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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 March 31, 2007
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 ¨ 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: 10,792,209 shares of Common Stock, par value $1.00 per share, were outstanding as of May 1, 2007.
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VIRGINIA FINANCIAL GROUP, INC.
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PART I – FINANCIAL INFORMATION
ITEM 1. | Financial statements |
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
(In thousands)
MARCH 31, 2007 | DECEMBER 31, 2006 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 36,190 | $ | 48,747 | ||||
Federal funds sold | 226 | 8,590 | ||||||
Interest-bearing deposits in banks | 333 | 298 | ||||||
Investment securities (market value: 2007, $259,906; 2006, $264,152) | 259,909 | 264,141 | ||||||
Mortgage loans held for sale | 6,875 | 7,640 | ||||||
Loans receivable, net of allowance for loan losses, 2007, $14,501; 2006, $14,500 | 1,203,434 | 1,203,132 | ||||||
Premises and equipment, net | 37,274 | 35,853 | ||||||
Accrued interest receivable | 7,812 | 8,197 | ||||||
Deferred income tax asset | 5,198 | 5,446 | ||||||
Core deposit intangibles, net | 3,707 | 3,871 | ||||||
Goodwill | 13,896 | 13,896 | ||||||
Bank owned life insurance | 10,350 | 10,231 | ||||||
Other assets | 15,949 | 15,947 | ||||||
Total assets | $ | 1,601,153 | $ | 1,625,989 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 240,649 | $ | 239,672 | ||||
Interest-bearing | 1,037,106 | 1,078,609 | ||||||
Total deposits | 1,277,755 | 1,318,281 | ||||||
Federal funds purchased and securities sold under agreements to repurchase | 18,000 | — | ||||||
Federal Home Loan Bank advances | 55,000 | 65,000 | ||||||
Subordinated debt | 20,619 | 20,619 | ||||||
Commercial paper | 63,788 | 58,632 | ||||||
Other borrowings | 493 | 561 | ||||||
Accrued interest payable | 4,188 | 4,274 | ||||||
Other liabilities | 7,927 | 7,970 | ||||||
Total liabilities | 1,447,770 | 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: 10,791,669 shares issued and outstanding; 2006: 10,784,303 shares issued and outstanding; | 10,792 | 10,784 | ||||||
Additional paid-in capital | 34,061 | 33,970 | ||||||
Retained earnings | 109,216 | 106,924 | ||||||
Accumulated other comprehensive loss, net | (686 | ) | (1,026 | ) | ||||
Total stockholders’ equity | 153,383 | 150,652 | ||||||
Total liabilities and stockholders’ equity | $ | 1,601,153 | $ | 1,625,989 | ||||
The accompanying notes are an integral part of these 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 MARCH 31, | |||||||
2007 | 2006 | ||||||
(unaudited) | (unaudited) | ||||||
Interest Income | |||||||
Loans, including fees | $ | 21,985 | $ | 19,433 | |||
Federal funds sold and deposits in other banks | 59 | 311 | |||||
Investment securities: | |||||||
Taxable | 1,834 | 1,499 | |||||
Tax exempt | 943 | 815 | |||||
Dividends | 126 | 115 | |||||
Total interest income | 24,947 | 22,173 | |||||
Interest Expense | |||||||
Deposits | 8,531 | 5,960 | |||||
Federal funds purchased and securities sold under agreements to repurchase | 108 | 86 | |||||
Federal Home Loan Bank advances | 777 | 582 | |||||
Subordinated debt | 417 | 374 | |||||
Commercial paper | 754 | 302 | |||||
Other borrowings | 5 | 4 | |||||
Total interest expense | 10,592 | 7,308 | |||||
Net interest income | 14,355 | 14,865 | |||||
Provision for loan losses | 165 | 510 | |||||
Net interest income after provision for loan losses | 14,190 | 14,355 | |||||
Noninterest Income | |||||||
Retail banking fees | 1,743 | 1,607 | |||||
Commissions and fees from fiduciary activities | 828 | 811 | |||||
Brokerage fee income | 256 | 227 | |||||
Losses on sale of securities available for sale | — | (181 | ) | ||||
Mortgage banking-related fees | 599 | 633 | |||||
Income from bank owned life insurance | 119 | — | |||||
Other operating income | 283 | 166 | |||||
Total noninterest income | 3,828 | 3,263 | |||||
Noninterest Expense | |||||||
Compensation and employee benefits | 6,819 | 6,601 | |||||
Net occupancy | 874 | 766 | |||||
Supplies and equipment | 1,121 | 977 | |||||
