|
ITEM 1.
|
Financial statements
|
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
SEPTEMBER 30,
2007
|
|
|
DECEMBER 31,
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
41,781
|
|
|
$
|
48,747
|
|
|
Federal funds sold
|
|
|
512
|
|
|
|
8,590
|
|
|
Interest-bearing deposits in banks
|
|
|
352
|
|
|
|
298
|
|
|
Investment securities (market value: 2007, $242,550; 2006, $264,152)
|
|
|
242,542
|
|
|
|
264,141
|
|
|
Mortgage loans held for sale
|
|
|
6,648
|
|
|
|
7,640
|
|
|
Loans receivable, net of allowance for loan losses, 2007, $14,617; 2006, $14,500
|
|
|
1,196,696
|
|
|
|
1,203,132
|
|
|
Premises and equipment, net
|
|
|
37,186
|
|
|
|
35,853
|
|
|
Accrued interest receivable
|
|
|
8,198
|
|
|
|
8,197
|
|
|
Deferred income tax asset
|
|
|
5,032
|
|
|
|
5,446
|
|
|
Core deposit intangibles, net
|
|
|
3,386
|
|
|
|
3,871
|
|
|
Goodwill
|
|
|
13,896
|
|
|
|
13,896
|
|
|
Bank owned life insurance
|
|
|
10,597
|
|
|
|
10,231
|
|
|
Other assets
|
|
|
19,890
|
|
|
|
15,947
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,586,716
|
|
|
$
|
1,625,989
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
|
$
|
214,412
|
|
|
$
|
239,672
|
|
|
Interest-bearing
|
|
|
959,001
|
|
|
|
1,078,609
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
|
1,173,413
|
|
|
|
1,318,281
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
35,500
|
|
|
|
—
|
|
|
Federal Home Loan Bank advances
|
|
|
107,000
|
|
|
|
65,000
|
|
|
Subordinated debt
|
|
|
20,619
|
|
|
|
20,619
|
|
|
Commercial paper
|
|
|
76,082
|
|
|
|
58,632
|
|
|
Other borrowings
|
|
|
4,213
|
|
|
|
561
|
|
|
Accrued interest payable
|
|
|
3,537
|
|
|
|
4,274
|
|
|
Other liabilities
|
|
|
7,200
|
|
|
|
7,970
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,427,564
|
|
|
|
1,475,337
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred stock; no par value; 5,000,000 shares authorized; no shares issued and outstanding;
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $1 par value; 25,000,000 shares authorized; 2007: 10,795,097 shares issued and outstanding; 2006: 10,784,303 shares issued and
outstanding;
|
|
|
10,795
|
|
|
|
10,784
|
|
|
Additional paid-in capital
|
|
|
34,327
|
|
|
|
33,970
|
|
|
Retained earnings
|
|
|
114,616
|
|
|
|
106,924
|
|
|
Accumulated other comprehensive loss, net
|
|
|
(586
|
)
|
|
|
(1,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
159,152
|
|
|
|
150,652
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,586,716
|
|
|
$
|
1,625,989
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Interest Income
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
21,891
|
|
|
$
|
21,618
|
|
Federal funds sold and deposits in other banks
|
|
|
13
|
|
|
|
386
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
1,738
|
|
|
|
1,772
|
|
Tax exempt
|
|
|
922
|
|
|
|
844
|
|
Dividends
|
|
|
150
|
|
|
|
131
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
24,714
|
|
|
|
24,751
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
7,634
|
|
|
|
7,601
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
190
|
|
|
|
25
|
|
Federal Home Loan Bank advances
|
|
|
1,206
|
|
|
|
860
|
|
Subordinated debt
|
|
|
426
|
|
|
|
434
|
|
Commercial paper
|
|
|
844
|
|
|
|
658
|
|
Other borrowings
|
|
|
12
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
10,312
|
|
|
|
9,582
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
14,402
|
|
|
|
15,169
|
|
Provision for loan losses
|
|
|
200
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
14,202
|
|
|
|
15,169
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
Retail banking fees
|
|
|
2,008
|
|
|
|
1,793
|
|
Commissions and fees from fiduciary activities
|
|
|
855
|
|
|
|
728
|
|
Brokerage fee income
|
|
|
185
|
|
|
|
169
|
|
Mortgage banking-related fees
|
|
|
602
|
|
|
|
686
|
|
(Losses) gains on sale of premises and equipment
|
|
|
(19
|
)
|
|
|
216
|
|
Gains on sale of securities available for sale
|
|
|
67
|
|
|
|
—
|
|
Income from bank owned life insurance
|
|
|
135
|
|
|
|
119
|
|
Other operating income
|
|
|
424
|
|
|
|
354
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
4,257
|
|
|
|
4,065
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
6,635
|
|
|
|
6,707
|
|
Net occupancy
|
|
|
907
|
|
|
|
754
|
|
Supplies and equipment
|
|
|
1,017
|
|
|
|
1,053
|
|
Amortization-intangible assets
|
|
|
161
|
|
|
|
161
|
|
Marketing
|
|
|
480
|
|
|
|
332
|
|
State franchise taxes
|
|
|
298
|
|
|
|
252
|
|
Data processing
|
|
|
451
|
|
|
|
333
|
|
Professional fees
|
|
|
195
|
|
|
|
357
|
|
Telecommunications
|
|
|
273
|
|
|
|
226
|
|
Other operating expenses
|
|
|
1,971
|
|
|
|
1,751
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
12,388
|
|
|
|
11,926
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,071
|
|
|
|
7,308
|
|
Income tax expense
|
|
|
1,748
|
|
|
|
2,239
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,323
|
|
|
$
|
5,069
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic
|
|
$
|
0.40
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, diluted
|
|
$
|
0.40
|
|
|
$
|
0.47
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
4
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED
SEPTEMBER 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Interest Income
|
|
|
|
|
|
|
|
|
|
Loans, including fees
|
|
$
|
66,154
|
|
|
$
|
61,885
|
|
|
Federal funds sold and deposits in other banks
|
|
|
84
|
|
|
|
860
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
5,287
|
|
|
|
4,782
|
|
|
Tax exempt
|
|
|
2,792
|
|
|
|
2,504
|
|
|
Dividends
|
|
|
410
|
|
|
|
357
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income
|
|
|
74,727
|
|
|
|
70,388
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
|
24,008
|
|
|
|
20,157
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
415
|
|
|
|
173
|
|
|
Federal Home Loan Bank advances
|
|
|
2,951
|
|
|
|
2,065
|
|
|
Subordinated debt
|
|
|
1,264
|
|
|
|
1,209
|
|
|
Commercial paper
|
|
|
2,388
|
|
|
|
1,491
|
|
|
Other borrowings
|
|
|
28
|
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
31,054
|
|
|
|
25,112
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
43,673
|
|
|
|
45,276
|
|
|
Provision for loan losses
|
|
|
365
|
|
|
|
610
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
43,308
|
|
|
|
44,666
|
|
|
|
|
|
|
Noninterest Income
|
|
|
|
|
|
|
|
|
|
Retail banking fees
|
|
|
5,671
|
|
|
|
5,166
|
|
|
Commissions and fees from fiduciary activities
|
|
|
2,541
|
|
|
|
2,321
|
|
|
Brokerage fee income
|
|
|
735
|
|
|
|
566
|
|
|
Mortgage banking-related fees
|
|
|
1,846
|
|
|
|
2,173
|
|
|
(Losses) gains on sale of premises and equipment
|
|
|
(23
|
)
|
|
|
292
|
|
|
Gains (losses) on sale of securities available for sale
|
|
|
36
|
|
|
|
(199
|
)
|
|
Income from bank owned life insurance
|
|
|
366
|
|
|
|
119
|
|
|
Other operating income
|
|
|
1,248
|
|
|
|
1,065
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest income
|
|
|
12,420
|
|
|
|
11,503
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
|
20,492
|
|
|
|
19,992
|
|
|
Net occupancy
|
|
|
2,666
|
|
|
|
2,258
|
|
|
Supplies and equipment
|
|
|
3,303
|
|
|
|
3,057
|
|
|
Amortization-intangible assets
|
|
|
485
|
|
|
|
417
|
|
|
Marketing
|
|
|
1,122
|
|
|
|
767
|
|
|
State franchise taxes
|
|
|
840
|
|
|
|
716
|
|
|
Data processing
|
|
|
1,349
|
|
|
|
1,024
|
|
|
Professional fees
|
|
|
722
|
|
|
|
636
|
|
|
Telecommunications
|
|
|
747
|
|
|
|
774
|
|
|
Other operating expenses
|
|
|
5,803
|
|
|
|
5,221
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest expense
|
|
|
37,529
|
|
|
|
34,862
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
18,199
|
|
|
|
21,307
|
|
|
Income tax expense
|
|
|
5,317
|
|
|
|
6,535
