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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
Commission File Number 0-12958
UNION BANKSHARES COMPANY
(Exact name of registrant as specified in its charter)
| Maine | 01-0395131 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
66 Main Street, Ellsworth, Maine 04605
(Address of principal executive offices) (Zip Code)
(207) 667-2504
(Registrant’s telephone number, including area code)
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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell holding company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of May 8, 2007, there were 1,064,530 shares of the registrant’s common stock, $12.50 par value, issued and outstanding.
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INDEX TO FORM 10-Q
| Page # | ||||
| PART I. FINANCIAL INFORMATION | ||||
| Item 1. | Financial Statements (Unaudited) | |||
| Report of Independent Registered Public Accounting Firm | 1 | |||
| Consolidated Balance Sheets – March 31, 2007 and 2006 and December 31, 2006 | 2 | |||
| Consolidated Statements of Income – Three months ended March 31, 2007 and 2006 | 3 | |||
| 4 | ||||
| Consolidated Statements of Cash Flows – Three months ended March 31, 2007 and 2006 | 5 | |||
| Condensed Notes to Consolidated Financial Statements – March 31, 2007 | 6 | |||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 9 | ||
| Item 3. | 17 | |||
| Item 4. | 18 | |||
| Item 4T. | 18 | |||
| PART II. OTHER INFORMATION | ||||
| Item 1. | 19 | |||
| Item 1A. | 19 | |||
| Item 2. | 19 | |||
| Item 3. | 19 | |||
| Item 4. | 19 | |||
| Item 5. | 19 | |||
| Item 6. | 20 | |||
| Signatures | 21 | |||
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| ITEM 1. | FINANCIAL STATEMENTS |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Union Bankshares Company
We have reviewed the accompanying interim consolidated financial information of Union Bankshares Company and Subsidiary as of March 31, 2007 and 2006, and for the three month periods then ended. These financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
/s/ Berry, Dunn, McNeil and Parker
Portland, Maine
May 14, 2007
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UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except number of shares)
| March 31, 2007 | March 31, 2006 | December 31, 2006 | ||||||||||
| (Unaudited) | (Unaudited) | (Audited) | ||||||||||
ASSETS | ||||||||||||
Cash and cash equivalents | $ | 9,506 | $ | 11,061 | $ | 11,900 | ||||||
Securities, available for sale, at market | 130,741 | 137,566 | 130,512 | |||||||||
Securities, held to maturity, at cost (market value $1,984, $2,033, and $2,019 at March 31, 2007, March 31, 2006 and December 31, 2006, respectively) | 1,945 | 1,982 | 1,977 | |||||||||
Other investment securities, at cost which approximates market value | 7,766 | 9,258 | 8,009 | |||||||||
Loans held for sale | 590 | 355 | 842 | |||||||||
Loans | 375,609 | 363,595 | 370,167 | |||||||||
Less allowance for loan losses | 4,187 | 4,283 | 4,255 | |||||||||
Net loans | 371,422 | 359,312 | 365,912 | |||||||||
Premises, furniture and equipment, net | 8,715 | 6,412 | 8,647 | |||||||||
Goodwill | 6,305 | 6,305 | 6,305 | |||||||||
Bank owned life insurance | 9,203 | 8,848 | 9,118 | |||||||||
Other assets | 7,304 | 6,840 | 7,753 | |||||||||
Total assets | $ | 553,497 | $ | 547,939 | $ | 550,975 | ||||||
LIABILITIES | ||||||||||||
Demand deposits | $ | 41,927 | $ | 41,366 | $ | 49,868 | ||||||
NOW deposits | 79,407 | 73,016 | 80,257 | |||||||||
Money market accounts | 27,531 | 22,307 | 21,290 | |||||||||
Savings deposits | 55,224 | 67,668 | 60,258 | |||||||||
Certificates of deposit | 145,464 | 112,845 | 136,092 | |||||||||
Total deposits | 349,553 | 317,202 | 347,765 | |||||||||
Borrowings from Federal Home Loan Bank | 124,891 | 162,424 | 129,729 | |||||||||
Other borrowed funds | 21,004 | 12,991 | 16,802 | |||||||||
Subordinated debt | 8,248 | 8,248 | 8,248 | |||||||||
Other liabilities | 7,262 | 6,647 | 6,838 | |||||||||
Total liabilities | 510,958 | 507,512 | 509,382 | |||||||||
SHAREHOLDERS’ EQUITY | ||||||||||||
Common stock, $12.50 par value. Authorized 10,000,000 shares, issued 1,064,682 shares at March 31, 2007, 1,090,986 shares at March 31, 2006 and 1,063,982 shares at December 31, 2006. | 13,308 | 13,637 | 13,300 | |||||||||
Surplus | 274 | 1,581 | 248 | |||||||||
Retained earnings | 29,891 | 27,499 | 29,417 | |||||||||
Accumulated other comprehensive loss | ||||||||||||
Net unrealized loss on securities available for sale, net of deferred tax asset of $(278), $(772) and $(504) at March 31, 2007, March 31, 2006 and December 31, 2006, respectively. | (540 | ) | (1,524 | ) | (978 | ) | ||||||
Net unrealized loss on pension and postretirement plans, net of deferred tax asset of $(203), $(395) and $(203) at March 31, 2007, March 31, 2006 and December 31, 2006, respectively. | (394 | ) | (766 | ) | (394 | ) | ||||||
Total shareholders’ equity | 42,539 | 40,427 | 41,593 | |||||||||
Total liabilities and shareholders’ equity | $ | 553,497 | $ | 547,939 | $ | 550,975 | ||||||
See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements.
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UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except number of shares and per share data)
Three months ended March 31, | ||||||
| 2007 | 2006 | |||||
| (Unaudited) | (Unaudited) | |||||
INTEREST AND DIVIDEND INCOME | ||||||
Interest and fees on loans | $ | 6,006 | $ | 5,417 | ||
Interest and dividends on investments | 1,696 | 1,517 | ||||
Total interest and dividend income | 7,702 | 6,934 | ||||
INTEREST EXPENSE | ||||||
Interest on deposits | 2,078 | 1,513 | ||||
Interest on borrowed funds | 1,994 | 1,647 | ||||
Total interest expense | 4,072 | 3,160 | ||||
Net interest income | 3,630 | 3,774 | ||||
Provision for loan losses | 15 | — | ||||
Net interest income after provision for loan losses | 3,615 | 3,774 | ||||
NON-INTEREST INCOME | ||||||
Net gain on sales of investment securities | 7 | — | ||||
Financial services fees and commissions | 668 | 621 | ||||
Service charges and fees on deposit accounts | 446 | 442 | ||||
Bankcard fees | 82 | 76 | ||||
Loan fees | 226 | 150 | ||||
Income from cash surrender value of life insurance | 85 | 87 | ||||
Other income | 73 | 2 | ||||
Total non-interest income | 1,587 | 1,378 | ||||
NON-INTEREST EXPENSE | ||||||
Salaries and employee benefits | 2,391 | 2,464 | ||||
Net occupancy | 442 | 386 | ||||
Equipment and data processing | 308 | 290 | ||||
Other expense | 823 | 905 | ||||
Total non-interest expense | 3,964 | 4,045 | ||||
Income before income taxes | 1,238 | 1,107 | ||||
Income taxes | 306 | 273 | ||||
Net income | $ | 932 | $ | 834 | ||
Net income per common share | $ | 0.88 | $ | 0.76 | ||
Cash dividends declared per common share | $ | 0.43 | $ | 0.40 | ||
Weighted average common shares outstanding | 1,064,155 | 1,096,208 | ||||
See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements.
