046	)	$	(5,096	)

The following ~~tables disclose~~table discloses the tax effects allocated to each component of OCI for the three ~~and nine~~ months ended ~~September 30:~~March 31:

Three Months Ended
September 30, 2017 September 30, 2016
Before-Tax Amount Tax (Expense) Benefit Net-of-Tax Amount Before-Tax Amount Tax (Expense) Benefit Net-of-Tax Amount
(Dollars in thousands)
Investment securities available-for-sale:
Net unrealized holding gains (losses) arising during the period on investment securities available-for-sale $ 70
$ (24 ) $ 46
$ (276 ) $ 94
$ (182 )
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income (24 ) 8
(16 ) (53 ) 18
(35 )
Total other comprehensive income (loss) $ 46
$ (16 ) $ 30
$ (329 ) $ 112
$ (217 )



	Three Months Ended
	March 31, 2018								March 31, 2017
	Before-Tax Amount			Tax (Expense) Benefit (1)		Net-of-Tax Amount			Before-Tax Amount		Tax (Expense) Benefit (1)			Net-of-Tax Amount
	(Dollars in thousands)
Investment securities available-for-sale:
Net unrealized holding (losses) gains arising during the period on investment securities available-for-sale	$	(1,203	)	$	253	$	(950	)	$	341	$	(116	)	$	225
Total other comprehensive (loss) income	$	(1,203	)	$	253	$	(950	)	$	341	$	(116	)	$	225

__________________


(1)	Tax expense/benefit is calculated using a marginal tax rate of 21% and 34% for the three months ended March 31, 2018 and 2017, respectively.

Nine Months Ended
September 30, 2017 September 30, 2016
Before-Tax Amount Tax (Expense) Benefit Net-of-Tax Amount Before-Tax Amount Tax (Expense) Benefit Net-of-Tax Amount
(Dollars in thousands)
Investment securities available-for-sale:
Net unrealized holding gains arising during the period on investment securities available-for-sale $ 923
$ (314 ) $ 609
$ 1,082
$ (368 ) $ 714
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income (33 ) 11
(22 ) (71 ) 24
(47 )
Total other comprehensive income $ 890
$ (303 ) $ 587
$ 1,011
$ (344 ) $ 667

~~The following table discloses information concerning the~~There were no reclassification adjustments from OCI for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017.

Three Months Ended Nine Months Ended
Reclassification Adjustment Description September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
Affected Line Item in
Consolidated Statement of Income
(Dollars in thousands)
Investment securities available-for-sale:
Net gains on investment securities available-for-sale $ (24 ) $ (53 ) $ (33 ) $ (71 ) Net gains on sales of investment securities available-for-sale
Tax benefit 8
18
11
24
Provision for income taxes
Total reclassifications $ (16 ) $ (35 ) $ (22 ) $ (47 ) Net income

Note 12. Fair Value Measurement

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

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

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

Assets measured at fair value on a recurring basis at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017, segregated by fair value hierarchy level, are summarized below:


	Fair Value Measurements								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)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2017:	(Dollars in thousands)
Investment securities available-for-sale (market approach)
Debt securities:
March 31, 2018:									(Dollars in thousands)
Debt securities AFS:
U.S. Government-sponsored enterprises									$	7,261	$	—	$	7,261	$	—
Agency mortgage-backed									32,560		—		32,560		—
State and political subdivisions									24,322		—		24,322		—
Corporate									4,297		—		4,297		—
Total debt securities									$	68,440	$	—	$	68,440	$	—

Other investments:
Mutual funds									$	502	$	502	$	—	$	—

December 31, 2017:
Debt securities AFS:
U.S. Government-sponsored enterprises	$	9,410	$	—	$	9,410	$	—	$	7,695	$	—	$	7,695	$	—
Agency mortgage-backed	18,741		—		18,741		—		28,116		—		28,116		—
State and political subdivisions	25,314		—		25,314		—		24,714		—		24,714		—
Corporate	10,005		—		10,005		—		4,393		—		4,393		—
Total debt securities	63,470		—		63,470		—		64,918		—		64,918		—
Mutual funds	500		500		—		—		521		521		—		—
Total	$	63,970	$	500	$	63,470	$	—	$	65,439	$	521	$	64,918	$	—

December 31, 2016:
Investment securities available-for-sale (market approach)
Debt securities:
U.S. Government-sponsored enterprises	$	10,040	$	—	$	10,040	$	—
Agency mortgage-backed	18,041		—		18,041		—
State and political subdivisions	27,372		—		27,372		—
Corporate	9,700		—		9,700		—
Total debt securities	65,153		—		65,153		—
Mutual funds	403		403		—		—
Total	$	65,556	$	403	$	65,153	$	—

There were no significant transfers in or out of Levels 1 and 2 during the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2018, 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, HTM securities, MSRs and OREO, were not considered material at ~~September 30, 2017~~March 31, 2018 or December 31, ~~2016~~2017. The Company has not elected to apply the fair value method to any financial assets or liabilities other than those situations where other accounting pronouncements require fair value measurements.

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

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

The following methods and assumptions were used by the Company in estimating the fair value of its significant financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate those assets' fair values and are classified as Level 1.

Interest bearing deposits in banks: Fair values for interest bearing deposits in banks are based on discounted present values of cash flows and are classified as Level 2.

Investment securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair value measurements consider observable data which 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 have been valued using unadjusted quoted prices from active markets. Investment securities are classified as Level 1 or Level 2 depending on availability of recent trade information.

Loans held for sale: The fair value of loans held for sale is estimated based on quotes from third party vendors, resulting in a Level 2 classification.

Loans: The fair values of loans are estimated for portfolios of loans with similar financial characteristics and segregated by loan class or segment. For variable-rate loan categories that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts adjusted for credit risk. The fair values for other loans (for example, fixed-rate residential, commercial real estate, and rental property mortgage loans as well as commercial and industrial loans) are estimated using discounted cash flow analysis, based on interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Loan fair value estimates include judgments regarding future cash flows, future expected loss experience and risk characteristics. As of March 31, 2018, the Company implemented exit pricing valuation methodologies which incorporate a liquidity premium adjustment into the fair value estimate of all loan portfolios. This adjustment factors the costs/market inefficiencies associated with the sale of a financial instrument into the fair value estimate. Fair values for impaired loans are estimated using discounted cash flow analysis or underlying collateral values, where applicable. The fair value methods and assumptions that utilize unobservable inputs as defined by current accounting standards are classified as Level 3.

Accrued interest receivable and payable: The carrying amounts of accrued interest approximate their fair values and are classified as Level 1, 2, or 3 in accordance with the classification of the related principal's valuation.

Nonmarketable equity securities: It is not practical to determine the fair value of the nonmarketable securities, such as FHLB stock, due to restrictions placed on their transferability.

Deposits: The fair values disclosed for noninterest bearing deposits and other interest bearing nontime deposits are, by definition, equal to the amount payable on demand at the reporting date, resulting in a Level 1 classification. The fair values for time deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on similar deposits to a schedule of aggregated expected maturities on such deposits, resulting in a Level 2 classification.

Borrowed funds: The fair values of the Company’s long-term debt are estimated using discounted cash flow analysis based on interest rates currently being offered on similar debt instruments, resulting in a Level 2 classification. The fair values of the Company’s short-term debt approximate the carrying amounts reported in the balance sheet, resulting in a Level 1 classification.

Off-balance-sheet financial instruments: Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The only commitments to extend credit that are normally longer than one year in duration are the home equity lines whose interest rates are variable quarterly. The only fees collected for commitments are an annual fee on credit card arrangements and often a flat fee on commercial lines of credit and standby letters of credit. The fair value of off-balance-sheet financial instruments as of the balance sheet dates was not significant.

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


	September 30, 2017										March 31, 2018
	Fair Value Measurements										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)		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)										(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	12,397	$	12,397	$	12,397	$	—	$	—	$	13,246	$	13,246	$	13,246	$	—	$	—
Interest bearing deposits in banks	8,356		8,365		—		8,365		—		9,601		9,510		—		9,510		—
Investment securities	64,970		64,969		500		64,469		—		68,942		68,942		502		68,440		—
Loans held for sale	5,675		5,777		—		5,777		—		2,938		2,969		—		2,969		—
Loans, net
Residential real estate	175,248		177,201		—		—		177,201		180,720		179,098		—		—		179,098
Construction real estate	36,436		36,208		—		—		36,208		42,943		42,231		—		—		42,231
Commercial real estate	254,503		252,903		—		—		252,903		257,965		257,596		—		—		257,596
Commercial	47,869		47,021		—		—		47,021		46,581		45,339		—		—		45,339
Consumer	3,811		3,875		—		—		3,875		3,505		3,521		—		—		3,521
Municipal	56,525		56,715		—		—		56,715		55,338		55,143		—		—		55,143
Accrued interest receivable	2,196		2,196		—		426		1,770		2,468		2,468		—		393		2,075
Nonmarketable equity securities	2,331		N/A		N/A		N/A		N/A		2,331		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	119,203	$	119,203	$	119,203	$	—	$	—	$	128,951	$	128,951	$	128,951	$	—	$	—
Interest bearing	387,707		387,707		387,707		—		—		392,027		392,027		392,027		—		—
Time	99,714		98,925		—		98,925		—		102,865		101,406		—		101,406		—
Borrowed funds
Short-term	2,232		2,231		2,231		—		—		122		122		122		—		—
Long-term	30,288		29,300		—		29,300		—		31,143		30,951		—		30,951		—
Accrued interest payable	84		84		—		84		—		97		97		—		97		—


	December 31, 2016										December 31, 2017
	Fair Value Measurements										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)		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)										(Dollars in thousands)
Financial assets
Cash and cash equivalents	$	39,275	$	39,275	$	39,275	$	—	$	—	$	38,508	$	38,508	$	38,508	$	—	$	—
Interest bearing deposits in banks	9,504		9,528		—		9,528		—		9,352		9,333		—		9,333		—
Investment securities	66,555		66,555		403		66,152		—		66,439		66,438		521		65,917		—
Loans held for sale	7,803		7,958		—		7,958		—		7,947		8,111		—		8,111		—
Loans, net
Residential real estate	171,538		173,024		—		—		173,024		177,880		178,818		—		—		178,818
Construction real estate	33,840		33,963		—		—		33,963		42,505		42,069		—		—		42,069
Commercial real estate	246,317		245,979		—		—		245,979		251,566		248,746		—		—		248,746
Commercial	41,708		41,491		—		—		41,491		50,393		49,132		—		—		49,132
Consumer	3,941		4,014		—		—		4,014		3,869		3,919		—		—		3,919
Municipal	31,348		31,749		—		—		31,749		55,789		55,778		—		—		55,778
Accrued interest receivable	2,259		2,259		—		414		1,845		2,500		2,500		—		395		2,105
Nonmarketable equity securities	2,354		N/A		N/A		N/A		N/A		2,331		N/A		N/A		N/A		N/A
Financial liabilities
Deposits
Noninterest bearing	$	112,384	$	112,384	$	112,384	$	—	$	—	$	127,824	$	127,824	$	127,824	$	—	$	—
Interest bearing	382,083		382,083		382,083		—		—		418,621		418,621		418,621		—		—
Time	103,193		102,594		—		102,594		—		101,129		99,967		—		99,967		—
Borrowed funds
Short-term	1,099		1,099		1,099		—		—		1,365		1,364		1,364		—		—
Long-term	30,496		30,423		—		30,423		—		30,216		29,039		—		29,039		—
Accrued interest payable	92		92		—		92		—		97		97		—		97		—

The carrying amounts in the preceding tables are included in the consolidated balance sheets under the applicable captions.

