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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2006
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-22283
Virginia Financial Group, Inc.
(Exact name of registrant as specified in its charter)
Virginia | 54-1829288 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
102 South Main Street, Culpeper, Virginia | 22701 | |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code) 540-829-1633
(Former name, former address and former fiscal year, if changed since last report)
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 report(s), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b – 2 of the Exchange Act). Yes ¨ No x
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.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes x No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 10,771,680 shares of Common Stock, par value $1.00 per share, were outstanding as of November 5, 2006.
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VIRGINIA FINANCIAL GROUP, INC.
INDEX
PART I - FINANCIAL INFORMATION
Page No. | ||||
ITEM 1 | Consolidated Financial Statements: | |||
Consolidated Balance Sheets | 3 | |||
Consolidated Statements of Income | 4-5 | |||
Consolidated Statements of Changes in Stockholders’ Equity | 6 | |||
Consolidated Statements of Cash Flows | 7-8 | |||
Notes to Consolidated Financial Statements | 9-20 | |||
ITEM 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21-31 | ||
ITEM 3 | Quantitative and Qualitative Disclosures About Market Risk | 31 | ||
ITEM 4 | Controls and Procedures | 31 | ||
PART II - OTHER INFORMATION | ||||
ITEM 1 | Legal Proceedings | 32 | ||
ITEM 1a | Risk Factors | 32 | ||
ITEM 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 32 | ||
ITEM 3 | Defaults Upon Senior Securities | 32 | ||
ITEM 4 | Submission of Matters to a Vote of Security Holders | 32 | ||
ITEM 5 | Other Information | 33 | ||
ITEM 6 | Exhibits | 33 |
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PART I – FINANCIAL INFORMATION
ITEM 1. | Financial statements |
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, 2006 | DECEMBER 31, 2005 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 39,339 | $ | 33,681 | ||||
Federal funds sold | 5,146 | 9,103 | ||||||
Interest-bearing deposits in banks | 318 | 5,232 | ||||||
Investment securities (market value: 2006, $271,134; 2005, $247,758) | 271,115 | 247,651 | ||||||
Loans held for sale | 5,657 | 9,223 | ||||||
Loans receivable, net of allowance for loan losses, 2006, $14,312; 2005, $13,581 | 1,190,501 | 1,129,495 | ||||||
Bank premises and equipment, net | 32,227 | 33,675 | ||||||
Interest receivable | 7,402 | 6,583 | ||||||
Deferred income tax asset | 5,768 | 5,944 | ||||||
Core deposit intangibles, net | 4,031 | 4,449 | ||||||
Goodwill | 13,896 | 13,896 | ||||||
Other real estate owned | 123 | 75 | ||||||
Bank owned life insurance | 10,119 | — | ||||||
Other assets | 6,912 | 6,177 | ||||||
Total assets | $ | 1,592,554 | $ | 1,505,184 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 241,666 | $ | 249,775 | ||||
Interest-bearing | 1,043,856 | 1,005,734 | ||||||
Total deposits | 1,285,522 | 1,255,509 | ||||||
Federal funds purchased and securities sold under agreements to repurchase | — | 15,890 | ||||||
Federal Home Loan Bank advances | 65,000 | 40,000 | ||||||
Trust preferred capital notes | 20,619 | 20,619 | ||||||
Commercial paper | 61,632 | 24,480 | ||||||
Other borrowings | 1,335 | 842 | ||||||
Interest payable | 3,686 | 2,515 | ||||||
Other liabilities | 7,620 | 9,224 | ||||||
Total liabilities | 1,445,414 | 1,369,079 | ||||||
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; | 10,771 | 10,759 | ||||||
Additional paid-in capital | 33,584 | 33,298 | ||||||
Retained earnings | 103,922 | 94,061 | ||||||
Accumulated other comprehensive loss, net | (1,137 | ) | (2,013 | ) | ||||
Total stockholders’ equity | 147,140 | 136,105 | ||||||
Total liabilities and stockholders’ equity | $ | 1,592,554 | $ | 1,505,184 | ||||
See notes to consolidated financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED SEPTEMBER 30, | ||||||
2006 | 2005 | |||||
(unaudited) | (unaudited) | |||||
Interest Income | ||||||
Interest and fees on loans | $ | 21,618 | $ | 18,335 | ||
Interest on deposits in other banks | 5 | 4 | ||||
Interest on investments | 52 | 72 | ||||
Interest and dividends on securities available for sale: | ||||||
Taxable | 1,720 | 1,460 | ||||
Tax exempt | 844 | 641 | ||||
Dividends | 131 | 79 | ||||
Interest income on federal funds sold | 381 | 106 | ||||
Total interest income | 24,751 | 20,697 | ||||
Interest Expense | ||||||
Interest on deposits | 7,601 | 5,195 | ||||
Interest on federal funds purchased and securities sold under agreements to repurchase | 25 | 135 | ||||
Interest on FHLB advances | 860 | 297 | ||||
Interest on trust preferred capital notes | 434 | 328 | ||||
Interest on commercial paper | 658 | 80 | ||||
Interest on other borrowings | 4 | 5 | ||||
Total interest expense | 9,582 | 6,040 | ||||
Net interest income | 15,169 | 14,657 | ||||
Provision for loan losses | — | 503 | ||||
Net interest income after provision for loan losses | 15,169 | 14,154 | ||||
Noninterest Income | ||||||
Retail banking fees | 1,793 | 1,745 | ||||
Commissions and fees from fiduciary activities | 728 | 696 | ||||
Brokerage fee income | 169 | 158 | ||||
Other operating income | 306 | 247 | ||||
Gain on sale of premises and equipment | 216 | 2 | ||||
Gain on sale of mortgage loans | 686 | 1,022 | ||||
Total noninterest income | 3,898 | 3,870 | ||||
Noninterest Expense | ||||||
Compensation and employee benefits | 6,636 | 6,456 | ||||
Net occupancy | 750 | 787 | ||||
Supplies and equipment | 1,042 | 919 | ||||
Amortization-intangible assets | 161 | 158 | ||||
Marketing | 329 | 296 | ||||
State franchise tax | 252 | 208 | ||||
Data processing | 333 | 315 | ||||
Telecommunications | 223 | 273 | ||||
Professional fees | 355 | 232 | ||||
Other operating expenses | 1,678 | 1,450 | ||||
Total noninterest expense | 11,759 | 11,094 | ||||
Income before income taxes | 7,308 | 6,930 | ||||
Income tax expense | 2,239 | 2,211 | ||||
Net income | $ | 5,069 | $ | 4,719 | ||
Earnings per share, basic | $ | .47 | $ | .44 | ||
Earnings per share, diluted | $ | .47 | $ | .43 | ||
See notes to consolidated financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
NINE MONTHS ENDED SEPTEMBER 30, | |||||||
2006 | 2005 | ||||||
(unaudited) | (unaudited) | ||||||
Interest Income | |||||||
Interest and fees on loans | $ | 61,885 | $ | 51,501 | |||
Interest on deposits in other banks | 70 | 11 | |||||
Interest on investments | 206 | 241 | |||||
Interest and dividends on securities available for sale: | |||||||