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UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands, except number of shares and per share data)
| Common Stock | Surplus | Retained Earnings | Accumulated Other Comprehensive Loss | Total Shareholders’ Equity | ||||||||||||||||
Balance at December 31, 2005 | $ | 13,721 | $ | 1,932 | $ | 27,126 | $ | (2,204 | ) | $ | 40,575 | |||||||||
Net income, three months ended March 31, 2006 | — | — | 834 | — | 834 | |||||||||||||||
Change in net unrealized loss on available for sale securities, net of tax of $31 | — | — | — | (86 | ) | (86 | ) | |||||||||||||
Total comprehensive income | — | — | 834 | (86 | ) | 748 | ||||||||||||||
Sale of 2,204 shares of common stock | 27 | 117 | — | — | 144 | |||||||||||||||
Repurchase of 8,884 shares of common stock | (111 | ) | (468 | ) | — | — | (579 | ) | ||||||||||||
Cash dividends declared | — | — | (461 | ) | — | (461 | ) | |||||||||||||
Balance at March 31, 2006 | $ | 13,637 | $ | 1,581 | $ | 27,499 | $ | (2,290 | ) | $ | 40,427 | |||||||||
Balance at December 31, 2006 | $ | 13,300 | $ | 248 | $ | 29,417 | $ | (1,372 | ) | $ | 41,593 | |||||||||
Net income, three months ended March 31, 2007 | — | — | 932 | — | 932 | |||||||||||||||
Change in net unrealized loss on available for sale securities, net of tax benefit of $225 | — | — | — | 438 | 438 | |||||||||||||||
Total comprehensive income | — | — | 932 | 438 | 1,370 | |||||||||||||||
Sale of 2,261 shares of common stock | 28 | 90 | — | — | 118 | |||||||||||||||
Repurchase of 1,561 shares of common stock | (20 | ) | (64 | ) | — | — | (84 | ) | ||||||||||||
Cash dividends declared | — | — | (458 | ) | — | (458 | ) | |||||||||||||
Balance at March 31, 2007 | $ | 13,308 | $ | 274 | $ | 29,891 | $ | (934 | ) | $ | 42,539 | |||||||||
See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements.
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UNION BANKSHARES COMPANY AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| Three months ended March 31, | ||||||||
| 2007 | 2006 | |||||||
| (Unaudited) | (Unaudited) | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net income | $ | 932 | $ | 834 | ||||
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES | ||||||||
Amortization of intangible asset | 12 | 12 | ||||||
Depreciation | 188 | 154 | ||||||
Net (accretion) amortization of (discounts) premium on investments | (1 | ) | 78 | |||||
Deferred income taxes | — | (47 | ) | |||||
Provision for loan losses | 15 | — | ||||||
Net gain on sales of available for sale securities | (7 | ) | — | |||||
Originations of loans held for sale | (4,475 | ) | (996 | ) | ||||
Proceeds from sale of loans | 4,727 | 641 | ||||||
Net change in other assets | 437 | (383 | ) | |||||
Net increase in other liabilities | 167 | 183 | ||||||
Net change in deferred loan origination fees | (8 | ) | (9 | ) | ||||
Net cash provided by operating activities | 1,987 | 467 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Proceeds from sale of available for sale securities | 4,007 | 170 | ||||||
Purchase of available for sale securities | (20,229 | ) | (12,866 | ) | ||||
Proceeds from maturities and principal payments on available for sale securities | 16,666 | 3,796 | ||||||
Proceeds from maturities and principal payments on held to maturity securities | 30 | 95 | ||||||
Net decrease in other investments | 243 | 500 | ||||||
Net increase in loans to customers | (5,517 | ) | (7,693 | ) | ||||
Net capital expenditures | (256 | ) | (345 | ) | ||||
Net increase in cash surrender value of life insurance | (85 | ) | (86 | ) | ||||
Net cash used by investment activities | (5,141 | ) | (16,429 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Net increase (decrease) in deposits | 1,788 | (17,796 | ) | |||||
Proceeds from long-term borrowings | 5,000 | — | ||||||
Repayment of long-term borrowings | (838 | ) | (787 | ) | ||||
Net change in short-term borrowings from Federal Home Loan Bank | (9,000 | ) | 33,100 | |||||
Net change in other borrowed funds | 4,202 | (4,593 | ) | |||||
Issuance of subordinated debt | — | 8,248 | ||||||
Purchase of common stock | (84 | ) | (579 | ) | ||||
Proceeds from stock issuance | 118 | 144 | ||||||
Dividends paid | (426 | ) | (439 | ) | ||||
Net cash provided by financing activities | 760 | 17,298 | ||||||
Net (decrease) increase in cash and cash equivalents | (2,394 | ) | 1,336 | |||||
Cash and cash equivalents at beginning of year | 11,900 | 9,725 | ||||||
Cash and cash equivalents at end of period | $ | 9,506 | $ | 11,061 | ||||
See Report of Independent Registered Public Accounting Firm. The accompanying notes are an integral part of these consolidated financial statements.
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CONDENSED NOTESTO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASISOF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. All significant intercompany transactions and balances are eliminated in consolidation. Operating results for the quarter ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007 or other interim periods. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the Securities and Exchange Commission.
NOTE 2. EARNINGS PER SHARE
Earnings per common share (“EPS”) is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period.
NOTE 3. DERIVATIVE FINANCIAL INSTRUMENTS
On March 15, 2007, the Company purchased interest rate protection agreements (caps) with notional amounts of $20.0 million, a strike rate of 5.50% and a termination date of March 15, 2010. These caps were acquired to limit the Company’s exposure to rising interest rates. Under these agreements, the Company paid up front premiums of $66,000 for the right to receive cash flow payments above the predetermined cap rate, thus effectively capping its interest expense for the duration of the agreement. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 133,Accounting for Derivative Instruments and Hedging Activity, management determined the cap did not qualify for hedge accounting treatment. Accordingly, the fair value of the cap, $56,000 at March 31, 2007, is recorded in the consolidated balance sheets with the change in fair value recorded in other expense in the consolidated statement of income.
NOTE 4. STOCK REPURCHASE PROGRAM
The Stock Repurchase Program, as originally adopted on April 14, 2002, provided for the repurchase of up to 57,700 shares or up to 5% of the Company’s then-outstanding common stock. On October 27, 2004, the Company amended the Stock Repurchase Program to authorize the repurchase of up to 86,550 shares or 7.5% of its outstanding common stock as of the Program’s original adoption date. On February 22, 2006, the Board of Directors of the Company authorized the repurchase of 5,000 additional shares under the Stock Repurchase Program. On April 19, 2006, the Board of Directors of the Company amended the Stock Repurchase Program to authorize the repurchase of an additional 54,529 shares, or 5%, of the Company’s common stock outstanding as of April 10, 2006. The repurchases may be made from time to time at the discretion of management of the Company. Shares repurchased by the Company are designated as authorized but unissued stock of the Company. The Company may utilize such shares for any purpose the Board of Directors of the Company deems advisable in compliance with applicable law. As of March 31, 2007, the Company had repurchased a total of 123,026 shares of its stock since the Program’s inception. The Company repurchased 1,561 shares as part of this program at an average price of $53.94 during the first quarter of 2007.
NOTE 5. MORTGAGE SERVICING RIGHTS
Capitalized mortgage servicing rights are recognized, in accordance with SFAS No. 156,Accounting for Servicing of Financial Assets—an amendment of SFAS No. 140, as separate assets when the Company continues to service residential real estate loans that have been sold in the secondary market. Capitalized servicing rights are included in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. The fair value of the mortgage servicing rights approximated $1.3 million and $1.1 million, respectively at March 31, 2007 and 2006.
In evaluating the reasonableness of the carrying values of mortgage servicing rights, the Company obtains third party valuations based on loan level data including note rate, type and term of the underlying loans. The model utilizes a variety of assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Prepayment assumptions, which are impacted by loan rates and terms, are calculated using a three-month moving average of weekly prepayment data published by the Public Securities Association and modeled against the serviced loan portfolio by the third party valuation specialist. The discount rate is the quarterly average 10-year US Treasury rate plus 5.0%. Other assumptions include delinquency rates, foreclosure rates, servicing cost inflation, and annual unit loan cost. All assumptions are adjusted periodically to reflect current circumstances. Amortization of the mortgage servicing rights, as well as write-offs of capitalized rights due to prepayments of the related mortgage loans, are recorded as a charge against other income.