Note 13. 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 ~~September 30, 2017~~March 31, 2018 have been evaluated as to their potential impact to the consolidated financial statements.

On ~~October~~April 18, ~~2017,~~2018, the Company declared a regular quarterly cash dividend of ~~$0.29~~$0.30 per share, payable ~~November 8, 2017,~~May 10, 2018, to stockholders of record on ~~October 28, 2017.~~

On October 18, 2017, the Company's Board of Directors voted to terminate Union Bank’s Defined Benefit Pension Plan. Benefit accruals have been frozen and the Plan closed to new participants since October 5, 2012. The termination of the Plan is expected to take affect in the fourth quarter ofApril 30, 2018. ~~See Note 9.~~

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 ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017, and its results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017. 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 2017 Annual Report ~~on Form 10-K for the year ended~~ ~~December 31, 2016, as amended ("2016 Annual Report on Form 10-K").~~ In the opinion of the Company's management, the interim unaudited ~~data reflects~~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 ~~September 30, 2017~~March 31, 2018 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,” “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: ~~(1) general~~

General economic conditions and financial instability, either nationally, internationally, regionally or locally; ~~(2) increased~~

Increased competitive pressures, including those from tax-advantaged credit unions and other financial service providers in ~~the Company's~~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; ~~(3) the effect of and changes~~

Interest rates change in ~~the United States monetary and fiscal policies, including interest rates changes in ways~~a way that ~~continues to put~~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 ~~spread or margins as depositors will be seeking higher rates on deposit accounts (4) changes~~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 ~~the Company's~~our business; ~~(5)~~

Further changes in federal or state tax policy; ~~(6) the effect of federal and state health care reform efforts; (7) changes~~

Changes in ~~the~~our level of nonperforming assets and charge-offs; ~~(8) changes~~

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; ~~(9) changes~~

Changes in information technology that require increased capital ~~spending; (10) changes~~spending or that result in new or increased risks;

Changes in consumer and business spending, borrowing and savings habits; ~~(11) increased cyber security threats.~~

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

Changes affecting the calculation of the amount of the contribution that will be required to settle our obligations in connection with termination of our defined benefit pension plan and the impact of such termination on our net income in 2018;

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

Increased cybersecurity threats; and

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.

When evaluating forward-looking statements to make decisions ~~with respect to~~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. ~~The~~They include establishing the amount of ALL, evaluating our investment securities for OTTI, valuing our intangible assets and determining the amount of our defined benefit pension plan obligation and net periodic cost/(benefit) as well as the amount of our required contribution in connection with termination of the Plan.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 ~~2016~~2017 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

As discussed in the Company's 2017 Annual Report , on October 18, 2017, the Company's Board of Directors voted to terminate Union Bank’s Defined Benefit Pension Plan. The Company anticipates completing the transfer of all liabilities and administrative responsibilities under the Plan by December 31, 2018. Once the process is complete, the Company will no longer have any remaining defined benefit pension plan obligations and thus no periodic pension expense in future periods.

Additionally, passage of the 2017 Tax Act reduced the Company's federal income tax rate from 34% to 21% effective January 1, 2018. The rate reduction has had a positive impact on earnings for the first three months of 2018.(See Results of Operations, Provision for Income Taxes on page 31.)

The Company's net income was ~~$2.4~~$2.7 million for the quarter ended ~~September 30, 2017~~March 31, 2018 compared to $~~2.3~~$1.9 million for the quarter ended ~~September 30, 2016~~,March 31, 2017, an increase of ~~$102~~$817 thousand,, or ~~4.5%~~42.3%. These results reflected an increase in the Company's net interest income of ~~$495~~$622 thousand, or ~~7.8%~~9.9%, an increase in noninterest income of $238 thousand, or 10.7%, and a decrease in ~~noninterest expenses~~the provision for income taxes of ~~$83~~$151 thousand, or ~~1.4%~~22.7%. These positive changes were partially offset by an increase in ~~the provision for loan losses~~noninterest expenses of ~~$150 thousand, a decrease in noninterest income of $298~~$194 thousand, or ~~10.6%, and an increase in the provision for income taxes of $28 thousand, or 3.4%~~3.3%.

Year to date net income for 2017 was $6.5 million, or $1.46 per share, compared to $6.2 million, or $1.38 per share, for the same period in 2016, an increase of 5.9% year over year. Net interest income improved $1.3 million, or 6.9%, and was partially offset by a decrease in noninterest income of $515 thousand, or 6.8%, an increase in noninterest expense of $218 thousand, or 1.2%, and an increase in the provision for income taxes of $184 thousand, or 8.5%.

At ~~September 30, 2017,~~March 31, 2018, the Company had total consolidated assets of ~~$705.3~~$722.7 million, including gross loans and loans held for sale (total loans) of ~~$584.6~~$594.6 million, deposits of ~~$606.6~~$623.8 million and stockholders' equity of ~~$59.6~~$59.2 million. The Company’s total assets

at ~~September 30, 2017 increased $14.0~~March 31, 2018 decreased $23.1 million, or ~~2.0%~~3.1%, from ~~$691.4~~$745.8 million at December 31, ~~2016,~~2017, and increased ~~$32.8~~$46.3 million, or ~~4.9%~~6.8%, compared to ~~September 30, 2016.~~March 31, 2017. (See Financial Condition on page ~~36.~~31.)

The Company's total capital increased from ~~$56.3~~$58.7 million at December 31, ~~2016~~2017 to ~~$59.6~~$59.2 million at ~~September 30, 2017~~.March 31, 2018. This increase primarily reflects net income of ~~$6.5~~$2.7 million for the first ~~nine~~three months of ~~2017 and a reduction~~2018, partially offset by an increase of ~~$587~~$950 thousand in accumulated other comprehensive loss ~~less~~and regular cash dividends paid of ~~$3.9~~$1.3 million. (See Capital Resources on page ~~43.~~38.)

The following unaudited per share information and key ratios depict several measurements of performance or financial condition at or for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017, respectively:


	Three Months Ended or At September 30,						Nine Months Ended or At September 30,						Three Months Ended or At March 31,
	2017			2016			2017			2016			2018			2017
Return on average assets (ROA) (1)	1.35		%	1.32		%	1.27		%	1.22		%
Return on average assets (1)													1.51		%	1.14		%
Return on average equity (1)	16.08		%	15.50		%	15.10		%	14.20		%	18.76		%	13.67		%
Net interest margin (1)(2)	4.23		%	4.26		%	4.22		%	4.21		%	4.15		%	4.15		%
Efficiency ratio (3)	62.31		%	66.22		%	64.79		%	68.05		%	64.48		%	67.95		%
Net interest spread (4)	4.15		%	4.18		%	4.13		%	4.12		%	4.04		%	4.06		%
Loan to deposit ratio	96.37		%	92.93		%	96.37		%	92.93		%	95.31		%	92.84		%
Net loan charge-offs to average loans not held for sale (1)	0.04		%	(0.02		)%	0.03		%	0.03		%	—		%	0.04		%
Allowance for loan losses to loans not held for sale	0.91		%	1.00		%	0.91		%	1.00		%	0.91		%	0.97		%
Nonperforming assets to total assets (5)	0.32		%	0.51		%	0.32		%	0.51		%	0.23		%	0.49		%
Equity to assets	8.45		%	8.80		%	8.45		%	8.80		%	8.19		%	8.45		%
Total capital to risk weighted assets	13.37		%	13.41		%	13.37		%	13.41		%	13.96		%	13.40		%
Book value per share	$	13.36		$	12.74		$	13.36		$	12.74		$	13.25		$	12.81
Earnings per share	$	0.53		$	0.51		$	1.46		$	1.38		$	0.62		$	0.43
Dividends paid per share	$	0.29		$	0.28		$	0.87		$	0.83		$	0.30		$	0.29
Dividend payout ratio (6)	54.72		%	54.90		%	59.59		%	60.14		%	48.39		%	67.44		%

__________________


(1)	Annualized.


(2)	The ratio of tax equivalent net interest income to average earning assets. See ~~pages 31 and 32~~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 ~~rate earned~~yield on earning assets and the average rate paid on interest bearing liabilities. See ~~pages 31 and 32~~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)	Cash dividends declared and paid per share divided by consolidated net income per share.

~~Recent Developments~~

On October 18, 2017, the Company's Board of Directors voted to terminate Union Bank’s Defined Benefit Pension Plan. Benefit accruals have been frozen and the Plan closed to new participants since October 5, 2012, due to the rapidly escalating cost of maintaining the Plan as well as balance sheet volatility caused by changes in the market value of the Plan assets. The Board of Directors carefully weighed the consequences of terminating the Plan, including the impact on the Company's financial condition and results of operation and the impact to Plan participants. After consideration of these factors the Board determined that 2018 is the appropriate time to terminate the Plan.

Based on the estimated value of assets held in the Plan, the Company currently expects that a cash contribution of approximately $1.1 million will be required to fully fund the Plan's liabilities at termination. In addition, the Company expects to record a charge to earnings of approximately $3.2 million at termination, which is expected to occur during the fourth quarter of 2018. Actual amounts may differ from these estimates.

Until the effective date of termination of the Plan, the Company will continue to recognize the pension benefit and cash funding obligations for the frozen benefits under the Plan, which are included in the Company's financial statements as of and for the periods ended September 30, 2017. The Plan provides defined benefits based on years of service and final average salary prior to October 5, 2012.

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 ~~interest~~ 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 a result of the 2017 Tax Act, our corporate tax rate has declined from 34% in prior years to 21% in 2018. Accordingly, the factor utilized in calculating tax equivalent interest income has declined, resulting in lower yields on the tax advantaged earning assets.

The Company’s net interest income increased ~~$495~~$622 thousand, or ~~7.8%~~9.9%, to ~~$6.8~~$6.9 million for the three months ended ~~September 30, 2017~~March 31, 2018 from $6.3 million for the three months ended ~~September 30, 2016.~~March 31, 2017. The net interest spread decreased 3two bps to ~~4.15%~~4.04% for the ~~third~~first quarter of ~~2017,~~2018, from ~~4.18%~~4.06% for the same period last year, reflecting a ~~2 bps~~six bp increase in the average rate paid on interest bearing liabilities, partially offset by a four bp increase in the average yield earned on interest earning assets between ~~periods, which was more than offset by a 5 bps increase in the average rate paid~~periods. Interest income on ~~interest bearing liabilities. Average yields~~loans increased ~~in all asset categories during~~$677 thousand to $7.0 million for the three ~~month comparison periods with the exception of loans which decreased 4 bps. The decrease in average yield~~months ended March 31, 2018 from $6.3 million for ~~loans was more than offset by an increase in average volume of $49.5 million during~~ the three ~~month comparison period. The~~months ended March 31, 2017 due to an increase in the average volume of loans ~~contributed to~~outstanding of $53.2 million during the ~~$538 thousand increase in interest~~20

18 comparison period. Interest income on ~~loans,~~investment securities increased $17 thousand between periods despite a slight decline in average volume and a 15 bp decrease in the average yield as ~~noted below under~~a result of a decrease in the ~~caption "Rate Volume Analysis."~~tax equivalent factor.

