Capital City Bank Group - 10-Q quarterly report FY

 

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.

At April 30, 2007, 18,286,564 shares of the Registrant's Common Stock, $.01 par value, were outstanding.

 

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements.

All forward-looking statements, by their nature, are subject to risks and uncertainties. Our actual future results may differ materially from those set forth in our forward-looking statements.

Our ability to achieve our financial objectives could be adversely affected by the factors discussed in detail in Part I, Item 2., “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II, Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q, the following sections of our Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 Form 10-K”): (a) “Introductory Note” in Part I, Item 1. “Business”; (b) “Risk Factors” in Part I, Item 1A., as updated in our subsequent quarterly reports filed on Form 10-Q, and (c) “Introduction” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II, Item 7. as well as:

 

However, other factors besides those referenced also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

 

 

 

The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission, including Regulation S-X. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. Prior period financial statements have been reformatted and/or amounts reclassified, as necessary, to conform to current presentation.

In the opinion of management, the consolidated financial statements contain all adjustments, which are those of a recurring nature, and disclosures necessary to present fairly the financial position of the Company as of March 31, 2007 and December 31, 2006, the results of operations for the three months ended March 31, 2007 and 2006, and cash flows for the three months ended March 31, 2007 and 2006.

The Company and its subsidiary follow accounting principles generally accepted in the United States of America and reporting practices applicable to the banking industry. The principles that materially affect its financial position, results of operations and cash flows are set forth in the Notes to Consolidated Financial Statements which are included in the Company's 2006 Annual Report on Form 10-K.

The amortized cost and related market value of investment securities available-for-sale were as follows:

The composition of the Company's loan portfolio was as follows:

Net deferred fees included in loans at March 31, 2007 and December 31, 2006 were $1.4 million and $1.5 million, respectively.

An analysis of the changes in the allowance for loan losses for the three month periods ended March 31 was as follows:

Impaired loans are primarily defined as all nonaccruing loans for the loan categories which are included within the scope of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." Selected information pertaining to impaired loans is depicted in the table below:

 

 

The composition of the Company's interest bearing deposits at March 31, 2007 and December 31, 2006 was as follows:

The provision for income taxes reflected in the statements of income is comprised of the following components:

The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Income Tax Uncertainties" ("FIN 48"), on January 1, 2007. There was no effect on its financial condition or results of operations as a result of implementing FIN 48. The Company had unrecognized tax benefits of approximately $1.6 million at March 31, 2007, all of which, if recognized, would affect the effective tax rate. In addition, interest and penalties associated with these unrecognized tax benefits was approximately $159,000.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is no longer subject to U.S. federal tax examinations for years before 2003. In addition, no state jurisdictions remain subject to examination before 2003. No material changes to the Company’s unrecognized tax positions is expected over the next 12 months. As a policy, the Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

In accordance with the Company’s adoption of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), in the first quarter of 2003, the cost related to stock-based associate compensation included in net income has been accounted for under the fair value method in all reported periods.

On January 1, 2006, the Company adopted SFAS 123R. The Company continues to include the cost of its share-based compensation plans in net income under the fair value method.

As of March 31, 2007, the Company had three stock-based compensation plans, consisting of the 2005 Associate Incentive Plan ("AIP"), the 2005 Associate Stock Purchase Plan ("ASPP"), and the 2005 Director Stock Purchase Plan ("DSPP"). Total compensation expense associated with these plans for the three months ended March 31, 2007 and 2006, was approximately $106,000 and $461,000, respectively.

At the end of each calendar year, the Compensation Committee of the Company’s Board of Directors will confirm whether the annual performance goal has been met prior to the payout of any awards. Any performance shares earned under the Incentive Plan will be issued in the calendar quarter following the calendar year in which the shares were earned. A total of 32,799 shares were issued under this plan during the first quarter of 2007 related to the 2006 award.