Taxable | 4,576 | 4,726 | |||||
Tax exempt | 2,504 | 1,937 | |||||
Dividends | 357 | 261 | |||||
Interest income on federal funds sold | 790 | 126 | |||||
Total interest income | 70,388 | 58,803 | |||||
Interest Expense | |||||||
Interest on deposits | 20,157 | 14,815 | |||||
Interest on federal funds purchased and securities sold under agreements to repurchase | 173 | 423 | |||||
Interest on FHLB advances | 2,065 | 936 | |||||
Interest on trust preferred capital notes | 1,209 | 904 | |||||
Interest on commercial paper | 1,491 | 82 | |||||
Interest on other borrowings | 17 | 13 | |||||
Total interest expense | 25,112 | 17,173 | |||||
Net interest income | 45,276 | 41,630 | |||||
Provision for loan losses | 610 | 1,595 | |||||
Net interest income after provision for loan losses | 44,666 | 40,035 | |||||
Noninterest Income | |||||||
Retail banking fees | 5,166 | 5,219 | |||||
Commissions and fees from fiduciary activities | 2,321 | 2,207 | |||||
Brokerage fee income | 566 | 519 | |||||
Other operating income | 722 | 373 | |||||
Gain on sale of premises and equipment | 292 | 427 | |||||
Gain (loss) on sale of securities available for sale | (199 | ) | 296 | ||||
Gain on sale of branches | — | 421 | |||||
Gain on sale of mortgage loans | 2,173 | 2,181 | |||||
Total noninterest income | 11,041 | 11,643 | |||||
Noninterest Expense | |||||||
Compensation and employee benefits | 19,833 | 18,552 | |||||
Net occupancy | 2,248 | 2,184 | |||||
Supplies and equipment | 3,035 | 3,127 | |||||
Amortization-intangible assets | 417 | 485 | |||||
Marketing | 762 | 754 | |||||
State franchise tax | 716 | 662 | |||||
Data processing | 1,024 | 942 | |||||
Telecommunications | 770 | 770 | |||||
Professional fees | 634 | 629 | |||||
Other operating expense | 4,961 | 4,319 | |||||
Total noninterest expense | 34,400 | 32,424 | |||||
Income before income taxes | 21,307 | 19,254 | |||||
Income tax expense | 6,535 | 6,051 | |||||
Net income | $ | 14,772 | $ | 13,203 | |||
Earnings per share, basic | $ | 1.37 | $ | 1.23 | |||
Earnings per share, diluted | $ | 1.36 | $ | 1.22 | |||
See notes to consolidated financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
(In thousands, except per share data)
(unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Comprehensive Income | Total | |||||||||||||||||
Balance, January 1, 2005 | $ | 10,742 | $ | 32,839 | $ | 81,869 | $ | 1,639 | $ | 127,089 | ||||||||||||
Net income | — | — | 13,203 | — | $ | 13,203 | 13,203 | |||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||
Unrealized holding losses arising during the period (net of tax of $1,037) | — | — | — | — | (1,927 | ) | ||||||||||||||||
Reclassification adjustment (net of tax of $104) | — | — | — | — | (192 | ) | — | |||||||||||||||
Other comprehensive loss | — | — | — | (2,119 | ) | (2,119 | ) | (2,119 | ) | |||||||||||||
Total comprehensive income | — | — | — | — | $ | 11,084 | — | |||||||||||||||
Cash dividends ($.41 per share) | — | — | (4,445 | ) | — | (4,445 | ) | |||||||||||||||
Stock-based compensation expense | 5 | 248 | — | — | 253 | |||||||||||||||||
Exercise of stock options | 9 | 119 | — | — | 128 | |||||||||||||||||
Balance, September 30, 2005 | $ | 10,756 | $ | 33,206 | $ | 90,627 | $ | (480 | ) | $ | 134,109 | |||||||||||
Balance, January 1, 2006 | $ | 10,759 | $ | 33,298 | $ | 94,061 | $ | (2,013 | ) | $ | 136,105 | |||||||||||
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 gain | — | — | — | 876 | 876 | 876 | ||||||||||||||||
Total comprehensive income | — | — | — | — | $ | 15,648 | — | |||||||||||||||
Cash dividends ($.45 per share) | — | — | (4,911 | ) | — | (4,911 | ) | |||||||||||||||
Stock-based compensation expense | 9 | 232 | — | — | 241 | |||||||||||||||||
Exercise of stock options | 3 | 54 | — | — | 57 | |||||||||||||||||
Balance, September 30, 2006 | $ | 10,771 | $ | 33,584 | $ | 103,922 | $ | (1,137 | ) | $ | 147,140 | |||||||||||
See notes to consolidated financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30, | ||||||||
2006 | 2005 | |||||||
(unaudited) | (unaudited) | |||||||
OPERATING ACTIVITIES | ||||||||
Net income | $ | 14,772 | $ | 13,203 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 2,113 | 2,267 | ||||||
Amortization of intangible assets | 417 | 485 | ||||||
Provision for loan losses | 610 | 1,595 | ||||||
Write-downs of other real estate | — | 15 | ||||||
Deferred tax benefit | (294 | ) | (556 | ) | ||||
Employee benefit plan expense | 163 | 143 | ||||||
Stock-based compensation expense | 241 | 253 | ||||||
Gain on sale of premises and equipment | (292 | ) | (427 | ) | ||||
(Gain) loss on sale of securities available for sale | 199 | (296 | ) | |||||
Gain on sale of branches | — | (421 | ) | |||||
Gain on sale of mortgage loans | (2,173 | ) | (2,181 | ) | ||||
Proceeds from sale of mortgage loans | 107,690 | 117,744 | ||||||
Origination of mortgage loans for sale | (101,951 | ) | (121,744 | ) | ||||
Amortization of security premiums and accretion of discounts, net | 66 | 427 | ||||||
Changes in assets and liabilities: | ||||||||
Increase in accrued interest receivable | (819 | ) | (247 | ) | ||||
(Increase) decrease in other assets | (10,854 | ) | 607 | |||||
Increase (decrease) in accrued interest payable | 1,171 | (54 | ) | |||||
(Decrease) increase in other liabilities | (1,761 | ) | 109 | |||||
Net cash provided by operating activities | $ | 9,298 | $ | 10,922 | ||||
INVESTING ACTIVITIES | ||||||||
Proceeds from maturities and principal payments of securities available for sale | $ | 49,604 | $ | 71,828 | ||||
Proceeds from sales and calls of securities available for sale | 22,046 | 3,965 | ||||||
Purchase of securities available for sale | (94,036 | ) | (7,058 | ) | ||||
Net increase in loans | (61,739 | ) | (112,699 | ) | ||||
Proceeds from sale of premises and equipment | 5,972 | 442 | ||||||
Purchase of premises and equipment | (6,346 | ) | (7,971 | ) | ||||
Proceeds from sale of other real estate | 75 | 50 | ||||||
Sale of branches, net of cash | — | (11,731 | ) | |||||
Net cash used in investing activities | $ | (84,424 | ) | $ | (63,174 | ) | ||
See notes to consolidated financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30, | ||||||||
2006 | 2005 | |||||||
(unaudited) | (unaudited) | |||||||
FINANCING ACTIVITIES | ||||||||
Net (decrease) increase in demand, money market and savings deposits | $ | (44,749 | ) | $ | 22,546 | |||
Net increase in certificates of deposit | 74,761 | 11,120 | ||||||
Net decrease in federal funds purchased and securities sold under agreement to repurchase | (15,890 | ) | (5,505 | ) | ||||
Proceeds from Federal Home Loan Bank advances | 81,000 | 30,000 | ||||||
Principal payments on Federal Home Loan Bank advances | (56,000 | ) | (9,060 | ) | ||||