The average rate paid on interest bearing liabilities increased 5six bps, to ~~0.44%~~0.49% for the ~~third~~first quarter of ~~2017~~2018 compared to ~~0.39%~~0.43% for the ~~third~~first quarter of ~~2016.~~2017. Average rates paid increased in all deposit ~~categories. The~~categories while the average rate paid on borrowed funds remained unchanged. The Company may need to continue to increase rates paid on deposit accounts to remain competitive as short term interest rates and competition for ~~the third quarter of 2017 decreased 38 bps and the average volume~~deposit monies continues to increase. Additionally, funding sources other than core deposits may be necessary to fund loan demand which may have a higher cost. These changes could result in increased ~~$14.9 million during the three month comparison periods.~~pressure on our net interest spread. The net interest margin was ~~4.23% and 4.26%~~unchanged at 4.15% for the three months ended ~~September 30, 2017~~March 31, 2018 and ~~September 30, 2016, respectively.~~

Net interest income was $19.7 million, on a fully tax equivalent basis for the nine months ended September 30, 2017, compared to $18.4 million for the nine months ended September 30, 2016, an increase of $1.3 million, or 6.94%. The volume of earning assets increased $42.9 million and the average yield on earning assets increased 1 bps to 4.55% compared to 4.54% for the comparison period. Average loans increased $35.0 million to $552.5 million for the nine months ended September 30, 2017 compared to $517.4 million for the nine months ended September 30, 2016. The increase in volume is the primary contributor to the $1.2 million increase in interest income on loans. While the FRB initiated three 25 bp increases in short-term rates since December 2016, not all of our loans are set to reprice immediately, or may be in the initial fixed period.

The average cost of funds, which is tied primarily to our customer deposits, remained consistent at 0.42% for the nine months ended September 30, 2017 and September 30, 2016. For the three months ended September 30, 2017, a year-over-year increase in the average balances and rates paid on interest bearing checking accounts and savings and money market accounts occurred, with a corresponding decrease in time deposits due to increased use of the Promontory Interfinancial Network beginning in the third quarter of 2016. See the following table for details.

March 31, 2017.

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


	Three Months Ended September 30,												Three Months Ended March 31,
	2017						2016						2018						2017
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)												(Dollars in thousands)
Average Assets:
Federal funds sold and overnight deposits	$	11,185	$	15	0.53	%	$	15,513	$	12	0.30	%	$	16,457	$	53	1.28	%	$	19,217	$	30	0.63	%
Interest bearing deposits in banks	8,356		38		1.77	%	9,830		37		1.51	%	9,957		45		1.83	%	9,252		35		1.54	%
Investment securities (1), (2)	65,882		426		3.06	%	55,943		362		3.04	%	68,413		445		2.81	%	68,456		428		2.96	%
Loans, net (1), (3)	573,512		6,893		4.88	%	523,973		6,355		4.92	%	590,321		6,999		4.87	%	537,117		6,322		4.87	%
Nonmarketable equity securities	2,576		25		3.85	%	2,220		20		3.61	%	2,362		29		4.95	%	2,354		24		4.16	%
Total interest earning assets (1)	661,511		7,397		4.59	%	607,479		6,786		4.57	%	687,510		7,571		4.53	%	636,396		6,839		4.49	%
Cash and due from banks	4,408						4,688						3,945						4,123
Premises and equipment	13,226						13,219						14,177						13,416
Other assets	22,848						23,388						22,359						22,062
Total assets	$	701,993					$	648,774					$	727,991					$	675,997
Average Liabilities and Stockholders' Equity:
Interest bearing checking accounts	$	146,505	55		0.15	%	$	130,228	30		0.09	%	$	145,091	47		0.13	%	$	140,253	39		0.11	%
Savings/money market accounts	232,132		211		0.36	%	214,232		154		0.29	%	258,066		298		0.47	%	230,935		211		0.37	%
Time deposits	105,693		187		0.70	%	108,569		179		0.66	%	101,793		188		0.75	%	103,723		172		0.67	%
Borrowed funds	40,033		134		1.31	%	25,169		108		1.69	%	32,343		114		1.41	%	32,720		115		1.41	%
Total interest bearing liabilities	524,363		587		0.44	%	478,198		471		0.39	%	537,293		647		0.49	%	507,631		537		0.43	%
Noninterest bearing deposits	112,974						109,077						124,875						106,794
Other liabilities	5,719						4,971						7,265						5,109
Total liabilities	643,056						592,246						669,433						619,534
Stockholders' equity	58,937						56,528						58,558						56,463
Total liabilities and stockholders’ equity	$	701,993					$	648,774					$	727,991					$	675,997
Net interest income			$	6,810					$	6,315					$	6,924					$	6,302
Net interest spread (1)					4.15	%					4.18	%					4.04	%					4.06	%
Net interest margin (1)					4.23	%					4.26	%					4.15	%					4.15	%

Nine Months Ended September 30,
2017 2016

Average
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
Average
Balance
Interest
Earned/
Paid
Average
Yield/
Rate
(Dollars in thousands)
Average Assets:
Federal funds sold and overnight deposits $ 14,751
$ 64
0.57 % $ 12,202
$ 23
0.25 %
Interest bearing deposits in banks 8,700
109
1.67 % 11,201
123
1.46 %
Investment securities (1), (2) 67,585
1,269
2.97 % 60,140
1,120
2.91 %
Loans, net (1), (3) 552,473
19,823
4.90 % 517,446
18,604
4.90 %
Nonmarketable equity securities 2,455
72
3.94 % 2,121
52
3.30 %
Total interest earning assets (1) 645,964
21,337
4.55 % 603,110
19,922
4.54 %
Cash and due from banks 4,199
4,603

Premises and equipment 13,286
13,091

Other assets 22,313
22,777

Total assets $ 685,762
$ 643,581

Average Liabilities and Stockholders' Equity:
Interest bearing checking accounts $ 144,961
136
0.13 % $ 125,407
79
0.08 %
Savings/money market accounts 229,938
610
0.35 % 196,903
325
0.22 %
Time deposits 103,763
525
0.68 % 133,351
796
0.80 %
Borrowed funds 35,713
369
1.36 % 23,905
303
1.67 %
Total interest bearing liabilities 514,375
1,640
0.42 % 479,566
1,503
0.42 %
Noninterest bearing deposits 108,395
103,870

Other liabilities 5,363
4,693

Total liabilities 628,133
588,129

Stockholders' equity 57,629
55,452

Total liabilities and stockholders’ equity $ 685,762
$ 643,581

Net interest income $ 19,697
$ 18,419

Net interest spread (1) 4.13 % 4.12 %
Net interest margin (1) 4.22 % 4.21 %

__________________


(1)	Average yields reported on a tax equivalent basis using a marginal tax rate of 21% and 34%. for the three months ended March 31, 2018 and 2017, respectively.


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


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

Tax exempt interest income amounted to $~~507~~506 thousand and $~~431~~433 thousand for the three months ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017, ~~respectively, and $1.4 million and $1.3 million for the~~ ~~2017~~ ~~and~~ ~~2016~~ ~~nine month comparison periods,~~ respectively. The following table presents the effect of tax exempt income on the calculation of net interest income, using a marginal tax rate of 21% and 34% for the three months ended March 31, 2018and2017, ~~and~~ ~~2016~~ ~~three and nine month comparison periods:~~ respectively:


	For the Three Months Ended September 30,				For The Nine Months Ended September 30,				For the Three Months Ended March 31,
	2017		2016		2017		2016		2018		2017
	(Dollars in thousands)								(Dollars in thousands)
Net interest income as presented	$	6,810	$	6,315	$	19,697	$	18,419
Net interest income, as presented									$	6,924	$	6,302
Effect of tax-exempt interest
Investment securities	77		64		235		192		34		79
Loans	168		130		431		395		85		130
Net interest income, tax equivalent	$	7,055	$	6,509	$	20,363	$	19,006	$	7,043	$	6,511

Rate/Volume Analysis. The following table describes the extent to which changes in average interest rates (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 September 30, 2017 Compared to Three Months Ended September 30, 2016 Increase/(Decrease) Due to Change In								Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016 Increase/(Decrease) Due to Change In									Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017 Increase/(Decrease) Due to Change In
	Volume			Rate			Net		Volume			Rate			Net			Volume (1)			Rate (1)			Net
	(Dollars in thousands)																	(Dollars in thousands)
Interest earning assets:
Federal funds sold and overnight deposits	$	(4	)	$	7		$	3	$	6		$	35		$	41		$	(4	)	$	27		$	23
Interest bearing deposits in banks	(5		)	6			1		(29		)	15			(14		)	3			7			10
Investment securities	62			2			64		144			5			149			—			17			17
Loans, net	598			(60		)	538		1,256			(37		)	1,219			677			—			677
Nonmarketable equity securities	3			2			5		9			11			20			—			5			5
Total interest earning assets	$	654		$	(43	)	$	611	$	1,386		$	29		$	1,415		$	676		$	56		$	732
Interest bearing liabilities:
Interest bearing checking accounts	$	4		$	21		$	25	$	14		$	43		$	57		$	2		$	6		$	8
Savings/money market accounts	14			43			57		61			224			285			27			60			87
Time deposits	(4		)	12			8		(162		)	(109		)	(271		)	(3		)	19			16
Borrowed funds	53			(27		)	26		127			(61		)	66			(1		)	—			(1		)
Total interest bearing liabilities	$	67		$	49		$	116	$	40		$	97		$	137		$	25		$	85		$	110
Net change in net interest income	$	587		$	(92	)	$	495	$	1,346		$	(68	)	$	1,278		$	651		$	(29	)	$	622

__________________


(1)	Tax equivalent interest income is calculated using a marginal tax rate of 21% and 34% for the three months ended March 31, 2018 and 2017, respectively.

Provision for Loan Losses. There was ~~$150 thousand~~no loan loss provision recorded for ~~the~~ three ~~months~~month periods ended ~~September 30, 2017~~ ~~compared to no loan loss~~March 31, 2018 or March 31, 2017. No provision for the first three ~~months ended September 30, 2016. A loan loss provision of $150 thousand was recorded for the nine months ended September 30, 2017 and~~ ~~2016. The provision for the three and nine~~ months of ~~2017~~2018 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 ~~the~~prevailing existing economic conditions. For further details, see FINANCIAL CONDITION- Allowance for Loan Losses and Asset Quality below.

Noninterest Income. Noninterest income was $2.5 million ~~or 25.3% of total income~~ for the three months ended ~~September 30, 2017~~March 31, 2018, compared to ~~$2.8~~$2.2 million, ~~or 29.2% of total income~~ for the three months ended ~~September 30, 2016~~March 31, 2017 ~~and $7.1 million, or 24.9% of total income for the nine months ended September 30, 2017 compared to $7.6 million, or 27.6% of total income for the nine months ended September 30, 2016.~~. The following table sets forth the components of noninterest income and changes from ~~2016~~2017 to ~~2017~~2018:


	For The Three Months Ended September 30,									For The Nine Months Ended September 30,									For The Three Months Ended March 31,
	2017		2016		$ Variance			% Variance		2017		2016		$ Variance			% Variance		2018		2017		$ Variance			% Variance
	(Dollars in thousands)																		(Dollars in thousands)
Trust income	$	179	$	171	$	8		4.7		$	548	$	523	$	25		4.8		$	193	$	178	$	15		8.4
Service fees	1,553		1,538		15			1.0		4,444		4,377		67			1.5		1,487		1,440		47			3.3
Net gains on sales of loans held for sale	657		921		(264		)	(28.7	)	1,762		2,196		(434		)	(19.8	)	295		508		(213		)	(41.9	)
Income from Company-owned life insurance	66		64		2			3.1		185		278		(93		)	(33.5	)	312		60		252			420.0
Other income	27		57		(30		)	(52.6	)	100		142		(42		)	(29.6	)	184		47		137			291.5
Net gains on sales of investment securities AFS	24		53		(29		)	(54.7	)	33		71		(38		)	(53.5	)
Total noninterest income	$	2,506	$	2,804	$	(298	)	(10.6	)	$	7,072	$	7,587	$	(515	)	(6.8	)	$	2,471	$	2,233	$	238		10.7

The significant changes in noninterest income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 compared to the same ~~periods~~period of ~~2016~~2017 are described below:

Service fees. Total service fees increased $47 thousand for the three months ended March 31, 2018 compared to the same period in 2017 due to increases of $23 thousand in overdraft fees and $31 thousand in loan servicing income, partially offset by nominal decreases in other miscellaneous fee income.