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,882
|
|
|
$
|
14,772
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, basic
|
|
$
|
1.19
|
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share, diluted
|
|
$
|
1.19
|
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’
EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
(In thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Additional
Paid-In
Capital
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
Comprehensive
Income
|
|
Total
|
|
|
Balance, January 1, 2006
|
|
$
|
10,759
|
|
$
|
33,298
|
|
$
|
94,061
|
|
|
$
|
(2,013
|
)
|
|
|
|
|
$
|
136,105
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
—
|
|
|
14,772
|
|
|
|
—
|
|
|
$
|
14,772
|
|
|
14,772
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the period (net of tax of $402)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
747
|
|
|
—
|
|
|
Reclassification adjustment (net of tax of $70)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
129
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
876
|
|
|
|
876
|
|
|
876
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
$
|
15,648
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.45 per share)
|
|
|
—
|
|
|
—
|
|
|
(4,911
|
)
|
|
|
—
|
|
|
|
|
|
|
(4,911
|
)
|
|
Stock-based compensation expense (9,571 shares)
|
|
|
9
|
|
|
232
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
241
|
|
|
Exercise of stock options (2,600 shares)
|
|
|
3
|
|
|
54
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2006
|
|
$
|
10,771
|
|
$
|
33,584
|
|
$
|
103,922
|
|
|
$
|
(1,137
|
)
|
|
|
|
|
$
|
147,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2007
|
|
$
|
10,784
|
|
$
|
33,970
|
|
$
|
106,924
|
|
|
$
|
(1,026
|
)
|
|
|
|
|
$
|
150,652
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
—
|
|
|
—
|
|
|
12,882
|
|
|
|
—
|
|
|
$
|
12,882
|
|
|
12,882
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized holding gains arising during the period (net of tax of $225)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
417
|
|
|
—
|
|
|
Reclassification adjustment (net of tax of $13)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
23
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
440
|
|
|
|
440
|
|
|
440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
$
|
13,299
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends ($.48 per share)
|
|
|
—
|
|
|
—
|
|
|
(5,190
|
)
|
|
|
—
|
|
|
|
|
|
|
(5,190
|
)
|
|
Stock-based compensation expense (7,594 shares)
|
|
|
8
|
|
|
321
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
329
|
|
|
Exercise of stock options (3,200 shares)
|
|
|
3
|
|
|
36
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
$
|
10,795
|
|
$
|
34,327
|
|
$
|
114,616
|
|
|
$
|
(586
|
)
|
|
|
|
|
$
|
159,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED
SEPTEMBER 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
12,882
|
|
|
$
|
14,772
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,235
|
|
|
|
2,113
|
|
|
Amortization of intangible assets
|
|
|
485
|
|
|
|
417
|
|
|
Provision for loan losses
|
|
|
365
|
|
|
|
610
|
|
|
Deferred tax expense (benefit)
|
|
|
177
|
|
|
|
(294
|
)
|
|
Employee benefit plan expense
|
|
|
156
|
|
|
|
163
|
|
|
Stock-based compensation expense
|
|
|
329
|
|
|
|
241
|
|
|
Losses (gains) on sale of premises and equipment
|
|
|
23
|
|
|
|
(292
|
)
|
|
(Gains) losses on sale of securities available for sale
|
|
|
(36
|
)
|
|
|
199
|
|
|
Gains on sale of mortgage loans
|
|
|
(1,846
|
)
|
|
|
(2,173
|
)
|
|
Proceeds from sale of mortgage loans
|
|
|
94,732
|
|
|
|
107,690
|
|
|
Origination of mortgage loans for sale
|
|
|
(91,895
|
)
|
|
|
(101,951
|
)
|
|
Amortization of securities premiums and accretion of discounts, net
|
|
|
(4
|
)
|
|
|
66
|
|
|
Income on bank owned life insurance
|
|
|
(366
|
)
|
|
|
(119
|
)
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Increase in accrued interest receivable
|
|
|
(1
|
)
|
|
|
(819
|
)
|
|
Increase in other assets
|
|
|
(3,016
|
)
|
|
|
(10,735
|
)
|
|
(Decrease) increase in accrued interest payable
|
|
|
(737
|
)
|
|
|
1,171
|
|
|
Decrease in other liabilities
|
|
|
(770
|
)
|
|
|
(1,761
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$
|
12,713
|
|
|
$
|
9,298
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds from maturities and principal payments of securities available for sale
|
|
$
|
63,634
|
|
|
$
|
49,604
|
|
|
Proceeds from sales and calls of securities available for sale
|
|
|
2,971
|
|
|
|
22,046
|
|
|
Purchase of securities available for sale
|
|
|
(44,289
|
)
|
|
|
(94,036
|
)
|
|
Net decrease (increase) in loans
|
|
|
6,071
|
|
|
|
(61,739
|
)
|
|
Proceeds from sale of premises and equipment
|
|
|
40
|
|
|
|
5,972
|
|
|
Purchase of premises and equipment
|
|
|
(4,750
|
)
|
|
|
(6,346
|
)
|
|
Proceeds from sale of foreclosed assets
|
|
|
37
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) in investing activities
|
|
$
|
23,714
|
|
|
$
|
(84,424
|
)
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
NINE MONTHS ENDED
|
|
|
|
|
SEPTEMBER 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
Net decrease in demand, money market and savings deposits
|
|
$
|
(99,332
|
)
|
|
$
|
(44,749
|
)
|
|
Net (decrease) increase in certificates of deposit
|
|
|
(45,536
|
)
|
|
|
74,761
|
|
|
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase
|
|
|
35,500
|
|
|
|
(15,890
|
)
|
|
Proceeds from Federal Home Loan Bank advances
|
|
|
127,000
|
|
|
|
81,000
|
|
|
Principal payments on Federal Home Loan Bank advances
|
|
|
(85,000
|
)
|
|
|
(56,000
|
)
|
|
Net increase in commercial paper
|
|
|
17,450
|
|
|
|
37,152
|
|
|
Net increase in other borrowings
|
|
|
3,652
|
|
|
|
493
|
|
|
Proceeds from exercise of stock options
|
|
|
39
|
|
|
|
57
|
|
|
Cash dividends paid
|
|
|
(5,190
|
)
|
|
|
(4,911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided by financing activities
|
|
$
|
(51,417
|
)
|
|
$
|
71,913
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
$
|
(14,990
|
)
|
|
$
|
(3,213
|
)
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
57,635
|
|
|
|
48,016
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
|
|
$
|
42,645
|
|
|
$
|
44,803
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Schedule of Noncash Activities
|
|
|
|
|
|
|
|
|
|
Reclassification of fixed assets no longer in service to other assets
|
|
$
|
1,119
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets acquired in settlement of loans
|
|
$
|
—
|
|
|
$
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains on securities available for sale
|
|
$
|
678
|
|
|
$
|
1,336
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
8
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Virginia Financial Group, Inc. (the “Company” or “VFG”) is a Virginia multi-bank holding company headquartered in Culpeper, Virginia. The Company owns Second
Bank & Trust (Fredericksburg, Virginia); Planters Bank & Trust Company of Virginia (Staunton, Virginia) and its subsidiary, Planters Insurance Agency, Inc.; Virginia Commonwealth Trust Company (Culpeper), and VFG Limited Liability
Trust. The consolidated statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts have been eliminated. In the opinion of management, the accompanying consolidated financial statements
contain all adjustments necessary to present fairly the financial position as of September 30, 2007 and December 31, 2006, the results of operations for the three and nine months ended September 30, 2007 and 2006, and cash flows for
the nine months ended September 30, 2007 and 2006. The statements should be read in conjunction with the Notes to Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
|
|
2.