Net increase in commercial paper | 37,152 | 15,965 | ||||||
Net increase in other borrowings | 493 | 5,051 | ||||||
Proceeds from exercise of stock options | 57 | 128 | ||||||
Cash dividends paid | (4,911 | ) | (4,445 | ) | ||||
Net cash provided by financing activities | $ | 71,913 | $ | 65,800 | ||||
(Decrease) increase in cash and cash equivalents | $ | (3,213 | ) | $ | 13,548 | |||
CASH AND CASH EQUIVALENTS | ||||||||
Beginning of the period | 48,016 | 39,326 | ||||||
End of the period | $ | 44,803 | $ | 52,874 | ||||
Supplemental Schedule of Noncash Investing/Financing Activities | ||||||||
Other real estate acquired in settlement of loans | $ | 123 | $ | 101 | ||||
Unrealized gain (loss) on securities available for sale | $ | 1,336 | $ | (3,260 | ) | |||
Stock-based compensation expense | $ | 241 | $ | 253 | ||||
See notes to consolidated financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO 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 and its subsidiary, Second Service Company; Virginia Heartland Bank and its subsidiary, Virginia Heartland Service Corporation; Planters Bank & Trust Company of Virginia and its subsidiary, Planters Insurance Agency, Inc.; Virginia Commonwealth Trust Company, 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 (consisting of only normal recurring accruals) necessary to present fairly the financial position as of September 30, 2006 and December 31, 2005, the results of operations for the three and nine months ended September 30, 2006 and 2005, and cash flows for the nine months ended September 30, 2006 and 2005. 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, 2005. |
2. | The results of operations for the nine month period ended September 30, 2006 and 2005 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, 2006 | December 31, 2005 | |||||||
(unaudited) | ||||||||
Real estate loans: | ||||||||
Construction | $ | 192,113 | $ | 115,944 | ||||
Secured by 1 – 4 family residential | 302,706 | 310,719 | ||||||
Commercial and multifamily | 566,497 | 593,396 | ||||||
Commercial, financial and agricultural loans | 101,920 | 78,110 | ||||||
Consumer loans | 34,134 | 40,876 | ||||||
All other loans | 6,585 | 3,486 | ||||||
1,203,955 | 1,142,531 | |||||||
Deferred loan costs | 858 | 545 | ||||||
Allowance for loan losses | (14,312 | ) | (13,581 | ) | ||||
$ | 1,190,501 | $ | 1,129,495 | |||||
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | Activity in the allowance for loan losses is as follows (In thousands): |
September 30, 2006 | December 31 2005 | September 30, 2005 | ||||||||||
(unaudited) | (unaudited) | |||||||||||
Balance, January 1 | $ | 13,581 | $ | 11,706 | $ | 11,706 | ||||||
Recoveries | 436 | 315 | 230 | |||||||||
Loan charged off | (315 | ) | (452 | ) | (403 | ) | ||||||
Provision for loan losses | 610 | 2,012 | 1,595 | |||||||||
Balance, ending | $ | 14,312 | $ | 13,581 | $ | 13,128 | ||||||
Information about impaired loans as of the periods indicated is as follows (In thousands):
September 30, 2006 | December 31, 2005 | |||||
(unaudited) | ||||||
Impaired loans for which an allowance has been provided | $ | 2,129 | $ | 1,710 | ||
Impaired loans for which an allowance has not been provided | 5,366 | 3,705 | ||||
Total impaired loans | 7,495 | 5,415 | ||||
Allowance provided for impaired loans, included in the allowance for loan losses | $ | 421 | $ | 684 | ||
5. | Commercial Paper and Other Borrowings: |
In 2005 the Company initiated 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 $61.6 million and $24.5 million at September 30, 2006 and December 31, 2005, 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, 2006 and December 31, 2005, respectively.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO 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.
Short-term debt consists of the following at September 30, 2006 (In thousands):
Commercial paper | $ | 61,632 | |
Other borrowings | 1,335 | ||
$ | 62,967 | ||
Selected information on short-term debt is as follows (In thousands):
Three Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
(unaudited) | (unaudited) | |||||||
End of period balance | $ | 62,967 | $ | 16,831 | ||||
Average balance | 56,466 | 10,789 | ||||||
Weighted average rate | 4.48 | % | 2.56 | % | ||||
Maximum balance of any month-end during the period | 62,967 | 16,831 | ||||||
Nine Months Ended September 30, | ||||||||
2006 | 2005 | |||||||
(unaudited) | (unaudited) | |||||||
End of period balance | $ | 62,967 | $ | 16,831 | ||||
Average balance | 45,507 | 4,701 | ||||||
Weighted average rate | 4.24 | % | 2.41 | % | ||||
Maximum balance of any month-end during the period | 62,967 | 16,831 |
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. | Earnings Per Share: |
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, 2006 and 2005. Potential dilutive stock had no effect on income available to common stockholders.
2006 | 2005 | |||||||||
Weighted Average Shares | Per Share Amount | Weighted Average Shares | Per Share Amount | |||||||
(unaudited) | (unaudited) | |||||||||
Basic earnings per share | 10,771,661 | $ | .47 | 10,755,788 | $ | .44 | ||||
Effect of dilutive securities: | ||||||||||
Restricted shares | 29,865 | — | 28,372 | — | ||||||
Stock options | 55,309 | — | 44,709 | .01 | ||||||
Diluted earnings per share | 10,856,835 | $ | .47 | 10,828,869 | $ | .43 | ||||
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, 2006 and 2005. Potential dilutive stock had no effect on income available to common stockholders.
2006 | 2005 | |||||||||
Weighted Average Shares | Per Share Amount | Weighted Average Shares | Per Share Amount | |||||||
(unaudited) | (unaudited) | |||||||||
Basic earnings per share | 10,769,170 | $ | 1.37 | 10,750,421 | $ | 1.23 | ||||
Effect of dilutive securities: | ||||||||||
Restricted shares | 29,252 | — | 28,832 | — | ||||||
Stock options | 52,736 | .01 | 42,955 | .01 | ||||||
Diluted earnings per share | 10,851,158 | $ | 1.36 | 10,822,208 | $ | 1.22 | ||||
In 2006 and 2005, stock options representing 59,152 and 12,390 shares, respectively, were not included in the calculation of earnings per share as their effect would have been anti-dilutive.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. | Stock-Based Compensation: |
The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method and as such, results for prior periods have not been restated. Prior to January 1, 2006, the value of restricted stock awards was expensed by the Company over the restriction period, and no compensation expense was recognized for stock option grants as all such grants had an exercise price not less than fair market value on the date of grant.