The Company did not recognize any expense for the first three months of 2007 related to the Incentive Plan as first quarter 2007 results fell short of the earnings performance goal. The Company recognized expense of $367,000 for the first three months of 2006 for the Incentive Plan. A total of 875,000 shares of common stock have been reserved for issuance under the AIP. To date, the Company has issued 60,892 shares of common stock.

A summary of the status of the Company’s option shares as of March 31, 2007 is presented below:

As of March 31, 2007, there was approximately $94,000 of total unrecognized compensation cost related to the nonvested option shares granted under the agreements. That cost is expected to be recognized over the next nine months.

Based on the Black-Scholes option pricing model, the weighted average estimated fair value of the purchase rights granted under the ASPP Plan was $5.91 for the first quarter of 2007. For the first quarter of 2006, the weighted average fair value of the purchase rights granted was $6.22. In calculating compensation, the fair value of each stock purchase right was estimated on the date of grant using the following weighted average assumptions:

The Company has a defined benefit pension plan covering substantially all full-time and eligible part-time associates and a Supplemental Executive Retirement Plan (“SERP”) covering selected executive officers.

The components of the net periodic benefit costs for the Company's qualified benefit pension plan were as follows:

The components of the net periodic benefit costs for the Company's SERP were as follows:

The Company’s maximum exposure to credit loss under standby letters of credit and commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in establishing commitments and issuing letters of credit as it does for on-balance sheet instruments. As of March 31, 2007, the amounts associated with the Company’s off-balance sheet obligations were as follows:

Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

SFAS No. 130, "Reporting Comprehensive Income," requires that certain transactions and other economic events that bypass the income statement be displayed as other comprehensive income (loss). The Company’s comprehensive income consists of net income and changes in unrealized gains (losses) on securities available-for-sale, net of income taxes. Changes in unrealized gains (losses), net of taxes, on securities totaled $315,000 and $(89,000) for the three months ended March 31, 2007 and 2006, respectively.

 

Management’s discussion and analysis ("MD&A") provides supplemental information, which sets forth the major factors that have affected our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and related notes. The MD&A is divided into subsections entitled "Business Overview," "Financial Overview," "Results of Operations," "Financial Condition," "Liquidity and Capital Resources," "Off-Balance Sheet Arrangements," and "Accounting Policies." Information therein should facilitate a better understanding of the major factors and trends that affect our earnings performance and financial condition, and how our performance during 2007 compares with prior years. Throughout this section, Capital City Bank Group, Inc., and its subsidiary, collectively, are referred to as "CCBG," "Company," "we," "us," or "our."

The period-to-date averages used in this report are based on daily balances for each respective period. In certain circumstances, comparing average balances for the comparable quarters of consecutive years may be more meaningful than simply analyzing year-to-date averages. Therefore, where appropriate, quarterly averages have been presented for analysis and have been noted as such. See Table I for average balances and interest rates presented on a quarterly basis.

In this MD&A, we present an operating efficiency ratio and operating net noninterest expense as a percent of average assets, both of which are not calculated based on accounting principles generally accepted in the United States ("GAAP"), but that we believe provide important information regarding our results of operations. Our calculation of the operating efficiency ratio is computed by dividing noninterest expense less intangible amortization and one-time merger expenses, by the sum of tax equivalent net interest income and noninterest income. We calculate our operating net noninterest expense as a percent of average assets by subtracting noninterest expense excluding intangible amortization and one-time merger expenses from noninterest income. Management uses these non-GAAP measures as part of its assessment of performance in managing non-interest expenses. We believe that excluding intangible amortization and one-time merger expenses in our calculations better reflects our periodic expenses and is more indicative of normalized operations.

Although we believe the above-mentioned non-GAAP financial measures enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an alternative to GAAP. In addition, there are material limitations associated with the use of these non-GAAP financial measures such as the risks that readers of our financial statements may disagree as to the appropriateness of items included or excluded in these measures and that our measures may not be directly comparable to other companies that calculate these measures differently. Our management compensates for these limitations by providing detailed reconciliations between GAAP information and the non-GAAP financial measure as detailed below.