Net gains on sales of loans held for sale. Continuing the Company's strategy to mitigate long-term interest rate risk, residential and commercial loans totaling ~~$32.0 million were sold during the~~ ~~third~~ ~~quarter of~~ ~~2017, versus residential loan sales of $40.7 million during the~~ ~~third~~ ~~quarter of~~ ~~2016. Residential and commercial loans of $90.6~~$23.1 million were sold during the first ~~nine months~~quarter of ~~2017,~~2018, versus residential loan sales of ~~$99.0~~$28.5 million during the first ~~nine months~~quarter of ~~2016.~~2017. The decline in net gains on sales of real estate loans is due to a combination of lower volumes of loans sold and lower average premiums on sold loans ~~for the three and nine month comparison periods.~~between periods reflecting a rising interest rate environment.

Income from Company-owned life insurance. Proceeds from the death benefit on an insurance policy on the life of a former director ~~resulting~~resulted in ~~$73~~$252 thousand of additional income ~~were received~~ during the ~~second~~first quarter of ~~2016 that did not reoccur in 2017. Additionally, the total yield on the policies has decreased as insurance costs have increased as each insured individual is another year older.~~2018.

Other income. Other income ~~decreased for the three and nine month comparison~~increased between periods due to the gain on the sale of a bank owned branch building of $191 thousand during the first quarter of 2018, partially offset by decreases of $43 thousand in MSR income ~~of $27~~and $11 thousand ~~and $25 thousand, respectively. Additionally,~~of miscellaneous noninterest ~~income decreased $2 thousand and $17 thousand for the three and nine month comparison periods.~~income.

Noninterest Expense. Noninterest expense ~~decreased $83~~increased $194 thousand, or ~~1.4%~~3.3%, for the three months ended ~~September 30, 2017~~March 31, 2018 ~~and increased $218 thousand, or 1.2% for the nine months ended September 30, 2017~~ compared to the same ~~periods~~period in ~~2016.~~2017. The following table sets forth the components of noninterest expense and changes between the three ~~and nine~~ month comparison periods of ~~2017~~2018 and ~~2016:~~2017:


	For The Three Months Ended September 30,									For The Nine Months Ended September 30,									For The Three Months Ended March 31,
	2017		2016		$ Variance			% Variance		2017		2016		$ Variance			% Variance		2018		2017		$ Variance			% Variance
	(Dollars in thousands)																		(Dollars in thousands)
Salaries and wages	$	2,570	$	2,622	$	(52	)	(2.0	)	$	7,642	$	7,522	$	120		1.6		$	2,649	$	2,568	$	81		3.2
Pension and employee benefits	954		865		89			10.3		2,784		2,659		125			4.7		958		879		79			9.0
Occupancy expense, net	320		297		23			7.7		1,073		923		150			16.3		395		390		5			1.3
Equipment expense	532		553		(21		)	(3.8	)	1,589		1,603		(14		)	(0.9	)	535		534		1			0.2
Vermont franchise tax	146		139		7			5.0		434		414		20			4.8
FDIC insurance assessment	84		81		3			3.7		255		246		9			3.7
Electronic banking expenses																			68		28		40			142.9
Other expenses	1,335		1,467		(132		)	(9.0	)	3,976		4,168		(192		)	(4.6	)	1,530		1,542		(12		)	(0.8	)
Total noninterest expense	$	5,941	$	6,024	$	(83	)	(1.4	)	$	17,753	$	17,535	$	218		1.2		$	6,135	$	5,941	$	194		3.3

The significant changes in noninterest expense for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 compared to the same ~~periods~~period of ~~2016~~2017 are described below:

Salaries and wages. Salaries and wages ~~decreased $52~~increased $81 thousand for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 primarily due to a reduction in commissions paid to mortgage loan originators. Salaries and wages increased $120 thousand for the nine months ended September 30, 2017March 31, 2018 compared to the same period of ~~2016~~2017 due to normal salary increases, partially offset by a reduction in commissions paid to mortgage loan originators.

Pension and employee benefits. Pension and employee benefits increased ~~$89 thousand and $125~~$79 thousand for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2018 compared to the same ~~periods~~period in ~~2016~~.2017. The increase ~~for the three month comparison period~~ is ~~primarily~~ the result of an increase in pension expense of $190 thousand,

partially offset by a reduction in the cost of the Company's medical plan of ~~$61 thousand, a~~$119 thousand. The reduction ~~of $22 thousand~~ in the benefit received from the pension plan, and an increase of $11 thousand in other employee benefit costs. The increase for the nine month comparison periods is the result of a reduction in the benefit received from the pension plan of $67 thousand, a $40 thousand increase in other employee benefits, and an increase in the cost of the Company's medical plan costs in 2018 reflects a $242 thousand plan credit due to favorable 2017 claims experience. A similar experience based credit received in 2017 was $130 thousand. As discussed in Note 9, the Company plans to terminate its defined benefit pension plan during 2018 with the settlement of ~~$30 thousand. Additionally,~~assets and liabilities expected to occur during the ~~Company's 401k contribution expense was $15 thousand less for~~fourth quarter of 2018. The Company will continue to recognize pension related costs during its interim periods until the nine months ended September 30, 2017 compared to the same period in 2016 as the 2016 profit sharing contribution paid to employees was less than the amount accrued based on the end of year employee census information.

plan has been settled.

~~Occupancy expense.~~Electronic banking expenses. ~~The Company experienced increases~~During the first quarter of ~~$12 thousand and $91 thousand in repairs and maintenance~~2018 Union changed its service provider for its ~~facilities for~~internet and mobile banking product. The new product was selected to provide a more robust product to Union's customers that includes additional functionality. The utilization of the ~~three and nine months ended September 30, 2017, respectively, compared to the same periods of~~ ~~2016. The mild winter experienced in Vermont and New Hampshire in 2016~~product resulted in lower than normal plowing costs. Also, the Company's janitorial services increased approximately $9 thousand and $33 during the three and nine month comparison periods, respectively, due to a change in vendor. Additionally, lease expense increased $7 thousand and $26 thousand for the three and nine months ended September 30, 2017, respectively, compared to the same periods of ~~2016. Lastly,~~ an increase in electronic banking expenses of ~~$18~~$40 thousand ~~in depreciation expense occurred during the nine month comparison~~between periods.

~~Other expenses.~~ ~~Other expenses have decreased~~ ~~$132 thousand~~ ~~and~~ ~~$192 thousand~~ for the three and nine months ended September 30, 2017, respectively. Professional and legal fees decreased $70 thousand and $184 thousand for the three and nine month comparison periods as various consulting engagements occurring in 2016 were not repeated in 2017.

Provision for Income Taxes. The Company has provided for current and deferred federal income taxes for the ~~quarters and nine~~three months ended ~~September 30, 2017~~March 31, 2018 and ~~2016.~~2017. The Company's net provision for income taxes was ~~$855~~$513 thousand ~~and $2.3 million~~ for the ~~quarter and nine~~three months ended ~~September 30, 2017, respectively,~~March 31, 2018, compared to ~~$827~~$664 thousand ~~and $2.2 million~~ for the same ~~periods~~period in ~~2016.~~2017. The Company's effective tax rate was ~~26.5%~~15.7% and ~~26.4%~~25.6% for the ~~quarter and nine~~three months ended ~~September 30,~~March 31, 2018, and 2017, ~~respectively, compared to an~~respectively. The reduction in the effective tax rate was primarily due to a decrease in the corporate income tax rate from 34% to 21% as a result of ~~26.7% and 25.9% for~~ the ~~same periods in 2016.~~2017 Tax Act.

Amortization expense related to limited partnership investments is included as a component of tax expense and amounted to ~~$157~~$140 thousand and ~~$471~~$157 thousand for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018, and 2017 ~~respectively, and $155 thousand and $391 thousand for the three and nine months ended September 30, 2016,~~ respectively. These investments provide tax benefits, including tax

credits. Low income housing tax credits with respect to limited partnership investments are also included as a component of income tax expense and amounted to ~~$158 thousand and $474~~$148 thousand for the three ~~and nine~~ months ended ~~September 30, 2017, respectively,~~March 31, 2018, and ~~$169 thousand and $429~~$158 thousand for the three ~~and nine~~ months ended ~~September 30, 2016, respectively.~~March 31, 2017.

FINANCIAL CONDITION

At ~~September 30, 2017~~March 31, 2018, the Company had total consolidated assets of $~~705.3~~722.7 million, including gross loans and loans held for sale (total loans) of $~~584.6~~594.6 million, deposits of $~~606.6~~623.8 million and stockholders' equity of $~~59.6~~59.2 million. The Company’s total assets at ~~September 30, 2017~~March 31, 2018 ~~increased~~decreased $~~14.0~~23.1 million, or ~~2.0%~~3.1%, from $~~691.4~~745.8 million at December 31, ~~2016~~2017, and increased $~~32.8~~46.3 million, or ~~4.9%~~6.8%, compared to ~~September 30, 2016~~March 31, 2017.

Net loans and loans held for sale ~~increased a total of~~totaled $~~43.6~~590.0 million, or ~~8.1%, to~~ ~~$580.1 million, or~~ ~~82.2%~~81.6% of total assets at ~~September 30, 2017~~March 31, 2018, compared to $~~536.5~~589.9 million, or ~~77.6%~~79.1% of total assets at December 31, ~~2016~~2017. (See Loans Held for Sale and Loan Portfolio below.)

Total deposits ~~increased~~decreased $~~9.0~~23.7 million, or ~~1.5%~~3.7%, to $~~606.6~~623.8 million at ~~September 30, 2017~~March 31, 2018, from $~~597.7~~647.6 million at December 31, ~~2016~~2017. ~~There were~~Interest bearing deposits decreased $26.6 million, or 6.4%, which was partially offset by increases in ~~interest bearing deposits of $5.6 million, or 1.5%, and~~ noninterest bearing deposits of $~~6.8~~1.1 million, or ~~6.1%~~0.9%, ~~which were partially offset by a decrease in~~and time deposits of $~~3.5~~1.7 million, or ~~3.4%~~1.7%. The decline in total deposits between periods is related to seasonal fluctuations in municipal deposit account balances. (See average balances and rates in the Yields Earned and Rates Paid tables on ~~pages 31 and 32.~~page 28.)

Total borrowed funds ~~increased~~decreased $~~925~~316 thousand, or ~~2.9%~~1.0%, from $31.6 million at December 31, ~~2016~~2017 to $~~32.5~~31.3 million at ~~September 30, 2017~~March 31, 2018. ~~There was $255 thousand in federal funds purchased at September 30, 2017 and customer~~Customer overnight collateralized repurchase sweeps ~~increased $879 thousand,~~decreased $1.2 million, while FHLB advances ~~decreased $209~~increased $928 thousand between December 31, ~~2016~~2017 and ~~September 30, 2017~~March 31, 2018. (See Borrowings on page ~~41.~~36.)

Total stockholders’ equity increased ~~$3.3 million~~$503 thousand to $~~59.6~~59.2 million at ~~September 30, 2017~~March 31, 2018 from $~~56.3~~58.7 million at December 31, ~~2016~~2017. (See Capital Resources on page ~~43.~~38.)