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 three month and nine month period ended September 30, 2006 is $107 thousand and $241 thousand of stock-based compensation. As a result of adopting SFAS 123R on January 1, 2006, incremental stock-based compensation expense recognized was $60 thousand ($42 thousand after tax) and $140 thousand ($97 thousand after tax) for the three and nine months ended September 30, 2006. Both basic and diluted earnings per share were each reduced by $.01 per share for the nine month period. Stock based compensation had no effect on any other per share data presented.
The following illustrates the effect on net income (In thousands) and earnings per share if the Company had applied the fair value method of SFAS No. 123R prior to January 1, 2006.
Three Months Ended September 30, 2005 | Nine Months Ended September 30, 2005 | |||||||
(unaudited) | (unaudited) | |||||||
Net income, as reported | $ | 4,719 | $ | 13,203 | ||||
Less: pro forma stock option compensation expense, net of tax | (20 | ) | (62 | ) | ||||
Pro forma net income | 4,699 | 13,141 | ||||||
Earnings per share: | ||||||||
Basic - as reported | $ | .44 | $ | 1.23 | ||||
Basic - pro forma | .44 | 1.22 | ||||||
Diluted - as reported | .43 | 1.22 | ||||||
Diluted - pro forma | .43 | 1.21 |
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. There were no stock options granted during the three months ended September 30, 2006. The weighted average estimated fair value of stock options granted in the nine months ended September 30, 2006 was $7.48. Fair value is estimated using the Black-Scholes option pricing model with the following assumptions: option term until exercise of approximately 6.5 years, volatility ranging from 27.7%, to 28.1%, risk-free interest rate ranging from 4.3% to 5.0% and an expected dividend yield of 2.4%.
During 2006, the Company took into consideration guidance under SFAS 123R and SEC Staff Accounting Bulletin No. 107 (SAB 107) when reviewing and updating assumptions. The weighted average expected option term for 2006 reflects the application of the simplified method set out in SAB 107, which defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches.
Restricted stock award activity for the nine months ended September 30, 2006 (unaudited) is summarized below:
Shares | Weighted Average Grant Date Fair Value Per Award | |||||
Unvested awards, January 1, 2006 | 26,640 | $ | 22.65 | |||
Granted | 12,580 | 25.74 | ||||
Vested | (7,202 | ) | 22.83 | |||
Canceled or expired | (2,153 | ) | 22.25 | |||
Unvested awards, September 30, 2006 | 29,865 | |||||
Stock option plan activity for the nine months ended September 30, 2006 (unaudited) is summarized below:
Shares | Weighted Average Exercise Price | Average Remaining Contractual Life (in years) | Value Unexercised In-The-Money Options (in thousands) | ||||||||
Outstanding, January 1, 2006 | 149,145 | $ | 17.41 | ||||||||
Granted | 66,645 | 27.06 | |||||||||
Exercised | (3,900 | ) | 14.67 | ||||||||
Canceled or expired | (5,651 | ) | 22.09 | ||||||||
Outstanding, September 30, 2006 | 206,239 | 20.49 | 6.7 | $ | 1,468 | ||||||
Exercisable, September 30, 2006 | 109,308 | 15.95 | 5.2 | 1,282 | |||||||
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total value of in-the-money options exercised during three and nine months ended September 30, 2006 was zero and $103 thousand, respectively.
As of September 30, 2006, there was $588 thousand and $616 thousand of total unrecognized compensation expense related to nonvested restricted stock awards and options, respectively, which will be recognized over the remaining requisite service period.
Prior to the adoption of SFAS 123R, the Company presented the benefit of all tax deductions resulting from the exercise of stock options and restricted stock awards as operating cash flows in the Consolidated Statements of Cash Flows. SFAS 123R requires the benefits of tax deductions in excess of grant-date fair value be reported as financing cash flow, rather than as an operating cash flow. Cash proceeds received from options exercised for the nine months ended September 30, 2006 and 2005 were $57 thousand and $128 thousand, respectively.
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, | ||||||||
2006 | 2005 | |||||||
(unaudited) | (unaudited) | |||||||
Service cost | $ | 130 | $ | 150 | ||||
Interest cost | 184 | 192 | ||||||
Expected return on plan assets | (189 | ) | (195 | ) | ||||
Amortization of prior service cost | 24 | 24 | ||||||
Amortization of net loss | 49 | 45 | ||||||
Net periodic benefit cost | $ | 198 | $ | 216 | ||||
The Company made cash contributions of $200 thousand to the plan during the first nine months of 2006, and anticipates contributing $640 thousand during the fourth quarter.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. | Sale of Branches: |
On February 16, 2005, the Company through its subsidiary, Planters Bank & Trust Company of Virginia, sold two branches located in Tazewell County, Virginia to the Bank of Tazewell County, an affiliate of National Bankshares, Inc. headquartered in Blacksburg, Virginia. The sale included the assumption of certain deposit accounts and purchase of selected loans, fixed assets and real estate as follows (In thousands):
Premium received on deposits transferred | $ | 1,304 | |
Liabilities transfered (at fair value): | |||
Deposit accounts | $ | 22,001 | |
Other liabilities | 39 | ||
Total liabilities transferred | $ | 22,040 | |
Assets sold (at fair value): | |||
Cash | $ | 228 | |
Loans | 8,844 | ||
Real estate and personal property | 311 | ||
Other assets | 32 | ||
Total assets sold | 9,415 | ||
Net liabilities transferred | $ | 11,321 | |
Premium received on deposits transferred | $ | 1,304 | |
Less: Write-off of core deposit intangibles | 465 | ||
Write-off of goodwill | 138 | ||
Write-off of loan premium | 115 | ||
Transaction costs | 165 | ||
Net Gain on Sale | $ | 421 | |
10. | Stock Split and Par Value Change |
On September 6, 2006 the Company paid a three-for-two stock split in the form of a 50% stock dividend. Shareholders of record at the close of business on August 14, 2006 received one additional share of the Company’s common stock for every two shares held on that date. On August 24, 2006 the Company’s Articles of Incorporation were amended to decrease the par value of the Company’s common stock from $5 per share to $1 per share. As a result, the Company decreased the common stock presented in the consolidated balance sheet as of December 31, 2005 by $25,105,000 with a corresponding increase in additional paid-in capital. All references in the accompanying consolidated financial statements and notes thereto to the number of common shares and per share amounts for all periods presented have been restated to reflect the three-for-two stock split.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. | Subsequent Event: Charter Consolidation |
VFG previously announced on October 16, 2006 that it will combine its Second Bank & Trust (Culpeper) affiliate and Virginia Heartland Bank (Fredericksburg) affiliate. The combined bank will retain the Second Bank & Trust name and charter, with 15 branches and pro forma assets of $715 million at September 30, 2006. The move is designed to create banks of sufficient size and depth to compete more effectively and accelerate growth prospects. The two banks to be combined are geographically contiguous, share increasingly similar market dynamics and offer the opportunity to create efficiencies and management depth. Pending regulatory approval, the banks will be combined in February 2007.
