|UNITED STATES                                                                                                                                                                                                                                                                                                                                             
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|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 September 30, 2006                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                          
|Commission File Number 0-12958                                                                                                                                                                                                                                                                                                                            
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|UNION BANKSHARES COMPANY                                                                                                                                                                                                                                                                                                                                  
|(Exact name of registrant as specified in its charter)                                                                                                                                                                                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                          
|Maine                                                                                                                                                                                                                                                                                                                                                     
|(State or other jurisdiction                                                                                                                                                                                                                                                                                                                              
|of incorporation or organization)                                                                                                                                                                                                                                                                                                                         
|                                                                                                                                                                                                                                                                                                                                                          
|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.
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|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 November 9, 2006, there were 1,070,375 shares of the registrant's common stock, $12.50 par value, issued and outstanding.                                                                                                                                                                                                                           
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UNION BANKSHARES COMPANYINDEX TO FORM 10-QPart I.  Financial Information
Page #Item 1.  Financial Statements (Unaudited)Report of Independent Registered Public Accounting Firm
1Consolidated Balance Sheets -September 30, 2006 and 2005 and December 31, 2005
2Consolidated Statements of Income -Three and nine months ended September 30, 2006 and 2005
3Consolidated Statements of Changes in Shareholders' Equity -Nine months ended September 30, 2006 and 2005
4Consolidated Statements of Cash Flows -Nine months ended September 30, 2006 and 2005
5Condensed Notes to Consolidated Financial Statements -September 30, 2006
6Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations
10Item 3.  Quantitative and Qualitative Disclosures About Market Risk
18Item 4.  Controls and Procedures
19Part II.  Other InformationItem 1.  Legal Proceedings
20Item 1A.  Risk Factors
20Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
20Item 3.  Defaults Upon Senior Securities
20Item 4.  Submission of Matters to a Vote of Security Holders
20Item 5.  Other Information
20Item 6.  Exhibits
21Signatures
22i Part I.  Financial InformationItem 1.  Financial StatementsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and ShareholdersUnion Bankshares CompanyWe have reviewed the accompanying interim consolidated financial information of Union Bankshares Company and Subsidiary as of September 30, 2006 and 2005, and for the three and nine-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 & PARKERPortland, MaineNovember 6, 20061UNION BANKSHARES COMPANY AND SUBSIDIARYCONSOLIDATED BALANCE SHEETS(Dollars in thousands, except number of shares and per share data)
September 30,
2006

September 30,
2005

December 31,
2005(Unaudited)

(Unaudited)

(Audited)ASSETSCash and cash equivalents
$  14,055

$  15,625

$    9,725Securities, available for sale, at market
129,173

128,530

128,852Securities, held to maturity, at cost (market value $2,022,$2,239, and $2,143 at September 30, 2006, September 30,2005 and December 31, 2005, respectively)
1,979

2,150

2,078Other investment securities, at cost which approximatesmarket value
9,543

9,758

9,758Loans held for sale
473

897

-Loans
382,089

354,801

355,858Less allowance for loan losses
4,257

4,243

4,248Net loans
377,832

350,558

351,610Premises, furniture and equipment, net
8,406

6,037

6,220Goodwill
6,305

6,305

6,305Bank owned life insurance
9,032

8,638

8,762Other assets
7,098

8,009

6,573Total assets
$563,896

$536,507

$529,883LIABILITIESDemand deposits
$  52,655

$  50,180

$  49,006NOW deposits
78,360

77,179

72,899Money market accounts
19,133

23,384

22,990Savings deposits
63,098

69,544

73,623Certificates of deposit
122,404

114,325

116,480Total deposits
335,650

334,612

334,998Borrowings from Federal Home Loan Bank
154,934

132,047

130,111Junior subordinated debt securities
8,248

-

-Other borrowed funds
17,886

20,449

17,584Other liabilities
6,631

8,400

6,615Total liabilities
523,349

495,508

489,308SHAREHOLDERS' EQUITYCommon stock, $12.50 par value.  Authorized 10,000,000 shares,issued 1,079,476 shares at September 30, 2006, 1,104,317shares at September 30, 2005 and 1,097,666 shares atDecember 31, 2005.
13,493

13,804

13,721Surplus
972

2,316

1,932Retained earnings
28,524

26,489

27,126Accumulated other comprehensive lossNet unrealized loss on securities available for sale, net ofdeferred tax asset of $864 at September 30, 2006, $368 atSeptember 30, 2005 and $741 at December 31, 2005.
(1,676)

(714)

(1,438)Minimum pension liability adjustment, net of deferred taxasset of $395 at September 30, 2006, $461 at September 30,2005 and $395 at December 31, 2005.
(766)

(896)

(766)Total shareholders' equity
40,547

40,999

40,575Total liabilities and shareholders' equity
$563,896

$536,507

$529,883
See Report of Independent Registered Public Accounting Firm.  The accompanying notes are an integral part of these consolidated financial statements.2UNION BANKSHARES COMPANY AND SUBSIDIARYCONSOLIDATED STATEMENTS OF INCOME(Dollars in thousands, except number of shares and per share data)
Three months ended
September  30,

Nine months ended
September 30,2006

2005

2006

2005(Unaudited)