Loans Held for Sale and Loan Portfolio. Total loans (including loans held for sale) ~~increased~~was $594.6 million, unchanged from December 31, 2017, and represented ~~$43.5 million, or~~ ~~8.0%, to~~ ~~$584.6 million, representing~~ ~~82.9%~~82.3% of assets at ~~September 30, 2017~~March 31, 2018~~, from~~ and ~~$541.1 million, representing~~ ~~78.3%~~79.7% of assets at December 31, ~~2016~~2017. The total loan portfolio at ~~September 30, 2017~~March 31, 2018 increased ~~$52.0~~$54.2 million compared to the ~~September 30, 2016~~March 31, 2017 level of $~~532.6~~540.4 million, representing ~~79.2%~~79.9% of assets. 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 $~~476.1~~488.9 million, or 82.2% of total loans at March 31, 2018 and $484.2 million, or 81.4% of total loans at ~~September 30, 2017~~ ~~and~~ ~~$463.8 million, or~~ ~~85.7%~~ ~~of total loans at~~ December 31, ~~2016~~2017. Although competition for good loans is strong, especially in the commercial sector, the Company has been able to originate loans to both current and new customers while maintaining credit quality. ~~Other than the increase in the municipal portfolio reflecting the successful bid season for municipal lending opportunities, the~~The composition of the Company’s loan portfolio remained relatively unchanged from December 31, ~~2016.~~2017. There was no material change in the Company’s lending programs or terms during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018.

The composition of the Company's loan portfolio as of ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017 was as follows:


	September 30, 2017				December 31, 2016				March 31, 2018				December 31, 2017
Loan Class	Amount			Percent	Amount			Percent	Amount			Percent	Amount			Percent
	(Dollars in thousands)								(Dollars in thousands)
Residential real estate	$	176,399		30.2	$	172,727		31.9	$	181,850		30.6	$	178,999		30.1
Construction real estate	36,796			6.3	34,189			6.3	43,379			7.3	42,935			7.2
Commercial real estate	257,192			44.0	249,063			46.0	260,695			43.8	254,291			42.8
Commercial	48,166			8.2	41,999			7.8	46,885			7.9	50,719			8.5
Consumer	3,832			0.6	3,962			0.7	3,525			0.6	3,894			0.7
Municipal	56,517			9.7	31,350			5.8	55,326			9.3	55,777			9.4
Loans held for sale	5,675			1.0	7,803			1.5	2,938			0.5	7,947			1.3
Total loans	584,577			100.0	541,093			100.0	594,598			100.0	594,562			100.0
Allowance for loan losses	(5,259		)		(5,247		)		(5,405		)		(5,408		)
Unamortized net loan costs	749				649				797				795
Net loans and loans held for sale	$	580,067			$	536,495			$	589,990			$	589,949

The Company originates and sells qualified residential mortgage loans in various secondary market avenues, with a majority of sales made to the FHLMC/Freddie ~~Mac.~~Mac, generally with servicing rights retained. At ~~September 30, 2017~~March 31, 2018, the Company serviced a $~~654.3~~675.6 million residential real estate mortgage portfolio, of which $~~5.7~~2.9 million was held for sale and approximately $~~472.2~~490.8 million was serviced for unaffiliated third parties.

The Company sold ~~$90.3~~$23.1 million of qualified residential real estate loans primarily originated during the first ~~nine~~three months of ~~2017~~2018 to the secondary market to mitigate long-term interest rate risk and to generate fee income, compared to sales of ~~$98.8~~$28.5 million during the first ~~nine~~three months of ~~2016~~2017. ~~The Company generally retains the servicing rights on sold residential mortgage loan~~s. 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 locations without needing prior HUD underwriting approval. The Company sells VA and FHA 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 we serve, including low and moderate income borrowers, while the government guaranty mitigates our exposure to credit risk.

The Company also originates commercial real estate and commercial loans under various SBA, USDA and State sponsored programs ~~which~~that provide a government agency guaranty for a portion of the loan amount. There was $~~4.9~~4.3 million guaranteed under these various programs at ~~September 30, 2017~~March 31, 2018 on an aggregate balance of $~~6.2~~5.5 million in subject loans. The Company occasionally sells the guaranteed portion of the loan to other financial concerns and retains servicing rights, which generates fee income. There were ~~$226~~no commercial loans sold in the first three months of 2018 and $27 thousand of commercial loans sold in the first ~~nine~~three months of ~~2017 and $251 thousand of commercial loans sold in the first nine months of 2016.~~2017. The Company recognizes gains and losses on the sale of the principal portion of these loans as they occur.

The Company serviced $~~17.1~~13.9 million of commercial and commercial real estate loans for unaffiliated third parties as of ~~September 30, 2017~~March 31, 2018. This includes $~~12.7~~11.6 million of commercial or commercial real estate loans the Company has participated out to other financial institutions, in the ordinary course of business on a nonrecourse basis, for liquidity or credit concentration management purposes.

As of ~~September 30, 2017~~March 31, 2018, there were $1.1 billion in total loans serviced, ~~had grown~~an increase of $5.6 million compared to ~~$1.1 billion, which includes~~December 31, 2017. Total loans serviced at March 31, 2018 included total loans on the balance sheet of ~~$584.6~~$594.6 million as well as total loans sold with servicing retained of ~~$489.2~~$504.8 million ~~compared to total loans serviced of $993.1 million as of~~ ~~December 31, 2016.~~.

The Company capitalizes MSRs for all loans sold with servicing retained and recognizes gains and losses on the sale of the principal portion of these loans as they occur. The unamortized balance of MSRs on loans sold with servicing retained was $1.7 million at ~~September 30, 2017~~March 31, 2018, 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.

~~There were~~ no ~~loans pledged to secure municipal deposits above the FDIC insurance coverage level as of~~ ~~September 30, 2017. Qualified~~Qualifying residential first mortgage loans and certain commercial real estate loans ~~held by Union are eligible to be~~with a carrying value of $165.0 million were pledged as collateral for borrowings from the FHLB under a blanket ~~lien.~~lien at March 31, 2018.

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. Renewed market volatility, high unemployment rates or weakness in the general economic condition of the country or our market area, may have a negative effect on our customers’ ability to make their loan payments on a timely basis and/or on underlying collateral values. 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. ~~Repossessed assets and loans or investments that are 90 days or more past due are considered to be nonperforming assets.~~ 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~~Repossessed assets and loans or investments that are 90 days or more past due are considered to be nonperforming assets.The following table shows the composition of nonperforming assets at the dates indicated and trends ofin certain ratios monitored by the Company's management in reviewing asset quality:


	As of or for the nine months ended			As of or for the year ended			As of or for the nine months ended			As of or for the three months ended			As of or for the year ended			As of or for the three months ended
	September 30, 2017			December 31, 2016			September 30, 2016			March 31, 2018			December 31, 2017			March 31, 2017
	(Dollars in thousands)									(Dollars in thousands)
Nonaccrual loans	$	2,029		$	3,545		$	2,414		$	1,400		$	1,191		$	3,083
Accruing loans 90+ days delinquent	229			840			1,002			294			494			257
Total nonperforming loans (1)										1,694			1,685			3,340
OREO										—			36			—
Total nonperforming assets (1)	$	2,258		$	4,385		$	3,416		$	1,694		$	1,721		$	3,340
Allowance for loan losses to loans not held for sale	0.91		%	0.98		%	1.00		%
Allowance for loan losses to nonperforming loans	232.91		%	119.66		%	152.99		%
ALL to loans not held for sale										0.91		%	0.92		%	0.97		%
ALL to nonperforming loans										319.07		%	320.95		%	155.45		%
Nonperforming loans to total loans	0.39		%	0.81		%	0.64		%	0.28		%	0.28		%	0.62		%
Nonperforming assets to total assets	0.32		%	0.63		%	0.51		%	0.23		%	0.23		%	0.49		%
Delinquent loans (30 days to nonaccruing) to total loans	0.64		%	1.55		%	0.82		%	1.22		%	1.05		%	1.64		%
Net charge-offs (annualized) to average loans not held for sale	0.03		%	0.02		%	0.03		%	—		%	0.01		%	0.04		%

____________________


(1)	The Company had guarantees of U.S. or state government agencies on the above nonperforming loans totaling $~~135~~129 thousand at ~~September 30, 2017~~March 31, 2018, $~~599~~131 thousand at December 31, ~~2016~~2017, and $~~500~~333 thousand at ~~September 30, 2016~~March 31, 2017.

The level of nonaccrual loans ~~decreased~~increased $~~1.5 million~~209 thousand, or ~~42.8%~~17.5%, since December 31, ~~2016~~2017, and accruing loans delinquent 90 days or more decreased $~~611~~200 thousand, or ~~72.7%~~40.5%, during the same time period. ~~The percentage of nonperforming loans to total loans~~ ~~decreased~~ ~~from~~ ~~0.81%~~ to ~~0.39%~~. There ~~were three~~was one residential real estate loan totaling ~~$373~~$131 thousand in process of foreclosure at ~~September 30, 2017~~March 31, 2018. The aggregate interest income not recognized on nonaccrual loans amounted to approximately ~~$1.3~~$1.2 million ~~as of~~ ~~September 30, 2017~~ ~~and~~ ~~2016~~ and $1.3 million as of March 31, 2018 and 2017, respectively, and $1.2 million as of December 31, ~~2016~~.2017.

At ~~September 30, 2017~~March 31, 2018, the Company had loans rated substandard that were on performing status totaling $~~2.9~~3.2 million, compared to ~~$1.8~~$3.0 million at December 31, ~~2016.~~2017. In management's view, substandard loans represent a higher degree of risk of becoming nonperforming loans in the future. The Company’s management is focused on the impact that the economy may have on its borrowers and closely monitors industry and geographic concentrations for evidence of financial problems. ~~In contrast to the lack of snow in the prior year~~The past two winter ~~season which strained the local tourism industry, this past winter season~~seasons have brought cold temperatures and ~~abundant~~ snowfall to the area, which appears to have ~~had a positive impact after~~improved the ~~difficult 2015/2016 winter season.~~related business' financial performance. Improvement in local economic indicators have also been identified over the past ~~year.~~two years. The unemployment rate has stabilized in Vermont and was ~~2.9%~~2.8% for ~~September 2017~~March 2018 compared to ~~3.3%~~3.0% for ~~September 2016.~~March 2017. The New Hampshire unemployment rate was ~~2.7%~~2.6% for ~~September 2017~~March 2018 compared to ~~2.9%~~2.8% for ~~September 2016.~~March 2017. These rates compare favorably with the nationwide unemployment rate of ~~4.2%~~4.1% and ~~5.0%~~4.5% for the comparable periods. Management will continue to monitor the national, regional and local economic environment and its impact on unemployment, business failures and real estate values in the Company’s market area.

On occasion, the Company acquires residential or commercial real estate properties through or in lieu of loan foreclosure. These properties are held for sale and are initially recorded as OREO at fair value less estimated selling costs at the date of the Company’s acquisition of the property, with fair value based on an appraisal for more significant properties and on a broker’s price opinion

for less significant properties. Holding costs and declines in the fair value of properties acquired are expensed as incurred. Declines in the fair value after acquisition of the property result in charges against income before tax. There were no such declines for the three ~~and nine~~ months ended ~~September 30, 2017,~~March 31, 2018, or ~~September 30, 2016.~~March 31, 2017. The Company evaluates each OREO property at least quarterly for

changes in the fair value. The Company had no properties classified as OREO at ~~September 30, 2017~~March 31, 2018 or March 31, 2017 and one residential real estate property valued at $36 thousand classified as OREO at December 31, ~~2016~~2017.

Allowance for Loan Losses. Some of the Company’s loan customers ultimately do not make all of their contractually scheduled payments, 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 2017 Annual Report ~~on Form 10-K for the year ended~~ ~~December 31, 2016~~, did not change during the first ~~nine~~three months of ~~2017~~2018.