12. | Recent Accounting Pronouncements |
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 158, (“SFAS No. 158”) “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans – An amendment of FASB Statements No. 87, 88, 106, and 132(R)”. The new standard 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 that funded status in the year in which the changes occur through comprehensive income of a business entity. This statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position.
For publicly traded companies Statement 158 is effective as of the end of the fiscal year ending after December 15, 2006 regarding the recognition of the funded status of the benefit plan. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008, and shall not be applied retrospectively.
The Company does not anticipate the adoption of Statement 158 at the end of 2006 to have a material effect on its financial statements.
In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 156, “Accounting for Servicing of Financial Assets an amendment of FASB Statement 140” (Statement 156). Statement 156 amends Statement 140 with respect to separately recognized servicing assets and liabilities. Statement 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract and requires all servicing assets and liabilities to be initially measured at fair value, if practicable. Statement 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization method or fair value measurement method. Under the amortization method, servicing assets and liabilities are amortized in proportion to and over the estimated period of servicing. Under the fair value measurement method, servicing assets are measured at fair value at each reporting date and changes in fair value are reported in net income for the period the change occurs.
Adoption of Statement 156 is required as of the beginning of fiscal years beginning subsequent to September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company does not expect the adoption of Statement 156 at the beginning of 2007 to have a material impact.
In February 2006, the Financial Accounting Standards Board issued Financial Accounting Standard No. 155 “Accounting for Certain Hybrid Financial Instruments (as amended)” (Statement 155). This Statement amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. This Statement resolves issues addressed in Statement 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets .” This Statement:
a. Permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation
b. Clarifies which interest-only strips and principal-only strips are not subject to the requirements of Statement 133
c. Establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation
d. Clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives
e. Amends Statement 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument.
This Statement shall be effective for all financial instruments acquired, issued, or subject to a remeasurement (new basis) event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The fair value election provided for in paragraph 4(c) of this Statement may also be applied upon adoption of this Statement for hybrid financial instruments that had been bifurcated underparagraph 12 of Statement 133 prior to the adoption of this Statement. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including financial statements for any interim period, for that fiscal year.
The FASB decided to issue a FASB Staff Position (FSP) to address issues raised by the banking industry in connection with its Statement 155. The concern was that securitized assets, such as mortgage-backed securities and collateralized mortgage obligations, could be subject to the requirements of SFAS 155, which requires the bifurcation and fair valuing of the prepayment risk associated with the mortgage (which qualifies as a derivative) or the fair valuing of the entire instrument. This requirement would have likely dampened the liquidity of the securitized asset markets due to additional cost and increased income statement volatility. The Board decided to issue a FSP to scope out prepayment risk as a derivative that would not trigger the bifurcation or fair value requirement, which is great for banks because it essentially leaves the accounting for a large portion of securitized assets alone. The staff anticipates issuing an exposure draft of the FSP in November for public comment and a final rule in January 2007, which would be retroactive to the effective date of SFAS 155.
The Company does not expect the adoption of Statement 155 at the beginning of 2007 to have a material impact.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48 “Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (as amended)” (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. The Interpretation 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, disclosure, and transition.
The evaluation of a tax position in accordance with this Interpretation is a two-step process. The first step is recognition: The enterprise determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. The second step is measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one of the following:
a. An increase in a liability for income taxes payable or a reduction of an income tax refund receivable
b. A reduction in a deferred tax asset or an increase in a deferred tax liability
c. Both (a) and (b).
An enterprise that presents a classified statement of financial position should classify a liability for unrecognized tax benefits as current to the extent that the enterprise anticipates making a payment within one year or the operating cycle, if longer. An income tax liability should not be classified as a deferred tax liability unless it results from a taxable temporary difference (that is, a difference between the tax basis of an asset or a liability as calculated using this Interpretation and its reported amount in the statement of financial position). This Interpretation does not change the classification requirements for deferred taxes.
Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Use of a valuation allowance as described in Statement 109 is not an appropriate substitute for the derecognition of a tax position. The requirement to assess the need for a valuation allowance for deferred tax assets based on the sufficiency of future taxable income is unchanged by this Interpretation.
This Interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted.
The Company does not expect the adoption of FIN 48 at the beginning of 2007 to have a material impact.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108), which provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the “rollover” and “iron curtain” approaches.
The rollover approach quantifies a misstatement based on the amount of the error originating in the current year income statement. Thus, this approach ignores the effects of correcting the portion of the current year balance sheet misstatement that originated in prior years (i.e., it ignores the “carryover effects” of prior year misstatements). The iron curtain approach quantifies a misstatement based on the effects of correcting the misstatement existing in the balance sheet at the end of the current year, irrespective of the misstatement’s year(s) of origination. The staff does not believe the exclusive reliance on either the rollover or iron curtain approach appropriately quantifies all misstatements that could be material to users of financial statements.
The staff believes registrants must quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial statements. The staff believes that this can be accomplished by quantifying an error under both the rollover and iron curtain approaches and by evaluating the error measured under each approach. Thus, a registrant’s financial statements would require adjustment when either approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors.
Early application of the guidance is encouraged in any report for an interim period of the first fiscal year ending after November 15, 2006, filed after the publication of this Staff Accounting Bulletin. In the event that the cumulative effect of application of the guidance is first reported in an interim period other than the first interim period of the first fiscal year ending after November 15, 2006, previously filed interim reports need not be amended.
The Company does not expect the adoption of SAB 108 at the beginning of 2007 to have a material impact.
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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) 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
In addition to historical information, Management’s Discussion and Analysis contains forward-looking statements. The forward-looking statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from historical results, or those anticipated. 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 wishes to caution the reader that factors, such as those listed below, in some cases have affected and could affect VFG’s actual results, causing actual results to differ materially from those in any forward looking statement. These factors include:
• | Expected cost savings from VFG’s acquisitions and dispositions, |
• | 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. |
OVERVIEW
Virginia Financial Group, Inc. (VFG) 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. VFG’s trust affiliate, Virginia Commonwealth Trust Company, is currently one of the largest independent trust companies headquartered in the Commonwealth of Virginia. Affiliates of VFG include: Planters Bank & Trust Company of Virginia - in Staunton, Second Bank & Trust - in Culpeper, Virginia Heartland Bank - in Fredericksburg and Virginia Commonwealth Trust Company - in Culpeper. The organization has a network of thirty-nine 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.