(Unaudited)

(Unaudited)

(Unaudited)INTEREST AND DIVIDEND INCOMEInterest and fees on loans
$5,972

$5,061

$17,034

$14,224Interest and dividends on investments
1,639

1,476

4,819

4,617Total interest and dividend income
7,611

6,537

21,853

18,841INTEREST EXPENSEInterest on deposits
1,838

1,125

4,863

2,824Interest on borrowed funds
2,164

1,416

6,115

3,998Total interest expense
4,002

2,541

10,978

6,822Net interest income
3,609

3,996

10,875

12,019Recovery of loan losses
-

-

-

(215)Net interest income after recovery of loan losses
3,609

3,996

10,875

12,234NON-INTEREST INCOMENet gain on sales of investment securities
-

-

-

4Financial services fees and commissions
567

588

1,830

1,766Service charges and fees on deposit accounts
513

502

1,480

1,453Bankcard fees
103

90

259

225Loan fees
192

189

554

590Income from cash surrender value of life insurance
87

83

270

225Other income (loss)
40

(5)

145

(4)Total non-interest income
1,502

1,447

4,538

4,259NON-INTEREST EXPENSESalaries and employee benefits
2,297

2,286

7,077

6,733Net occupancy
353

374

1,130

1,163Equipment and data processing
336

291

993

955Other expense
767

790

2,668

2,415Total non-interest expense
3,753

3,741

11,868

11,266Income before income taxes
1,358

1,702

3,545

5,227Income taxes
326

508

845

1,557Net income
$1,032

$1,194

$  2,700

$  3,670Net income per common share
$  0.95

$  1.08

$    2.48

$    3.30Cash dividends declared per common share
$  0.40

$  0.40

$    1.20

$    1.20Weighted average common shares outstanding
1,082,121

1,105,055

1,088,979

1,112,446
See Report of Independent Registered Public Accounting Firm.  The accompanying notes are an integral part of these consolidated financial statements.3UNION BANKSHARES COMPANY AND SUBSIDIARYCONSOLIDATED 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
Income (Loss)

Total
Shareholders'
EquityBalance at December 31, 2004
$13,937

$ 2,973

$24,152

$      30

$41,092Net income, nine months endedSeptember 30, 2005
-

-

3,670

-

3,670Change in net unrealized gain on available forsale securities, net of tax benefit of $603
-

-

-

(1,171)

(1,171)Minimum pension liability adjustment, net oftax benefit of $241
-

-

-

(469)

(469)Total comprehensive income


-

3,670

(1,640)

2,030Sale of 4,762 shares of common stock
60

272

-

-

332Repurchase of 15,383 shares of commonstock
(193)

(929)

-

-

(1,122)Cash dividends declared
-

-

(1,333)

-

(1,333)Balance at September 30, 2005
$13,804

$ 2,316

$26,489

$(1,610)

$40,999Balance at December 31, 2005
$13,721

$ 1,932

$27,126

$(2,204)

$40,575Net income, nine months endedSeptember 30, 2006
-

-

2,700

-

2,700Change in net unrealized loss on available forsale securities, net of tax benefit of $123
-

-

-

(238)

(238)Total comprehensive income
-

-

2,700

(238)

2,462Sale of 5,941 shares of common stock
74

314

-

-

388Repurchase of 24,131 shares of commonstock
(302)

(1,274)

-

-

(1,576)Cash dividends declared
-

-

(1,302)

-

(1,302)Balance at September 30, 2006
$13,493

$    972

$28,524

$(2,442)

$40,547
See Report of Independent Registered Public Accounting Firm.  The accompanying notes are an integral part of these consolidated financial statements.4UNION BANKSHARES COMPANY AND SUBSIDIARYCONSOLIDATED STATEMENTS OF CASH FLOWS(Dollars in thousands)
Nine months ended September 30,2006

2005(Unaudited)

(Unaudited)CASH FLOWS FROM OPERATING ACTIVITIESNet income
$   2,700

$   3,670ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASHPROVIDED BY OPERATING ACTIVITIESAmortization of intangible assets
35

35Depreciation
521

493Net amortization of premium on investments
169

328Deferred income taxes
(48)

-Recovery of loan losses
-

(215)Donation of building
-

55Net gain on sales of available for sale securities
-

(4)Originations of loans held for sale
(7,064)

(6,833)Proceeds from sale of loans
6,591

6,182Net increase in other assets
(662)

(23)Net increase in other liabilities
300

667Net increase (decrease) in deferred loan origination fees
43

(73)Net cash provided by operating activities
2,585

4,282CASH FLOWS FROM INVESTING ACTIVITIESProceeds from sale of available for sale securities
170

2,313Purchase of available for sale securities
(22,518)

(20,949)Proceeds from maturities and principal payments on availablefor sale securities
21,501

22,170Proceeds from maturities and principal payments on held tomaturity securities
95

100Net decrease (increase) in other investments
215

(2,031)Net increase in loans to customers
(26,265)

(44,823)Net capital expenditures
(2,706)

(913)Net increase in cash surrender value of life insurance
(270)

(225)Net cash used by investment activities
(29,778)