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The following summarizes mortgage servicing rights capitalized and amortized, along with the activity in the related valuation allowance:
| Three months ended March 31, | ||||||||
| 2007 | 2006 | |||||||
| (Dollars in thousands) | ||||||||
Balance of loans serviced for others at March 31, | $ | 108,067 | $ | 103,060 | ||||
Mortgage Servicing Rights, Net of Valuation Allowance: | ||||||||
Balance at beginning of year | $ | 561 | $ | 619 | ||||
Mortgage servicing rights capitalized | 71 | 14 | ||||||
Amortization charged against mortgage servicing income | (76 | ) | (71 | ) | ||||
Change in valuation allowance | (1 | ) | — | |||||
Balance at end of period | $ | 555 | $ | 562 | ||||
Valuation Allowance: | ||||||||
Balance at beginning of year | $ | 2 | $ | 4 | ||||
Increase in impairment reserve | 1 | — | ||||||
Balance at end of period | $ | 3 | $ | 4 | ||||
NOTE 6. CORE DEPOSIT INTANGIBLE
On August 31, 2000, the Company acquired the outstanding stock of Mid-Coast Bancorp, Inc. and its subsidiary, The Waldoboro Bank, FSB. The acquisition was accounted for under the purchase method of accounting for business combinations. The Company has an intangible asset subject to amortization related to the acquisition. The core deposit intangible is being amortized on a straight-line basis over 7 years, and reviewed for possible impairment when it is determined that events or changed circumstances may affect the underlying basis of the asset. The carrying amount is as follows:
March 31, 2007 | March 31, 2006 | December 31, 2006 | |||||||
| (Dollars in thousands) | |||||||||
Core deposit intangible, cost | $ | 323 | $ | 323 | $ | 323 | |||
Accumulated amortization | 308 | 261 | 296 | ||||||
Core deposit intangible, net | $ | 15 | $ | 62 | $ | 27 | |||
Amortization expense related to the core deposit intangible amounted to $12,000 for the three months ended March 31, 2007 and March 31, 2006. The expected total amortization expense is estimated to be $27,000 in 2007.
NOTE 7. EMPLOYEE BENEFITS
The Company’s subsidiary has a noncontributory defined benefit pension plan covering substantially all permanent full-time employees. Effective May 15, 2005, the Company froze the defined benefit pension plan. As a result, all affected employees retained any benefits accumulated to the effective date, but were no longer eligible to increase their benefit.
The Company also sponsors a postretirement benefit program that provides medical coverage and life insurance benefits to certain employees who meet minimum age and service requirements. Active employees accrue benefits over a 25-year period.
In December 2006, the Company implemented SFAS Statement No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans” – an amendment of FASB Statements No. 87, 88, 106 and 132(R). This Statement requires changes to the existing reporting for defined benefit postretirement plans that, among other changes, requires the Company to recognize on its balance sheet the over funded or under funded status of the above described plans measured as the difference between the fair value of plan assets and the projected benefit obligation.
Net periodic benefit cost of these plans includes the following components:
| Three months ended March 31, | ||||||||||||||||
| 2007 | 2006 | |||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Service cost | $ | — | $ | 18 | $ | — | $ | 19 | ||||||||
Interest cost | 101 | 21 | 98 | 21 | ||||||||||||
Expected return on plan assets | (98 | ) | — | (98 | ) | — | ||||||||||
Recognized net actuarial (gain) loss | 12 | (3 | ) | 8 | (3 | ) | ||||||||||
Amortization of unrecognized transition obligation | — | 12 | — | 12 | ||||||||||||
Net periodic benefit cost | $ | 15 | $ | 48 | $ | 8 | $ | 49 | ||||||||
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Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income (loss) are as follows:
| Three months ended March 31, | ||||||||||||||||
| 2007 | 2006 | |||||||||||||||
Pension Benefits | Other Benefits | Pension Benefits | Other Benefits | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Net actuarial loss (gain) | $ | 939 | $ | (617 | ) | $ | — | $ | — | |||||||
Unrecognized transition obligation | — | 275 | — | — | ||||||||||||
| 939 | (342 | ) | — | — | ||||||||||||
Net deferred tax expense (benefit) | (319 | ) | 116 | — | — | |||||||||||
Total accumulated other comprehensive (income) loss | $ | 620 | $ | (226 | ) | $ | — | $ | — | |||||||
Weighted-average discount rate assumption used to determine benefit obligation | 6.00 | % | 6.00 | % | 5.50 | % | 5.50 | % | ||||||||
Weighted-average discount rate assumption used to determine benefit cost | 5.75 | % | 5.50 | % | 5.75 | % | 5.75 | % | ||||||||
The Company’s expected pension and postretirement benefit payments for the second quarter of 2007 are $77,000 and $13,000, respectively and the expected benefit payments for all of 2007 are $310,000 and $52,000, respectively. The expected pension and postretirement contributions for 2007 is $0 and $52,000, respectively.
The Company has established a defined contribution plan under Section 401(k) of the Internal Revenue Code. Plan participants, who consist of all employees meeting minimum age and service requirements who elect to participate, are permitted to contribute a percentage of their wages to the plan on a pre-tax basis. In 2005, the Company amended the Plan to include an employer-paid match on amounts deferred by employees and an annual discretionary profit sharing contribution paid by the Company.
The Company also maintains a nonqualified supplemental executive retirement plan for the benefit of certain key employees. Life insurance policies were acquired to generate income to offset the cost of the plan. The amount of the annual benefit is indexed to the financial performance of each insurance policy owned by the Company.
NOTE 8. REPURCHASE AGREEMENTS
Both wholesale and retail repurchase agreements are collateralized by mortgage-backed securities and U.S. Government obligations. At March 31, 2007, the Company had $10.0 million of wholesale repurchase agreements outstanding with third party brokers and $10.0 million of customer repurchase agreements outstanding. The related securities are included in the securities available for sale portfolio.
NOTE 9. INCOME TAXES
In June 2006, the FASB issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109 (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company has adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48.
The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2004 through 2006. The Company and its subsidiaries state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2004 through 2006.
NOTE 10. RECENT ACCOUNTING DEVELOPMENTS
In September 2006, The Financial Accounting Standards Board (“FASB”) issued SFAS No. 157,Fair Value Measurements. SFAS No. 157 establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and early application is encouraged. This Statement does not require any new fair value measurements and we do not expect application of this Statement to change current practice.
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In February of 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, which gives entities the option to measure eligible financial assets, and financial liabilities at fair value on an instrument by instrument basis, that are otherwise not permitted to be accounted for at fair value under other accounting standards. The election to use the fair value option is available when an entity first recognizes a financial asset or financial liability. Subsequent changes in fair value must be recorded in earnings. This statement is effective as of the beginning of a company’s first fiscal year after November 15, 2007. The Company is in the process of analyzing the impact of SFAS 159.
| ITEM 2. | MANAGEMENT’S DISCUSSIONAND ANALYSISOF FINANCIAL CONDITIONAND RESULTSOF OPERATIONS |
The following discussion and analysis reviews the consolidated financial condition of Union Bankshares Company (the “Company”) at March 31, 2007 and 2006 and December 31, 2006, and the consolidated results of operations for the three months ended March 31, 2007 and 2006. This discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission on March 30, 2007.
Certain information discussed below is presented on a fully tax-equivalent basis. Management believes the disclosure of tax-equivalent net interest income information improves the clarity of financial analysis, and is particularly useful to investors in understanding and evaluating the changes and trends in the Company’s results of operations.
Forward Looking Statements
This Form 10-Q contains “forward-looking statements” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated” and “potential.” Examples of forward-looking statements include, but are not limited to, estimates with respect to our financial condition, results of operations and business that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to:
| • | The Company’s loan portfolio includes loans with a higher risk of loss. |
| • | If the Company’s allowance for loan losses is not sufficient to cover actual loan losses, earnings could decrease. |
| • | Changes in interest rates could adversely affect the Company’s results of operations and financial condition. |
| • | The local economy may affect future growth possibilities. |
| • | The Company depends on its executive officers and key personnel to continue the implementation of its long-term business strategy and could be harmed by the loss of their services. |
| • | The Company operates in a highly regulated environment, and changes in laws and regulations to which it is subject may adversely affect its results of operations. |
| • | Competition in the Bank’s primary market area may reduce its ability to attract and retain deposits and originate loans. |
| • | If the Company fails to maintain an effective system of internal control over financial reporting, it may not be able to accurately report financial results or prevent fraud, and, as a result, investors and depositors could lose confidence in the Company’s financial reporting, which could adversely affect its business, the trading price of its stock and its ability to attract additional deposits. |
| • | The Company’s Certificate of Incorporation and bylaws may prevent a transaction you may favor or limit growth opportunities, which could cause the market price of the Company’s common stock to decline. |
| • | The Company may not be able to pay dividends in the future in accordance with past practice. |
This list of important factors is not exclusive. Any or all of the forward looking statements in this report and in any other public statements made by the Company may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks or uncertainties. Consequently, no forward looking statement can be guaranteed. The Company and its wholly-owned subsidiary, Union Trust Company (the “Bank”), disclaim any obligation to update any forward-looking statement, whether written or oral, to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events or circumstances.