Amortization-intangible assets | 164 | 100 | |||||
Marketing | 249 | 125 | |||||
State franchise taxes | 244 | 248 | |||||
Data processing | 468 | 383 | |||||
Professional fees | 150 | 130 | |||||
Telecommunications | 238 | 274 | |||||
Other operating expenses | 1,960 | 1,579 | |||||
Total noninterest expense | 12,287 | 11,183 | |||||
Income before income taxes | 5,731 | 6,435 | |||||
Income tax expense | 1,713 | 1,971 | |||||
Net income | $ | 4,018 | $ | 4,464 | |||
Earnings per share, basic | $ | 0.37 | $ | 0.41 | |||
Earnings per share, diluted | $ | 0.37 | $ | 0.41 | |||
The accompanying notes are an integral part of these consolidated financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 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 | — | — | 4,464 | — | $ | 4,464 | 4,464 | ||||||||||||||
Other comprehensive income, net of tax: | |||||||||||||||||||||
Unrealized holding gains arising during the period (net of tax of $54) | — | — | — | — | 101 | — | |||||||||||||||
Reclassification adjustment (net of tax of $63) | — | — | — | — | 118 | — | |||||||||||||||
Other comprehensive income | — | — | — | 219 | 219 | 219 | |||||||||||||||
Total comprehensive income | — | — | — | — | $ | 4,683 | — | ||||||||||||||
Cash dividends ($.15 per share) | — | — | (1,584 | ) | — | (1,584 | ) | ||||||||||||||
Stock-based compensation expense (7,695 shares) | 7 | 41 | — | — | 48 | ||||||||||||||||
Exercise of stock options (1,650 shares) | 2 | 33 | — | — | 35 | ||||||||||||||||
Balance, March 31, 2006 | $ | 10,768 | $ | 33,372 | $ | 96,941 | $ | (1,794 | ) | $ | 139,287 | ||||||||||
Balance, January 1, 2007 | $ | 10,784 | $ | 33,970 | $ | 106,924 | $ | (1,026 | ) | $ | 150,652 | ||||||||||
Comprehensive income: | |||||||||||||||||||||
Net income | — | — | 4,018 | — | $ | 4,018 | 4,018 | ||||||||||||||
Other comprehensive income, net of tax: | |||||||||||||||||||||
Unrealized holding gains arising during the period (net of tax of $183) | — | — | — | 340 | 340 | 340 | |||||||||||||||
Total comprehensive income | — | — | — | — | $ | 4,358 | — | ||||||||||||||
Cash dividends ($.16 per share) | — | — | (1,726 | ) | — | (1,726 | ) | ||||||||||||||
Stock-based compensation expense (6,466 shares) | 7 | 83 | — | — | 90 | ||||||||||||||||
Exercise of stock options (900 shares) | 1 | 8 | — | — | 9 | ||||||||||||||||
Balance, March 31, 2007 | $ | 10,792 | $ | 34,061 | $ | 109,216 | $ | (686 | ) | $ | 153,383 | ||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS MARCH 31, | ||||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 4,018 | $ | 4,464 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 754 | 700 | ||||||
Amortization of intangible assets | 164 | 100 | ||||||
Provision for loan losses | 165 | 510 | ||||||
Deferred tax expense (benefit) | 65 | (90 | ) | |||||
Employee benefit plan expense | 70 | 54 | ||||||
Stock-based compensation expense | 90 | 48 | ||||||
Gain on sale of premises and equipment | (4 | ) | — | |||||
Loss on sale of securities available for sale | — | 181 | ||||||
Gain on sale of mortgage loans | (599 | ) | (633 | ) | ||||
Proceeds from sale of mortgage loans | 22,699 | 29,956 | ||||||
Origination of mortgage loans for sale | (21,335 | ) | (27,895 | ) | ||||
Amortization of securities premiums and accretion of discounts, net | (10 | ) | 196 | |||||
Income on bank owned life insurance | (119 | ) | — | |||||
Changes in assets and liabilities: | ||||||||
Decrease in accrued interest receivable | 385 | 98 | ||||||
Decrease (increase) in other assets | 384 | (193 | ) | |||||
(Decrease) increase in accrued interest payable | (86 | ) | 368 | |||||
Decrease in other liabilities | (139 | ) | (166 | ) | ||||
Net cash provided by operating activities | $ | 6,502 | $ | 7,698 | ||||
Cash Flows from Investing Activities | ||||||||
Proceeds from maturities and principal payments of securities available for sale | $ | 21,147 | $ | 26,779 | ||||
Proceeds from sales and calls of securities available for sale | 195 | 21,256 | ||||||
Purchase of securities available for sale | (16,937 | ) | (32,207 | ) | ||||
Net increase in loans | (467 | ) | (46,358 | ) | ||||
Proceeds from sale of premises and equipment | 10 | 1,549 | ||||||