|
The results of operations for the nine month period ended September 30, 2007 and 2006 are not necessarily indicative of the results to be expected for the full year. Certain
reclassifications have been made to prior period balances to conform to the current presentation.
|
|
3.
|
The Company’s loan portfolio is composed of the following (In thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
Construction and land development
|
|
$
|
225,268
|
|
|
$
|
209,583
|
|
|
Secured by 1-4 family residential
|
|
|
326,858
|
|
|
|
306,423
|
|
|
Commercial and multifamily
|
|
|
507,096
|
|
|
|
550,081
|
|
|
Commercial, financial and agricultural loans
|
|
|
117,490
|
|
|
|
110,939
|
|
|
Consumer loans
|
|
|
27,544
|
|
|
|
33,030
|
|
|
All other loans
|
|
|
6,021
|
|
|
|
6,762
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,210,277
|
|
|
|
1,216,818
|
|
|
Deferred loan costs
|
|
|
1,036
|
|
|
|
814
|
|
|
Allowance for loan losses
|
|
|
(14,617
|
)
|
|
|
(14,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loans
|
|
$
|
1,196,696
|
|
|
$
|
1,203,132
|
|
|
|
|
|
|
|
|
|
|
|
9
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
4.
|
Activity in the allowance for loan losses is as follows (In thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
|
September 30,
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
Balance, beginning
|
|
$
|
14,500
|
|
|
$
|
13,581
|
|
|
$
|
13,581
|
|
|
Provisions for loan losses
|
|
|
365
|
|
|
|
750
|
|
|
|
610
|
|
|
Loans charged off
|
|
|
(433
|
)
|
|
|
(402
|
)
|
|
|
(315
|
)
|
|
Recoveries
|
|
|
185
|
|
|
|
571
|
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net recoveries (charge-offs)
|
|
|
(248
|
)
|
|
|
169
|
|
|
|
121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, ending
|
|
$
|
14,617
|
|
|
$
|
14,500
|
|
|
$
|
14,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about impaired loans as of the periods indicated is as follows (In thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
December 31,
2006
|
|
|
|
(unaudited)
|
|
|
|
Impaired loans for which an allowance has been provided
|
|
$
|
6,236
|
|
$
|
3,949
|
|
Impaired loans for which an allowance has not been provided
|
|
|
3,138
|
|
|
2,439
|
|
|
|
|
|
|
|
|
|
Total impaired loans
|
|
$
|
9,374
|
|
$
|
6,388
|
|
|
|
|
|
|
|
|
|
Allowance provided for impaired loans, included in the allowance for loan losses
|
|
$
|
1,599
|
|
$
|
763
|
|
|
|
|
|
|
|
|
|
5.
|
Commercial Paper and Other Borrowings:
|
The Company has a
commercial paper program whereby customers of the affiliate banks can invest in unrated commercial paper of VFG. Terms include a daily maturity and floating rate of interest. The balance outstanding was $76.1 million and $58.6 million at
September 30, 2007 and December 31, 2006, respectively.
Securities sold under agreements to repurchase, which are classified as
secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction.
The Company has an unused line of credit agreement with a correspondent bank for general working capital needs. The $15 million line is unsecured, calls
for variable interest payments and is payable on demand. There were no balances outstanding at September 30, 2007 and December 31, 2006, respectively.
10
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
One of the Company’s affiliates has an agreement with the Federal Reserve where it can borrow
funds deposited by its customers. This agreement calls for variable interest and is payable on demand. U. S. Government securities are pledged as collateral. The targeted threshold maximum amount available under this agreement is $6.0 million.
The following table shows certain information regarding the Company’s commercial paper (In thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
End of period balance
|
|
$
|
76,082
|
|
|
$
|
58,632
|
|
|
Weighted average rate at end of period
|
|
|
4.16
|
%
|
|
|
4.70
|
%
|
|
Average balance
|
|
|
76,399
|
|
|
|
56,092
|
|
|
Weighted average rate
|
|
|
4.32
|
%
|
|
|
4.65
|
%
|
|
Maximum balance of any month-end during the period
|
|
|
76,717
|
|
|
|
58,632
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
End of period balance
|
|
$
|
76,082
|
|
|
$
|
58,632
|
|
|
Weighted average rate at end of period
|
|
|
4.16
|
%
|
|
|
4.70
|
%
|
|
Average balance
|
|
|
69,983
|
|
|
|
45,142
|
|
|
Weighted average rate
|
|
|
4.50
|
%
|
|
|
4.42
|
%
|
|
Maximum balance of any month-end during the period
|
|
|
76,717
|
|
|
|
58,632
|
|
11
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following shows the weighted
average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock for the three month periods ended September 30, 2007 and 2006. Potential dilutive stock had no
effect on income available to common stockholders for the three month period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
Weighted
Average
Shares
|
|
Per Share
Amount
|
|
Weighted
Average
Shares
|
|
Per Share
Amount
|
|
Basic earnings per share
|
|
10,794,322
|
|
$
|
.40
|
|
10,771,661
|
|
$
|
.47
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
4,834
|
|
|
—
|
|
29,865
|
|
|
—
|
|
Stock options
|
|
17,643
|
|
|
—
|
|
55,309
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
10,816,799
|
|
$
|
.40
|
|
10,856,835
|
|
$
|
.47
|
|
|
|
|
|
|
|
|
|
|
|
|
The following shows the weighted average number of shares used in computing earnings per share and
the effect on weighted average number of shares of diluted potential common stock for the nine month periods ended September 30, 2007 and 2006. Potential dilutive stock had no effect on income available to common stockholders for the nine month
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
Weighted
Average
Shares
|
|
Per Share
Amount
|
|
Weighted
Average
Shares
|
|
Per Share
Amount
|
|
|
Basic earnings per share
|
|
10,792,268
|
|
$
|
1.19
|
|
10,769,170
|
|
$
|
1.37
|
|
|
|
|
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
|
|
3,572
|
|
|
—
|
|
29,252
|
|
|
—
|
|
|
Stock options
|
|
21,891
|
|
|
—
|
|
52,736
|
|
|
(.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
10,817,731
|
|
$
|
1.19
|
|
10,851,158
|
|
$
|
1.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007 and 2006, stock options representing 181,372 and 17,258 shares, respectively, were not
included in the calculation of earnings per share as their effect would have been anti-dilutive.