Critical Accounting Policies
Management’s discussion and analysis of the Company’s financial condition are based on the consolidated financial statements which are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of such financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to the allowance for loan losses and the evaluation of mortgage servicing rights. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets that are not readily apparent from other sources. Actual results could differ from the amount derived from management’s estimates and assumptions under different assumptions or conditions.
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Allowance for Loan Losses. Management believes the allowance for loan losses is a critical accounting policy that requires estimates and assumptions in the preparation of the consolidated financial statements. The allowance for loan losses is based on management’s evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. Management believes the allowance for loan losses is a significant estimate and therefore regularly evaluates it for adequacy by taking into consideration factors such as prior loan loss experience, the character and size of the loan portfolio, business and economic conditions and management’s estimation of probable losses. The use of different estimates or assumptions could produce different provisions for loan losses.
Mortgage Servicing Rights. The valuation of mortgage servicing rights is also a critical accounting policy which requires significant estimates and assumptions. Servicing assets are recognized as separate assets when servicing rights are acquired through the sale of residential mortgage loans. Capitalized servicing rights are reported in other assets and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Management uses, on a quarterly basis, an independent firm which specializes in the valuation of mortgage servicing rights to determine the fair value which is recorded on the balance sheet. This includes an evaluation for impairment based upon the fair value of the rights, which can vary depending upon current interest rates and prepayment expectations, as compared to amortized cost. When the book value exceeds the fair value, a valuation allowance is recorded against these servicing assets. The Company’s assumptions are adjusted periodically to reflect current circumstances.
Executive Overview
Net income increased $98,000, or 11.7%, for the quarter ended March 31, 2007 compared to the first quarter last year. The following were significant factors contributing to the results for the first quarter of 2007:
| • | Net interest income, on a tax equivalent basis, decreased $127,000, or 3.2% compared to the first quarter last year, largely resulting from continued margin compression. |
| • | Non-interest income increased $209,000, or 15.2% compared to the first quarter last year, primarily due to continued growth in financial services fees and commissions, loan fees, bankcard fees, and other income. |
| • | Non-interest expense decreased $81,000, or 2.0% compared to the first quarter last year, primarily due to decreases in salaries and employee benefits and advertising expense. |
| • | Total loans increased by $12.0 million, or 3.3%, at March 31, 2007 compared to March 31, 2006, primarily driven by continued growth in the commercial categories. |
Results of Operations
Net Income. Net income for the three months ended March 31, 2007 was $932,000, an increase of $98,000, or 11.7%, compared to the same period in 2006. Earnings per share were $0.88 and $0.76, respectively, for the three months ended March 31, 2007 and March 31, 2006. Annualized return on average equity (“ROE”) and return on average assets (“ROA”) for the first three months of the year were 9.00% and .68%, respectively. Annualized ROE and ROA were 8.18% and .62%, respectively, for the same period in 2006.
Net Interest Income.The amount of net interest income is affected by changes in interest rates and by the volume and mix of interest earning assets and interest bearing liabilities. On a fully tax-equivalent basis, net interest income for the quarter ended March 31, 2007 decreased by $127,000, or 3.2%, to $3.8 million in comparison to the same period last year. The Company’s net interest margin declined 18 basis points to 3.00% for the three months ended March 31, 2007 compared to 3.18% for the same period a year ago. The continued compression in the net interest margin can be attributed to higher deposit costs and increases in the cost of borrowings, without a proportional increase in the yields on loans and investments. The Company’s interest rate spread (the difference between the weighted average yield on interest-earning assets and the weighted average cost of interest-bearing liabilities) decreased 25 basis points to 2.60% for the first three months of 2007 compared to the first three months of 2006.
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The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average costs; (iii) net interest income; (iv) net interest rate spread; and (v) net interest margin. For purposes of this table and the following discussion, income from interest-earning assets and net interest income are presented on a fully tax-equivalent basis and nonaccrual loans have been included in average balances only.
Average Balance Sheets and Analysis of Net Interest Income
(On a Tax-Equivalent Basis)
| Three months ended March 31, | ||||||||||||||||||
| 2007 | 2006 | |||||||||||||||||
| Average Balance | Interest | Yield/ Rate | Average Balance | Interest | Yield/ Rate | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Assets | ||||||||||||||||||
Interest Earning Assets: | ||||||||||||||||||
Investment securities (1) | $ | 141,687 | $ | 1,864 | 5.34 | % | $ | 142,110 | $ | 1,655 | 4.72 | % | ||||||
Loans, gross (excludes loans held for sale ) (1) | 373,680 | 6,016 | 6.53 | % | 359,400 | 5,439 | 6.14 | % | ||||||||||
Total interest earning assets | 515,367 | $ | 7,880 | 6.20 | % | 501,510 | $ | 7,094 | 5.74 | % | ||||||||
Other assets: | ||||||||||||||||||
Cash and cash equivalents | 9,575 | 8,710 | ||||||||||||||||
Other assets | 28,236 | 23,929 | ||||||||||||||||
| $ | 553,178 | $ | 534,149 | |||||||||||||||
Liabilities | ||||||||||||||||||
Interest Bearing Liabilities: | ||||||||||||||||||
Deposits: | ||||||||||||||||||
Savings deposits | $ | 57,277 | $ | 202 | 1.43 | % | $ | 70,339 | $ | 266 | 1.53 | % | ||||||
NOW deposits | 77,900 | 303 | 1.58 | % | 72,425 | 182 | 1.02 | % | ||||||||||
Money market accounts | 25,399 | 168 | 2.69 | % | 22,921 | 85 | 1.51 | % | ||||||||||
Time deposits | 134,549 | 1,405 | 4.24 | % | 116,531 | 980 | 3.41 | % | ||||||||||
Total interest bearing deposits | 295,125 | 2,078 | 2.86 | % | 282,216 | 1,513 | 2.18 | % | ||||||||||
Borrowings: | ||||||||||||||||||
Borrowings from Federal Home Loan Bank | 141,201 | 1,711 | 4.91 | % | 142,265 | 1,497 | 4.26 | % | ||||||||||
Subordinated debt | 8,248 | 137 | 6.72 | % | 3,941 | 59 | 6.11 | % | ||||||||||
Other borrowed funds | 14,241 | 146 | 4.17 | % | 14,886 | 91 | 2.49 | % | ||||||||||
Total borrowings | 163,690 | 1,994 | 4.94 | % | 161,092 | 1,647 | 4.15 | % | ||||||||||
Total interest bearing liabilities | 458,815 | $ | 4,072 | 3.60 | % | 443,308 | $ | 3,160 | 2.89 | % | ||||||||
Non-Interest Bearing Liabilities & Shareholders’ Equity: | ||||||||||||||||||
Demand deposits | 45,518 | 43,779 | ||||||||||||||||
Other liabilities | 6,881 | 6,268 | ||||||||||||||||
Shareholders’ equity | 41,964 | 40,794 | ||||||||||||||||
| $ | 553,178 | $ | 534,149 | |||||||||||||||
Net interest income (1) | $ | 3,808 | $ | 3,934 | ||||||||||||||
Net interest rate spread (2) | 2.60 | % | 2.85 | % | ||||||||||||||
Net interest margin (2) | 3.00 | % | 3.18 | % | ||||||||||||||
Supplemental Information: | ||||||||||||||||||
Total deposits, including demand deposits | $ | 340,643 | $ | 2,078 | $ | 325,995 | $ | 1,513 | ||||||||||
Cost of total deposits | 2.48 | % | 1.88 | % | ||||||||||||||
Total funding liabilities, including demand deposits | $ | 504,333 | $ | 4,072 | $ | 487,087 | $ | 3,160 | ||||||||||
Cost of funding liabilities | 3.28 | % | 2.63 | % | ||||||||||||||
| (1) | The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $178,000 and $160,000 for the three months ended March 31, 2007 and 2006, respectively. |
| (2) | Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average costs of interest-bearing liabilities. Net interest margin represents net interest income as a percent of average interest-earning assets. |
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The following table presents certain information on a fully tax-equivalent basis regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to (i) changes in volume (change in volume multiplied by prior year rate), (ii) changes in rate (change in rate multiplied by prior year volume), and (iii) changes in rate/volume (change in rate multiplied by change in volume).