Purchase of premises and equipment | (2,181 | ) | (3,314 | ) | ||||
Proceeds from sale of foreclosed assets | — | 34 | ||||||
Net cash provided (used) in investing activities | $ | 1,767 | $ | (32,261 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
THREE MONTHS MARCH 31, | ||||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
Cash Flows from Financing Activities | ||||||||
Net decrease in demand, money market and savings deposits | $ | (45,404 | ) | $ | (27,850 | ) | ||
Net increase in certificates of deposit | 4,878 | 45,393 | ||||||
Net increase (decrease) in federal funds purchased and securities sold under agreements to repurchase | 18,000 | (12,095 | ) | |||||
Proceeds from Federal Home Loan Bank advances | 5,000 | 30,000 | ||||||
Principal payments on Federal Home Loan Bank advances | (15,000 | ) | (10,000 | ) | ||||
Net increase in commercial paper | 5,156 | 17,890 | ||||||
Net decrease in other borrowings | (68 | ) | (840 | ) | ||||
Proceeds from exercise of stock options | 9 | 35 | ||||||
Cash dividends paid | (1,726 | ) | (1,584 | ) | ||||
Net cash (used) provided by financing activities | $ | (29,155 | ) | $ | 40,949 | |||
(Decrease) increase in cash and cash equivalents | $ | (20,886 | ) | $ | 16,386 | |||
Cash and Cash Equivalents | ||||||||
Beginning | 57,635 | 48,016 | ||||||
Ending | $ | 36,749 | $ | 64,402 | ||||
Supplemental Schedule of Noncash Investing Activities | ||||||||
Foreclosed assets acquired in settlement of loans | $ | — | $ | 38 | ||||
Unrealized gain on securities available for sale | $ | 523 | $ | 336 | ||||
The accompanying notes are an integral part of these 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 (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. VFG combined Virginia Heartland Bank into its Second Bank & Trust affiliate on February 16, 2007. 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 March 31, 2007 and December 31, 2006, the results of operations for the three months ended March 31, 2007 and 2006, and cash flows for the three months ended March 31, 2007 and 2006. The 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 three month period ended March 31, 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): |
March 31, 2007 | December 31, 2006 | |||||||
(unaudited) | ||||||||
Real estate loans: | ||||||||
Construction and land development | $ | 225,350 | $ | 209,583 | ||||
Secured by 1-4 family residential | 313,012 | 306,423 | ||||||
Commercial and multifamily | 528,702 | 550,081 | ||||||
Commercial, financial and agricultural loans | 112,455 | 110,939 | ||||||
Consumer loans | 31,176 | 33,030 | ||||||
All other loans | 6,305 | 6,762 | ||||||
Total loans | $ | 1,217,000 | $ | 1,216,818 | ||||
Deferred loan costs | 935 | 814 | ||||||
Allowance for loan losses | (14,501 | ) | (14,500 | ) | ||||
Net loans | $ | 1,203,434 | $ | 1,203,132 | ||||
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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): |
March 31, 2007 | December 31, 2006 | March 31, 2006 | ||||||||||
(unaudited) | (unaudited) | |||||||||||
Balance, beginning | $ | 14,500 | $ | 13,581 | $ | 13,581 | ||||||
Provisions for loan losses | 165 | 750 | 510 | |||||||||
Loans charged off | (211 | ) | (402 | ) | (173 | ) | ||||||
Recoveries | 47 | 571 | 23 | |||||||||
Net recoveries (charge-offs) | (164 | ) | 169 | (150 | ) | |||||||
Balance, ending | $ | 14,501 | $ | 14,500 | $ | 13,941 | ||||||
Information about impaired loans as of the periods indicated is as follows (In thousands):
March 31, 2007 | December 31, 2006 | |||||
(unaudited) | ||||||
Impaired loans for which an allowance has been provided | $ | 1,154 | $ | 2,950 | ||
Impaired loans for which an allowance has not been provided | 6,758 | 6,098 | ||||
Total impaired loans | 7,912 | 9,048 | ||||
Allowance provided for impaired loans, included in the allowance for loan losses | $ | 150 | $ | 750 | ||
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 $63.8 million and $58.6 million at March 31, 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 March 31, 2007 and December 31, 2006, 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.