(44,358)CASH FLOWS FROM FINANCING ACTIVITIESNet increase in deposits
652

29,630Proceeds from long-term borrowings
6,000

25,000Repayment of long-term borrowings
(6,378)

(8,913)Net increase (decrease) in short-term borrowings from Federal HomeLoan Bank
25,200

(4,200)Net increase in other borrowed funds
302

6,195Issuance of junior subordinated debt securities
8,248

-Purchase of common stock
(1,576)

(1,122)Proceeds from stock issuance
388

332Dividends paid
(1,313)

(1,333)Net cash provided by financing activities
31,523

45,589Net increase in cash and cash equivalents
4,330

5,513Cash and cash equivalents at beginning of year
9,725

10,112Cash and cash equivalents at end of period
$ 14,055

$ 15,625
See Report of Independent Registered Public Accounting Firm.  The accompanying notes are an integral part of these consolidated financial statements.5Condensed Notes to Consolidated Financial StatementsNote 1.  Basis of PresentationThe 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 September 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006 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, 2005 filed with the Securities and Exchange Commission.Note 2. Earnings Per ShareEarnings 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. Stock Repurchase ProgramThe 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 September 30, 2006, the Company had repurchased a total of 103,860 shares of its stock since the Program's inception.  The Company repurchased 6,848 shares as part of this program at an average price of $62.96 during the third quarter of 2006.Note 4. Mortgage Servicing RightsCapitalized mortgage servicing rights are recognized, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, 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.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.6The following summarizes mortgage servicing rights capitalized and amortized, along with the activity in the related valuation allowance:
Nine months ended
September 30,2006

2005(Dollars in thousands)Balance of loans serviced for others at September 30,
$102,558

$102,741Mortgage Servicing Rights, Net of Valuation Allowance:Balance at beginning of year
$       619

$       806Mortgage servicing rights capitalized
332

81Amortization charged against mortgage servicing income
(407)

(231)Change in valuation allowance
2

(5)Balance at end of period
$       546

$       651Valuation Allowance:Balance at beginning of year
$           4

$         13Increase in impairment reserve
-

19Reduction of impairment reserve
(2)

(14)Balance at end of period
$           2

$         18
Note 5. Core Deposit IntangibleOn 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:
September 30,
2006

September 30,
2005

December 31,
2005(Dollars in thousands)Core deposit intangible, cost
$323

$323

$323Accumulated amortization
284

237

249Core deposit intangible, net
$  39

$  86

$  74
Amortization expense related to the core deposit intangible amounted to $35,000 for the nine months ended September 30, 2006 and September 30, 2005.  The expected total amortization expense is estimated to be $47,000 in 2006 and $27,000 in 2007.Note 6. Employee BenefitsThe Company's subsidiary sponsors a noncontributory defined benefit pension plan covering substantially all permanent full-time employees who are at least 21 years of age and have completed one year of service.  Plan benefits generally are based on years of service and average compensation.The defined benefit pension plan was frozen as of May 15, 2005.  As a result, all affected employees retain any benefits accumulated to the effective date, but are no longer eligible to increase their benefit.  The Company made no pension plan contributions during the nine month periods ended September 30, 2006 and 2005.  The expected pension contribution for the Company for 2006 is $0.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.7Net periodic benefit cost of these plans includes the following components:
Three months ended September 30,2006

2005Pension
Benefits

Other
Benefits

Pension
Benefits

Other
Benefits(Dollars in thousands)Service cost
$    -

$19

$      -

$19Interest cost
98

21

95

21Expected return on plan assets
(98)

-

(112)

-Recognized net actuarial (gain) loss
8

(3)

10

(3)Amortization of unrecognized transition obligation
-

12

-

12Net periodic benefit cost
$   8

$49

$    (7)

$49
Nine months ended September 30,2006

2005Pension
Benefits

Other
Benefits

Pension
Benefits

Other
Benefits(Dollars in thousands)Service cost
$      -

$  57

$      -

$  57Interest cost
294

63

331

63Expected return on plan assets
(294)

-

(341)

-Recognized net actuarial (gain) loss
24

(9)

58

(9)Amortization of unrecognized transition obligation
-

36

(1)