Reconciliation of operating efficiency ratio to efficiency ratio -

Reconciliation of operating net noninterest expense ratio -

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q, including this MD&A section, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements about our beliefs, plans, objectives, goals, expectations, estimates and intentions that are subject to significant risks and uncertainties and are subject to change based on various factors, many of which are beyond our control. The words "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan," "target," "goal," and similar expressions are intended to identify forward-looking statements.

However, other factors besides those listed above, in our Quarterly Report or in our Annual Report also could adversely affect our results, and you should not consider any such list of factors to be a complete set of all potential risks or uncertainties. Any forward-looking statements made by us or on our behalf speak only as of the date they are made. We do not undertake to update any forward-looking statement, except as required by applicable law.

We are a financial holding company headquartered in Tallahassee, Florida and are the parent of our wholly-owned subsidiary, Capital City Bank (the "Bank" or "CCB"). The Bank offers a broad array of products and services through a total of 69 full-service offices located in Florida, Georgia, and Alabama. The Bank also has mortgage lending offices in three additional Florida communities, and one Georgia community. The Bank offers commercial and retail banking services, as well as trust and asset management, merchant services, securities brokerage and data processing services.

Our profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee benefits, occupancy and other operating expenses including income taxes, and noninterest income such as service charges on deposit accounts, asset management and trust fees, mortgage banking revenues, merchant service fees, brokerage and data processing revenues.

A summary overview of our financial performance for the first quarter of 2007 versus the first quarter of 2006 is provided below.

Earnings were $7.0 million, or $.38 per diluted share, for the first quarter of 2007. This compares to $7.4 million, or $.40 per diluted share for the first quarter of 2006, decreases of 6.3% and 5.0%, respectively.

A condensed earnings summary is presented below:

 

Net interest income represents our single largest source of earnings and is equal to interest income and fees generated by earning assets, less interest expense paid on interest bearing liabilities. First quarter taxable-equivalent net interest income decreased $0.6 million, or 1.9%, over the comparable quarter in 2006. This decrease was caused primarily by a higher cost of funds and a higher percentage of earning assets funded by interest bearing liabilities. The cost of funds increase was attributable to a shift in deposit mix to higher interest rate accounts and the higher interest rate environment. Partially offsetting the higher costs of funds was an increase in the yield on earning assets. The net interest margin increased four basis points to 5.29% in the first quarter of 2007 versus the comparable period in 2006. Table I provides a comparative analysis of our average balances and interest rates.

For the first quarter of 2007, taxable-equivalent interest income increased $2.3 million, or 5.9% over the comparable quarter in 2006. The increase was attributable to higher yields on earning assets. Earning asset yields improved 63 basis points to 7.71% in the first quarter of 2007 from 7.08% in the first quarter of 2006 and 7.65% from the prior quarter, attributable to the higher interest rate environment and partially offset by the lower loan volume. We anticipate that our income on earning assets will expand slightly during the second quarter due to higher yields on earning assets.

Our interest rate spread (defined as the average federal taxable-equivalent yield on earning assets less the average rate paid on interest bearing liabilities) decreased from 4.69% in the first quarter of 2006 to 4.60% in the comparable period of 2007, reflecting the higher costs of funds.

Our net yield on earning assets (defined as federal taxable-equivalent net interest income divided by average earning assets) was 5.29% in the first three months of 2007, versus 5.25% in the first three months of 2006. The margin increase is primarily attributable to higher yields on earning assets. Market conditions and competition will continue to place pressure on net interest income during the second quarter.

The table below reflects the major components of noninterest income.

Various significant components of noninterest income are discussed in more detail below.