12
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
7.
|
Stock-Based Compensation:
|
Effective January 1, 2006,
the Company has adopted FASB Statement No. 123 (R), “Share-Based Payment”. Statement 123 (R) requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured
based on the fair value of the equity or liability instruments issued.
SFAS 123R also requires that new awards to employees eligible for
retirement prior to the award becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. The Company
had no such awards granted during the nine month period.
Included within compensation and employee benefits expense for the nine month
period ended September 30, 2007 and 2006 is $329 thousand and $241 thousand of stock-based compensation, respectively.
Stock option
compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each separately vesting portion of the award. Depending on the specific characteristics of the related
options, fair value was estimated using either the Lattice or the Black-Scholes option pricing model with the following assumptions: option term until exercise of approximately 4.50 to 6.5 years, volatility ranging from 22.6%, to 28.8%, risk-free
interest rate of 4.57% to 4.78% and an expected dividend yield of 2.4% to 2.9%.
A summary of the stock option plan at September 30,
2007 and 2006 and changes during the periods ended on those dates are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding, January 1
|
|
193,616
|
|
|
$
|
21.17
|
|
149,145
|
|
|
$
|
17.41
|
|
Granted
|
|
56,968
|
|
|
|
30.07
|
|
66,645
|
|
|
|
27.06
|
|
Forfeited
|
|
(2,630
|
)
|
|
|
25.32
|
|
(3,900
|
)
|
|
|
14.67
|
|
Expired
|
|
(2,733
|
)
|
|
|
18.45
|
|
(5,651
|
)
|
|
|
22.09
|
|
Exercised
|
|
(3,200
|
)
|
|
|
9.73
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30
|
|
242,021
|
|
|
$
|
23.28
|
|
206,239
|
|
|
$
|
20.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30
|
|
115,752
|
|
|
|
|
|
109,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes nonvested restricted shares outstanding as of September 30, 2007
and the related activity during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested Shares
|
|
Number of
Shares
|
|
|
Weighted-
Average
Grant-
Date Fair
Value
|
|
(In thousands)
Total Intrinsic
Value
|
|
|
Nonvested at January 1, 2007
|
|
30,058
|
|
|
$
|
24.03
|
|
$
|
841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
12,755
|
|
|
|
25.51
|
|
|
|
|
|
Vested & Exercised
|
|
(7,594
|
)
|
|
|
23.98
|
|
$
|
(205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
(3,869
|
)
|
|
|
24.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30, 2007
|
|
31,350
|
|
|
$
|
24.56
|
|
$
|
596
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the options outstanding as of September 30, 2007 was $441
thousand. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the quarter ended September 30, 2007 and the exercise price,
multiplied by the number of options outstanding). The aggregate intrinsic value of the options currently exercisable as of September 30, 2007 was $441 thousand. The weighted average remaining contractual life is 5.1 years for exercisable
options at September 30, 2007.
The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested
restricted stock and stock options issued and outstanding as of September 30, 2007 that will be recognized in future periods is as follows (In thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
Nonvested
Restricted
Stock
|
|
Total
|
|
For the remaining three months of 2007
|
|
$
|
59
|
|
$
|
61
|
|
$
|
120
|
|
For year ended December 31, 2008
|
|
|
207
|
|
|
233
|
|
|
440
|
|
For year ended December 31, 2009
|
|
|
172
|
|
|
172
|
|
|
344
|
|
For year ended December 31, 2010
|
|
|
157
|
|
|
101
|
|
|
258
|
|
For year ended December 31, 2011
|
|
|
74
|
|
|
48
|
|
|
122
|
|
For year ended December 31, 2012
|
|
|
3
|
|
|
2
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
672
|
|
$
|
617
|
|
$
|
1,289
|
|
|
|
|
|
|
|
|
|
|
|
14
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
8.
|
Employee Benefit Plan:
|
The Company has a noncontributory
pension plan which conforms to the Employee Retirement Income Security Act of 1974 (ERISA). The amount of benefits payable under the plan is determined by an employee’s period of credited service. The amount of normal retirement benefit will be
determined based on a Pension Equity Credit formula. The employee receives credits based on their age and years of service. The plan provides for early retirement for participants with five years of service and the attainment of age 55. The benefits
are payable in single or joint/survivor annuities as well as a lump sum payment upon retirement or separation of service. The Company froze participation in this plan during 2003, and has approximately one hundred thirty-six participants remaining
in the plan.
The components of net periodic benefit cost are as follows (In thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Service cost
|
|
$
|
130
|
|
|
$
|
130
|
|
|
Interest cost
|
|
|
199
|
|
|
|
184
|
|
|
Expected return on plan assets
|
|
|
(219
|
)
|
|
|
(189
|
)
|
|
Amortization of prior service cost
|
|
|
24
|
|
|
|
24
|
|
|
Amortization of net loss
|
|
|
30
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
164
|
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
|
The Company made cash contributions of $57 thousand to the plan during the first nine months of
2007 and anticipates making similar levels of contributions to the plan during the remainder of 2007.
|
9.
|
Merger with FNB Corporation:
|
On July 26, 2007, VFG
announced the signing of an agreement to combine in a merger of equals transaction with FNB Corporation to create the largest independent bank holding company headquartered in the Commonwealth of Virginia. VFG and FNB have received approval of the
merger from the Federal Reserve Board and the Virginia State Corporation Commission. Approvals from the stockholders of VFG and FNB are pending. The merger process is expected to be completed late in the fourth quarter of 2007. Additionally, merger
and integration teams have been formed and are making significant progress on specific initiatives related to the combination and integration of the two companies.
In connection with the proposed merger, VFG filed with the Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4 on September 21, 2007, and amended the S-4 on
October 26, 2007, to register the shares of VFG common stock to be issued to the shareholders of FNB. The joint proxy statement/prospectus, once the registration statement is declared effective, will be sent to the shareholders of VFG and FNB
seeking their approval of the merger. In addition, VFG and FNB each may file other relevant documents concerning the proposed merger with the SEC.
|
10.
|
Recent Accounting Pronouncements
|
In September 2006, FASB
Issued Statement No. 157 (SFAS 157), “Fair Value Measurements” which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a
framework for measuring fair value and expands the related disclosure requirements. The adoption of SFAS 157 is not expected to have a material impact on the Company’s consolidated financial statements.
15
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
In September 2006, the Emerging Issues Task Force issued EITF 06-4, “Accounting for Deferred
Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements”. This consensus concludes that for a split-dollar life insurance arrangement within the scope of this issue, an employer should recognize a
liability for future benefits in accordance with FASB Statement No. 106 (if, in substance, a postretirement benefit plan exits) or APB Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based
on the substantive agreement with the employee. The implementation of EITF 06-4 is not expected to have a material impact on the Company’s consolidated financial statements.