36Net periodic benefit cost
$   24

$147

$   47

$147
Note 7. Trust Preferred SecuritiesOn February 17, 2006, Union Bankshares Capital Trust I (the "Trust"), a Delaware trust affiliate formed by the Company, completed a private placement of $8.0 million of trust preferred securities (liquidation amount of $1,000 per security) as part of a pooled capital securities transaction.  The Trust also issued common securities totaling $248,000 to the Company.  The Trust used the proceeds from the trust preferred securities and the common securities to purchase an aggregate principal amount of $8.2 million of 30-year junior subordinated deferrable interest debt securities of the Company.  The Company has contributed $3.0 million of the proceeds from the issuance of the subordinated debt securities to the Bank as Tier 1 Capital to support the Bank's growth.  For the first five years after issuance, the debt securities will bear interest at a Blended Rate equal to the sum of (1) the product of (a) 50% times (b) the floating three month LIBOR plus 1.42% (the "Variable Rate") plus (2) the product of (a) 50% times (b) the 5 year interest rate swap rate fixed two business days prior to closing plus 1.42% (the "Fixed Rate").  Therefore, for the first five years after issuance, the Variable Rate portion of the Blended Rate will float in relation to the floating three month LIBOR rate and the Fixed Rate portion of the Blended Rate will be fixed. The debt securities were issued pursuant to the terms on the Indenture dated as of February 17, 2006, between the Company, as Issuer, and Wells Fargo Bank, National Association, as Trustee.The debt securities obligate the Company to pay interest on their principal sum quarterly in arrears on January 7, April 7, July 7, and October 7 of each year. So long as an "Event of Default" has not occurred and is continuing under the Indenture, the Company has the right to defer payments of interest on the debt securities by extending the interest payment period on the debt securities for up to 20 consecutive quarterly periods. At September 30, 2006, the Blended Rate was 6.70%.  The debt securities mature on April 7, 2036, but may be redeemed by the Company, in whole or in part, beginning on April 7, 2011, on any interest payment date. The debt securities may also be redeemed by the Company, in whole or in part, within 90 days of the occurrence of certain special redemption events as defined in the Indenture. Special redemption events relate to the regulatory capital treatment of the issuance, the Trust being deemed an investment company, and the occurrence of certain tax events.The debt securities are the sole assets of the Trust. The Trust issued an aggregate principal amount of $8.0 million of capital securities with a floating interest rate corresponding to that of the debt securities to an unaffiliated pooled investment vehicle. The payments of distributions on and redemption of liquidation of the trust preferred securities issued by the Trust are guaranteed by the Company pursuant to a Guarantee Agreement dated as of February 17, 2006, executed and delivered by the Company and Wells Fargo Bank, National Association, the Guarantee Trustee, for the benefit of the holders of the trust preferred securities.8Note 8. Recent Accounting DevelopmentsSFAS No. 156, Accounting for Servicing of Financial Assets-an amendment to Financial Accounting Standards Board(FASB)Statement No. 140, requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. Servicing assets and servicing liabilities will subsequently be reported using the amortization method or the fair value measurement method. An entity should adopt this Statement as of the beginning of its first fiscal year that begins after September 15, 2006 with earlier application permitted with certain restrictions. The initial application of the fair value measurement method would be reported as a cumulative effect adjustment to beginning retained earnings. The Statement requires certain disclosures about the basis for measurement and regarding risks, activity, and fair value of servicing assets and of servicing liabilities. Management does not expect SFAS No.156 to have a material impact on the Company's financial statements.FASB Staff Position (FSP) 115-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, was issued on November 3, 2005. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. Guidance in the FSP shall be applied to reporting periods beginning after December 15, 2005, with earlier application permitted. Application of this FSP during 2006 did not have a material effect on the consolidated financial condition and results of operations of the Company.In July 2006, FASB issued Financial Accounting Standards Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes.  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is analyzing effects of FIN 48.In September 2006, 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 the Company does not expect application of this Statement will change current practice.In September 2006, FASB issued SFAS 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 an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in the funded status in the year in which the changes occur through comprehensive income of a business entity.  The funded status of a plan should be measured as of the date of the Company's year-end statement of financial position, with limited exceptions.  An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide required disclosures as of the end of the fiscal year ending after December 15, 2006.As of December 31, 2005, the Company's Pension Plan was underfunded by $1,084,000, as defined in the Statement.  At December 31, 2005, the Company recorded a minimum pension liability of $766,000, net of tax of $395,000 as a reduction in shareholders' equity.  Accordingly, management does not expect the impact of applying the Statement to the Pension Plan to have a material impact on the Company's financial statements.As of December 31, 2005, the Company's Post-Retirement Plan was underfunded by $1,560,000, as defined in the Statement; Accordingly, management does not expect the impact of applying the Statement to the Post-Retirement Plan to have a material impact on the Company's financial statements.In September 2006, the Security and Exchange Committee issued Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB No. 108 requires registrants to evaluate the materiality of unadjusted financial statement misstatements using both the rollover and iron curtain methods. The rollover method quantifies a misstatement based on the amount of the error originating in the current period statement of income. The iron curtain method quantifies a misstatement based on the effects of correcting the misstatement existing in the statement of financial condition at the end of the current period, irrespective of the misstatement's
year(s) of origination. SAB No. 108 is effective for years ending after November 15, 2006. The cumulative effect of the initial application on prior years is required to be reported as an adjustment to retained earnings at the beginning of the year of initial application. Management is studying the effects of SAB No. 108 on the Company's financial statements.9Item 2.  Management's Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis reviews the consolidated financial condition of Union Bankshares Company (the "Company") at September 30, 2006 and 2005 and December 31, 2005, and the consolidated results of operations for the three and nine months ended September 30, 2006 and 2005.  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, 2005, filed with the Securities and Exchange Commission.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 StatementsThis 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 PoliciesManagement'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.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.10Mortgage 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 OverviewNet income decreased $162,000, or 14%, for the quarter ended September 30, 2006 compared to the third quarter last year.  The following were significant factors contributing to the results for the third quarter of 2006:
*
Net interest income decreased $387,000, or 10%, largely resulting from continued margin compression.*
Non-interest income increased $55,000, or 4%, primarily due to increases in bankcard income, service charges and fees on deposit accounts and other income.*
Non-interest expense was essentially flat year on year.*
Total loans increased by $27.3 million, or 8%, at September 30, 2006 compared to September 30, 2005, primarily driven by continued growth in the residential and commercial real estate categories.
Results of OperationsNet Income.  Net income for the nine months ended September 30, 2006 was $2.7 million, a decrease of $970,000 compared to the same period in 2005.  Earnings per share were $2.48 and $3.30 for the nine months ended September 30, 2006 and September 30, 2005, respectively.  Annualized return on average equity ("ROE") and return on average assets ("ROA") for the first nine months of the year were 8.96% and .66%, respectively.  Annualized ROE and ROA were 11.95% and .95%, respectively, for the same period in 2005.Net income for the three months ended September 30, 2006 decreased $162,000, or 14%, compared with the same period last year and earnings per share decreased to $0.95 compared to $1.08 for the same period one year ago.  Annualized ROE and ROA were 10.32% and .74%, respectively for the third quarter of 2006 compared to 11.61% and .90% for the same period in 2005.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 decreased by $1.2 million, or 9%, to $11.4 million in comparison to the same period last year.  The Company's net interest margin declined 49 basis points to 2.97% for the nine months ended September 30, 2006 compared to 3.46% 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 59 basis points to 2.61% for the first nine months of 2006 as compared to the first nine months of 2005.11The 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)Nine months ended September 30,2006