The following table shows certain information regarding the Company’s commercial paper (In thousands):
Three Months Ended March 31, | ||||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
End of period balance | $ | 63,788 | $ | 42,372 | ||||
Average balance | 63,805 | 30,602 | ||||||
Weighted average rate | 4.67 | % | 3.63 | % | ||||
Maximum balance of any month-end during the period | 66,134 | 42,372 |
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 March 31, 2007 and 2006. Potential dilutive stock had no effect on income available to common stockholders.
2007 | 2006 | |||||||||
(unaudited) | (unaudited) | |||||||||
Weighted Average Shares | Per Share Amount | Weighted Average Shares | Per Share Amount | |||||||
Basic earnings per share | 10,789,966 | $ | .37 | 10,765,223 | $ | .41 | ||||
Effect of dilutive securities: | ||||||||||
Restricted stock | 3,953 | — | 28,455 | — | ||||||
Stock options | 27,036 | — | 52,471 | — | ||||||
Diluted earnings per share | 10,820,955 | $ | .37 | 10,846,149 | $ | .41 | ||||
In 2007 and 2006, stock options representing 151,071 and 59,151 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: |
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 three month period.
Included within compensation and employee benefits expense for the three month period ended March 31, 2007 and 2006 is $90 thousand and $48 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 5.13 years, volatility ranging from 22.6%, to 27.7%, risk-free interest rate of 4.78% and an expected dividend yield of 2.4%.
The following table summarizes nonvested restricted shares outstanding as of March 31, 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 | 10,917 | 26.49 | — | |||||
Vested | 6,467 | 23.76 | 173 | |||||
Forfeited | 1,830 | 24.06 | — | |||||
Nonvested at March 31, 2007 | 32,678 | $ | 24.91 | $ | 847 | |||
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the stock option plan at March 31, 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 | 149,150 | $ | 17.42 | ||||||
Granted | 56,518 | 30.11 | 64,889 | 27.06 | ||||||||
Forfeited | — | — | (3,000 | ) | 21.30 | |||||||
Expired | (2,163 | ) | 16.90 | (1,350 | ) | 21.12 | ||||||
Exercised | (900 | ) | 9.73 | (1,650 | ) | 21.42 | ||||||
Outstanding, March 31 | 247,071 | $ | 23.29 | 208,039 | $ | 20.31 | ||||||
Exercisable, March 31 | 116,212 | 109,244 | ||||||||||
The aggregate intrinsic value of the options outstanding as of March 31, 2007 was $1.1 million. 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 March 31, 2007 and the exercise price, multiplied by the number of options outstanding). The aggregate intrinsic value of the options currently exercisable as of March 31, 2007 was $955 thousand. The weighted average remaining contractual life is 5.5 years for exercisable options at March 31, 2007.
As of March 31, 2007, there was $742 thousand and $806 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.
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.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of net periodic benefit cost are as follows (In thousands):
Three Months Ended March 31, | ||||||||
2007 | 2006 | |||||||
Service cost | $ | 44 | $ | 43 | ||||
Interest cost | 64 | 61 | ||||||
Expected return on plan assets | (73 | ) | (62 | ) | ||||
Amortization of prior service cost | 8 | 8 | ||||||
Amortization of net obligation at transition | 10 | 16 | ||||||
Net periodic benefit cost | $ | 53 | $ | 66 | ||||
The Company made no contributions to the plan during the first three months of 2007, but anticipates contributing $640 thousand in total to the plan for 2007.
9. | 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. 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.