In September 2006, The Emerging Issues Task Force issued EITF 06-5, “Accounting for Purchases of Life Insurance- Determining the Amount That Could Be
Realized in Accordance with FASB Technical Bulletin No. 85-4” . This consensus concludes that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender
value in determining the amount that could be realized under the insurance contract. A consensus also was reached that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an
individual-life by individual-life policy (or certificate by certificate in a group policy). The consensuses are effective for fiscal years beginning after December 15, 2006. The implementation of EITF 06-5 is not expected to have a material
impact on the Company’s consolidated financial statements.
In February 2007, FASB Issued Statement No. 159 (SFAS 159), “The
Fair Value Option for Financial Assets and Financial Liabilities (as amended)” which is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before
November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements.
This statement establishes the fair value option and permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair
value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The adoption of SFAS 159 is not expected to have a material impact on the Company’s
consolidated financial statements.
The fair value option:
1. May be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method
2. Is irrevocable (unless a new election date occurs)
3. Is applied only to entire instruments
and not to portions of instruments.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes”, on January 1, 2007. Previously, the Company had accounted for tax consequences in accordance with Statement of Financial Accounting Standards 5 (SFAS 5), “Accounting for Contingencies”. As required by
Interpretation No. 48, which clarifies Statement of Financial Accounting Standards 109, “Accounting for Income Taxes”, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant
tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50
percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied Interpretation 48 to all tax positions for which the statute of limitations remained open. As a result of the
implementation of Interpretation 48, the Company recorded no adjustment for future tax benefits.
16
VIRGINIA FINANCIAL GROUP, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The
following discussion provides management’s analysis of the consolidated financial results of operations, financial condition, liquidity and capital resources of Virginia Financial Group, Inc. (“VFG” or the “Company”) and its
affiliates. This discussion and analysis should be read in conjunction with the financial statements and footnotes appearing elsewhere in this report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, other periodic reports filed by VFG under the
Securities Exchange Act of 1934 (the “Exchange Act”) and any other written or oral statements made by or on behalf of VFG may include forward-looking statements that reflect VFG’s current views with respect to future events and
financial performance. VFG intends that such forward-looking statements be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement in
order to claim the protections provided by such safe harbor provisions. Forward-looking statements are not based on historical information, but are related to future operations, strategies, financial results, or other developments. Forward-looking
statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to management at the time the statements are made and are, therefore, subject to various risks, uncertainties, and
other factors that may cause actual results to differ materially from the views and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to:
|
|
•
|
|
Our ability to achieve the earnings expectations related to the businesses that were acquired, or that may be acquired in the future, including our announced plan
to merge with FNB Corporation, which in turn depends on a variety of factors, including:
|
|
|
•
|
|
Our ability to achieve the anticipated cost savings and revenue enhancements with the respect to the acquired operations;
|
|
|
•
|
|
The continued growth of the markets that the acquired entities serve, consistent with recent historical experience;
|
|
|
•
|
|
The difficulties related to the integration of the businesses, including retention of key personnel and integration of information systems.
|
|
|
•
|
|
Competitive pressure in the banking industry or in VFG’s markets may increase significantly,
|
|
|
•
|
|
Changes in the interest rate environment may reduce margins,
|
|
|
•
|
|
General economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration,
|
|
|
•
|
|
Changes may occur in banking legislation and regulation,
|
|
|
•
|
|
Changes may occur in general business conditions, and
|
|
|
•
|
|
Changes may occur in the securities markets.
|
When
we use words such as “believes”, “expects”, “anticipates” or similar expressions, we are making forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which
reflect management’s analysis only as of the date thereof. VFG undertakes no obligation to update or revise any forward-looking statements.
17
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Virginia Financial Group, Inc. is a bank holding company incorporated under the laws of the Commonwealth of Virginia. Currently, VFG is one of the largest independent bank holding companies headquartered in the Commonwealth of Virginia.
Affiliates of VFG include: Planters Bank & Trust Company of Virginia—in Staunton, Second Bank & Trust—in Fredericksburg and Virginia Commonwealth Trust Company—in Culpeper. The organization has a network of
thirty-five branches serving a contiguous market throughout central, south central and southwest Virginia. Virginia Commonwealth Trust Company has offices in Culpeper, Charlottesville, Fredericksburg, Harrisonburg and Staunton.
Critical Accounting Policies
General
The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States “GAAP”. The financial
information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate
value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining inherent losses in our loan portfolio. Actual losses could differ
significantly from the historical factors that we use.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have been incurred, but not realized through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The Company’s
banking subsidiaries conduct an analysis of the loan portfolio on a regular basis. This analysis is used in assessing the sufficiency of the allowance for loan losses and in the determination of the necessary provision for loan losses. The review
process generally begins with lenders identifying problem loans to be reviewed on an individual basis for impairment. When a loan has been identified as impaired, a specific reserve may be established based on management’s calculation of the
loss embedded in the individual loan. In addition to impairment testing, the banking subsidiaries have an eight point grading system for each non-homogeneous loan in the portfolio. Loans meeting the criteria for impairment are segregated for
analysis from performing loans within the portfolio. Loans are then grouped by loan type and, in the case of commercial and construction loans, by risk rating. Each loan type is assigned an allowance factor based on historical loss experience,
economic conditions, and overall portfolio quality including delinquency rates and commercial real estate loan concentrations. The total of specific reserves required for impaired classified loans and the calculated reserves by loan category are
then used to compute an estimated range of losses which is then compared to the recorded allowance for loan losses. This is the methodology used to determine the sufficiency of the allowance for loan losses and the amount of the provision for loan
losses. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays
and payment shortfalls generally are not classified as impaired.
18
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and
interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market
price, or the fair value of the collateral if the loan is collateral dependent. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Goodwill
The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other
Intangible Assets” (“SFAS 142”), effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by
applying a fair value based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and
amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS 142 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS 142. The cost of purchased
deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed fifteen years. Amortization expense charged to operations was $485 thousand and $417 thousand for the
nine months ended September 30, 2007 and 2006, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the
temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred taxes are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation
The Company has a stock-based employee compensation plan under which nonqualified stock options may be granted periodically to certain employees. The
Company’s stock options typically have an exercise price equal to at least the fair value of the stock on the date of grant, and vest based on continued service with the Company for a specified period, generally five years. The Company has
adopted SFAS 123R, which requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.
SFAS 123R also requires that new awards to employees eligible for retirement prior to the award becoming fully vested be recognized as compensation cost over the period
through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award.
19
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Non-GAAP Financial Measures
This report refers to the efficiency ratio, which is computed by dividing non-interest expense by the sum of net interest income on a tax equivalent basis and non-interest income excluding gains or losses on
securities, fixed assets and foreclosed assets. This is a non-GAAP financial measure that we believe provides investors with important information regarding our operational efficiency. Such information is not in accordance with generally accepted
accounting principles and should not be construed as such. Management believes such financial information is meaningful to the reader in understanding operating performance, but cautions that such information not be viewed as a substitute for GAAP.
VFG, in referring to its net income, is referring to income under GAAP.