Analysis of Changes in Interest Income and Expense
| Three months ended March 31, | ||||||||||||||||
| Volume | Rate | Rate/ Volume | Total | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
Interest Earning Assets | ||||||||||||||||
Investment securities (1) | $ | (5 | ) | $ | 214 | $ | — | $ | 209 | |||||||
Loans, gross (excludes loans held for sale) (1) (2) | 217 | 347 | 13 | 577 | ||||||||||||
Total interest earning assets | $ | 212 | $ | 561 | $ | 13 | $ | 786 | ||||||||
Interest Bearing Liabilities | ||||||||||||||||
Savings deposits | $ | (49 | ) | $ | (18 | ) | $ | 3 | $ | (64 | ) | |||||
NOW deposits | 14 | 99 | 8 | 121 | ||||||||||||
Money market accounts | 9 | 67 | 7 | 83 | ||||||||||||
Time deposits | 152 | 238 | 36 | 426 | ||||||||||||
Total deposits | $ | 126 | $ | 386 | $ | 54 | $ | 566 | ||||||||
Borrowings from FHLB | (11 | ) | 228 | (3 | ) | 214 | ||||||||||
Subordinated debt | 65 | 6 | 7 | 78 | ||||||||||||
Other borrowed funds | (4 | ) | 61 | (2 | ) | 55 | ||||||||||
Total borrowings | 50 | 295 | 2 | 347 | ||||||||||||
Total interest bearing liabilities | $ | 176 | $ | 681 | $ | 56 | $ | 913 | ||||||||
Net change in net interest income | $ | 36 | $ | (120 | ) | $ | (43 | ) | $ | (127 | ) | |||||
| (1) | The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $178,000 and $160,000 for the three months ended March 31, 2007 and 2006, respectively. |
| (2) | Loans include portfolio loans and nonaccrual loans, but unpaid interest on nonperforming loans has not been included for purposes of determining interest income. |
The average balance of interest-earning assets for the first three months of 2007 amounted to $515.4 million, an increase of $13.9 million, or 2.8%, over the same period in 2006. Average loan balances increased $14.3 million, or 4.0% for the first three months of 2007 compared to the same period in 2006. Average investment securities decreased by $423,000 for the three months ended March 31, 2007 compared to the same period in 2006. The yield on interest-earning assets increased 46 basis points to 6.20% for the first three months in 2007, compared to 5.74% for the same period in 2006. The yield on loans increased 39 basis points from 6.14% for the three months ended March 31, 2006 to 6.53% for the three months ended March 31, 2007 and the yield on investments also increased 62 basis points to 5.34% for the three months ended March 31, 2007.
The average balance of interest-bearing liabilities for the first three months of 2007 was $458.8 million, an increase of $15.5 million, or 3.5%, over the same period in 2006. Average interest-bearing deposits increased $12.9 million, or 4.6%, to $295.1 million for the three months ended March 31, 2007 compared to the same period in 2006. Average time deposits grew $18.0 million, or 15.5%, for the three months ended March 31, 2007 compared to the same period in 2006; of this increase, $10.7 million was from brokered time certificates of deposit. Average borrowings for the three months ended March 31, 2007 were $163.7 million compared to $161.1 million for the same period in 2006, an increase of $2.6 million, or 1.6%.
The cost of interest-bearing liabilities increased to 3.60% during the three months ended March 31, 2007, an increase of 71 basis points over the three months ended March 31, 2006. The increase is, in part, attributable to a 79 basis points increase in the cost of borrowings during the first three months of 2007 compared to the same period in 2006. Interest expense on the subordinated debt for the three months ended March 31, 2007 was $137,000 compared to $59,000 for the three months ended March 31, 2006. The cost of interest-bearing deposits also increased 68 basis points during the first three months of 2007 compared to the same period in 2006, primarily resulting from upward competitive pricing pressures on deposits, due in part to the rising interest rate environment. Additionally, the growth in deposits over the prior year was in certificates of deposit, which are typically higher costing than other core sources of funding.
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Provision for Loan Losses.The provision for loan losses represents the charge to expense that is required to maintain an adequate level of allowance for loan losses. The process of evaluating the adequacy of the allowance for loan losses involves a high degree of management judgment, based in part on systematic methods. These methods, which are generally quantitative measures, are employed to help ensure all relevant matters affecting loan collectibility will be consistently identified. Such methods include: a loan-by-loan analysis of all impaired loans and loans under close monitoring by management for potential problems; a risk rating analysis for all commercial and commercial real estate loans; and a quantitative analysis of residential real estate and consumer loans. Other factors included in the evaluation of the adequacy of the allowance for loan losses involve: overall loan growth; the character and mix of the loan portfolio; current trends in nonperforming loans; delinquent loans and net charge-offs; new loan origination; local economic conditions; regulatory changes; and other qualitative considerations.
The Company recorded a provision for loan losses of $15,000 during the first three months of 2007 compared to $0 for the three months ended March 31, 2006. The increase in the provision for loan losses is due to the increasing size of the loan portfolio and a change in the mix of the portfolio towards commercial loans which may expose the Company to greater credit risk than one-to-four family loans. Asset quality remains good with nonperforming assets of $2.5 million, or 0.45% of total assets, at March 31, 2007 compared to 0.58% of total assets at December 31, 2006. Total net charge offs as a percent of total loans was 0.02% for the three months ended March 31, 2007 and 0.00% for December 31, 2006.
Management believes that the level of allowance for loan losses at March 31, 2007, of $4.2 million, or 1.11% of total loans outstanding, is adequate. The allowance for loan losses was $4.3 million, or 1.18% of total loans outstanding, as of March 31, 2006.
Non-Interest Income.Non-interest income increased by $209,000, or 15.2%, to $1.6 million for the three months ended March 31, 2007 compared to the same period last year. Loan fees increased $76,000, or 50.6% for the three months ended March 31, 2007 compared to the same period last year, due primarily to higher levels of loan origination fees and increased gains on the sale of loans. Financial services fees and commissions increased $47,000, or 7.6% for the three months ended March 31, 2007 compared to the same period last year, largely due to continued increases in new business volume and growth in managed assets. Bankcard fees increased $5,600, or 7.3% for the three months ended March 31, 2007 compared to the same period last year, as a result of increased debit card interchange revenue. Other income also increased $71,000 for the three months ended March 31, 2007 compared to the same period in 2006, primarily due to higher levels of mortgage banking income.
Non-Interest Expense. Total non-interest expense, which consists of employee compensation and benefits, occupancy costs, equipment and data processing costs and other operating expense, decreased $81,000, or 2.0%, to $4.0 million for the three months ended March 31, 2007 compared to $4.0 million for the three months ended March 31, 2006. The decrease was primarily attributable to a reduction in salaries and employee benefits costs of $73,000, or 3.0%, for the first three months of 2007 compared to the same period last year, resulting from lower employee incentives and a reduction in staffing levels. Other expense also decreased by $82,000, or 9.1%, for the three months ended March 31, 2007 compared to the same period in 2006, largely due to a decrease in advertising costs of $45,000 attributable to higher costs incurred during 2006 in connection with the Bank’s new branding efforts and related marketing campaigns.