10. | Subsequent Event: Restructuring / Branch Closings |
On April 24, 2007 the Company announced that a plan has been initiated which involves the closing of five branches as well as some staffing adjustments throughout the Company. Each of these branches is located in slow growth to declining markets and not complimentary to future expansion plans of the Company. The branches will be combined with existing branches nearby. A total of twenty-two full-time equivalent positions (FTE’s) will be impacted, and the facilities will close on August 3, 2007. Annual estimated net pretax cost savings from this component amount to approximately $1 million, with approximately $400 thousand expected to be realized in 2007. The additional staffing adjustments came about after much analysis to adjust appropriate staffing levels to better align the Company with current customer behaviors and organizational effectiveness. This analysis resulted in the companywide reduction of another twenty-one FTE’s, creating an estimated pretax annual cost savings of $1.2 million of which $450 thousand is expected to be realized in 2007. Pretax severance benefits and transaction costs, which have not been reflected in the pretax cost savings estimates, are estimated at $300 thousand and will be expensed in the second quarter of 2007.
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VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. | 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.
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.
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 Company has implemented the requirements of these two consensuses, the effect of which was not material to the Company’s consolidated financial statements as a whole.
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 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.
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SFAS 159 is intended to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. It is also expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. The adoption of SFAS 159 is not expected to have a material impact on the Company’s consolidated financial statements.
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, “Accounting for Contingencies”. As required by Interpretation 48, which clarifies Statement 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.
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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 Fredericksburg and Virginia Commonwealth Trust Company—in Culpeper. VFG combined Virginia Heartland Bank into its Second Bank & Trust affiliate on February 16, 2007. The organization has a network of forty 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.
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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, the calculated reserves by loan category and the unallocated reserve 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
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $164 thousand and $100 thousand for the three months ended March 31, 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.
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 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.
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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 (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 March 31, 2007 amounted to $4.0 million or $.37 per diluted share, compared to earnings of $4.5 million or $.41 per diluted share for the quarter ended March 31, 2006. Net income decreased 10.0% and diluted earnings per share decreased 9.8% compared to first quarter 2006 results. The Company’s earnings for the first quarter produced an annualized return on average assets (ROA) of 1.01% and return on average equity (ROE) of 10.77%, compared to prior year ratios of 1.19% and 13.08%, respectively.
Net Interest Income
Net interest income amounted to $14.4 million for the first quarter of 2007, down $510 thousand or 3.4% compared with $14.9 million for the same quarter in 2006. Net interest margin compression coupled with a reduction in the rate of growth in average earning assets contributed to this decrease. The net interest margin for the first quarter of 2007 was 4.05%, down three basis points sequentially compared to 4.08% for the fourth quarter of 2006, and down thirty basis points when compared to 4.35% for the first quarter of 2006. Asset yields rose sequentially, with an average yield on assets of 6.92% for the first quarter of 2007, compared to 6.82% for the fourth quarter of 2006 and 6.43% for the first quarter of 2006. Average cost of interest bearing deposits increased to 3.25% for the first quarter of 2007, as compared to 3.13% for the fourth quarter of 2006 and 2.38% for the first quarter of 2006. Average balances in VFG commercial paper increased to $63.8 million for the first quarter of 2007 at a cost of 4.73%, compared to $30.6 million at a cost of 4.00% for the first quarter of 2006 and remained stable on a linked quarter basis compared to $66.5 million at a cost of 4.67%. Average balances in FHLB advances increased to $62.2 million for the first quarter of 2007 at a cost of 5.00%, compared to $56.4 million at a cost of 4.18% for the first quarter of 2006 and stable on a linked quarter basis compared to $65.0 million at a cost of 4.70%.