Results of Operations
VFG’s third quarter 2007 earnings were $4.3 million, down 14.7% from $5.1 million for the third quarter of 2006. Net income per diluted share was $0.40, down 14.9%
from $0.47 for the same period in 2006. VFG’s earnings for the third quarter of 2007 produced an annualized return on average assets (“ROA”) of 1.10% and an annualized return on average equity (“ROE”) of 10.96%, compared to
prior year ratios of 1.27% and 13.88%, respectively. For the first nine months of 2007, net income was $12.9 million, down 12.8% from $14.8 million for the same period in 2006. Net income per diluted share was $1.19, down 12.5% from $1.36 for the
first nine months of 2006. ROA and ROE for the nine month period ended September 30, 2007 were 1.09% and 11.19%, respectively, compared to 1.27% and 13.88% for the same period in 2006.
Net Interest Income
Net interest income amounted to $14.4 million
for the third quarter of 2007, down $767 thousand or 5.1% compared with $15.2 million for the same quarter in 2006. The net interest margin for the third quarter of 2007 was 4.06%, down fifteen basis points when compared to 4.21% for the third
quarter of 2006. Higher funding costs associated with competition for deposits in local markets and greater use of wholesale funding, coupled with a lower rate of growth in loans receivable and average earning assets, led to this decrease in net
interest margin and revenues for the period.
On a sequential basis, the net interest margin was down seven basis points from the 4.13% margin for the
second quarter (normalized for previously disclosed interest adjustment on a participation loan). This drop was due in most part to a drop in asset yields sequentially, with an average yield on assets of 6.87% for the third quarter of 2007, compared
to 6.99% for the second quarter of 2007 and 6.78% for the third quarter of 2006. Loan yields were impacted by prepayment activity, the Federal Open Market Committee recent reduction of the Fed funds target rate which led to a fifty basis point
decrease in the prime rate and an increase in non-accruals for the period. On a linked quarter basis, the average cost of interest bearing liabilities remained stable at 3.43% for the both the second and third quarters of 2007 and increased
twenty-four basis points when compared to 3.19% for the third quarter of 2006.
The net interest margin for the nine month period ended September 30,
2007 was 4.11%, compared to 4.31% for the same period in 2006. Continuing pressures of a flat yield curve, loan prepayment activity, strong competition for deposits and increased use of wholesale funding contributed to this contraction. Given that
approximately 34% of VFG’s loan portfolio immediately repriced with the fifty basis point decrease in the prime rate during the third quarter, and the fact that VFG’s balance sheet is slightly asset sensitive, some additional margin
contraction is anticipated in the fourth quarter.
20
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
(unaudited)
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Average
|
|
Interest
|
|
Average
|
|
|
Average
|
|
Interest
|
|
Average
|
|
|
Dollars in thousands
|
|
Balance
|
|
Inc/Exp
|
|
Rates
|
|
|
Balance
|
|
Inc/Exp
|
|
Rates
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
1,199,114
|
|
$
|
21,930
|
|
7.26
|
%
|
|
$
|
1,192,675
|
|
$
|
21,658
|
|
7.20
|
%
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
165,128
|
|
|
1,888
|
|
4.47
|
%
|
|
|
171,150
|
|
|
1,903
|
|
4.41
|
%
|
|
Tax exempt
|
|
|
93,275
|
|
|
1,419
|
|
5.95
|
%
|
|
|
84,315
|
|
|
1,299
|
|
6.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
258,403
|
|
|
3,307
|
|
5.01
|
%
|
|
|
255,465
|
|
|
3,202
|
|
4.97
|
%
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
545
|
|
|
4
|
|
2.87
|
%
|
|
|
575
|
|
|
5
|
|
3.45
|
%
|
|
Federal funds sold
|
|
|
667
|
|
|
9
|
|
5.28
|
%
|
|
|
28,174
|
|
|
381
|
|
5.37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
259,615
|
|
|
3,320
|
|
5.01
|
%
|
|
|
284,214
|
|
|
3,588
|
|
5.01
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
1,458,729
|
|
|
25,250
|
|
6.87
|
%
|
|
|
1,476,889
|
|
|
25,246
|
|
6.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonearning assets
|
|
|
107,662
|
|
|
|
|
|
|
|
|
110,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,566,391
|
|
|
|
|
|
|
|
$
|
1,587,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
172,637
|
|
$
|
46
|
|
0.11
|
%
|
|
$
|
166,206
|
|
$
|
240
|
|
0.57
|
%
|
|
Money market
|
|
|
138,217
|
|
|
789
|
|
2.26
|
%
|
|
|
170,955
|
|
|
1,020
|
|
2.37
|
%
|
|
Savings
|
|
|
89,573
|
|
|
423
|
|
1.87
|
%
|
|
|
104,623
|
|
|
179
|
|
0.68
|
%
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than $100,000
|
|
|
390,529
|
|
|
4,105
|
|
4.17
|
%
|
|
|
406,289
|
|
|
4,040
|
|
3.95
|
%
|
|
$100,000 and more
|
|
|
194,095
|
|
|
2,271
|
|
4.64
|
%
|
|
|
194,008
|
|
|
2,122
|
|
4.34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
985,051
|
|
|
7,634
|
|
3.07
|
%
|
|
|
1,042,081
|
|
|
7,601
|
|
2.89
|
%
|
|
|
|
|
|
|
|
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
13,899
|
|
|
190
|
|
5.35
|
%
|
|
|
1,829
|
|
|
25
|
|
5.42
|
%
|
|
Federal Home Loan Bank advances
|
|
|
91,440
|
|
|
1,206
|
|
5.16
|
%
|
|
|
69,348
|
|
|
860
|
|
4.92
|
%
|
|
Subordinated debt
|
|
|
20,619
|
|
|
426
|
|
8.08
|
%
|
|
|
20,619
|
|
|
434
|
|
8.35
|
%
|
|
Commercial paper
|
|
|
76,399
|
|
|
844
|
|
4.32
|
%
|
|
|
56,092
|
|
|
658
|
|
4.65
|
%
|
|
Other borrowings
|
|
|
1,157
|
|
|
12
|
|
4.06
|
%
|
|
|
374
|
|
|
4
|
|
4.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,514
|
|
|
2,678
|
|
5.15
|
%
|
|
|
148,262
|
|
|
1,981
|
|
5.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,188,565
|
|
|
10,312
|
|
3.43
|
%
|
|
|
1,190,343
|
|
|
9,582
|
|
3.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
221,368
|
|
|
|
|
|
|
|
|
252,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,409,933
|
|
|
|
|
|
|
|
|
1,442,816
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
156,458
|
|
|
|
|
|
|
|
|
144,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,566,391
|
|
|
|
|
|
|
|
$
|
1,587,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax equivalent)
|
|
|
|
|
$
|
14,938
|
|
|
|
|
|
|
|
$
|
15,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate spread
|
|
|
|
|
|
|
|
3.44
|
%
|
|
|
|
|
|
|
|
3.59
|
%
|
|
Interest expense as percentage of average earning assets
|
|
|
|
|
|
|
|
2.80
|
%
|
|
|
|
|
|
|
|
2.57
|
%
|
|
Net interest margin
|
|
|
|
|
|
|
|
4.06
|
%
|
|
|
|
|
|
|
|
4.21
|
%
|
21
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
(unaudited)
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Average
|
|
Interest
|
|
Average
|
|
|
Average
|
|
Interest
|
|
Average
|
|
|
Dollars in thousands