Impaired loans ~~including $3.5 million of TDR loans,~~ were $~~3.9~~3.3 million at ~~September 30, 2017~~March 31, 2018, with government guaranties of $~~564~~533 thousand and a specific reserve amount allocated of $6150 thousand. Impaired loans ~~including $3.4 million of TDR loans,~~ at December 31, ~~2016~~2017 were $~~5.3~~3.3 million, with government guaranties of $~~637~~550 thousand and a specific reserve amount allocated of ~~$103~~$48 thousand. All of the impaired loans were also TDR loans at March 31, 2018 and December 31, 2017. Based on management's evaluation of the Company's historical loss experience on substandard commercial loans, commercial loans with balances greater than $500 thousand was established as the threshold for individual impairment evaluation 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~~increased $422 thousand as a result of the ~~September 30, 2017~~March 31, 2018 impairment evaluation.

The following table reflects activity in the ALL for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2018 and ~~2016~~2017:


	For the Three Months Ended September 30,						For The Nine Months Ended September 30,						For the Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
	(Dollars in thousands)												(Dollars in thousands)
Balance at beginning of period	$	5,168		$	5,226		$	5,247		$	5,201		$	5,408		$	5,247
Charge-offs	(102		)	(4		)	(191		)	(160		)	(6		)	(61		)
Recoveries	43			4			53			35			3			6
Net charge-offs	(59		)	—			(138		)	(125		)	(3		)	(55		)
Provision for loan losses	150			—			150			150			—			—
Balance at end of period	$	5,259		$	5,226		$	5,259		$	5,226		$	5,405		$	5,192

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:


	September 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
	Amount		Percent	Amount		Percent	Amount		Percent	Amount		Percent
	(Dollars in thousands)						(Dollars in thousands)
Residential real estate	$	1,379	30.5	$	1,399	32.4	$	1,375	30.7	$	1,375	30.5
Construction real estate	408		6.4	391		6.4	494		7.3	494		7.3
Commercial real estate	2,790		44.4	2,687		46.7	2,773		44.1	2,773		43.4
Commercial	359		8.3	342		7.9	367		7.9	367		8.6
Consumer	26		0.6	26		0.7	25		0.6	25		0.7
Municipal	65		9.8	40		5.9	63		9.4	63		9.5
Unallocated	232		—	362		—	308		—	308		—
Total	$	5,259	100.0	$	5,247	100.0	$	5,405	100.0	$	5,405	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.

There were no changes to the reserve factors assigned to any of the loan portfolios based on the qualitative factor reviews performed during the first ~~nine~~three months of ~~2017~~2018. Management of the Company believes, in its best estimate, that the ALL at ~~September 30,~~

~~2017~~March 31, 2018 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 ~~September 30, 2017~~March 31, 2018. 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 ~~may~~could require increased provisions to replenish the ALL, which could negatively affect earnings. While the Company recognizes that economic slowdowns or financial and credit market turmoil may adversely impact its borrowers' financial performance and ultimately their ability to repay their loans, managementManagement continues to be cautiously optimistic about the collectability of the Company's loan portfolio.

Investment Activities. At ~~September 30, 2017~~March 31, 2018, investment securities classified as AFS totaled $~~64.0 million~~ ~~and securities classified as HTM totaled~~ ~~$1.0~~68.4 million, ~~or $65.0 million combined,~~ comprising ~~9.2%~~9.5% of total ~~assets.~~assets, compared to $65.4 million, or 8.8% of total assets at December 31, 2017 . Total investment securities decreased $~~1.6~~2.0 million, or ~~2.4%~~3.0%, from $~~66.6~~66.4 million, or ~~9.6%~~8.9% of total assets at December 31, ~~2016~~2017. Net unrealized losses for the Company’s AFS investment securities portfolio were $~~116 thousand~~1.6 million as of ~~September 30, 2017~~March 31, 2018, compared to net unrealized losses of $~~1.0 million~~381 thousand as of December 31, ~~2016~~2017. Net unrealized losses of $~~77 thousand~~1.3 million, net of income tax effect, were reflected in the Company’s accumulated OCI component of stockholders’ equity at ~~September 30, 2017~~March 31, 2018. There ~~was $1 thousand~~were no securities classified as HTM at March 31, 2018 and $1.0 million in ~~net unrealized losses in the Company's HTM~~ investment securities ~~portfolio at~~ ~~September 30, 2017~~ ~~and~~ no ~~unrealized gain or loss~~classified as HTM at December 31, ~~2016~~2017. No declines in value were deemed by management to be OTT at ~~September 30, 2017~~March 31, 2018. Deterioration in credit quality and/or imbalances in liquidity that may exist in the financial marketplace 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 certain resulting unrealized losses will be designated as OTT in future periods, resulting in write-downs and charges to earnings. There was ~~$4.9~~$2.7 million of investment securities pledged to secure various public deposits or customer repurchase agreements as of ~~September 30, 2017,~~March 31, 2018, compared to ~~$8.4~~$4.6 million at December 31, ~~2016.~~2017.

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 ~~nine~~three months ended ~~September 30, 2017~~March 31, 2018 and year ended December 31, ~~2016~~2017:


	Nine Months Ended September 30, 2017					Year Ended December 31, 2016					Three Months Ended March 31, 2018					Three Months Ended March 31, 2017
	Average Amount		Percent of Total Deposits	Average Rate		Average Amount		Percent of Total Deposits	Average Rate		Average Amount		Percent of Total Deposits	Average Rate		Average Amount		Percent of Total Deposits	Average Rate
	(Dollars in thousands)										(Dollars in thousands)
Nontime deposits:
Noninterest bearing deposits	$	108,395	18.5	—		$	105,596	18.7	—		$	124,875	19.8	—		$	106,794	18.4	—
Interest bearing checking accounts	144,961		24.7	0.13	%	128,977		22.8	0.09	%	145,091		23.0	0.13	%	140,253		24.1	0.11	%
Money market accounts	131,008		22.3	0.51	%	110,938		19.6	0.35	%	154,704		24.6	0.68	%	132,652		22.8	0.53	%
Savings accounts	98,930		16.8	0.15	%	93,118		16.5	0.15	%	103,362		16.4	0.15	%	98,283		16.9	0.15	%
Total nontime deposits	483,294		82.3	0.21	%	438,629		77.6	0.15	%	528,032		83.8	0.26	%	477,982		82.2	0.21	%
Time deposits:
Less than $100,000	61,787		10.5	0.65	%	63,720		11.3	0.66	%	60,009		9.5	0.67	%	62,330		10.7	0.66	%
$100,000 and over	41,976		7.2	0.72	%	62,528		11.1	0.90	%	41,784		6.7	0.86	%	41,393		7.1	0.69	%
Total time deposits	103,763		17.7	0.68	%	126,248		22.4	0.77	%	101,793		16.2	0.75	%	103,723		17.8	0.67	%
Total deposits	$	587,057	100.0	0.29	%	$	564,877	100.0	0.29	%	$	629,825	100.0	0.34	%	$	581,705	100.0	0.29	%

During the first three months of 2018, average total deposits grew $48.1 million, or 8.3%, compared to the three months ended March 31, 2017, with growth in all categories except time deposits.

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 ~~$11.2~~$12.3 million of time deposits of $250,000 or less on the balance sheet at ~~September 30, 2017~~March 31, 2018 and ~~$10.9~~$11.5 million at December 31, ~~2016,~~2017, which were exchanged with other CDARS participants and are therefore considered for certain regulatory purposes to be “brokered” deposits. There were no purchased CDARS deposits at ~~September 30, 2017~~March 31, 2018 or December 31, ~~2016.~~2017.

The Company also participates in the ICS program, a service through which Union can offer its customers a savings product 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 savings deposits through ICS provides a depositor with full deposit insurance coverage ~~for the customer,~~of excess balances, thereby helping Union 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. ~~During the third quarter of 2016,~~There were

Union began offering an ICS money market account to its municipal and commercial customers. Several municipal customers began utilizing this account and as monies in time deposits matured they were placed into these money market accounts. There were $37.7$45.5 million and ~~$52.6~~$67.0 million in exchanged ICS money market deposits on the balance sheet at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016,~~2017, respectively. ~~As a result, an increase in the average balance and rate paid on money market accounts and total non-time deposit accounts occurred during~~ ~~the nine months ended September 30, 2017~~ ~~compared to the year ended December 31, 2016, with corresponding decreases in time deposits $100,000 and over.~~ There were no purchased ICS deposits at ~~September 30, 2017~~March 31, 2018 or December 31, ~~2016.~~2017.

At ~~September 30, 2017,~~March 31, 2018, there was ~~$2.0 million~~$998 thousand in retail brokered deposits issued under a master ~~certificates~~certificate of deposit toprogram with a deposit broker for the purpose of providing a supplemental source of funding and liquidity. These deposits will mature in ~~$1.0 million increments in each of the next two years.~~February 2019. There were ~~$3.0~~$2.0 million of retail brokered deposits at December 31, ~~2016.~~2017.

The following table provides a maturity distribution of the Company’s time deposits in amounts of $100,000 and over at ~~September 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017:

September 30, 2017 December 31, 2016
(Dollars in thousands)
Within 3 months $ 6,145
$ 5,202
3 to 6 months 5,708
9,927
6 to 12 months 15,220
12,051
Over 12 months 12,996
13,401
$ 40,069
$ 40,581

~~During~~ ~~the first nine months~~ of ~~2017~~, average total deposits grew $22.2 million, or 3.9%, compared to the year ended December 31, 2016, with growth in all categories except time deposits. In total, time deposits at September 30, 2017 decreased $3.5 million, or 3.4%, from December 31, 2016, with the average balance decreasing $22.5 million. The Company’s time deposits in amounts of $100 thousand and over decreased ~~$512 thousand, or~~ ~~1.3%, between~~ ~~December 31, 2016~~ ~~and~~ ~~September 30, 2017, while the average balance decreased from~~ ~~$62.5 million~~ to ~~$42.0 million. The decrease in the average time deposits is primarily the result of the third quarter 2016 shift in municipal deposit funds from time deposits to the fully insured ICS money market product.~~



	March 31, 2018		December 31, 2017
	(Dollars in thousands)
Within 3 months	$	9,363	$	5,345
3 to 6 months	9,410		9,752
6 to 12 months	13,826		13,737
Over 12 months	10,649		12,348
	$	43,248	$	41,182

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. At ~~September 30, 2017~~March 31, 2018, the Company had deposit accounts with less than $250 thousand totaling $~~447.0~~463.1 million, or ~~73.7%~~74.2% of its deposits, with FDIC insurance protection. An additional $~~3.5~~2.5 million of municipal deposits were over the FDIC insurance coverage limit at ~~September 30, 2017~~March 31, 2018 and were collateralized by Union under applicable state regulations by investment securities.

Borrowings. Total borrowed funds at ~~September 30, 2017~~March 31, 2018 were $~~32.5~~31.3 million compared to $31.6 million at December 31, ~~2016~~2017, a net ~~increase~~decrease of $~~925~~316 thousand, or ~~2.9%~~1.0%. The increase in borrowed funds reflects a balance of $255 thousand in overnight federal funds purchased at a rate of 1.30% from FHLB at September 30, 2017, versus no federal funds purchased at December 31, 2016. The FHLB option advance borrowings were $~~30.3~~31.1 million at ~~September 30, 2017~~March 31, 2018, at a weighted average rate of ~~1.38%~~1.44%, and $~~30.5~~30.2 million at December 31, ~~2016~~2017, at a weighted average rate of 1.42%. The ~~decrease~~increase in option advance borrowings reflects a $7.0 million five year option advance (callable after one year) at 0.77% taken for liquidity purposes, partially offset by the ~~balance~~maturity of a $1.0 million option ~~advances reflects~~advance, a $5.0 million option advance called by FHLB and scheduled monthly payments of ~~$208~~$72 thousand on long-term FHLB amortizing advances during the first ~~nine~~three months of ~~2017.~~2018. In addition, the Company had overnight secured customer repurchase agreement sweeps at ~~September 30, 2017~~March 31, 2018 of $~~2.0~~121 thousand, at a weighted average rate of 0.15%, compared to $1.4 million, at a weighted average rate of 0.25%~~, compared to~~ ~~$1.1 million, at a weighted average rate of 0.23%~~ at December 31, ~~2016~~2017, ~~an increase~~a decrease of $~~879 thousand~~1.2 million, or ~~80.0%~~91.1%., primarily due to a customer converting their account to another deposit product during the quarter. The volume of the overnight secured customer repurchase agreement sweeps is volatile and is a function of our customers' cash flow and cash management needs.