Noninterest expense in the first quarter of 2006 increased $470,000, or 1.6%, over the first quarter of 2006. Higher expense for compensation and a one-time expense to write-off leasehold improvement costs ($250,000) for a banking office site were the primary reasons for the increase. Various expense management initiatives were implemented in late 2006 which made a positive impact on first quarter expense control.

The table below reflects the major components of noninterest expense.

Various significant components of noninterest expense are discussed in more detail below.

The operating net noninterest expense ratio (defined as noninterest income minus noninterest expense, net of intangible amortization and one-time merger expenses, as a percent of average assets) was 2.43% in the first quarter of 2007 compared to 2.42% for the comparable period in 2006. Our operating efficiency ratio (expressed as noninterest expense, net of intangible amortization and one-time merger expenses, as a percent of taxable equivalent net interest income plus noninterest income) was 67.90% for the first quarter of 2007 compared to 67.20% for the comparable period in 2006. The increase in these operating ratios is due to the expense growth noted above.

Average assets decreased $26.6 million, or 1.04%, to $2.531 billion for the quarter-ended March 31, 2007 from $2.557 billion in the fourth quarter of 2006. Average earning assets of $2.212 billion decreased $26.5 million, or 1.18%, from the fourth quarter of 2006. A decrease in average loans of $23.5 million and a $3.4 million decrease in average short term investments were the primary reasons for the decline. We discuss these variances in more detail below.

We ended the first quarter with approximately $21.9 million in average net overnight funds sold, compared to $26.1 million net overnight funds sold in the fourth quarter of 2006. The slight decline is due to the decrease in deposit account balances which we discuss in further detail below.

Our investment portfolio is a significant component of our operations and, as such, it functions as a key element of liquidity and asset/liability management. As of March 31, 2007, the average investment portfolio increased $395,000, or .21%, from the fourth quarter of 2006. We will continue to evaluate the need to purchase securities for the investment portfolio for the remainder of 2007, taking into consideration the Bank’s overall liquidity position and pledging requirements.

Securities classified as available-for-sale are recorded at fair value and unrealized gains and losses associated with these securities are recorded, net of tax, as a separate component of shareowners’ equity. At March 31, 2007 and December 31, 2006, shareowners’ equity included a net unrealized loss of $520,000 and $834,000, respectively.

Average loans for the first quarter decreased $23.5 million, or 1.17%, from the fourth quarter, due to an overall slowing of lending activity within Bank markets, a high level of principal pay-downs and pay-offs, including the pay-off of several larger commercial loans. Management expects this trend to a lesser extent to continue in the second quarter, and for loan production to pick up momentum in the second half of the year.

Our nonperforming loans were $8.2 million at March 31, 2007 compared to $8.0 million at December 31, 2006. As a percent of nonperforming loans, the allowance for loan losses represented 208% at March 31, 2007 and 214% at December 31, 2006. Nonperforming loans include nonaccruing and restructured loans. Total loans past due 90 days and still accruing totaled $0.9 million at March 31, 2007, compared to $0.1 million at December 31, 2006 with the increase due primarily to one large loan ($0.7 million) in this reporting category. Other real estate, which includes property acquired either through foreclosure or by receiving a deed in lieu of foreclosure, was $1.2 million at March 31, 2007 versus $0.7 million at December 31, 2006. The increase in other real estate is related to four properties for which no additional loss exposure is expected. The ratio of nonperforming assets as a percent of loans plus other real estate was .48% at March 31, 2007, compared to .44% at December 31, 2006, evidencing a slight decline in this credit quality metric during the quarter.

The allowance for loan losses at March 31, 2007 was $17.1 million, compared to $17.2 million at December 31, 2006. At March 31, 2007, the allowance represented 0.87% of outstanding loans and provided coverage of 208% of nonperforming loans, compared to 0.86% and 214%, respectively at December 31, 2006. While there can be no assurance that we will not sustain loan losses in a particular period that are substantial in relation to the size of the allowance, our assessment of the loan portfolio does not indicate a likelihood of this occurrence. It is management’s opinion that the allowance at March 31, 2007 is adequate to absorb losses inherent in the loan portfolio at quarter-end.