VFG previously announced on October 16, 2006 that it will combine its Second Bank & Trust (Culpeper) affiliate and Virginia Heartland Bank (Fredericksburg) affiliate. The combined bank will retain the Second Bank & Trust name and charter, with 15 branches and pro forma assets of $715 million at September 30, 2006. The move is designed to create banks of sufficient size and depth to compete more effectively and accelerate growth prospects. The two banks to be combined are geographically contiguous, share increasingly similar market dynamics and offer the opportunity to create efficiencies and management depth. Pending regulatory approval, the banks will be combined in February 2007.
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 the inherent loss that may be present 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 occurred 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 affiliate Banks 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 Banks 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. The total of specific reserves required for impaired classified loans and the calculated reserves by loan category are 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. 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.
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 $417 thousand and $485 thousand for the nine months ended September 30, 2006 and 2005, respectively.
Non-GAAP Financial Measures
This report refers to the efficiency ratio, which is computed by dividing noninterest expense (excluding foreclosed property expense) by the sum of net interest income on a tax equivalent basis and noninterest income (excluding gain of sale of securities). 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 (GAAP) 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 generally accepted accounting principles, or “GAAP”.
Results of Operations
VFG’s consolidated net income for the quarter ended September 30, 2006 amounted to $5.1 million or $.47 per diluted share, compared to earnings of $4.7 million or $.43 per diluted share for the quarter ended September 30, 2005. Net income increased 7.4% and diluted earnings per share increased 9.3% compared to third quarter 2005 results. The Company’s earnings for the third quarter produced an annualized return on average assets (ROA) of 1.27% and return on average equity (ROE) of 13.88%, compared to prior year ratios of 1.26% and 14.03%, respectively.
For the first nine months of 2006, net income was $14.8 million, up 11.9% from $13.2 million for the same period in 2005. Net income per diluted share was $1.36, up 11.5% from $1.22 for the first nine months of 2005. ROA and ROE for the nine month period was 1.27% and 13.91%, respectively, compared to 1.20% and 13.60% for the same period in 2005.
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net Interest Income
Net interest income amounted to $15.2 million for the third quarter, up $512 thousand or 3.5% compared with $14.7 million for the same quarter in 2005. For the nine months ended September 30, 2006, net interest income was $45.3 million, an increase of $3.7 million or 8.8% from $41.6 million for the same period in 2005. Improvements in the growth and mix of average earning assets were primary contributors to this growth. The net interest margin for the third quarter of 2006 was 4.21%, down fourteen basis points sequentially compared to 4.35% for the second quarter of 2006, and down fifteen basis points when compared to 4.36% for the third quarter of 2005. The net interest margin for the nine month period ended September 30, 2006 was 4.31%, compared to 4.25% for the same period in 2005. Further margin contraction is likely in the fourth quarter.
The following tables provide information on average earning assets and interest-bearing liabilities for the three and nine months ended September 30, 2006 and 2005 as well as amounts and rates of tax equivalent interest earned and interest paid. The tax equivalent adjustment, utilizing a federal statutory rate of 35%, amounted to $495 thousand and $394 thousand for the three months ended September 30, 2006 and 2005 and $1.5 million and $1.2 million for the nine months ended September 30, 2006 and 2005, respectively.
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three months ended September 30, | ||||||||||||||||||
2006 | 2005 | |||||||||||||||||
Dollars in thousands | Average Balance | Interest Inc/Exp | Average Rates | Average Balance | Interest Inc/Exp | Average Rates | ||||||||||||
Assets | ||||||||||||||||||
Loans receivable, net | $ | 1,192,675 | $ | 21,658 | 7.20 | % | $ | 1,130,355 | $ | 18,383 | 6.45 | % | ||||||
Investment securities | ||||||||||||||||||
Taxable | 171,150 | 1,903 | 4.41 | % | 164,792 | 1,610 | 3.88 | % | ||||||||||
Tax exempt | 84,315 | 1,299 | 6.11 | % | 61,207 | 988 | 6.40 | % | ||||||||||
Total investments | 255,465 | 3,202 | 4.97 | % | 225,999 | 2,598 | 4.56 | % | ||||||||||
Interest bearing deposits | 575 | 5 | 3.45 | % | 823 | 4 | 1.93 | % | ||||||||||
Federal funds sold | 28,174 | 381 | 5.37 | % | 12,422 | 106 | 3.39 | % | ||||||||||
284,214 | 3,588 | 5.01 | % | 239,244 | 2,708 | 4.49 | % | |||||||||||
Total earning assets | 1,476,889 | 25,246 | 6.78 | % | 1,369,599 | 21,091 | 6.11 | % | ||||||||||
Total nonearning assets | 110,775 | 110,549 | ||||||||||||||||
Total assets | $ | 1,587,664 | $ | 1,480,148 | ||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||
Interest checking | $ | 166,206 | $ | 240 | 0.57 | % | $ | 189,899 | $ | 202 | 0.42 | % | ||||||
Money market | 170,955 | 1,020 | 2.37 | % | 176,364 | 601 | 1.35 | % | ||||||||||
Savings | 104,623 | 179 | 0.68 | % | 130,959 | 222 | 0.67 | % | ||||||||||
Time deposits: | ||||||||||||||||||
Less than $100,000 | 406,289 | 4,040 | 3.95 | % | 363,943 | 2,883 | 3.14 | % | ||||||||||
$100,000 and more | 194,008 | 2,122 | 4.34 | % | 138,015 | 1,287 | 3.70 | % | ||||||||||
Total interest-bearing deposits | 1,042,081 | 7,601 | 2.89 | % | 999,180 | 5,195 | 2.06 | % | ||||||||||
Federal funds purchased and securities sold under agreements to repurchase | 1,829 | 25 | 5.42 | % | 17,607 | 135 | 3.04 | % | ||||||||||
Federal Home Loan Bank advances | 69,348 | 860 | 4.92 | % | 32,018 | 297 | 3.68 | % | ||||||||||
Trust preferred capital notes | 20,619 | 434 | 8.35 | % | 20,619 | 328 | 6.31 | % | ||||||||||
Commercial paper | 56,092 | 658 | 4.65 | % | 10,345 | 80 | 3.07 | % | ||||||||||
Other borrowings | 374 | 4 | 4.24 | % | 444 | 5 | 4.47 | % | ||||||||||
148,262 | 1,981 | 5.30 | % | 81,033 | 845 | 4.14 | % | |||||||||||
Total interest-bearing liabilities | 1,190,343 | 9,582 | 3.19 | % | 1,080,213 | 6,040 | 2.22 | % | ||||||||||
Total noninterest-bearing liabilities | 252,473 | 266,491 | ||||||||||||||||