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 $33.3 million and $29.6 million were utilized as collateral for these deposits at March 31, 2018 and December 31, 2017, respectively. Total fees paid by the Company in connection with the issuance of these letters of credit were $6 thousand for the three months ended March 31, 2018, with no fees paid for the three months ended March 31, 2017.

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.

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


	September 30, 2017		December 31, 2016		March 31, 2018		December 31, 2017
	(Dollars in thousands)				(Dollars in thousands)
Commitments to originate loans	$	22,287	$	31,404	$	28,361	$	25,394
Unused lines of credit	93,278		76,544		87,457		85,906
Standby and commercial letters of credit	2,158		1,624		2,121		2,064
Credit card arrangements	1,290		1,341		1,286		1,326
FHLB Mortgage Partnership Finance credit enhancement obligation, net	615		610		643		640
Commitment to purchase investment in a real estate limited partnership	1,470		980		1,470		1,470
Contract commitment for renovation projects					740		662
Total	$	121,098	$	112,503	$	122,078	$	117,462

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. 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 and maple syrup products production. ~~The large increase in unused lines of credit at September 30, 2017 from December 31, 2016 is primarily related to an increase in construction loan availability of $14.3 million.~~

The Company did not hold any derivative or hedging instruments at ~~September 30, 2017~~March 31, 2018 or December 31, ~~2016.~~2017.

The Company’s subsidiary bank is required (as are all banks) to maintain vault cash or a noninterest bearing reserve balance as established by FRB regulations. The Bank’s average total required reserve for the 14 day maintenance period including ~~September 30, 2017~~March 31, 2018 was ~~$1.0 million~~$994 thousand and for December 31, ~~2016~~2017 was ~~$891 thousand,~~$1.4 million, both of which were satisfied by vault cash.

Contractual Obligations. The Company and Union have various financial obligations, including contractual obligations that may require future cash payments. The following table presents, as of ~~September 30, 2017,~~March 31, 2018, significant fixed and determinable contractual obligations to third parties:


	September 30, 2017		March 31, 2018
	(Dollars in thousands)		(Dollars in thousands)
Operating lease commitments	$	324	$	623
Contractual payments on borrowed funds (1)	32,520		31,265
Deposits without stated maturity (1) (2)	506,910		520,978
Certificates of deposit (1) (2)	99,714		102,865
Deferred compensation payouts	971		880
Total	$	640,439	$	656,611

____________________


(1)	The amounts exclude interest payable.


(2)	While Union has a contractual obligation to depositors should they wish to withdraw all or some of the funds on deposit, management believes, based on historical analysis as well as current conditions in the financial markets, that the majority of these deposits will remain on deposit for the foreseeable future.

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, 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; 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 are a relatively predictable source of ~~funds,~~funds; however, 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 ~~September 30, 2017,~~March 31, 2018, Union, as a member of FHLB, had access to unused lines of credit up to ~~$58.0~~$35.0 million over and above the ~~$30.3~~$65.3 million in combined outstanding ~~term advances with~~borrowings and other credit subject to collateralization, subject 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 ~~September 30, 2017.~~March 31, 2018. 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 $10.0 million with an upstream correspondent bank and one-way buy options with CDARS and ICS as well as access to the FRB discount window, which would require pledging of qualified assets. Core deposits are the lowest cost of funds the Company has access to but these deposits may not be sufficient to cover the on balance sheet liquidity needs which makes using these other funding sources necessary. In an attempt to control the cost of these other funding sources, an agreement was entered into with Promontory Interfinancial Network that locks in the cost of funds on purchased ICS deposits at 10 basis points over the federal funds rate for a period of one year. At ~~September 30, 2017~~March 31, 2018 there were no purchased ICS deposits under this agreement, no purchased CDARS deposits, and no outstanding advances on the federal funds line or at the discount window.

Union's investment and residential loan portfolios provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. We also have additional contingent liquidity sources with access to the brokered deposit market and the FRB discount window. These sources are considered as liquidity alternatives in our contingent liquidity plan. At ~~September 30, 2017,~~March 31, 2018, there was ~~$2.0 million~~$998 thousand in retail brokered deposits issued under a master ~~certificates~~certificate of deposit toprogram with a deposit broker. Management believes the Company has sufficient liquidity to meet all reasonable borrower, depositor, and creditor needs in the present economic environment. However, any projections of future cash needs and flows are subject to substantial uncertainty, including factors outside the Company's control.

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

Stockholders’ equity increased from ~~$56.3~~$58.7 million at December 31, ~~2016~~2017 to ~~$59.6~~$59.2 million at ~~September 30, 2017,~~March 31, 2018, reflecting net income of ~~$6.5~~$2.7 million for the first ~~nine~~three months of ~~2017, a decrease~~2018, an increase of ~~$587~~$41 thousand ~~in accumulated other comprehensive loss, $102 thousand of~~from stock based compensation, and an ~~$18~~$8 thousand increase due to the issuance of common stock under the ~~DRIP and a $19 thousand increase due to the issuance of 1,000 shares of common stock from the exercise of incentive stock options.~~DRIP. These increases were partially offset by cash dividends paid of ~~$3.9~~$1.3 million, a decrease of $950 thousand in accumulated other comprehensive loss due to a decline in the fair market value of the Company's AFS securities, and stock repurchases of ~~$43~~$3 thousand during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2018. The components of the other comprehensive loss are illustrated in Note 11 of the unaudited consolidated financial statements.

The Company has 7,500,000 shares of $2.00 par value common stock authorized. As of ~~September 30, 2017,~~March 31, 2018, the Company had ~~4,937,652~~4,940,961 shares issued, of which ~~4,462,517~~4,465,657 were outstanding and ~~475,135~~475,304 were held in treasury.

In January ~~2017,~~2018, the Company's Board reauthorized the limited stock repurchase plan that was initially established in May of 2010 and has been reauthorized annually since that time. 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 (currently ~~3,000~~2,500 shares) 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 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, ~~2017,~~2018, unless reauthorized. The Company repurchased ~~1,040~~60 shares during the first ~~nine~~three months of ~~2017~~2018 under this program at a total cost of ~~$43~~$3 thousand.

~~During the first quarter of 2016, the~~The Company adopted a Dividend Reinvestment and Stock Purchase Plan 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 ~~September 30, 2017, 737~~March 31, 2018, 1,460 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 ~~rules effective January 1, 2015, a bank holding company, such as~~capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company ~~is considered “well capitalized” if~~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 ~~bank holding company (i) has~~regulators about components, risk weightings and other factors.

Under the current guidelines, banking organizations must have a minimum total ~~risk based~~risk-based capital ratio of ~~at least 10%~~8.0%, ~~(ii) has~~ a minimum Tier I risk-based capital ratio of ~~at least 8%~~6.0%, ~~and (iii) is not subject to any written agreement order, capital directive or prompt corrective action directive to meet and maintain~~ a specific capital level for any capital measure. In addition, the FDIC has amended its prompt corrective action rules to reflect the revisions made by the new capital rules implementing Basel III. Under the FDIC’s revised rules, which became effective January 1, 2015, an FDIC supervised institution is considered “well capitalized” if it (i) has a total risk-based capital ratio of 10.0% or greater; (ii) aminimum common equity Tier I risk-based capital ratio of ~~8.0% or greater; (iii)~~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, ~~ratio of at least 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (iv) is not~~ subject to ~~any written agreement, order,~~a transition schedule with a full phase-in by 2019. Effective January 1, 2018, the Company and the Bank were required to establish a capital ~~directive, or prompt corrective action directive~~conservation buffer of 1.875%, increasing the minimum required total risk-based capital, Tier I risk-based and common equity Tier I capital to ~~meet and~~risk-weighted assets they must maintain ~~a specific capital level for any capital measure. The final rule also requires unrealized gains and losses~~to avoid limits on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank elected to opt-out of this regulatory capital provision. By opting out of the provision, the bank retains what is known as the accumulated other comprehensive income filter. The rule limits a banking organization’s capital distributions and certain ~~discretionary~~ bonus payments ~~if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital~~ to ~~risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.~~executive officers and similar employees.

As of ~~September 30, 2017,~~March 31, 2018, both the Company and Union met all capital adequacy requirements to which they are subject. There were no conditions or events between ~~September 30, 2017~~March 31, 2018 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				Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
As of September 30, 2017	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of March 31, 2018													Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)												(Dollars in thousands)
Company:
Total capital to risk weighted assets	$	64,832	13.51	%	$	38,391	8.00	%	N/A		N/A		$	67,850	13.96	%	$	38,883	8.00	%	N/A		N/A
Tier I capital to risk weighted assets	59,573		12.42	%	28,779		6.00	%	N/A		N/A		62,445		12.85	%	29,157		6.00	%	N/A		N/A
Common Equity Tier 1 to risk weighted assets	59,573		12.42	%	21,584		4.50	%	N/A		N/A		62,445		12.85	%	21,868		4.50	%	N/A		N/A
Tier I capital to average assets	59,573		8.54	%	27,903		4.00	%	N/A		N/A		62,445		8.63	%	28,943		4.00	%	N/A		N/A

Union:
Total capital to risk weighted assets	$	64,492	13.47	%	$	38,303	8.00	%	$	47,878	10.00	%	$	67,379	13.89	%	$	38,807	8.00	%	$	48,509	10.00	%
Tier I capital to risk weighted assets	59,233		12.37	%	28,731		6.00	%	38,308		8.00	%	61,974		12.78	%	29,096		6.00	%	38,794		8.00	%
Common Equity Tier 1 to risk weighted assets	59,233		12.37	%	21,548		4.50	%	31,125		6.50	%	61,974		12.78	%	21,822		4.50	%	31,520		6.50	%
Tier I capital to average assets	59,233		8.49	%	27,907		4.00	%	34,884		5.00	%	61,974		8.56	%	28,960		4.00	%	36,200		5.00	%

~~The~~Dividends paid by Union are the primary source of funds available to the Company ~~remains focused on achieving~~for payment of dividends to its ~~goals~~stockholders. Union is subject to certain requirements imposed by federal banking laws and regulations, which among other things, establish minimum levels of ~~long-term growth~~capital and ~~an above-average shareholder return, while maintaining a strong capital position. Management is aware~~restrict the amount of dividends that may be distributed by Union to the ~~particular importance in today’s uncertain economic environment~~Company.

Quarterly cash dividends of ~~maintaining strong capital reserves and planning for future capital needs, including those required by the Basel III capital standards through the final phase in period ending on January 1, 2019.~~

~~A quarterly cash dividend of $0.29~~$0.30 per share ~~was~~were paid during the first quarter of 2018 and declared for the second quarter, payable on May 10, 2018 to stockholders of record on ~~October 28,~~April 30, 2018.The dividend rate of $0.30 per share represents an increase of $0.01 per share in the quarterly cash dividends paid in 2017 ~~payable November 8, 2017. The dividend for the previous quarter was $0.29 per share.~~.