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three months ended March 31, | ||||||||||||||||||
2007 | 2006 | |||||||||||||||||
Dollars in thousands | Average Balance | Interest Inc/Exp | Average Rates | Average Balance | Interest Inc/Exp | Average Rates | ||||||||||||
Assets | ||||||||||||||||||
Loans receivable, net | $ | 1,219,094 | $ | 22,026 | 7.33 | % | $ | 1,157,736 | $ | 19,453 | 6.81 | % | ||||||
Investment securities | ||||||||||||||||||
Taxable | 174,839 | 1,960 | 4.48 | % | 152,945 | 1,614 | 4.28 | % | ||||||||||
Tax exempt | 94,854 | 1,451 | 6.12 | % | 80,623 | 1,253 | 6.30 | % | ||||||||||
Total investments | 269,693 | 3,411 | 5.05 | % | 233,568 | 2,867 | 4.98 | % | ||||||||||
Interest bearing deposits | 626 | 6 | 3.83 | % | 5,961 | 35 | 2.38 | % | ||||||||||
Federal funds sold | 3,831 | 53 | 5.53 | % | 30,691 | 276 | 3.65 | % | ||||||||||
274,150 | 3,470 | 5.05 | % | 270,220 | 3,178 | 4.77 | % | |||||||||||
Total earning assets | 1,493,244 | 25,496 | 6.92 | % | 1,427,956 | 22,631 | 6.43 | % | ||||||||||
Total nonearning assets | 112,808 | 96,907 | ||||||||||||||||
Total assets | $ | 1,606,052 | $ | 1,524,863 | ||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||
Interest checking | $ | 159,417 | $ | 63 | 0.16 | % | $ | 180,122 | $ | 198 | 0.45 | % | ||||||
Money market | 179,678 | 1,256 | 2.83 | % | 166,666 | 701 | 1.71 | % | ||||||||||
Savings | 96,518 | 302 | 1.27 | % | 120,090 | 195 | 0.66 | % | ||||||||||
Time deposits: | ||||||||||||||||||
Less than $ 100,000 | 414,884 | 4,435 | 4.34 | % | 372,152 | 3,185 | 3.47 | % | ||||||||||
$100,000 and more | 213,672 | 2,475 | 4.70 | % | 175,314 | 1,681 | 3.89 | % | ||||||||||
Total interest-bearing deposits | 1,064,169 | 8,531 | 3.25 | % | 1,014,344 | 5,960 | 2.38 | % | ||||||||||
Federal funds purchased and securities sold under agreements to repurchase | 7,883 | 108 | 5.48 | % | 14,801 | 86 | 2.36 | % | ||||||||||
Federal Home Loan Bank advances | 62,205 | 777 | 5.00 | % | 56,427 | 582 | 4.18 | % | ||||||||||
Subordinated debt | 20,619 | 417 | 8.09 | % | 20,619 | 374 | 7.36 | % | ||||||||||
Commercial paper | 63,805 | 754 | 4.73 | % | 30,602 | 302 | 4.00 | % | ||||||||||
Other borrowings | 345 | 5 | 5.80 | % | 254 | 4 | 6.39 | % | ||||||||||
154,857 | 2,061 | 5.32 | % | 122,703 | 1,348 | 4.46 | % | |||||||||||
Total interest-bearing liabilities | 1,219,026 | 10,592 | 3.51 | % | 1,137,047 | 7,308 | 2.60 | % | ||||||||||
Total noninterest-bearing liabilities | 235,715 | 249,452 | ||||||||||||||||
Total liabilities | 1,454,741 | 1,386,499 | ||||||||||||||||
Stockholders’ equity | 151,311 | 138,364 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,606,052 | $ | 1,524,863 | ||||||||||||||
Net interest income (tax equivalent) | $ | 14,904 | $ | 15,323 | ||||||||||||||
Average interest rate spread | 3.41 | % | 3.83 | % | ||||||||||||||
Interest expense as percentage of average earning assets | 2.88 | % | 2.08 | % | ||||||||||||||
Net interest margin | 4.05 | % | 4.35 | % |
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest Income
Total non-interest income was $3.8 million for the first quarter of 2007, up compared with $3.3 million for the first quarter of 2006 and down sequentially compared with $4.0 million for the fourth quarter of 2006. Retail banking fee income increased $136 thousand or 8.5% to $1.7 million, compared to $1.6 million in the first quarter of 2006. Mortgage banking revenue amounted to $599 thousand, a decrease of $34 thousand or 5.4%, as compared to $633 thousand for the first quarter of 2006, and down sequentially $98 thousand or 14.1% from the fourth quarter of 2006. Revenues from trust and brokerage for the first quarter were $1.1 million, up $46 thousand or 4.4% compared to $1.0 million in the first quarter of 2006, and up sequentially $105 thousand or 10.7% from the fourth quarter of 2006. Fiduciary and brokerage assets under management were $628 million at March 31, 2007, representing an increase of $30.0 million or 5.0% from $598 million at December 31, 2006. Included in other non-interest income during first quarter 2007 was income associated with an investment in bank owned life insurance of $119 thousand. The Company invested $10 million in bank owned life insurance in July 2006.