Average deposits for the first quarter decreased $24.7 million, or 1.22% from the fourth quarter of 2006 due primarily to a reduction in DDA account balances of $23.2 million reflecting a seasonal variance in public fund and tax deposit balances which typically spike at year-end.

The ratio of average noninterest bearing deposits to total deposits was 22.9% for the first quarter of 2007, compared to 23.7% for the fourth quarter of 2006. For the same periods, the ratio of average interest bearing liabilities to average earning assets was 77.8% and 76.8%, respectively.

Average liquidity, defined as funds sold and interest bearing deposits with other banks, for the first quarter of 2007 was $40.3 million compared to $43.7 million in the fourth quarter of 2006. The decrease is primarily reflective of the aforementioned decline in deposit balances, partially offset by a reduction in the loan portfolio. Average liquidity in the second quarter is anticipated to be approximately the same or slightly lower than the amount for the first quarter.

 

We have issued two junior subordinated, deferrable interest notes to two wholly-owned Delaware statutory trusts. The first note for $30.9 million was issued to CCBG Capital Trust I in November 2004. The second note for $32.0 million was issued to CCBG Capital Trust II in May 2005. The interest payments for the CCBG Capital Trust I borrowing are due quarterly at a fixed rate of 5.71% for five years, then adjustable annually to LIBOR plus a margin of 1.90%. This note matures on December 31, 2034. The proceeds of this borrowing were used to partially fund the acquisition of Farmers and Merchants Bank of Dublin. The interest payments for the CCBG Capital Trust II borrowing are due quarterly at a fixed rate of 6.07% for five years, then adjustable quarterly to LIBOR plus a margin of 1.80%. This note matures on June 15, 2035. The proceeds of this borrowing were used to partially fund the First Alachua Banking Corporation acquisition.

Equity capital was $310.5 million as of March 31, 2007 compared to $315.8 million as of December 31, 2006. Management continues to monitor our capital position in relation to our level of assets with the objective of maintaining a strong capital position. The leverage ratio was 11.22% at March 31, 2007 compared to 11.30% at December 31, 2006. Further, the risk-adjusted capital ratio of 14.83% at March 31, 2007 exceeds the 8.0% minimum requirement under the risk-based regulatory guidelines. As allowed by the Federal Reserve Board capital guidelines the trust preferred securities issued by CCBG Trust I and CCBG Capital Trust II are included as Tier 1 capital in our capital calculations.

Adequate capital and financial strength is paramount to the stability of CCBG and the Bank. Cash dividends declared and paid should not place unnecessary strain on our capital levels. Although a consistent dividend payment is believed to be favorably viewed by the financial markets and shareowners, the Board of Directors will declare dividends only if we are considered to have adequate capital. Future capital requirements and corporate plans are considered when the Board considers a dividend payment. Dividends declared and paid during the first quarter of 2007 totaled $.1750 per share compared to $.1625 per share for the first quarter of 2006, an increase of 7.7%. The dividend payout ratios for the first quarter ended 2007 and 2006 were 45.42% and 40.07%, respectively.

State and federal regulations as well as our long-term debt agreements place certain restrictions on the payment of dividends by both CCBG and the Bank. At March 31, 2007, these regulations and covenants did not impair CCBG or the Bank's ability to declare and pay dividends or to meet other existing obligations in the normal course of business.

During the first three months of 2007, shareowners’ equity decreased $5.3 million, or 6.7%, on an annualized basis. During this same period, shareowners’ equity was positively impacted by net income of $7.0 million, a decrease in the net unrealized loss on available-for-sale securities of $0.3 million, the issuance of common stock of $0.4 million, and stock-based compensation accretion of $63,000. Equity was reduced by dividends paid during the first three months of the year by $3.2 million, or $.1750 per share and the repurchase/retirement of common stock of $9.8 million. At March 31, 2007, our common stock had a book value of $16.97 per diluted share compared to $17.01 at December 31, 2006.