Income Taxes. In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement 109” (“FIN 48”). This statement clarifies the criteria that an individual tax position must satisfy for some or all of the benefits of that position to be recognized in a company’s financial statements. FIN 48 prescribes a recognition threshold of more-likely-than-not, and a measurement attribute for all tax positions taken or expected to be taken on a tax return, in order for those tax positions to be recognized in the financial statements. Effective January 1, 2007, the Company has adopted the provisions of FIN 48 and there was no material effect on the financial statements. As a result, there was no cumulative effect related to adopting FIN 48. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service for the years ending December 31, 2004 through 2006. The Company and its subsidiaries state income tax returns are open to audit under the statute of limitations for the years ending December 31, 2004 through 2006.
Financial Condition
The Company’s total assets increased to $553.5 million at March 31, 2007, an increase of $5.6 million, or 1.0%, and $2.5 million, or 0.46%, over March 31, 2006 and December 31, 2006, respectively. The increase in total assets was primarily attributable to continued growth in total loans.
Loan Portfolio.Total loans increased by $5.4 million, or 1.5%, during the three months ended March 31, 2007 compared to December 31, 2006. The increases were mainly in the commercial real estate, consumer and municipal loan categories, which increased $5.9 million, $1.2 million and $1.1 million, respectively.
Between March 31, 2006 and March 31, 2007, the loan portfolio increased $12.0 million, or 3.3%, as the Company’s commercial real estate portfolio continued to expand, increasing by $14.0 million, or 20.1%, from 2006. Commercial and industrial loans also experienced growth with outstanding balances for the three months ended March 31, 2007 increasing $1.4 million, or 5.2%, over the same period one year ago.
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The following table summarizes the composition of the Bank’s loan portfolio by type of loan at the dates indicated.
Loan Portfolio Composition
| March 31, 2007 | March 31, 2006 | December 31, 2006 | ||||||||||||||||
| Amount | Percent of Loans in Category to Total Loans | Amount | Percent of Loans in Category to Total Loans | Amount | Percent of Loans in Category to Total Loans | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Real estate: | ||||||||||||||||||
Residential | $ | 230,038 | 61.2 | % | $ | 229,476 | 63.2 | % | $ | 232,970 | 62.9 | % | ||||||
Commercial | 83,602 | 22.3 | % | 69,583 | 19.1 | % | 77,666 | 21.0 | % | |||||||||
Commercial and industrial | 28,006 | 7.5 | % | 26,611 | 7.3 | % | 27,939 | 7.6 | % | |||||||||
Consumer | 30,857 | 8.2 | % | 31,306 | 8.6 | % | 29,627 | 8.0 | % | |||||||||
Municipal | 3,106 | 0.8 | % | 6,619 | 1.8 | % | 1,965 | 0.5 | % | |||||||||
Total | $ | 375,609 | 100.0 | % | $ | 363,595 | 100.0 | % | $ | 370,167 | 100.0 | % | ||||||
Asset Quality.As of March 31, 2007, nonperforming assets totaled $2.5 million, an increase of $327,000 over the same period last year and a decrease of $698,000 from December 31, 2006. As a percentage of total assets, nonperforming assets at March 31, 2007 were 0.45% compared to 0.39% at March 31, 2006 and 0.58% at December 31, 2006.
The following table sets forth information regarding nonperforming assets at the dates indicated.
Nonperforming Assets
| March 31, 2007 | March 31, 2006 | December 31, 2006 | ||||||||||
| (Dollars in thousands) | ||||||||||||
Loans accounted for on a nonaccrual basis | $ | 1,138 | $ | 1,791 | $ | 1,267 | ||||||
Accruing loans contractually past due 90 days or more | 1,341 | 319 | 1,910 | |||||||||
Total nonperforming loans | 2,479 | 2,110 | 3,177 | |||||||||
Other real estate owned | — | 42 | — | |||||||||
Nonperforming securities | — | — | — | |||||||||
Total nonperforming assets | $ | 2,479 | $ | 2,152 | $ | 3,177 | ||||||
Ratio of nonperforming assets to total assets | 0.45 | % | 0.39 | % | 0.58 | % | ||||||
Ratio of nonperforming loans to total loans | 0.66 | % | 0.58 | % | 0.86 | % | ||||||
Allowance for Loan Losses.At March 31, 2007, the allowance for loan losses totaled $4.2 million, or 1.11% of total loans compared to $4.3 million, or 1.18% of total loans at March 31, 2006. Net charge-offs totaled $83,000 for the first three months of 2007 compared to net recoveries of $35,000 for the same period one year ago.
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The following table sets forth the breakdown of the allowance for loan losses for the periods indicated.
Analysis of Allowance for Loan Losses
| March 31, | ||||||||
| 2007 | 2006 | |||||||
| (Dollars in thousands) | ||||||||
Total loans outstanding at the end of the period (1) | $ | 375,609 | $ | 363,595 | ||||
Average loans outstanding during the period (1) | $ | 373,680 | $ | 359,341 | ||||
Allowance for loan losses, beginning of the period | $ | 4,255 | $ | 4,248 | ||||
Provision for loan losses | 15 | — | ||||||
Balance before loan charge-offs | 4,270 | 4,248 | ||||||
Loans charged-off | 120 | 122 | ||||||
Less recoveries on loans charged-off | 37 | 157 | ||||||
Net loan (recoveries) charge-offs | 83 | (35 | ) | |||||
Allowance for loan losses, end of the period | $ | 4,187 | $ | 4,283 | ||||
Ratios: | ||||||||
Net charge-offs to average loans outstanding | 0.02 | % | (0.01 | )% | ||||
Net charge-offs to loans, end of period | 0.02 | % | (0.01 | )% | ||||
Allowance for loan losses to average loans outstanding | 1.12 | % | 1.19 | % | ||||
Allowance for loan losses to total loans, end of period | 1.11 | % | 1.18 | % | ||||
Allowance for loan losses to nonperforming loans | 168.90 | % | 202.99 | % | ||||
| (1) | Excludes loans held for sale. |
Investments. Total investments decreased slightly to $140.5 million at March 31, 2007 from $140.5 million at December 31, 2006, representing a decrease of $46,000. At March 31, 2007, the Company’s available for sale portfolio had a net unrealized loss, net of taxes, of $540,000, compared to $978,000 at December 31, 2006. Management feels that the change in the net unrealized position is primarily due to a change in market rates during the period.
Between March 31, 2006 and March 31, 2007, the investment securities portfolio decreased $8.4 million, or 5.6%, as cash flows from maturing investments were used to fund growth in the loan portfolio.
The following table sets forth the Company’s securities at the dates indicated.
| March 31, 2007 | March 31, 2006 | December 31, 2006 | ||||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||||
Securities available for sale: | ||||||||||||||||||
Mortgage-backed securities | $ | 92,171 | $ | 91,162 | $ | 86,611 | $ | 84,534 | $ | 88,406 | $ | 86,754 | ||||||
U.S. Treasury notes and other U.S. Government agencies | 1,999 | 1,973 | 23,039 | 22,751 | 6,998 | 6,969 | ||||||||||||
Obligations of states and political subdivisions | 22,191 | 22,382 | 21,473 | 21,601 | 20,888 | 21,096 | ||||||||||||
Other securities | 15,198 | 15,224 | 8,739 | 8,680 | 15,702 | 15,693 | ||||||||||||
Total | $ | 131,559 | $ | 130,741 | $ | 139,862 | $ | 137,566 | $ | 131,994 | $ | 130,512 | ||||||
Securities held to maturity: | ||||||||||||||||||
Obligations of states and political subdivisions | $ | 1,945 | $ | 1,984 | $ | 1,982 | $ | 2,033 | $ | 1,977 | $ | 2,019 | ||||||
Other securities: | ||||||||||||||||||
Equity securities | $ | 7,766 | $ | 7,766 | $ | 9,258 | $ | 9,258 | $ | 8,009 | $ | 8,009 | ||||||
Deposits.Deposits continue to represent the Company’s primary source of funds for lending and investment activities. At March 31, 2007, deposits of $349.6 million were $1.8 million higher than at December 31, 2006. Between March 31, 2006 and March 31, 2007, total deposits increased $32.4 million, or 10.2%.