Total liabilities | 1,442,816 | 1,346,704 | ||||||||||||||||
Stockholders’ equity | 144,848 | 133,444 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,587,664 | $ | 1,480,148 | ||||||||||||||
Net interest income (tax equivalent) | $ | 15,664 | $ | 15,051 | ||||||||||||||
Average interest rate spread | 3.59 | % | 3.89 | % | ||||||||||||||
Interest expense as percentage of average earning assets | 2.57 | % | 1.75 | % | ||||||||||||||
Net interest margin | 4.21 | % | 4.36 | % |
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Nine months ended Septermber 30, | ||||||||||||||||||
2006 | 2005 | |||||||||||||||||
Dollars in thousands | Average Balance | Interest Inc/Exp | Average Rates | Average Balance | Interest Inc/Exp | Average Rates | ||||||||||||
Assets | ||||||||||||||||||
Loans receivable, net | $ | 1,179,781 | $ | 61,996 | 7.03 | % | $ | 1,102,011 | $ | 51,650 | 6.27 | % | ||||||
Investment securities | ||||||||||||||||||
Taxable | 159,480 | 5,139 | 4.31 | % | 178,407 | 5,216 | 3.91 | % | ||||||||||
Tax exempt | 83,102 | 3,852 | 6.20 | % | 61,645 | 2,999 | 6.50 | % | ||||||||||
Total investments | 242,582 | 8,991 | 4.96 | % | 240,052 | 8,215 | 4.58 | % | ||||||||||
Interest bearing deposits | 3,439 | 70 | 2.72 | % | 524 | 11 | 2.81 | % | ||||||||||
Federal funds sold | 27,148 | 790 | 3.89 | % | 6,417 | 126 | 2.63 | % | ||||||||||
273,169 | 9,851 | 4.83 | % | 246,993 | 8,352 | 4.53 | % | |||||||||||
Total earning assets | 1,452,950 | 71,847 | 6.62 | % | 1,349,004 | 60,002 | 5.95 | % | ||||||||||
Total nonearning assets | 104,702 | 116,140 | ||||||||||||||||
Total assets | $ | 1,557,652 | $ | 1,465,144 | ||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||
Interest checking | $ | 173,469 | $ | 683 | 0.53 | % | $ | 194,863 | $ | 601 | 0.41 | % | ||||||
Money market | 164,785 | 2,399 | 1.95 | % | 172,382 | 1,544 | 1.20 | % | ||||||||||
Savings | 111,483 | 548 | 0.66 | % | 132,972 | 665 | 0.67 | % | ||||||||||
Time deposits: | ||||||||||||||||||
Less than $100,000 | 390,365 | 10,833 | 3.71 | % | 365,460 | 8,454 | 3.09 | % | ||||||||||
$100,000 and more | 184,747 | 5,693 | 4.12 | % | 133,570 | 3,551 | 3.55 | % | ||||||||||
Total interest-bearing deposits | 1,024,849 | 20,156 | 2.63 | % | 999,247 | 14,815 | 1.98 | % | ||||||||||
Federal funds purchased and securities sold under agreements to repurchase | 12,074 | 173 | 1.92 | % | 22,868 | 423 | 2.47 | % | ||||||||||
Federal Home Loan Bank advances | 60,470 | 2,065 | 4.57 | % | 30,715 | 936 | 4.07 | % | ||||||||||
Trust preferred capital notes | 20,619 | 1,210 | 7.85 | % | 20,619 | 904 | 5.86 | % | ||||||||||
Commercial paper | 45,142 | 1,491 | 4.42 | % | 3,603 | 82 | 3.04 | % | ||||||||||
Other borrowings | 365 | 17 | 6.23 | % | 1,098 | 13 | 1.58 | % | ||||||||||
138,670 | 4,956 | 4.78 | % | 78,903 | 2,358 | 4.00 | % | |||||||||||
Total interest-bearing liabilities | 1,163,519 | 25,112 | 2.89 | % | 1,078,150 | 17,173 | 2.13 | % | ||||||||||
Total noninterest-bearing liabilities | 252,178 | 257,195 | ||||||||||||||||
Total liabilities | 1,415,697 | 1,335,345 | ||||||||||||||||
Stockholders’ equity | 141,955 | 129,799 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,557,652 | $ | 1,465,144 | ||||||||||||||
Net interest income (tax equivalent) | $ | 46,735 | $ | 42,829 | ||||||||||||||
Average interest rate spread | 3.73 | % | 3.82 | % | ||||||||||||||
Interest expense as percentage of average earning assets | 2.31 | % | 1.70 | % | ||||||||||||||
Net interest margin | 4.31 | % | 4.25 | % |
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Noninterest Income
Total noninterest income was $3.9 million for the third quarter of 2006, essentially flat with the $3.9 million for the third quarter of 2005 and the $3.9 million for the second quarter of 2006. Retail banking fee income increased $48 thousand or 2.8% to $1.8 million, compared to $1.7 million in the third quarter of 2005. Gains on the sale of mortgage loans amounted to $686 thousand, a decrease of $336 thousand or 32.9%, as compared to $1.0 million for the third quarter of 2005, and down sequentially $167 thousand or 19.6% from the second quarter of 2006. Revenues from trust and brokerage for the third quarter were $897 thousand, up $43 thousand or 5.0% compared to $854 thousand in the third quarter of 2005. Fiduciary and brokerage assets under management were $576 million at September 30, 2006, representing a 13.2% growth rate for the nine month period. Included in noninterest income during third quarter 2006 was a net gain on sale of real estate of $216 thousand and income associated with an investment in bank owned life insurance of $120 thousand.
Total noninterest income was $11.0 million for the nine months ended September 30, 2006, a decrease of $603 thousand or 5.2% compared to $11.6 million for the same period in 2005. Included in the 2005 results is a net gain of $296 thousand in connection with the sale of securities, and a gain of $421 thousand realized on the sale of two branches in Tazewell County, Virginia during the first quarter. Retail banking fees decreased $53 thousand or 1.0% to $5.2 million compared to the same period a year ago. Gross mortgage banking fees amounted to $2.2 million, essentially flat when compared to $2.2 million for the first nine months of 2005.
Noninterest Expense
Noninterest expense for the third quarter of 2006 amounted to $11.8 million, up $665 thousand or 6.0% from $11.1 million for the same period in 2005, and up sequentially $304 thousand or 2.7% from the second quarter of 2006. These increases reflect operating costs associated with the openings of the Graves Mill, Mill Creek and Langhorne Road branches during the past nine months. Professional fees associated with business advisory services and recruiting fees also added to the increase for the quarter. Management anticipates some increase in fourth quarter operating expenses associated with the hiring of four additional commercial loan officers during the later stages of the third quarter, and the opening of our thirty-ninth and fortieth branches during the fourth quarter. VFG’s efficiency ratio was 60.8% for the quarter, compared to 58.3% for the same quarter in 2005.
For the nine month period ended September 30, 2006, noninterest expense amounted to $34.4 million, an increase of $2.0 million or 6.1% over $32.4 million for the same period in 2005. These increases reflect operating costs associated with the openings of the Graves Mill, Mill Creek and Langhorne Road branches during the past nine months. Professional fees associated with business advisory services and recruiting fees also added to the increase. For both the nine month period ended September 30, 2006, and 2005 the efficiency ratio was 59.6%.