Regulatory Matters. The Company and Union are subject to periodic examinations by the various regulatory agencies. These examinations include, but are not limited to, procedures designed to review lending practices, risk management, credit quality, liquidity, compliance and capital adequacy. In May of 2017, the FDIC performed its regular, periodic safety and soundness examination of Union. In February of 2017, the FDIC performed its regular periodic compliance examination of Union. In ~~January~~September of ~~2016,~~2017, the FRB performed its regular, periodic examination of the Company. During 2015, the Vermont Department of Financial Regulation performed a regular safety and soundness examination of Union. No comments were received that would have a material adverse effect on the Company’s or Union’s liquidity, financial position, capital resources, or results of operations.

OTHER FINANCIAL CONSIDERATIONS

Market Risk and Interest Rate Risk. Market risk is the potential of loss in a financial instrument arising from adverse changes in market prices, interest rates, foreign currency exchange rates, commodity prices, and equity prices. As of ~~September 30, 2017~~March 31, 2018, the Company did not have any market risk sensitive instruments acquired for trading purposes. The Company’s market risk arises primarily from interest rate risk inherent in its lending, investing, deposit taking and borrowing activities. Management of interest rate risk is an important component of our asset and liability management process, which is governed by established policies that are reviewed and approved annually. Our investment policy details the types of securities that may be purchased, and establishes portfolio limits and maturity limits for the various sectors. Our investment policy also establishes specific investment quality

limits. The ALCO develops guidelines and strategies impacting our asset and liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels and trends. Members of the ALCO also manage the investment portfolio to maximize net interest income while mitigating market and interest rate risk.

Interest rate risk arises naturally from imbalances in repricing, maturity and cash flow characteristics of our assets and liabilities. The ALCO takes into consideration the cash flow and repricing attributes of balance sheet and off-balance sheet items and their relation to possible changes in interest rates. The ALCO manages interest rate exposure primarily by using on-balance sheet strategies, generally accomplished through the management of the duration, rate sensitivity and average lives of our various investments, and by extending or shortening maturities of borrowed funds, as well as carefully managing and monitoring the maturities and pricing of loans and deposits.

An outside consultant is utilized to perform rate shocks to our balance sheet to assess our risk to earnings in different interest rate environments, and to perform a variety of other analyses. The consultant’s most recent completed analysis was as of ~~September 30, 2017.~~March 31, 2018. The base simulation assumed no changes in rates, as well as 200 and 300 basis point rising interest rate scenarios which assume a parallel shift of the yield curve over a one-year period, and no growth assumptions. Management is not aware of any significant changes in the Company's risk profile since the analysis was performed as of ~~September 30, 2017.~~March 31, 2018. A summary of the results is as follows:

Current/Flat Rates: If rates remain at current levels net interest income is projected to trend sideways for the entire simulation as declining asset yields are similarly offset by reductions to funding costs.

Rising Rates: Higher rates indicate positive results under all scenarios. Under the rising rate scenarios if rates rise in a parallel fashion, net interest income is expected to trend close to the base case scenario over the near term as higher funding costs match increasing asset yields. Once funding cost increases stabilize, net interest income is projected to increase for the duration of the simulation as assets reprice at higher rates and investment and loan cash flow continues to cycle into the elevated environment. The timing of recovery will depend on the slope and shape of the yield curve as rates rise.

The net interest income simulation as of ~~September 30, 2017~~March 31, 2018 showed that the change in net interest income for the next 12 months from our expected or “most likely” forecast was as follows:

Rate Change Percent Change in Net Interest Income Limit Percent Change in Net Interest Income
Up 300 basis points (21.00 )% 1.6 %
Up 200 basis points (14.00 )% 1.4 %



Rate Change	Percent Change in Net Interest Income Limit		Percent Change in Net Interest Income
Up 300 basis points	(21.00	)%	2.6	%
Up 200 basis points	(14.00	)%	2.1	%

The preceding sensitivity analysis does not represent our forecast and should not be relied upon as being indicative of expected operating results. These estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels including yield curve shape, prepayments on loans and securities, deposit run-off rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions including how customer preferences or competitor influences might change.

The model used to perform the base case balance sheet simulation assumes a parallel shift of the yield curve over twelve months and reprices every interest earning asset and interest bearing liability on our balance sheet, simultaneously. The use of pricing betas help simulate the expected pricing behavior regarding non-maturing deposits, limiting the rate increases that occur when market rates rise. A historic analysis of the bank's prepayment history was performed and the results were used as a basis for future prepayment expectations. Investment securities with call provisions are examined on an individual basis to estimate the likelihood of a call.

As market conditions vary from those assumed in the sensitivity analysis, actual results will likely differ due to: the varying impact of changes in the balances and mix of loans and deposits differing from those assumed, the impact of possible off balance sheet

commitments, and other internal/external variables. Furthermore, the sensitivity analysis does not reflect all actions that the ALCO might take in responding to or anticipating changes in interest rates.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Information called for by this item is incorporated to Part I, Item 2, reference in Management’s Discussion and Analysis of Financial Condition and Results of Operations under the caption OTHER FINANCIAL CONSIDERATIONS on page 4539 of this report

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 ~~September 30, 2017~~March 31, 2018. 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.

There are no known pending legal proceedings to which the Company or its subsidiary is a party, or to which any of their properties is subject, other than ordinary litigation arising in the normal course of business activities. Although the amount of any ultimate liability with respect to such proceedings cannot be determined, in the opinion of management, any such liability is not expected to have a material adverse effect on the consolidated financial condition or results of operations of the Company and its subsidiary.

Item 1A. Risk Factors

There have been no material changes in the risk factors discussed in Part I-Item 1A, "Risk Factors" in our ~~2016~~2017 Annual Report ~~on Form 10-K,~~ since the date of the filing of that report.

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

During the quarter ended ~~September 30, 2017~~March 31, 2018, the ~~only~~Company did not issue any unregistered ~~issuance of the Company's~~ equity securities was pursuant to the exercise of incentive stock options issued under the 2008 ISO Plan, resulting in the issuance of 1,000 shares of the Company's common stock. The shares were issued in reliance upon an exemption in section 4(a)(2) of the Securities Act of 1933 for distributions not involving a public offering.securities.

The following table summarizes repurchases of the Company's equity securities during the quarter ended ~~September 30, 2017:~~March 31, 2018:

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)
July 2017 215
$41.70 215
2,785
August 2017 —
—
—
2,785
September 2017 150
$43.16 150
—



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 2018	60	$48.82	60	2,440
February 2018	—	—	—	2,440
March 2018	—	—	—	—

__________________

(1)

All repurchases shown in the table were made pursuant to a discretionary stock repurchase program under which the Company may repurchase up to ~~3,000~~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 2018. The program will expire on December 31, 2018, unless reauthorized.

~~in 2010 and was reauthorized most recently in January 2017. The program will expire on December 31, 2017, 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 ~~September 30, 2017~~March 31, 2018 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ (iii) the unaudited consolidated statements of comprehensive income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ (iv) the unaudited consolidated statements of changes in stockholders' equity, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

____________________


*	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.

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.

~~November 9, 2017~~May 10, 2018		/s/ David S. Silverman
		David S. Silverman
		Director, President and Chief Executive Officer


~~November 9, 2017~~May 10, 2018		/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 ~~September 30, 2017~~March 31, 2018 formatted in eXtensible Business Reporting Language (XBRL): (i) the unaudited consolidated balance sheets, (ii) the unaudited consolidated statements of income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ (iii) the unaudited consolidated statements of comprehensive income for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2018 and 2017, ~~and 2016,~~ (iv) the unaudited consolidated statements of changes in stockholders' equity, (iv) the unaudited consolidated statements of cash flows and (v) related notes.

____________________


*	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 4842



	New TDRs During the					New TDRs During the
	Three Months Ended September 30, 2016					Nine Months Ended September 30, 2016
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment		Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Residential real estate	3	$	89	$	99	6	$	278	$	295
Commercial real estate	4	643		647		6	803		807



	Three Months Ended
	September 30, 2017									September 30, 2016
	Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount			Before-Tax Amount			Tax (Expense) Benefit		Net-of-Tax Amount
	(Dollars in thousands)
Investment securities available-for-sale:
Net unrealized holding gains (losses) arising during the period on investment securities available-for-sale	$	70		$	(24	)	$	46		$	(276	)	$	94	$	(182	)
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income	(24		)	8			(16		)	(53		)	18		(35		)
Total other comprehensive income (loss)	$	46		$	(16	)	$	30		$	(329	)	$	112	$	(217	)



	Nine Months Ended
	September 30, 2017									September 30, 2016
	Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount			Before-Tax Amount			Tax (Expense) Benefit			Net-of-Tax Amount
	(Dollars in thousands)
Investment securities available-for-sale:
Net unrealized holding gains arising during the period on investment securities available-for-sale	$	923		$	(314	)	$	609		$	1,082		$	(368	)	$	714
Reclassification adjustment for net gains on investment securities available-for-sale realized in net income	(33		)	11			(22		)	(71		)	24			(47		)
Total other comprehensive income	$	890		$	(303	)	$	587		$	1,011		$	(344	)	$	667



	Three Months Ended						Nine Months Ended
Reclassification Adjustment Description	September 30, 2017			September 30, 2016			September 30, 2017			September 30, 2016			Affected Line Item in Consolidated Statement of Income
	(Dollars in thousands)
Investment securities available-for-sale:
Net gains on investment securities available-for-sale	$	(24	)	$	(53	)	$	(33	)	$	(71	)	Net gains on sales of investment securities available-for-sale
Tax benefit	8			18			11			24			Provision for income taxes
Total reclassifications	$	(16	)	$	(35	)	$	(22	)	$	(47	)	Net income



	Nine Months Ended September 30,
	2017						2016
	Average Balance		Interest Earned/ Paid		Average Yield/ Rate		Average Balance		Interest Earned/ Paid		Average Yield/ Rate
	(Dollars in thousands)
Average Assets:
Federal funds sold and overnight deposits	$	14,751	$	64	0.57	%	$	12,202	$	23	0.25	%
Interest bearing deposits in banks	8,700		109		1.67	%	11,201		123		1.46	%
Investment securities (1), (2)	67,585		1,269		2.97	%	60,140		1,120		2.91	%
Loans, net (1), (3)	552,473		19,823		4.90	%	517,446		18,604		4.90	%
Nonmarketable equity securities	2,455		72		3.94	%	2,121		52		3.30	%
Total interest earning assets (1)	645,964		21,337		4.55	%	603,110		19,922		4.54	%
Cash and due from banks	4,199						4,603
Premises and equipment	13,286						13,091
Other assets	22,313						22,777
Total assets	$	685,762					$	643,581
Average Liabilities and Stockholders' Equity:
Interest bearing checking accounts	$	144,961	136		0.13	%	$	125,407	79		0.08	%
Savings/money market accounts	229,938		610		0.35	%	196,903		325		0.22	%
Time deposits	103,763		525		0.68	%	133,351		796		0.80	%
Borrowed funds	35,713		369		1.36	%	23,905		303		1.67	%
Total interest bearing liabilities	514,375		1,640		0.42	%	479,566		1,503		0.42	%
Noninterest bearing deposits	108,395						103,870
Other liabilities	5,363						4,693
Total liabilities	628,133						588,129
Stockholders' equity	57,629						55,452
Total liabilities and stockholders’ equity	$	685,762					$	643,581
Net interest income			$	19,697					$	18,419
Net interest spread (1)					4.13	%					4.12	%
Net interest margin (1)					4.22	%					4.21	%