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Borrowings.Borrowings amounted to $154.1 million at March 31, 2007, a decrease of $636,000 from December 31, 2006. At March 31, 2007, borrowings consisted primarily of Federal Home Loan Bank of Boston (“FHLB”) borrowings totaling $124.9 million, a decrease of $4.8 million from balances as of December 31, 2006. The remaining borrowings consisted primarily of assets sold under repurchase agreements totaling $20.0 million and subordinated debt issued in connection with our trust preferred securities offering totaling $8.2 million.
Between March 31, 2006 and March 31, 2007, total borrowings decreased $29.5 million, or 16.1%, primarily due to a decrease in FHLB borrowings offset, in part, by an increase in assets sold under repurchase agreements.
Liquidity and Capital Resources
Liquidity.Liquidity, as it pertains to the Company, is the ability to generate adequate amounts of cash to meet current and future financial obligations. The Company’s primary sources of funds consist of deposits, borrowings, and the amortization, prepayment and maturities of loans and securities. While scheduled repayment of loans and maturities of securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, seasonality, economic conditions and competitive factors. The Bank has also established repurchase agreements with major brokerage firms as potential sources of liquidity. At March 31, 2007, the Company had $10.0 million outstanding of such repurchase agreements. In addition to agreements with brokers, the Bank also had customer repurchase agreements outstanding amounting to $10.0 million at March 31, 2007. In addition, as an alternative source of funding to borrowings, the Bank will occasionally purchase brokered certificates of deposits. At March 31, 2007, the Bank had $42.5 million of brokered certificates of deposits outstanding. The Company had $16.8 million in brokered certificates of deposits for the comparable period of 2006.
The Company, as a separately incorporated bank holding company, has no significant operations other than serving as the sole stockholder of the Bank. The Company’s commitments and debt service requirement, at March 31, 2007, consist of $8.4 million of junior subordinated debt securities, including accrued interest, issued to an unconsolidated subsidiary, Union Bankshares Capital Trust I. The Company has contributed $3.0 million of the proceeds from the issuance of trust preferred securities to the Bank as Tier 1 Capital to support the Bank’s growth.
The Company actively manages its liquidity position under the direction of the Asset/Liability Management Committee. Periodic review under prescribed policies and procedures is intended to ensure that the Company will maintain adequate levels of available funds. At March 31, 2007, the Company’s liquidity position was well within policy guidelines. Management believes that the Company has adequate liquidity available to respond to current and future funding requirements.
Capital Resources.The Federal Reserve Board (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), and other regulatory agencies have established capital guidelines for banks and bank holding companies. Risk-based capital guidelines issued by the federal regulatory agencies require banks to meet a minimum Tier 1 leverage capital ratio of 4.0%, a Tier 1 risk-based capital ratio of 4.0% and a total risk-based capital ratio of 8.0%. At March 31, 2007, the Company and the Bank exceeded all of their regulatory capital requirements.
On February 17, 2006, the Company, through Union Bankshares Capital Trust I, raised additional capital from the issuance of $8.0 million of trust preferred securities, the proceeds of which were used to purchase 30-year junior subordinated deferrable interest debt securities of the Company.
At March 31, 2007, the Company had a Tier 1 risk-based capital ratio and a total risk-based capital ratio of 13.55% and 14.80%, respectively, compared to 13.51% and 14.76%, respectively, at December 31, 2006. At March 31, 2007, the Company and the Bank had a Tier 1 leverage ratios of 8.18 % and 7.36%, respectively, compared to 7.99% and 7.22%, respectively, at December 31, 2006.
Off-Balance Sheet Risks and Commitments
As of March 31, 2007 and 2006, the total of approved loan commitments outstanding, commitments under unused lines of credit and unadvanced portions of loans amounted to $74.7 million and $74.2 million, respectively. Other than the foregoing, the Company does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
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Contractual Obligations
The following table is a summary of the Company’s contractual obligations as of March 31, 2007, consisting of operating and capital lease obligations, FHLB borrowings and other borrowings, by contractual maturity date for the next five years.
Contractual Obligations by Maturity
| Payment due by period | |||||||||||||||
| Total | Less than 1 Year | 1 –3 Years | 4 –5 Years | After 5 Years | |||||||||||
| Contractual Obligations | (Dollars in thousands) | ||||||||||||||
Operating lease obligations | $ | 5,360 | $ | 286 | $ | 531 | $ | 535 | $ | 4,008 | |||||
Capital lease obligations | 1,881 | 92 | 185 | 189 | 1,415 | ||||||||||
FHLB borrowings | 124,891 | 99,236 | 20,217 | 5,055 | 383 | ||||||||||
Wholesale repurchase agreements | 10,000 | — | — | 10,000 | — | ||||||||||
Customer repurchase agreements | 9,974 | 9,974 | — | — | — | ||||||||||
Subordinated debt | 8,248 | — | — | — | 8,248 | ||||||||||
Total | $ | 160,354 | $ | 109,588 | $ | 20,933 | $ | 15,779 | $ | 14,054 | |||||
The Company may use derivative instruments as partial hedges against large fluctuations in interest rates. At March 31, 2007, the Company had $20.0 million in cap contracts with a strike rate of 5.50% and a termination date of March 15, 2010. If rates were to rise, resulting in an increased interest cost, there would be an increased income flow from the cap instruments. These financial instruments are factored into the Company’s overall interest rate risk position.
| ITEM 3. | QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market risk is the sensitivity of income to changes in interest rates, foreign exchange rates, commodity prices, equity prices and other market-driven rates or prices. The Company has no trading operations, and therefore is only exposed to non-trading market risk. The Company’s primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of the Company’s asset/liability management process, which is governed by policies established by its Board of Directors that are reviewed and approved annually. The Board of Directors delegates responsibility for carrying out the asset/liability management policies to the Asset/Liability Committee (“ALCO”), whose members are comprised of the Bank’s senior management. In this capacity ALCO develops guidelines and strategies, consistent with policies established by the Board of Directors, which monitor and coordinate the Bank’s interest rate sensitivity and the sources, uses and pricing of funds.
Net interest income sensitivity to movements in interest rates is measured through the use of a simulation model that analyzes resulting net interest income under various interest rate scenarios established by regulators. Projected net interest income (NII) is modeled, based on a gradual shift in market interest rates (“ramped”) over a 12-month period. The model is based on the actual maturity and repricing characteristics of interest rate sensitive assets and liabilities and factors in projections for activity levels by product lines of the Company. Assumptions are made as to the changing relationship between different interest rates as interest rates increase/decrease (basis risk) and the customer’s ability to prepay loans and withdraw deposit balances or transfer them to a higher yielding account (option risk). The sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for NII exposure over a one-year horizon, assuming no balance sheet growth, given both a 200 basis point (bp) upward and a 200 basis point downward shift in interest rates.
The following table sets forth the estimated effects on the Company’s net interest income for the periods indicated and reflects such change as a percentage of projected net interest income for the subsequent 12-month period.
Interest Rate Sensitivity
200 Basis Point Rate Increase | 200 Basis Point Rate Decrease | |||||
March 31, 2007 | (5.36 | )% | 2.41 | % | ||
March 31, 2006 | (5.34 | )% | 2.42 | % |
The results implied in the above table indicate estimated changes in simulated net interest income for the subsequent 12 months assuming a gradual shift in market rates up or down of 200 basis points across the entire yield curve. This sensitivity analysis does not represent a Company forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including: the nature and timing of interest rate levels including yield curve shape; prepayments on loans and securities; deposit decay rates; pricing decisions on loans and deposits; reinvestment/replacement of asset and liability cash flows; and others. While assumptions are developed based upon current economic and local market conditions, the Company cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.
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Also, as market conditions vary from those assumed in the sensitivity analysis, actual results will also differ due to: prepayment/refinancing levels likely deviating from those assumed; the potential effect of changing debt service levels on customers with adjustable rate loans; depositor early withdrawals and product preference changes; and other internal/external variables. Furthermore, the sensitivity analysis does not reflect actions that ALCO might take in responding to or anticipating changes in interest rates.
| ITEM 4. | CONTROLSAND PROCEDURES |
Management of the Company, including the Company’s President and Chief Executive Officer and the Company’s Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report. Based upon that evaluation, the Company’s President and Chief Executive Officer and the Company’s Senior Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports the Company files and submits under the Exchange Act is (i) recorded, processed, summarized and reported as and when required, and (ii) accumulated and communicated to the Company’s management, including the Company’s President and Chief Executive Officer and the Company’s Senior Vice President and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in the Company’s internal control over financial reporting identified in connection with the evaluation that occurred during the Company’s last fiscal quarter that has materially affected, or that is reasonably likely to materially affect, the Company’s internal control over financial reporting.
| ITEM 4T. | CONTROLSAND PROCEDURES |
Not applicable.