2005Average
Balance

Interest

Yield/
Rate

Average
Balance

Interest

Yield/
Rate(Dollars in thousands)AssetsInterest Earning Assets:Investment securities (1)
$145,663

$  5,230

4.80%

$149,354

$  5,026

4.50%Loans, gross (excludes loans held for sale) (1)
368,173

17,147

6.23%

332,886

14,353

5.74%Total interest earning assets
513,836

$22,377

5.82%

482,240

$19,379

5.35%Other assets:Cash and due from banks
9,634





10,265Other assets
25,321





24,545$548,791





$517,050LiabilitiesInterest Bearing Liabilities:Deposits:NOW deposits
$72,296

$603

1.12%

$64,664

$215

0.44%Money market accounts
20,288

230

1.52%

27,092

186

0.92%Savings deposits
66,138

724

1.46%

67,261

448

0.89%Time deposits
120,309

3,306

3.67%

98,474

1,975

2.68%Total interest bearing deposits
279,031

4,863

2.33%

257,491

2,824

1.47%Borrowings:Federal Home Loan Bank borrowings
157,588

5,470

4.64%

152,531

3,768

3.30%Junior subordinated debt securities
6,828

335

6.56%

-

-

0.00%Other borrowed funds
14,050

310

2.95%

13,766

230

2.23%Total borrowings
178,466

6,115

4.58%

166,297

3,998

3.21%Total interest bearing liabilities
457,497

$10,978

3.21%

423,788

$6,822

2.15%Non-Interest Bearing Liabilities & Shareholders'
  Equity:Demand deposits
45,065





44,795Other liabilities
5,942





7,500Shareholders' equity
40,287





40,967$548,791





$517,050Net interest income (1)


$11,399





$12,557Net interest rate spread (2)




2.61%





3.20%Net interest margin (2)




2.97%





3.46%Supplemental Information:Total deposits, including demand deposits
$324,096

$4,863



$302,286

$2,824Cost of total deposits




2.01%





1.25%Total funding liabilities, including demand deposits
$502,562

$10,978



$468,583

$6,822Cost of funding liabilities




2.92%





1.95%
(1)
The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $524,000and $538,000 for the nine months ended September 30, 2006 and 2005, 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.12The 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
Nine months ended September 30,Volume

Rate

Rate/
Volume

Total(Dollars in thousands)Interest Earning AssetsInvestment securities (1)
$  (124)

$    336

$    (8)

$    204Loans, gross  (excludes
  loans held for sale) (1)  (2)
1,521

1,151

123

2,795Total interest earning assets
$1,397

$ 1,487

$ 115

$ 2,999Interest Bearing LiabilitiesNOW deposits
$     26

$    324

$   38

$    388Money market accounts
(47)

122

(31)

44Savings deposits
(7)

288

(5)

276Time deposits
438

731

162

1,331Total deposits
410

1,465

164

2,039FHLB borrowings
125

1,527

50

1,702Junior subordinated debt securities
-

-

335

335Other borrowed funds
5

74

1

80Total borrowings
130

1,601

386

2,117Total interest bearing liabilities
$   540

$ 3,066

$ 550

$  4,156Net change in net interest income
$   857

$(1,579)

$(435)

$(1,157)
(1)
The total amount of adjustment to present interest income and yield on a fully tax-equivalent basis is $524,000 and $538,000 for the nine months ended September 30, 2006 and 2005, 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 nine months of 2006 amounted to $513.8 million, an increase of $31.6 million, or 7%, over the same period in 2005.  Average loan balances increased $35.3 million, or 11% for the first nine months of 2006 compared to the same period in 2005.  Average investment securities decreased by $3.7 million, or 2% for the nine months ended September 30, 2006 compared to the same period in 2005, as cash flows from maturing investments continue to be used to fund growth in the loan portfolio.  The yield on interest-earning assets increased 47 basis points to 5.82% for the first nine months in 2006, compared to 5.35% for the same period in 2005.  The yield on loans increased 49 basis points from 5.74% for the nine months ended September 30, 2005 to 6.23% for the nine months ended September 30, 2006 and the yield on investments also increased 30 basis points to 4.80% for the nine months ended September 30, 2006.The average balance of interest-bearing liabilities for the first nine months of 2006 was $457.5 million, an increase of $33.7 million, or 8%, over the same period in 2005.  Average interest-bearing deposits increased $21.5 million, or 8%, to $279.0 million for the nine months ended September 30, 2006 compared to the same period in 2005.  Average time deposits grew $21.8 million, or 22%, for the nine months ended September 30, 2006 compared to the same period in 2005; of this increase, $17.3 million was from brokered time certificates of deposit.  Average borrowings for the nine months ended September 30, 2006 were $178.5 million compared to $166.3 million for the same period in 2005, an increase of $12.2 million, or 7%.  The increase in borrowings was in part due to the issuance of $8.2 million of junior subordinated debt securities, related to our issuance of trust preferred securities, (see Note 7 to the Condensed Notes to Consolidated Financial Statements included in Item 1).  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 cost of interest-bearing liabilities increased to 3.21% during the nine months ended September 30, 2006, an increase of 106 basis points over the nine months ended September 30, 2005.  The increase is, in part, attributable to a 137 basis points increase in the cost of borrowings during the first nine months of 2006 compared to the same period in 2005.  Interest expense on the subordinated debt securities for the nine months ended September 30, 2006 was $335,000 compared to $0 for the nine months ended September 30, 2005.  The cost of interest-bearing deposits also increased 86 basis points during the first nine months of 2006 compared to the same period in 2005, 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.13Provision 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.No provision for loan losses was recorded in the first nine months of 2006 compared to recording a net provision benefit of $215,000 for the nine months ended September 30, 2005.  Asset quality remains sound with nonperforming assets of $2.7 million, or .48% of total assets, at September 30, 2006 compared to .46% of total assets at December 31, 2005.  Total net charge offs as a percent of total loans was 0% for the nine months ended September 30, 2006 and .01% for September 30, 2005.Management believes that the level of allowance for loan losses at September 30, 2006, of $4.3 million, or 1.11% of total loans outstanding, is adequate.  The allowance for loan losses was $4.2 million, or 1.20% of total loans outstanding, as of September 30, 2005.Non-Interest Income.Non-interest income increased by $279,000, or 7%, to $4.5 million for the nine months ended September 30, 2006 compared to the same period last year.  Financial services fees and commissions increased $64,000, or 4% for the nine months ended September 30, 2006 compared to the same period last year.  Income from cash surrender value of life insurance increased $45,000, or 20% for the nine months ended September 30, 2006 compared to the same period last year.  Bankcard fees increased $34,000, or 15% and other income increased $149,000 for the nine months ended September 30, 2006 compared to the same period last year .  Partially offsetting this increase was a $36,000, or 6%, decline in loan fees for the nine months ended September 30, 2006 compared to the same period last year.Total non-interest income increased $55,000, or 4%, during the third quarter of 2006 compared to the third quarter of 2005.  Bankcard income increased 14% or $13,000 during the three months ended September 30, 2006 compared to the same period last year.  Service charges and fees on deposit accounts increased $11,000, or 2%, for the third quarter of 2006 compared to 2005.  Other income increased by $45,000.  Offsetting these increases was a decline in income from financial services fees and commissions of $21,000, or 4% during the third quarter of 2006 compared to 2005.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 increased $602,000, or 5%, to $11.9 million for the nine months ended September 30, 2006 compared to $11.3 million for the nine months ended September 30, 2005.  The increase was primarily attributable to a $344,000, or 5%, increase in salaries and employee benefits costs resulting from an increase in health insurance costs and additional staffing.  Other expense also increased by $253,000, or 10% for the nine months ended September 30, 2006 compared to the same period in 2005, primarily due to increases in advertising and promotional costs in connection with the Bank's new branding efforts.Non-interest expense was $3.8 million in the third quarter of 2006 compared to $3.7 million for the third quarter of 2005, representing an increase of only $12,000.Financial ConditionThe Company's total assets increased to $563.9 million at September 30, 2006, an increase of  $34.0 million, or 6%, over December 31, 2005.  The increase in total assets was primarily attributable to continued growth in total loans.Loan Portfolio.Total loans increased by $26.2 million, or 7%, during the nine months ended September 30, 2006 compared to December 31, 2005.  The increases were mainly in residential real estate, commercial real estate and municipal loans which increased $9.9 million, $10.1 million and $4.5 million, respectively.Between September 30, 2005 and September 30, 2006, the loan portfolio increased $27.3 million or 8%, a direct result of continued strong origination and customer demand throughout our market areas.14The following table summarizes the composition of the Bank's loan portfolio by type of loan at the dates indicated.
Loan Portfolio CompositionSeptember 30, 2006

September 30, 2005

December 31, 2005Amount

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
$235,524

61.6%

$218,807

61.6%

$225,648

63.4%Commercial
77,022

20.2%

64,241

18.1%

66,924

18.8%Commercial and industrial
28,763

7.5%

27,870

7.9%

27,919

7.8%Consumer
31,353

8.2%

29,484

8.3%

30,471

8.6%Municipal
9,427

2.5%

14,399

4.1%

4,896

1.4%Total
$382,089

100.0%

$354,801

100.0%

$355,858

100.0%
Asset Quality.As of September 30, 2006, nonperforming assets totaled $2.7 million, an increase of $313,000 over the same date last year and an increase of $288,000 from December 31, 2005.  As a percentage of total assets, nonperforming assets at September 30, 2006 were 0.48% compared to 0.45% at September 30, 2005.The following table sets forth information regarding nonperforming assets at the dates indicated.
Nonperforming AssetsSeptember 30,
2006

September 30,
2005

December 31,
2005(Dollars in thousands)Loans accounted for on a nonaccrual basis
$1,670

$2,073

$2,256Accruing loans contractually past due 90 days or more
1,060

344

186Total nonperforming loans
2,730

2,417

2,442Other real estate owned
-

-

-Nonperforming securities
-

-

-Total nonperforming assets
$2,730

$2,417

$2,442Ratio of nonperforming assets to total assets
0.48%

0.45%

0.46%Ratio of nonperforming loans to total loans
0.71%

0.68%

0.69%
Allowance for Loan Losses.At September 30, 2006, the allowance for loan losses totaled $4.3 million, or 1.11% of total loans compared to $4.2 million, or 1.20% of total loans at September 30, 2005.  Net recovery activity totaled $9,000 for the first nine months of 2006 compared to net charge-offs of $46,000 for the same period one year ago.15The following table sets forth the breakdown of the allowance for loan losses for the periods indicated.
Analysis of Allowance for Loan Losses
September 30,2006

2005(Dollars in thousands)Total loans outstanding at the end of the period (1)
$382,089

$354,801Average loans outstanding during the period (1)
$368,173

$332,886Allowance for loan losses, beginning of the period
$    4,248

$    4,504Recovery of loan losses
-

(215)Balance before loan charge-offs
4,248

4,289Loans charged-off
268

217Less recoveries on loans charged-off
277

171Net loan (recoveries) charge-offs
(9)

46Allowance for loan losses, end of the period
$    4,257

$    4,243Ratios:Net charge-offs to average loans outstanding
0.00%

0.01%Net charge-offs to loans, end of period
0.00%

0.01%Allowance for loan losses to average loans outstanding
1.16%

1.27%Allowance for loan losses to total loans, end of period
1.11%

1.20%Allowance for loan losses to nonperforming loans
155.93%

175.55%
(1)
Excludes loans held for sale.
Investments. Total investments increased $7,000 to $140.7 million at September 30, 2006 from December 31, 2005.  At September 30, 2006, the Company's available for sale portfolio had a net unrealized loss, net of taxes, of $1.7 million, compared to $1.4 million at December 31, 2005.  Management feels that the change in the net unrealized position is primarily due to a change in market rates during the period.The following table sets forth the Company's securities at the dates indicated.
September 30, 2006

September 30, 2005

December 31, 2005Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value(Dollars in thousands)Securities available for sale:Mortgage-backed securities
$  86,356

$  83,989

$  76,502

$  75,273

$  78,531

$  76,480U.S. Treasury notes and other U.S.
      Government agencies
17,507

17,321

26,586

26,401

23,061

22,769Obligations of states and political subdivisions
21,141

21,254

21,710

22,151

21,646

21,939Other securities
6,709

6,609

4,815

4,705

7,793

7,664Total$131,713

$129,173

$129,613

$128,530

$131,031

$128,852Securities held to maturity:Obligations of states and political subdivisions
$    1,979

$    2,022

$    2,150

$    2,239

$    2,078

$    2,143
Deposits.Deposits continue to represent the Company's primary source of funds for lending and investment activities.  At September 30, 2006, deposits of $335.7 million were $652,000 higher than at December 31, 2005.  Between September 30, 2005 and September 30, 2006, total deposits increased $1.0 million.Borrowings.Borrowings amounted to $181.1 million at September 30, 2006, an increase of $33.4 million, or 23%, from December 31, 2005.  At September 30, 2006, borrowings consisted primarily of Federal Home Loan Bank of Boston ("FHLB") borrowings totaling $154.9 million, an increase of $24.8 million over balances as of December 31, 2005.  The remaining borrowings consisted primarily of assets sold under repurchase agreements totaling $17.9 million and junior subordinated debt securities issued in connection with our trust preferred securities offering totaling $8.2 million.16Between September 30, 2005 and September 30, 2006, total borrowings increased $28.6 million, or 19%, primarily due to an increase in FHLB borrowings resulting from continued loan growth and the issuance of $8.2 million of junior subordinated debt securities.Liquidity and Capital ResourcesLiquidity.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.  In addition, as an alternative source of funding to borrowings, the Bank will occasionally purchase brokered certificates of deposits.  At September 30, 2006, the Bank had $22.1 million of brokered certificates of deposits outstanding.  The Company had $19.9 million in brokered certificates of deposits for the comparable period of 2005.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 September 30, 2006, consist of $8.4 million of junior subordinated debt securities, including accrued interest, issued to an unconsolidated subsidiary, Union Bankshares Capital Trust I, (see Note 7 to the Condensed Notes to Consolidated Financial Statements included in Item 1).  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 September 30, 2006, 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 September 30, 2006, 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, (see Note 7 to the Condensed Notes to Consolidated Financial Statements included in Item 1).At September 30, 2006, the Company had a Tier 1 risk-based capital ratio and a total risk-based capital ratio of 13.03% and 14.28%, respectively, compared to 11.50% and 12.75%, respectively, at December 31, 2005.  At September 30, 2006, the Company and the Bank had a Tier 1 leverage ratios of 7.93% and 7.08%, respectively, compared to 6.83% and 6.80%, respectively, at December 31, 2005.Off-Balance Sheet Risks and CommitmentsAs of September 30, 2006 and 2005, the total of approved loan commitments outstanding, commitments under unused lines of credit and unadvanced portions of loans amounted to $74.7 million and $74.9 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.17Contractual ObligationsThe following table is a summary of the Company's contractual obligations as of September 30, 2006, consisting of operating and capital lease obligations and FHLB borrowings, by contractual maturity date for the next five years.
Contractual Obligations by MaturityPayment due by periodTotal

Less than
1 Year

1 - 3 Years

4 - 5
Years

After 5
YearsContractual Obligations
(Dollars in thousands)Operating lease obligations
$     5,042

$       211

$     361

$   367

$  4,103Capital lease obligations
1,936

92

185

187

1,472FHLB borrowings
154,934

105,876

40,120

8,555

383Junior subordinated debt securities
8,248

-

-

-

8,248Total
$170,160

$106,179

$40,666

$9,109

$14,206
Item 3.  Quantitative and Qualitative Disclosures About Market RiskMarket 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 DecreaseSeptember 30, 2006

(3.58%)

1.88%September 30, 2005

(0.73%)

(0.42%)


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.18Also, 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.  Controls and ProceduresManagement 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.19Part II.  Other InformationItem 1.  Legal ProceedingsThere 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 FactorsThere 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, 2005.Item 2.  Unregistered Sales of Equity Securities and Use of ProceedsOn 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 September 30, 2006, the Company had repurchased a total of 103,860 shares of its stock since the Program's inception.During the three months ended September 30, 2006, the Company repurchased 6,848 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 ProgramsJuly 1 - 31, 2006
2,700

63.89

2,700

46,367August 1 - 31, 2006
2,805

62.85

2,805

43,562September 1 - 30, 2006
1,343

61.31

1,343

42,219TOTAL
6,848

62.96

6,848

42,219
Item 3.  Defaults Upon Senior SecuritiesNoneItem 4.  Submission of Matters to a Vote of Security HoldersNoneItem 5.  Other InformationNone20Item 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

Stock Purchase Plan for the employees of Union Trust Company (the "Bank")*****10.2

Form of 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.****10.3

Salary Continuation Agreements for the Executive Officers of the Bank***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 Agreements 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.******15

Letter from Berry, Dunn, McNeil & Parker regarding unaudited interim financial information31.1

Rule 13a-14(a)/15d-14(a) Certification of the CEO31.2

Rule 13a-14(a)/15d-14(a) Certification of the CFO32.1

Section 1350 Certification of the CEO32.2

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 15, 2004.**
Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed with the SEC on
May 16, 2005.***
Incorporated by reference to the Company's Current Report on Form 8-K, filed with the SEC on
February 23, 2006.****
Incorporated by reference to the Company's Registration Statement on Form S-1, filed with the SEC on
June 15, 1984, Registration No. 2-90679.*****
Incorporated by reference to the Company's Current Report on Form 8-K, filed with the SEC on June 16, 2006.******
Included as page 1 of this Quarterly Report on Form 10-Q.21SIGNATURESPursuant 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 COMPANYNovember 14, 2006

/s/ Peter A. BlybergDate

Peter A. Blyberg, President and Chief Executive OfficerNovember 14, 2006

/s/ Timothy R. MaynardDate

Timothy R. Maynard, Senior Vice President and Chief Financial Officer22Exhibit 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

Stock Purchase Plan for the employees of Union Trust Company (the "Bank")*****10.2

Form of 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.****10.3

Salary Continuation Agreements for the Executive Officers of the Bank***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 Agreements 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.******15

Letter from Berry, Dunn, McNeil & Parker regarding unaudited interim financial information31.1

Rule 13a-14(a)/15d-14(a) Certification of the CEO31.2

Rule 13a-14(a)/15d-14(a) Certification of the CFO32.1

Section 1350 Certification of the CEO32.2

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 15, 2004.**
Incorporated by reference to the Company's Quarterly Report on Form 10-Q, filed with the SEC on
May 16, 2005.***
Incorporated by reference to the Company's Current Report on Form 8-K, filed with the SEC on
February 23, 2006.****
Incorporated by reference to the Company's Registration Statement on Form S-1, filed with the SEC on
June 15, 1984, Registration No. 2-90679.*****
Incorporated by reference to the Company's Current Report on Form 8-K, filed with the SEC on June 16, 2006.******
Included as page 1 of this Quarterly Report on Form 10-Q.23