Noninterest Expense
Non-interest expense for the first quarter of 2007 amounted to $12.3 million, up $1.1 million or 9.9% from $11.2 million for the same period in 2006, and up sequentially $230 thousand or 1.9% from the fourth quarter of 2006. This increase reflects incremental operating costs of $471 thousand associated with four branches and a loan production office opened during 2006. Additionally, $231 thousand of non-recurring transaction costs associated with the consummated combination of our Second Bank & Trust affiliate and former Virginia Heartland Bank affiliate during the first quarter. Increases in other operating expenses are attributed to increases in training costs and aforementioned transaction costs. VFG’s efficiency ratio was 65.6% for the quarter, compared to 59.6% for the same quarter in 2006. Excluding the impact of the nonrecurring transaction costs, the efficiency ratio was 64.4% for the quarter.
Income Taxes
Income tax expense for the first quarter of 2007 was $1.7 million resulting in an effective tax rate of 29.9% compared to $2.0 million, or 30.6%, for the first quarter of 2006. The decrease in the effective tax rate for the quarter 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 first quarter of 2007 increased by $14.2 million over the same period last year, resulting in an increase in related tax-exempt interest income.
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VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Asset Quality
Asset quality remains strong, with VFG’s ratio of non-performing assets as a percentage of total assets amounting to .17% as of March 31, 2007, compared to .13% at March 31, 2006 and .19% at December 31, 2006. Net charge-offs as a percentage of average loans receivable amounted to .05% on an annualized basis for the quarter and for the same quarter a year ago. At March 31, 2007, 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%, the same percentage it was at December 31, 2006. VFG recorded a provision for loan losses for the first quarter of $165 thousand compared to net charge-offs of $164 thousand for the period, and compared to a provision of $510 thousand for the three months ended March 31, 2006. The reduction in provision is a result of reduced loan growth and continuing strength in asset quality during the period.
The following table provides information on asset quality statistics for the periods presented (In thousands):
March 31, 2007 | December 31, 2006 | March 31, 2006 | ||||||||||
Non-accrual loans | $ | 2,709 | $ | 2,999 | $ | 1,787 | ||||||
Troubled debt restructurings | — | — | 134 | |||||||||
Foreclosed assets | 38 | 38 | 79 | |||||||||
Loans past due 90 days accruing interest | — | — | — | |||||||||
Total non-performing assets | $ | 2,747 | $ | 3,037 | $ | 2,000 | ||||||
Nonperforming assets to total assets | 0.17 | % | 0.19 | % | 0.13 | % | ||||||
Nonperforming assets to loans and foreclosed property | 0.23 | % | 0.25 | % | 0.17 | % | ||||||
Allowance for loan losses as a percentage of loans receivable | 1.19 | % | 1.19 | % | 1.17 | % | ||||||
Allowance for loan losses as a percentage of nonperforming assets | 527.88 | % | 477.44 | % | 697.05 | % | ||||||
Annualized net charge-offs (recoveries) as a percentage of average loans receiveable | 0.05 | % | (0.01 | %) | 0.05 | % | ||||||
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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 three months ended March 31, 2007, the Company retained $2.3 million, or 57.0% of its net income. Stockholders’ equity increased by $14.1 million, reflecting the earnings retention and a increase of $340 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 March 31, 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 March 31, 2007 (In thousands):
Tier 1 capital | $ | 156,274 | ||
Tier 2 capital | 14,805 | |||
Total risk-based capital | 171,079 | |||
Total risk-weighted assets | 1,355,949 | |||
Average adjusted total assets | 1,590,524 | |||
Capital ratios: | ||||
Tier 1 risk-based capital ratio | 11.53 | % | ||
Total risk-based capital ratio | 12.62 | % | ||
Leverage ratio (Tier 1 capital to average adjusted total assets) | 9.83 | % | ||
Equity to assets ratio | 9.58 | % | ||
Tangible equity to assets ratio | 8.58 | % |
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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 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.
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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 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.
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, 2006.
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 March 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting or control of assets.
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, 2006.
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. |
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 |
May 9, 2007 |
/s/ Jeffrey W. Farrar |
Jeffrey W. Farrar, CPA |
Executive Vice President and Chief Financial Officer |
May 9, 2007 |
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