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| Item 1. | Legal Proceedings |
There are no material legal proceedings pending, to which the Company or its subsidiaries is a party, or of which any of their property is the subject, other than ordinary routine litigation incidental to the business.
| Item 1A. | Risk Factors |
There have been no material changes to the risk factors previously disclosed by the Company in its Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
On April 14, 2002, the Board of Directors of the Company adopted a Stock Repurchase Program, which provided for the repurchase of up to 57,700 shares, or 5%, of the Company’s then-outstanding common stock. On October 27, 2004, the Board of Directors of the Company amended the Stock Repurchase Program to authorize the repurchase of up to 86,550 shares, or 7.5%, of the Company’s common stock outstanding as of April 14, 2002. On February 22, 2006, the Board of Directors of the Company authorized the repurchase of 5,000 additional shares under the Stock Repurchase Program. On April 19, 2006, the Board of Directors of the Company amended the Stock Repurchase Program to authorize the repurchase of an additional 54,529 shares, or 5%, of the Company’s common stock outstanding as of April 10, 2006. Originally adopted for a term of 12 months, the Stock Repurchase Program has been extended several times by the Company, and was extended, effective April 19, 2006, until such time as all shares authorized for repurchase under the Stock Repurchase Program have been repurchased. The repurchases may be made from time to time at the discretion of management of the Company. Shares repurchased by the Company are designated as authorized but unissued stock of the Company. The Company may utilize such shares for any purpose the Board of Directors of the Company deems advisable in compliance with applicable law. As of March 31, 2007, the Company had repurchased a total of 123,026 shares of its stock since the Program’s inception.
During the three months ended March 31, 2007, the Company repurchased 1,561 shares of its common stock.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
January 1 – 31, 2007 | 1,561 | $ | 53.94 | 1,561 | 23,053 | ||||
February 1 – 28, 2007 | — | — | — | 23,053 | |||||
March 1 – 31, 2007 | — | — | — | 23,053 | |||||
TOTAL | 1,561 | $ | 53.94 | 1,561 | 23,053 | ||||
| Item 3. | Defaults Upon Senior Securities |
None
| Item 4. | Submission of Matters to a Vote of Security Holders |
None
| Item 5. | Other Information |
None
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| Item 6. | Exhibits |
| Exhibit No. | Description | |
| *3.1 | Amended and Restated Articles of Incorporation of Union Bankshares Company (the “Company”) | |
| **3.2 | Amended and Restated Bylaws of the Company | |
| ***4.1 | Form of Floating Rate Junior Subordinated Debt Security issued by the Company to Wells Fargo Bank, National Association, dated February 17, 2006. | |
| 10.1 | Union Trust Company Employee Stock Plan | |
| ****10.2 | Form of Deferred Compensation Agreement between Union Trust Company and each of Mr. Peter A. Blyberg, President and Chief Executive Officer, Mr. John P. Lynch, Executive Vice President, and Ms. Rebecca J. Sargent, Senior Vice President and Senior Financial Services Officer. | |
| *****10.3 | Form of Salary Continuation Agreement between Union Trust Company and each of Mr. Peter A. Blyberg, President and Chief Executive Officer, Mr. John P. Lynch, Executive Vice President and Regional Manager, and Ms. Rebecca J. Sargent, Senior Vice President and Senior Trust Officer | |
| ***10.4 | Indenture by and between the Company, as Issuer, and Wells Fargo Bank, National Association, as Trustee, dated February 17, 2006, for Floating Rate Junior Subordinated Debt Securities. | |
| ***10.5 | Guarantee Agreement executed and delivered by the Company and Wells Fargo Bank, National Association for the benefit of the Holders from time to time of the Capital Securities of Union Bankshares Capital Trust I | |
| ******10.6 | Form of Amendment to the Deferred Compensation Agreement between the Company and each of Mr. Peter A. Blyberg, President and Chief Executive Officer, Mr. John P. Lynch, Executive Vice President, and Ms. Rebecca J. Sargent, Senior Vice President and Senior Financial Services Officer. | |
| *******14 | Amended and Restated Code of Ethics of the Company | |
| ********15 | Letter from Berry, Dunn, McNeil & Parker regarding unaudited interim financial information | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of the CEO | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of the CFO | |
| 32.1 | Section 1350 Certification of the CEO | |
| 32.2 | Section 1350 Certification of the CFO | |
| * | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on November 14, 2005. | |
| ** | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on March 28, 2007. | |
| *** | Incorporated by reference to the Company’s Current Report on Form 8-K, files with the SEC on February 23, 2006. | |
| **** | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on June 16, 2006. | |
| ***** | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on May 1, 2007. | |
| ****** | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on June 16, 2006. | |
| ******* | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on January 23, 2006. | |
| ******** | Included as page 1 of this Quarterly Report on Form 10-Q. |
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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 COMPANY | ||||||||||
May 14, 2007 | /s/ Peter A. Blyberg | |||||||||
| Date | Peter A. Blyberg, President and Chief Executive Officer | |||||||||
May 14, 2007 | /s/ Timothy R. Maynard | |||||||||
| Date | Timothy R. Maynard, Senior Vice President and Chief Financial Officer | |||||||||
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Exhibit Index
| Exhibit No. | Description | |
| *3.1 | Amended and Restated Articles of Incorporation of Union Bankshares Company (the “Company”) | |
| **3.2 | Amended and Restated Bylaws of the Company | |
| ***4.1 | Form of Floating Rate Junior Subordinated Debt Security issued by the Company to Wells Fargo Bank, National Association, dated February 17, 2006. | |
| 10.1 | Union Trust Company Employee Stock Plan | |
| ****10.2 | Form of Deferred Compensation Agreement between Union Trust Company and each of Mr. Peter A. Blyberg, President and Chief Executive Officer, Mr. John P. Lynch, Executive Vice President, and Ms. Rebecca J. Sargent, Senior Vice President and Senior Financial Services Officer. | |
| *****10.3 | Form of Salary Continuation Agreement between Union Trust Company and each of Mr. Peter A. Blyberg, President and Chief Executive Officer, Mr. John P. Lynch, Executive Vice President and Regional Manager, and Ms. Rebecca J. Sargent, Senior Vice President and Senior Trust Officer | |
| ***10.4 | Indenture by and between the Company, as Issuer, and Wells Fargo Bank, National Association, as Trustee, dated February 17, 2006, for Floating Rate Junior Subordinated Debt Securities. | |
| ***10.5 | Guarantee Agreement executed and delivered by the Company and Wells Fargo Bank, National Association for the benefit of the Holders from time to time of the Capital Securities of Union Bankshares Capital Trust I | |
| ******10.6 | Form of Amendment to the Deferred Compensation Agreement between the Company and each of Mr. Peter A. Blyberg, President and Chief Executive Officer, Mr. John P. Lynch, Executive Vice President, and Ms. Rebecca J. Sargent, Senior Vice President and Senior Financial Services Officer. | |
| *******14 | Amended and Restated Code of Ethics of the Company | |
| ********15 | Letter from Berry, Dunn, McNeil & Parker regarding unaudited interim financial information | |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of the CEO | |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of the CFO | |
| 32.1 | Section 1350 Certification of the CEO | |
| 32.2 | Section 1350 Certification of the CFO | |
| * | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on November 14, 2005. | |
| ** | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on March 28, 2007. | |
| *** | Incorporated by reference to the Company’s Current Report on Form 8-K, files with the SEC on February 23, 2006. | |
| **** | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on June 16, 2006. | |
| ***** | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on May 1, 2007. | |
| ****** | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on June 16, 2006. | |
| ******* | Incorporated by reference to the Company’s Current Report on Form 8-K, filed with the SEC on January 23, 2006. | |
| ******** | Included as page 1 of this Quarterly Report on Form 10-Q. |
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