Income Taxes
Income tax expense for the third quarter of 2006 was $2.2 million resulting in an effective tax rate of 30.6% compared to $2.2 million, or 31.9%, for the third quarter of 2005. For the nine month period ended September 30, 2006, income tax expense amounted to $6.5 million, resulting in an effective tax rate of 30.7% compared to $6.1 million, or 31.4% for the same period in 2005. The
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
decrease in the effective tax rate for the quarter and nine month period is a result of an increase in earnings from tax-exempt assets as a percentage of total income. The average balance of tax-exempt securities for the third quarter of 2006 increased by $23.1 million over the same period last year, resulting in an increase in related tax-exempt interest income.
Asset Quality
Asset quality remains strong, with VFG’s ratio of non-performing assets as a percentage of total assets amounting to .18% as of September 30, 2006, compared to .11% at September 30, 2005 and .16% at June 30, 2006. Net charge-offs (recoveries) as a percentage of average loans receivable amounted to (.09)% on an annualized basis for the quarter and (.01)% for the nine month period ended September 30, 2006, compared to none and .02% for the same periods in 2005. At September 30, 2006, the allowance for loan losses was approximately five times the level of non-performing assets, while the allowance as a percentage of total loans amounted to 1.19%. VFG did not record a provision for loan losses for the third quarter, compared to $503 thousand for the three months ended September 30, 2005. For the nine month period ended September 30, 2006, the provision for loan losses was $610 thousand, a decrease of $985 thousand or 61.8% compared to the same period in 2005. The reduction in the provision is a direct result of our analysis on the adequacy of our Allowance for loan losses, factors that lead to the reduction in provision included the receipt of loss recoveries of $357 thousand during the quarter, including a large unanticipated recovery of $289 thousand, as well as reduced loan growth and continuing strong asset quality during the period. Though the ratio of nonperforming assets to total assets has risen when compared period to period, the ratio remains at a positive level and management believes that the overall allowance is adequate.
The following table provides information on asset quality statistics for the periods presented (In thousands):
September 30, 2006 | December 31, 2005 | September 30, 2005 | ||||||||||
Non accrual loans | $ | 2,757 | $ | 1,604 | $ | 1,422 | ||||||
Troubled debt restructurings | — | 154 | 173 | |||||||||
Other real estate owned | 123 | 75 | 41 | |||||||||
Loans past due as to principal or interest for 90 days or more accruing interest | — | — | — | |||||||||
Total nonperforming assets | $ | 2,880 | $ | 1,833 | $ | 1,636 | ||||||
Nonperforming assets to total assets | .18 | % | .12 | % | .11 | % | ||||||
Nonperforming assets to loans and other property | .24 | % | .16 | % | .14 | % | ||||||
Allowance for loan losses as a percentage of loans receivable | 1.19 | % | 1.19 | % | 1.13 | % | ||||||
Allowance for loan losses as a percentage of nonperforming assets | 496.94 | % | 740.92 | % | 802.44 | % | ||||||
Annualized net charge-offs (recoveries) as a percentage of average loans receivable | (.01 | )% | .01 | % | .02 | % | ||||||
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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, 2006, the Company retained $9.9 million, or 66.8% of its net income. Stockholders’ equity increased by $11.0 million, reflecting the earnings retention and a increase of $876 thousand in accumulated comprehensive income net of tax, after sales and reinvestment of securities related to branch realignment within the Company.
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. Management believes, as of September 30, 2006, that 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, 2006 (In thousands):
Tier 1 capital | $ | 150,245 | ||
Tier 2 capital | 14,480 | |||
Total risk-based capital | 164,725 | |||
Total risk-weighted assets | 1,328,261 | |||
Average adjusted total assets | 1,569,737 | |||
Capital ratios: | ||||
Tier 1 risk-based capital ratio | 11.31 | % | ||
Total risk-based capital ratio | 12.40 | % | ||
Leverage ratio (Tier 1 capital to average adjusted total assets) | 9.57 | % | ||
Equity to assets ratio | 9.24 | % | ||
Tangible equity to assets ratio | 8.21 | % |
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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 Parent Company also represents an important aspect of liquidity management. The Parent 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 Parent 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 trust preferred 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, 2005.
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, 2005. Federal Home Loan Bank Advances rose from $40 million to $65 million during first nine months of the year. These advances were incurred in order to manage the Company’s liquidity.
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.
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Access to Filings
The Company provides access to their SEC filings through the corporate Website atwww.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.
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes to the quantitative and qualitative market risk disclosures in the Company’s Form 10-K for the year ended December 31, 2005.
ITEM 4 – CONTROLS AND PROCEDURES
We are required to include in our periodic reports information regarding our controls and procedures for complying with the disclosure requirements of the federal securities laws. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
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VIRGINIA FINANCIAL GROUP, INC.
PART I – FINANCIAL INFORMATION
We have established disclosure controls and procedures to ensure that material information related to the Company is made known to our principal executive officer and principal financial officer on a regular basis, in particular during the periods in which our quarterly and annual reports are being prepared. Our principal executive officer and principal financial officer evaluated the effectiveness of these disclosure controls and procedures as of the end of the period covered by this report and, based on their evaluation, concluded that our disclosure controls and procedures are operating effectively.
Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that our disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the organization to disclose material information otherwise required to be set forth in our period reports.
Our management is also responsible for establishing and maintaining adequate internal controls over financial reporting and control of our assets to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in our internal control over financial reporting or control of assets during the quarter ended September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting or control of assets.
PART II - OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS. |
There are no material legal proceedings to which the Company or any of its subsidiaries, directors, or officers is a party or by which they, or any of them, are threatened. Any legal proceeding presently pending or threatened against Virginia Financial Group, Inc. and its subsidiaries are either not material in respect to the amount in controversy or fully covered by insurance.
ITEM 1a. | RISK FACTORS. |
There have been no changes to the identified risk factors as disclosed in VFG’s annual report on Form 10-K for the fiscal year ended December 31, 2005.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
The Company has a stock repurchase program authorized that is not currently active, with 210,000 shares remaining available for repurchase.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES. |
None.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
None.
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ITEM 5. | OTHER INFORMATION. |
Not applicable.
ITEM 6. | EXHIBITS: |
(a) The following exhibits either are filed as part of this Report or are incorporated herein by reference:
Exhibit No. 2 | Agreement and Plan of Reorganization incorporated by reference to Agreement and Plan of Reorganization filed as Exhibit A to Form S-4 Amendment No. 2 filed on November 20, 2001 (File No. 333-69216). | |
Exhibit No. 3.1 | Articles of Incorporation (as amended August 24, 2006) incorporated by reference to Exhibit 3.1 to Form 8-K filed on August 29, 2006. | |
Exhibit No. 3.2 | Bylaws incorporated by reference to Exhibit 3. | |
Exhibit No. 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
Exhibit No. 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. | |
Exhibit No. 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VIRGINIA FINANCIAL GROUP, INC. |
/s/ O. R. Barham, Jr. |
O.R. Barham, Jr. |
President and Chief Executive Officer |
November 9, 2006 |
/s/ Jeffrey W. Farrar |
Jeffrey W. Farrar, CPA |
Executive Vice President and Chief Financial Officer |
November 9, 2006 |
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