|
|
Balance
|
|
Inc/Exp
|
|
Rates
|
|
|
Balance
|
|
Inc/Exp
|
|
Rates
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans receivable, net
|
|
$
|
1,209,413
|
|
$
|
66,272
|
|
7.33
|
%
|
|
$
|
1,179,781
|
|
$
|
61,996
|
|
7.03
|
%
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
|
|
168,024
|
|
|
5,697
|
|
4.47
|
%
|
|
|
159,480
|
|
|
5,139
|
|
4.31
|
%
|
|
Tax exempt
|
|
|
93,996
|
|
|
4,295
|
|
6.03
|
%
|
|
|
83,102
|
|
|
3,852
|
|
6.20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
|
262,020
|
|
|
9,992
|
|
5.03
|
%
|
|
|
242,582
|
|
|
8,991
|
|
4.96
|
%
|
|
|
|
|
|
|
|
|
|
Interest bearing deposits
|
|
|
516
|
|
|
14
|
|
3.58
|
%
|
|
|
3,439
|
|
|
70
|
|
2.72
|
%
|
|
Federal funds sold
|
|
|
1,710
|
|
|
70
|
|
5.40
|
%
|
|
|
27,148
|
|
|
790
|
|
3.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264,246
|
|
|
10,076
|
|
5.03
|
%
|
|
|
273,169
|
|
|
9,851
|
|
4.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earning assets
|
|
|
1,473,659
|
|
|
76,348
|
|
6.93
|
%
|
|
|
1,452,950
|
|
|
71,847
|
|
6.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonearning assets
|
|
|
111,812
|
|
|
|
|
|
|
|
|
104,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,585,471
|
|
|
|
|
|
|
|
$
|
1,557,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
|
$
|
165,530
|
|
$
|
179
|
|
0.14
|
%
|
|
$
|
173,469
|
|
$
|
683
|
|
0.53
|
%
|
|
Money market
|
|
|
155,812
|
|
|
2,943
|
|
2.53
|
%
|
|
|
164,785
|
|
|
2,399
|
|
1.95
|
%
|
|
Savings
|
|
|
93,835
|
|
|
1,050
|
|
1.50
|
%
|
|
|
111,483
|
|
|
548
|
|
0.66
|
%
|
|
Time deposits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than $100,000
|
|
|
401,010
|
|
|
12,738
|
|
4.25
|
%
|
|
|
390,365
|
|
|
10,833
|
|
3.71
|
%
|
|
$100,000 and more
|
|
|
203,978
|
|
|
7,098
|
|
4.65
|
%
|
|
|
184,747
|
|
|
5,693
|
|
4.12
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
1,020,165
|
|
|
24,008
|
|
3.15
|
%
|
|
|
1,024,849
|
|
|
20,156
|
|
2.63
|
%
|
|
Federal funds purchased and securities sold under agreements to repurchase
|
|
|
10,067
|
|
|
415
|
|
5.44
|
%
|
|
|
12,074
|
|
|
173
|
|
1.92
|
%
|
|
Federal Home Loan Bank advances
|
|
|
75,869
|
|
|
2,951
|
|
5.13
|
%
|
|
|
60,470
|
|
|
2,065
|
|
4.57
|
%
|
|
Subordinated debt
|
|
|
20,619
|
|
|
1,264
|
|
8.08
|
%
|
|
|
20,619
|
|
|
1,210
|
|
7.85
|
%
|
|
Commercial paper
|
|
|
69,983
|
|
|
2,388
|
|
4.50
|
%
|
|
|
45,142
|
|
|
1,491
|
|
4.42
|
%
|
|
Other borrowings
|
|
|
741
|
|
|
28
|
|
4.98
|
%
|
|
|
365
|
|
|
17
|
|
6.23
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
177,279
|
|
|
7,046
|
|
5.24
|
%
|
|
|
138,670
|
|
|
4,956
|
|
4.78
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,197,444
|
|
|
31,054
|
|
3.46
|
%
|
|
|
1,163,519
|
|
|
25,112
|
|
2.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total noninterest-bearing liabilities
|
|
|
234,070
|
|
|
|
|
|
|
|
|
252,178
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,431,514
|
|
|
|
|
|
|
|
|
1,415,697
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
153,957
|
|
|
|
|
|
|
|
|
141,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,585,471
|
|
|
|
|
|
|
|
$
|
1,557,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income (tax equivalent)
|
|
|
|
|
$
|
45,294
|
|
|
|
|
|
|
|
$
|
46,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest rate spread
|
|
|
|
|
|
|
|
3.47
|
%
|
|
|
|
|
|
|
|
3.73
|
%
|
|
Interest expense as percentage of average earning assets
|
|
|
|
|
|
|
|
2.82
|
%
|
|
|
|
|
|
|
|
2.31
|
%
|
|
Net interest margin
|
|
|
|
|
|
|
|
4.11
|
%
|
|
|
|
|
|
|
|
4.31
|
%
|
22
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Noninterest Income
Total non-interest income was $4.3 million for both the second and third quarters of 2007 and up 4.7% compared with $4.1 million for the third quarter of 2006. Retail banking fee income increased $215 thousand or 12.0% to $2.0 million,
compared to $1.8 million in the third quarter of 2006. The increase in retail banking fee income is a result of increased NSF fees and debit card fee income, partly attributable to the High Performance Checking Account Program. Mortgage banking
revenue amounted to $602 thousand, a decrease of $84 thousand or 12.2%, as compared to $686 thousand for the third quarter of 2006, and down sequentially $43 thousand or 6.7% from the second quarter of 2007. Revenues from trust and brokerage for the
third quarter were $1.0 million, up $143 thousand or 15.9% compared to $897 thousand in the third quarter of 2006, and down sequentially $111 thousand or 9.6% from the second quarter of 2007. Fiduciary and brokerage assets under management were $617
million at September 30, 2007, down from $633 million at June 30, 2007. Included in other non-interest income during third quarter 2007 was income associated with an investment in bank owned life insurance of $135 thousand for the third
quarter 2007 and $366 thousand for the nine month period, compared to $119 thousand in 2006 for each period, respectively.
Noninterest Expense
Non-interest expense for the third quarter of 2007 amounted to $12.4 million, up $463 thousand or 3.9% from $11.9 million for the same period in 2006, and
down sequentially $466 thousand or 3.6% from the second quarter of 2007. Compensation and benefits decreased $402 thousand or 5.7% sequentially from second quarter 2007 and $72 thousand or 1.0% compared to third quarter 2006, reflecting reductions
associated with five branch closings during the quarter and previous initiatives to improve efficiency. Marketing increases of $87 thousand or 22.1% sequentially, and $148 thousand or 44.6% as compared to the third quarter of 2006 are attributable
to the previously announced High Performance Checking Account Program. Other expense increased $102 thousand or 5.6% from second quarter 2007, and $220 thousand or 12.56% compared to third quarter 2006, reflecting an increase in various fraud
related losses ($198 thousand) incurred during the quarter in the normal course of business.
For the nine month period ended September 30, 2007,
non-interest expense amounted to $37.5 million, an increase of $2.7 million or 7.7% over $34.9 million for the same period in 2006. This increase reflects incremental operating costs primarily in compensation, occupancy and supplies of $1.3 million
associated with four branches and two loan production offices during 2006 and 2007, respectively. Additionally, the DDA account acquisition initiative mentioned previously contributed approximately $355 thousand to this increase during the nine
month period. VFG’s efficiency ratio was 64.7% for the quarter, compared to 60.8% for the same quarter in 2006. For the nine month period ended September 30, 2007, the efficiency ratio was 65.0%, compared to 59.6% for the same period in
2006.