Our Board of Directors has authorized the repurchase of up to 2,171,875 shares of our outstanding common stock. The purchases are made in the open market or in privately negotiated transactions. To date, we have repurchased a total of 1,165,938 shares at an average purchase price of $22.37 per share. We repurchased 286,101 shares of our common stock in the first quarter of 2007 at an average purchase price of $34.13 per share.

We do not currently engage in the use of derivative instruments to hedge interest rate risks. However, we are a party to financial instruments with off-balance sheet risks in the normal course of business to meet the financing needs of our clients.

At March 31, 2007, we had $407.4 million in commitments to extend credit and $18.5 million in standby letters of credit. Commitments to extend credit are agreements to lend to a client so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client to a third party. We use the same credit policies in establishing commitments and issuing letters of credit as we do for on-balance sheet instruments.

If commitments arising from these financial instruments continue to require funding at historical levels, management does not anticipate that such funding will adversely impact its ability to meet on-going obligations. In the event these commitments require funding in excess of historical levels, management believes current liquidity, available lines of credit from the FHLB, investment security maturities and our revolving credit facility provide a sufficient source of funds to meet these commitments.

The consolidated financial statements and accompanying Notes to Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make various estimates and assumptions (see Note 1 in the Notes to Consolidated Financial Statements). We believe that, of our significant accounting policies, the following may involve a higher degree of judgment and complexity.

Core deposit assets represent the premium we paid for core deposits. Core deposit intangibles are amortized on the straight-line method over various periods ranging from 5-10 years. Generally, core deposits refer to nonpublic, non-maturing deposits including noninterest-bearing deposits, NOW, money market and savings. We make certain estimates relating to the useful life of these assets, and rate of run-off based on the nature of the specific assets and the client bases acquired. If there is a reason to believe there has been a permanent loss in value, management will assess these assets for impairment. Any changes in the original estimates may materially affect reported earnings.

The weighted-average discount rate is determined by matching the anticipated Retirement Plan cash flows to a long-term corporate Aa-rated bond index and solving for the underlying rate of return, which investing in such securities would generate. This methodology is applied consistently from year-to-year. We anticipate using a 6.00% discount rate in 2007.

The weighted-average expected long-term rate of return on plan assets is determined based on the current and anticipated future mix of assets in the plan. The assets currently consist of equity securities, U.S. Government and Government Agency debt securities, and other securities (typically temporary liquid funds awaiting investment). We anticipate using a rate of return on plan assets of 8.0% for 2007.

The assumed rate of annual compensation increases is based on expected trends in salaries and the employee base. We used a rate of 5.50% in 2006 and do not expect this assumption to change materially in 2007.

Information on components of our net periodic benefit cost is provided in Note 9 of the Notes to Consolidated Financial Statements included herein and Note 12 of the Notes to Consolidated Financial Statements in our 2006 Annual Report on Form 10-K.

SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments." SFAS 155 amends SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 155 (i) permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (ii) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS 133, (iii) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, (iv) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and (v) amends SFAS 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS 155 became effective on January 1, 2007, and did not have a significant impact on the our financial statements.

SFAS No. 157, "Fair Value Measurements." SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective on January 1, 2008 and is not expected to have a significant impact on our financial statements.

SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115." SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for us on January 1, 2008 and is not expected to have a significant impact on our financial statements.

In July 2006, the FASB issued FASB Interpretation 48, "Accounting for Income Tax Uncertainties" ("FIN 48"). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as "more-likely-than-not" to be sustained by the taxing authority. The recently issued literature also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. The differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. FIN 48 became effective for us in the first quarter of 2007 and did not have a material impact on our consolidated financial statements.