Income Taxes
Income tax expense for the third
quarter of 2007 was $1.7 million, resulting in an effective tax rate of 28.8% compared to $2.2 million, or 30.6%, for the third quarter of 2006. For the nine month period ended September 30, 2007, income tax expense amounted to $5.3 million,
resulting in an effective tax rate of 29.2% compared to $6.5 million, or 30.7% for the same period in 2006. The decrease in the effective tax rate for the nine month period is a result of tax free income generated by the purchase of bank owned life
insurance in July 2006, and an increase in earnings from tax-exempt securities as a percentage of total income. The average balance of tax-exempt securities for the third quarter of 2007 increased by $9.0 million over the same period last year,
resulting in an increase in related tax-exempt interest income.
23
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Asset Quality
VFG’s ratio of non-performing assets as a percentage of total assets amounted to 0.47% as of September 30, 2007, compared to 0.18% at September 30, 2006 and 0.20% at June 30, 2007. Net charge-offs as a percentage of
average loans receivable amounted to 0.03% for the quarter ended September 30, 2007, compared to net recoveries of (0.02%) for the same period in 2006. At September 30, 2007, the allowance for loan losses was approximately two times the
level of non-performing assets, while the allowance as a percentage of total loans amounted to 1.21%. VFG recorded a provision for loan losses of $200 thousand for the third quarter, compared to no provision for the three months ended
September 30, 2006. The increase in non-performing assets and provision for loan losses is a result of a $4.1 million commercial real estate loan that was put on nonaccrual status during the quarter coupled with a continuing decline in the real
estate market conditions in VFG’s primary markets. For the nine month period, the provision for loan losses amounted to $365 thousand, compared to net charge-offs of $248 thousand for the period.
The following table provides information on asset quality statistics for the periods presented (In thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
September 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
Non-accrual loans
|
|
$
|
7,487
|
|
|
$
|
2,999
|
|
|
$
|
2,757
|
|
|
Troubled debt restructurings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Foreclosed assets
|
|
|
—
|
|
|
|
38
|
|
|
|
123
|
|
|
Loans past due 90 days accruing interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
7,487
|
|
|
$
|
3,037
|
|
|
$
|
2,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total assets
|
|
|
0.47
|
%
|
|
|
0.19
|
%
|
|
|
0.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to loans and foreclosed property
|
|
|
0.62
|
%
|
|
|
0.25
|
%
|
|
|
0.24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percentage of loans receivable
|
|
|
1.21
|
%
|
|
|
1.19
|
%
|
|
|
1.19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses as a percentage of nonperforming assets
|
|
|
195.23
|
%
|
|
|
477.44
|
%
|
|
|
496.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annualized net charge-offs (recoveries) as a percentage of average loans receiveable
|
|
|
0.03
|
%
|
|
|
(0.01
|
)%
|
|
|
(0.02
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
Capital Resources
The management of capital in a regulated financial services industry must properly balance return
on equity to stockholders while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. Additionally, capital management must also consider acquisition opportunities that may exist, and the
resulting accounting treatment. The Company’s capital management strategies have been developed to provide attractive rates of returns to stockholders, while maintaining its “well-capitalized” position at each of the banking
subsidiaries.
The primary source of additional capital to the Company is earnings retention, which represents net income less dividends declared. During
the nine months ended September 30, 2007, the Company retained $7.7 million, or 59.7% of its net income. Stockholders’ equity increased by $8.5 million, reflecting the earnings retention, stock based compensation and option exercises
totaling $368 thousand and an increase of $440 thousand in accumulated comprehensive income net of tax.
The Company and its banking subsidiaries are
subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company and the subsidiary banks’ financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and its banking subsidiaries
must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and reclassifications are also subject
to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Company and its banking subsidiaries to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. As of September 30, 2007, the Company and the subsidiary banks met all minimum capital
adequacy requirements to which they are subject and are categorized as “well capitalized.” There are no conditions or events that management believes have changed the subsidiary banks’ well capitalized position.
The following table includes information with respect to the Company’s risk-based capital and equity levels as of September 30, 2007 (In thousands):
|
|
|
|
|
|
|
Tier 1 capital
|
|
$
|
162,622
|
|
|
Tier 2 capital
|
|
|
14,733
|
|
|
Total risk-based capital
|
|
|
177,355
|
|
|
Total risk-weighted assets
|
|
|
1,349,108
|
|
|
Average adjusted total assets
|
|
|
1,550,470
|
|
|
Capital ratios:
|
|
|
|
|
|
Tier 1 risk-based capital ratio
|
|
|
12.05
|
%
|
|
Total risk-based capital ratio
|
|
|
13.15
|
%
|
|
Leverage ratio (Tier 1 capital to average adjusted total assets)
|
|
|
10.49
|
%
|
|
Equity to assets ratio
|
|
|
10.03
|
%
|
|
Tangible equity to assets ratio
|
|
|
9.04
|
%
|
25
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity
Liquidity is identified as the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate withdrawals, payments of debt, and increased loan demand. These events may occur daily or other
short-term intervals in the normal operation of the business. Experience helps management predict time cycles in the amount of cash required. In assessing liquidity, management gives consideration to relevant factors including stability of deposits,
quality of assets, economy of markets served, concentrations of business and industry, competition, and the Company’s overall financial condition. The Company’s primary sources of liquidity are cash, securities in our available for sale
portfolio and a $15 million line of credit with a correspondent bank. In addition, the Banks have substantial lines of credit from their correspondent banks and access to the Federal Reserve discount window and Federal Home Loan Bank of Atlanta to
support liquidity as conditions dictate.
The liquidity of the Company also represents an important aspect of liquidity management. The Company’s cash
outflows consist of overhead associated with corporate expenses, executive management, finance, marketing, human resources, loan and deposit operations, information technology, audit, compliance and loan review functions. It also includes outflows
associated with dividends to shareholders. The main sources of funding for the Company are the management fees and dividends it receives from its banking and trust subsidiaries, a working line of credit with a correspondent bank, and availability of
the subordinated debt security market as deemed necessary. The Company’s capital base provides the resource and ability to support the assets of the Company and provide capital for future expansion.
In the judgment of management, the Company maintains the ability to generate sufficient amounts of cash to cover normal requirements and any additional funds as needs
may arise.
Off Balance Sheet Items
There have been no
material changes to the off balance sheet items disclosed in “Management’s Discussion and Analysis” in VFG’s annual report on Form 10-K for the fiscal year ended December 31, 2006.
Contractual Obligations
There have been no material changes outside
the ordinary course of business to the contractual obligations disclosed in VFG’s annual report on Form 10-K for the fiscal year ended December 31, 2006.
Effects of Inflation
The effect of changing prices on financial institutions is typically different from other industries as the
Company’s assets and liabilities are monetary in nature. Interest rates and thus the Company’s asset liability management is impacted by changes in inflation, but there is not a direct correlation between the two measures. Management
monitors the impact of inflation on the financial markets.
26
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Access to Filings
The Company provides access to its SEC filings through the corporate Website at
www.vfgi.net
. After accessing the Website, the filings are available upon selecting the SEC Filings & Other Documents icon. Reports available
include the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC.