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 June 30, 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: 10,792,797 shares of Common Stock, par value $1.00 per share, were outstanding as of July 30, 2007.
VIRGINIA FINANCIAL GROUP, INC.
INDEX
Page No. | ||||
PART I - FINANCIAL INFORMATION | ||||
ITEM 1 | ||||
3 | ||||
4-5 | ||||
6 | ||||
7-8 | ||||
9-17 | ||||
ITEM 2 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18-27 | ||
ITEM 3 | 28 | |||
ITEM 4 | 28 | |||
PART II - OTHER INFORMATION | ||||
ITEM 1 | 29 | |||
ITEM 1a | 29 | |||
ITEM 2 | 29 | |||
ITEM 3 | 29 | |||
ITEM 4 | 29 | |||
ITEM 5 | 29 | |||
ITEM 6 | 30 |
2
PART I – FINANCIAL INFORMATION
ITEM 1. | Financial statements |
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, 2007 | DECEMBER 31, 2006 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | 40,689 | $ | 48,747 | ||||
Federal funds sold | 229 | 8,590 | ||||||
Interest-bearing deposits in banks | 533 | 298 | ||||||
Investment securities (market value: 2007, $253,876; 2006, $264,152) | 253,960 | 264,141 | ||||||
Mortgage loans held for sale | 9,890 | 7,640 | ||||||
Loans receivable, net of allowance for loan losses, 2007, $14,495; 2006, $14,500 | 1,180,352 | 1,203,132 | ||||||
Premises and equipment, net | 38,328 | 35,853 | ||||||
Accrued interest receivable | 8,103 | 8,197 | ||||||
Deferred income tax asset | 5,894 | 5,446 | ||||||
Core deposit intangibles, net | 3,546 | 3,871 | ||||||
Goodwill | 13,896 | 13,896 | ||||||
Bank owned life insurance | 10,471 | 10,231 | ||||||
Other assets | 17,738 | 15,947 | ||||||
Total assets | $ | 1,583,629 | $ | 1,625,989 | ||||
LIABILITIES | ||||||||
Deposits: | ||||||||
Noninterest-bearing | $ | 233,110 | $ | 239,672 | ||||
Interest-bearing | 1,003,232 | 1,078,609 | ||||||
Total deposits | 1,236,342 | 1,318,281 | ||||||
Federal Home Loan Bank advances | 85,500 | 65,000 | ||||||
Subordinated debt | 20,619 | 20,619 | ||||||
Commercial paper | 73,724 | 58,632 | ||||||
Other borrowings | 873 | 561 | ||||||
Accrued interest payable | 3,798 | 4,274 | ||||||
Other liabilities | 7,757 | 7,970 | ||||||
Total liabilities | 1,428,613 | 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: 10,792,797 shares issued and outstanding; 2006: 10,784,303 shares issued and outstanding; | 10,793 | 10,784 | ||||||
Additional paid-in capital | 34,174 | 33,970 | ||||||
Retained earnings | 112,021 | 106,924 | ||||||
Accumulated other comprehensive loss, net | (1,972 | ) | (1,026 | ) | ||||
Total stockholders’ equity | 155,016 | 150,652 | ||||||
Total liabilities and stockholders’ equity | $ | 1,583,629 | $ | 1,625,989 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS ENDED JUNE 30, | ||||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
Interest Income | ||||||||
Loans, including fees | $ | 22,278 | $ | 20,834 | ||||
Federal funds sold and deposits in other banks | 13 | 162 | ||||||
Investment securities: | ||||||||
Taxable | 1,715 | 1,512 | ||||||
Tax exempt | 926 | 845 | ||||||
Dividends | 134 | 111 | ||||||
Total interest income | 25,066 | 23,464 | ||||||
Interest Expense | ||||||||
Deposits | 7,843 | 6,594 | ||||||
Federal funds purchased and securities sold under agreements to repurchase | 117 | 64 | ||||||
Federal Home Loan Bank advances | 969 | 623 | ||||||
Subordinated debt | 421 | 402 | ||||||
Commercial paper | 791 | 531 | ||||||
Other borrowings | 10 | 8 | ||||||
Total interest expense | 10,151 | 8,222 | ||||||
Net interest income | 14,915 | 15,242 | ||||||
Provision for loan losses | — | 100 | ||||||
Net interest income after provision for loan losses | 14,915 | 15,142 | ||||||
Noninterest Income | ||||||||
Retail banking fees | 1,920 | 1,767 | ||||||
Commissions and fees from fiduciary activities | 857 | 781 | ||||||
Brokerage fee income | 294 | 170 | ||||||
Mortgage banking-related fees | 645 | 853 | ||||||
Gains on sale of premises and equipment | 1 | 80 | ||||||
Losses on sale of securities available for sale | (32 | ) | (18 | ) | ||||
Income from bank owned life insurance | 121 | — | ||||||
Other operating income | 530 | 246 | ||||||
Total noninterest income | 4,336 | 3,879 | ||||||
Noninterest Expense | ||||||||
Compensation and employee benefits | 7,037 | 6,596 | ||||||
Net occupancy | 885 | 732 | ||||||
Supplies and equipment | 1,166 | 1,016 | ||||||
Amortization-intangible assets | 161 | 157 | ||||||
Marketing | 393 | 307 | ||||||
State franchise taxes | 299 | 216 | ||||||
Data processing | 430 | 308 | ||||||
Professional fees | 378 | 148 | ||||||
Telecommunications | 236 | 272 | ||||||
Other operating expenses | 1,869 | 1,703 | ||||||
Total noninterest expense | 12,854 | 11,455 | ||||||
Income before income taxes | 6,397 | 7,566 | ||||||
Income tax expense | 1,856 | 2,326 | ||||||
Net income | $ | 4,541 | $ | 5,240 | ||||
Earnings per share, basic | $ | 0.42 | $ | 0.49 | ||||
Earnings per share, diluted | $ | 0.42 | $ | 0.48 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
SIX MONTHS ENDED JUNE 30, | ||||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
Interest Income | ||||||||
Loans, including fees | $ | 44,264 | $ | 40,268 | ||||
Federal funds sold and deposits in other banks | 71 | 474 | ||||||
Investment securities: | ||||||||
Taxable | 3,549 | 3,010 | ||||||
Tax exempt | 1,869 | 1,659 | ||||||
Dividends | 260 | 226 | ||||||
Total interest income | 50,013 | 45,637 | ||||||
Interest Expense | ||||||||
Deposits | 16,373 | 12,556 | ||||||
Federal funds purchased and securities sold under agreements to repurchase | 225 | 148 | ||||||
Federal Home Loan Bank advances | 1,746 | 1,205 | ||||||
Subordinated debt | 838 | 776 | ||||||
Commercial paper | 1,545 | 833 | ||||||
Other borrowings | 16 | 12 | ||||||
Total interest expense | 20,743 | 15,530 | ||||||
Net interest income | 29,270 | 30,107 | ||||||
Provision for loan losses | 165 | 610 | ||||||
Net interest income after provision for loan losses | 29,105 | 29,497 | ||||||
Noninterest Income | ||||||||
Retail banking fees | 3,663 | 3,375 | ||||||
Commissions and fees from fiduciary activities | 1,685 | 1,592 | ||||||
Brokerage fee income | 550 | 396 | ||||||
Mortgage banking-related fees | 1,244 | 1,486 | ||||||
(Losses) gains on sale of premises and equipment | (4 | ) | 76 | |||||
Losses on sale of securities available for sale | (32 | ) | (199 | ) | ||||
Income from bank owned life insurance | 240 | — | ||||||
Other operating income | 818 | 416 | ||||||
Total noninterest income | 8,164 | 7,142 | ||||||
Noninterest Expense | ||||||||
Compensation and employee benefits | 13,856 | 13,197 | ||||||
Net occupancy | 1,759 | 1,498 | ||||||
Supplies and equipment | 2,286 | 1,992 | ||||||
Amortization-intangible assets | 325 | 257 | ||||||
Marketing | 642 | 432 | ||||||
State franchise taxes | 543 | 463 | ||||||
Data processing | 898 | 691 | ||||||
Professional fees | 528 | 279 | ||||||
Telecommunications | 475 | 547 | ||||||
Other operating expenses | 3,829 | 3,282 | ||||||
Total noninterest expense | 25,141 | 22,638 | ||||||
Income before income taxes | 12,128 | 14,001 | ||||||
Income tax expense | 3,568 | 4,297 | ||||||
Net income | $ | 8,560 | $ | 9,704 | ||||
Earnings per share, basic | $ | 0.79 | $ | 0.90 | ||||
Earnings per share, diluted | $ | 0.79 | $ | 0.89 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
5
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006
(In thousands, except per share data)
(unaudited)
Common Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Comprehensive Income | Total | |||||||||||||||||
Balance, January 1, 2006 | $ | 10,759 | $ | 33,298 | $ | 94,061 | $ | (2,013 | ) | $ | 136,105 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||
Net income | — | — | 9,704 | — | $ | 9,704 | 9,704 | |||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||
Unrealized holding losses arising during the period (net of tax of $353) | — | — | — | — | (655 | ) | — | |||||||||||||||
Reclassification adjustment (net of tax of $70) | — | — | — | — | 129 | — | ||||||||||||||||
Other comprehensive loss | — | — | — | (526 | ) | (526 | ) | (526 | ) | |||||||||||||
Total comprehensive income | — | — | — | — | $ | 9,178 | — | |||||||||||||||
Cash dividends ($.30 per share) | — | — | (3,235 | ) | — | (3,235 | ) | |||||||||||||||
Stock-based compensation expense (5,851 shares) | 6 | 128 | — | — | 134 | |||||||||||||||||
Exercise of stock options (2,600 shares) | 3 | 54 | — | — | 57 | |||||||||||||||||
Balance, June 30, 2006 | $ | 10,768 | $ | 33,480 | $ | 100,530 | $ | (2,539 | ) | $ | 142,239 | |||||||||||
Balance, January 1, 2007 | $ | 10,784 | $ | 33,970 | $ | 106,924 | $ | (1,026 | ) | $ | 150,652 | |||||||||||
Comprehensive income: | ||||||||||||||||||||||
Net income | — | — | 8,560 | — | $ | 8,560 | 8,560 | |||||||||||||||
Other comprehensive income, net of tax: | ||||||||||||||||||||||
Unrealized holding losses arising during the period (net of tax of $521) | — | — | — | — | (967 | ) | — | |||||||||||||||
Reclassification adjustment (net of tax of $11) | — | — | — | — | 21 | — | ||||||||||||||||
Other comprehensive loss | — | — | — | (946 | ) | (946 | ) | (946 | ) | |||||||||||||
Total comprehensive income | — | — | — | — | $ | 7,593 | — | |||||||||||||||
Cash dividends ($.32 per share) | — | — | (3,463 | ) | — | (3,463 | ) | |||||||||||||||
Stock-based compensation expense (7,594 shares) | 8 | 196 | — | — | 204 | |||||||||||||||||
Exercise of stock options (900 shares) | 1 | 8 | — | — | 9 | |||||||||||||||||
Balance, June 30, 2007 | $ | 10,793 | $ | 34,174 | $ | 112,021 | $ | (1,972 | ) | $ | 155,016 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED JUNE 30, | ||||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
Cash Flows from Operating Activities | ||||||||
Net income | $ | 8,560 | $ | 9,704 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 1,525 | 1,408 | ||||||
Amortization of intangible assets | 325 | 257 | ||||||
Provision for loan losses | 165 | 610 | ||||||
Deferred tax expense (benefit) | 62 | (170 | ) | |||||
Employee benefit plan expense | 103 | 109 | ||||||
Stock-based compensation expense | 204 | 134 | ||||||
Losses (gains) on sale of premises and equipment | 4 | (76 | ) | |||||
Losses on sale of securities available for sale | 32 | 199 | ||||||
Gains on sale of mortgage loans | (1,244 | ) | (1,486 | ) | ||||
Proceeds from sale of mortgage loans | 57,720 | 73,217 | ||||||
Origination of mortgage loans for sale | (58,726 | ) | (67,230 | ) | ||||
Amortization of securities premiums and accretion of discounts, net | (1 | ) | 178 | |||||
Income on bank owned life insurance | (240 | ) | — | |||||
Changes in assets and liabilities: | ||||||||
Decrease (increase) in accrued interest receivable | 94 | (338 | ) | |||||
Increase in other assets | (1,829 | ) | (510 | ) | ||||
(Decrease) increase in accrued interest payable | (476 | ) | 734 | |||||
Decrease in other liabilities | (315 | ) | (1,771 | ) | ||||
Net cash provided by operating activities | $ | 5,963 | $ | 14,969 | ||||
Cash Flows from Investing Activities | ||||||||
Proceeds from maturities and principal payments of securities available for sale | $ | 50,348 | $ | 41,122 | ||||
Proceeds from sales and calls of securities available for sale | 588 | 21,418 | ||||||
Purchase of securities available for sale | (42,242 | ) | (66,066 | ) | ||||
Net decrease (increase) in loans | 22,615 | (56,534 | ) | |||||
Proceeds from sale of premises and equipment | 8 | 5,603 | ||||||
Purchase of premises and equipment | (4,012 | ) | (5,058 | ) | ||||
Proceeds from sale of foreclosed assets | 37 | 75 | ||||||
Net cash provided (used) in investing activities | $ | 27,342 | $ | (59,440 | ) | |||
The accompanying notes are an integral part of these consolidated financial statements.
7
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS ENDED JUNE 30, | ||||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
Cash Flows from Financing Activities | ||||||||
Net decrease in demand, money market and savings deposits | $ | (62,982 | ) | $ | (36,105 | ) | ||
Net (decrease) increase in certificates of deposit | (18,957 | ) | 77,303 | |||||
Net decrease in federal funds purchased and securities sold under agreements to repurchase | — | (15,890 | ) | |||||
Proceeds from Federal Home Loan Bank advances | 35,000 | 76,000 | ||||||
Principal payments on Federal Home Loan Bank advances | (35,000 | ) | (41,000 | ) | ||||
Net increase in commercial paper | 15,092 | 24,380 | ||||||
Net increase (decrease) in other borrowings | 20,812 | (830 | ) | |||||
Proceeds from exercise of stock options | 9 | 57 | ||||||
Cash dividends paid | (3,463 | ) | (3,235 | ) | ||||
Net cash (used) provided by financing activities | $ | (49,489 | ) | $ | 80,680 | |||
(Decrease) increase in cash and cash equivalents | $ | (16,184 | ) | $ | 36,209 | |||
Cash and Cash Equivalents | ||||||||
Beginning | 57,635 | 48,016 | ||||||
Ending | $ | 41,451 | $ | 84,225 | ||||
Supplemental Schedule of Noncash Investing Activities | ||||||||
Foreclosed assets acquired in settlement of loans | $ | — | $ | 38 | ||||
Unrealized (losses) gains on securities available for sale | $ | (1,456 | ) | $ | 810 | |||
The accompanying notes are an integral part of these consolidated financial statements.
8
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. 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 June 30, 2007 and December 31, 2006, the results of operations for the three and six months ended June 30, 2007 and 2006, and cash flows for the six months ended June 30, 2007 and 2006. See Note 10 for subsequent event information related to VFG’s pending merger of equals transaction with FNB Corporation. 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 six month period ended June 30, 2007 and 2006 are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made to prior period balances to conform to the current presentation. |
3. | The Company’s loan portfolio is composed of the following (In thousands): |
June 30, 2007 | December 31, 2006 | |||||||
(unaudited) | ||||||||
Real estate loans: | ||||||||
Construction and land development | $ | 215,142 | $ | 209,583 | ||||
Secured by 1-4 family residential | 317,879 | 306,423 | ||||||
Commercial and multifamily | 524,527 | 550,081 | ||||||
Commercial, financial and agricultural loans | 100,441 | 110,939 | ||||||
Consumer loans | 29,580 | 33,030 | ||||||
All other loans | 6,266 | 6,762 | ||||||
Total loans | 1,193,835 | 1,216,818 | ||||||
Deferred loan costs | 1,012 | 814 | ||||||
Allowance for loan losses | (14,495 | ) | (14,500 | ) | ||||
Net loans | $ | 1,180,352 | $ | 1,203,132 | ||||
9
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. | Activity in the allowance for loan losses is as follows (In thousands): |
June 30, 2007 | December 31, 2006 | June 30, 2006 | ||||||||||
(unaudited) | (unaudited) | |||||||||||
Balance, beginning | $ | 14,500 | $ | 13,581 | $ | 13,581 | ||||||
Provisions for loan losses | 165 | 750 | 610 | |||||||||
Loans charged off | (245 | ) | (402 | ) | (226 | ) | ||||||
Recoveries | 75 | 571 | 78 | |||||||||
Net (charge-offs) recoveries | (170 | ) | 169 | (148 | ) | |||||||
Balance, ending | $ | 14,495 | $ | 14,500 | $ | 14,043 | ||||||
Information about impaired loans as of the periods indicated is as follows (In thousands):
June 30, 2007 | December 31, 2006 | |||||
(unaudited) | ||||||
Impaired loans for which an allowance has been provided | $ | 2,622 | $ | 3,949 | ||
Impaired loans for which an allowance has not been provided | 3,174 | 2,439 | ||||
Total impaired loans | 5,796 | 6,388 | ||||
Allowance provided for impaired loans, included in the allowance for loan losses | $ | 510 | $ | 763 | ||
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 $73.7 million and $58.6 million at June 30, 2007 and December 31, 2006, respectively.
Securities sold under agreements to repurchase, which are classified as secured borrowings, generally mature within one to four days from the transaction date. Securities sold under agreements to repurchase are reflected at the amount of cash received in connection with the transaction.
The Company has an unused line of credit agreement with a correspondent bank for general working capital needs. The $15 million line is unsecured, calls for variable interest payments and is payable on demand. There were no balances outstanding at June 30, 2007 and December 31, 2006, respectively.
10
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 June 30, | ||||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
End of period balance | $ | 73,724 | $ | 48,872 | ||||
Weighted average rate at end of period | 4.58 | % | 4.49 | % | ||||
Average balance | 69,605 | 48,919 | ||||||
Weighted average rate | 4.50 | % | 4.40 | % | ||||
Maximum balance of any month-end during the period | 73,724 | 57,109 | ||||||
Six Months Ended June 30, | ||||||||
2007 | 2006 | |||||||
(unaudited) | (unaudited) | |||||||
End of period balance | $ | 73,724 | $ | 48,872 | ||||
Weighted average rate at end of period | 4.58 | % | 4.49 | % | ||||
Average balance | 66,721 | 39,937 | ||||||
Weighted average rate | 4.61 | % | 4.24 | % | ||||
Maximum balance of any month-end during the period | 73,724 | 57,109 |
11
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 June 30, 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 | 10,792,467 | $ | .42 | 10,770,557 | $ | .49 | |||||
Effect of dilutive securities: | |||||||||||
Restricted stock | 3,570 | — | 28,455 | — | |||||||
Stock options | 21,845 | — | 50,492 | (.01 | ) | ||||||
�� | |||||||||||
Diluted earnings per share | 10,817,882 | $ | .42 | 10,849,504 | $ | .48 | |||||
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 six month periods ended June 30, 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 | 10,791,224 | $ | .79 | 10,767,905 | $ | .90 | |||||
Effect of dilutive securities: | |||||||||||
Restricted stock | 3,674 | — | 29,436 | — | |||||||
Stock options | 24,454 | — | 50,501 | (.01 | ) | ||||||
Diluted earnings per share | 10,819,352 | $ | .79 | 10,847,842 | $ | .89 | |||||
In 2007 and 2006, stock options representing 169,793 and 17,258 shares, respectively, were not included in the calculation of earnings per share as their effect would have been anti-dilutive.
12
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO 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 six month period.
Included within compensation and employee benefits expense for the six month period ended June 30, 2007 and 2006 is $229 thousand and $134 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 to 6.5 years, volatility ranging from 22.6%, to 28.8%, risk-free interest rate of 4.57% to 4.78% and an expected dividend yield of 2.4% to 2.9%.
The following table summarizes nonvested restricted shares outstanding as of June 30, 2007 and the related activity during the period:
Nonvested Shares | Number of Shares | Weighted- Grant-Date Fair Value | (In thousands) Total Intrinsic | |||||||
Nonvested at January 1, 2007 | 30,058 | $ | 24.03 | $ | 841 | |||||
Granted | 10,917 | 26.49 | ||||||||
Vested & Exercised | (7,195 | ) | 23.70 | $ | (191 | ) | ||||
Forfeited | (3,630 | ) | 24.73 | |||||||
Nonvested at June 30, 2007 | 51,800 | $ | 24.92 | $ | 669 | |||||
13
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the stock option plan at June 30, 2007 and 2006 and changes during the periods ended on those dates are as follows:
2007 | 2006 | |||||||||||
Number of Shares | Weighted Average Exercise Price | Number of Shares | Weighted Average Exercise Price | |||||||||
Outstanding, January 1 | 193,616 | $ | 21.17 | 149,145 | $ | 17.41 | ||||||
Granted | 56,968 | 30.07 | 66,645 | 27.06 | ||||||||
Forfeited | (960 | ) | 25.24 | (3,900 | ) | 14.67 | ||||||
Expired | (2,403 | ) | 17.73 | (4,350 | ) | 21.25 | ||||||
Exercised | (900 | ) | 9.73 | — | — | |||||||
Outstanding, June 30 | 246,321 | $ | 23.28 | 207,540 | $ | 20.49 | ||||||
Exercisable, June 30 | 118,382 | 109,308 | ||||||||||
The aggregate intrinsic value of the options outstanding as of June 30, 2007 was $666 thousand. The aggregate intrinsic value represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of the quarter ended June 30, 2007 and the exercise price, multiplied by the number of options outstanding). The aggregate intrinsic value of the options currently exercisable as of June 30, 2007 was $642 thousand. The weighted average remaining contractual life is 5.3 years for exercisable options at June 30, 2007.
The estimated unamortized compensation expense, net of estimated forfeitures, related to nonvested stock and stock options issued and outstanding as of June 30, 2007 that will be recognized in future periods is as follows (In thousands):
Stock Options | Nonvested Stock | Total | |||||||
For the remaining six months of 2007 | $ | 120 | $ | 117 | $ | 237 | |||
For year ended December 31, 2008 | 210 | 221 | 431 | ||||||
For year ended December 31, 2009 | 175 | 160 | 335 | ||||||
For year ended December 31, 2010 | 159 | 92 | 251 | ||||||
For year ended December 31, 2011 | 76 | 48 | 124 | ||||||
For year ended December 31, 2012 | 3 | 2 | 5 | ||||||
Total | $ | 743 | $ | 640 | $ | 1,383 | |||
14
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. | Employee Benefit Plan: |
The Company has a noncontributory pension plan which conforms to the Employee Retirement Income Security Act of 1974 (ERISA). The amount of benefits payable under the plan is determined by an employee’s period of credited service. The amount of normal retirement benefit will be determined based on a Pension Equity Credit formula. The employee receives credits based on their age and years of service. The plan provides for early retirement for participants with five years of service and the attainment of age 55. The benefits are payable in single or joint/survivor annuities as well as a lump sum payment upon retirement or separation of service. The Company froze participation in this plan during 2003, and has approximately one hundred thirty-six participants remaining in the plan.
The components of net periodic benefit cost are as follows (In thousands):
Six Months Ended June 30, | ||||||||
2007 | 2006 | |||||||
Service cost | $ | 87 | $ | 86 | ||||
Interest cost | 133 | 122 | ||||||
Expected return on plan assets | (146 | ) | (124 | ) | ||||
Amortization of prior service cost | 16 | 16 | ||||||
Amortization of net obligation at transition | 20 | 32 | ||||||
Net periodic benefit cost | $ | 110 | $ | 132 | ||||
The Company made cash contributions of $57 thousand to the plan during the first six months of 2007 and anticipates contributing $640 thousand in total to the plan for 2007.
9. | Resource Reallocation Initiative: |
As previously announced, the Company commenced a program to adjust staffing to appropriate levels and reallocate resources to compliment future expansion plans of the Company. As a part of this program the Company is closing five branches on August 3, 2007 and reducing the workforce through the branch closings and a separate company-wide initiative by approximately 7%. The cost of implementing this program is estimated to result in cumulative charges totaling $89 thousand ($58 thousand after tax).
15
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Details of the plan and the related liability are presented in the following table:
For the Six Months Ended June 30, 2007 | ||||
(In thousands) | ||||
Reallocation liability, January 1, 2007 | $ | — | ||
Reallocation charges: | ||||
Employee termination benefit costs | 60 | |||
Lease termination costs | 19 | |||
Branch consolidation / relocation costs | 25 | |||
Reallocation charges June 30, 2007 | 104 | |||
Cash expenditures | (15 | ) | ||
Reallocation liability, June 30, 2007 | $ | 89 | ||
10. | Subsequent Event: |
As previously announced, the Company entered into a definitive agreement with FNB Corporation, Christiansburg, Virginia, to combine in a merger of equals transaction, creating the largest independent bank holding company headquartered in the Commonwealth of Virginia.
Under the terms of the merger agreement, FNB shareholders will receive 1.5850 shares of VFG common stock for each of their shares of FNB common stock, with each share of VFG common stock becoming one share of common stock of the resulting holding company. Each option to purchase a share of VFG and FNB common stock outstanding immediately prior to the effective date will be converted into an option to purchase shares of common stock of the resulting holding company, adjusted for the exchange ratio.
The merger is subject to customary closing conditions, including approval by VFG’s and FNB’s shareholders and by both companies’ regulatory agencies. It is expected to be completed during the last quarter of 2007.
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.
16
VIRGINIA FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September 2006, The Emerging Issues Task Force issued EITF 06-5, “Accounting for Purchases of Life Insurance- Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4” . This consensus concludes that a policyholder should consider any additional amounts included in the contractual terms of the insurance policy other than the cash surrender value in determining the amount that could be realized under the insurance contract. A consensus also was reached that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). The consensuses are effective for fiscal years beginning after December 15, 2006. The implementation of these two consensuses is not expected to have a material impact on the Company’s consolidated financial statements.
In February 2007, FASB Issued Statement No. 159 (SFAS 159), “The Fair Value Option for Financial Assets and Financial Liabilities (as amended)” which is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, Fair Value Measurements.
This statement establishes the fair value option and permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings (or another performance indicator if the business entity does not report earnings) at each subsequent reporting date. The adoption of SFAS 159 is not expected to have a material impact on the Company’s consolidated financial statements.
The fair value option:
1. May be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method
2. Is irrevocable (unless a new election date occurs)
3. Is applied only to entire instruments and not to portions of instruments.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007. Previously, the Company had accounted for tax consequences in accordance with Statement of Financial Accounting Standards 5 (SFAS 5), “Accounting for Contingencies”. As required by Interpretation No. 48, which clarifies Statement of Financial Accounting Standards 109, “Accounting for Income Taxes”, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. At the adoption date, the Company applied Interpretation 48 to all tax positions for which the statute of limitations remained open. As a result of the implementation of Interpretation 48, the Company recorded no adjustment for future tax benefits.
17
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
This Quarterly Report on Form 10-Q, other periodic reports filed by VFG under the Securities Exchange Act of 1934 and any other written or oral statements made by or on behalf of VFG may include forward-looking statements that reflect VFG’s current views with respect to future events and financial performance. VFG intends that such forward-looking statements be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement in order to claim the protections provided by such safe harbor provisions. Forward-looking statements are not based on historical information, but are related to future operations, strategies, financial results, or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to , management at the time the statements are made and are, therefore, subject to various risks, uncertainties, and other factors that may cause actual results to differ materially from the views and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to:
Our ability to achieve the earnings expectations related to the businesses that were acquired, or that may be acquired in the future, including our announced plan to merge with FNB Corporation, which in turn depends on a variety of factors, including:
• | Our ability to achieve the anticipated cost savings and revenue enhancements with the respect to the acquired operations; |
• | The continued growth of the markets that the acquired entities serve, consistent with recent historical experience; |
• | The difficulties related to the integration of the businesses, including retention of key personnel and integration of information systems. |
• | Competitive pressure in the banking industry or in VFG’s markets may increase significantly, |
• | Changes in the interest rate environment may reduce margins, |
• | General economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, |
• | Changes may occur in banking legislation and regulation, |
• | Changes may occur in general business conditions, and |
• | Changes may occur in the securities markets. |
When we use words such as “believes”, “expects”, “anticipates” or similar expressions, we are making forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date thereof. VFG undertakes no obligation to update or revise any forward-looking statements.
18
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. Affiliates of VFG include: Planters Bank & Trust Company of Virginia—in Staunton, Second Bank & Trust—in Fredericksburg and Virginia Commonwealth Trust Company—in Culpeper. The organization has a network of 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.
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 banking subsidiaries conduct an analysis of the loan portfolio on a regular basis. This analysis is used in assessing the sufficiency of the allowance for loan losses and in the determination of the necessary provision for loan losses. The review process generally begins with lenders identifying problem loans to be reviewed on an individual basis for impairment. When a loan has been identified as impaired, a specific reserve may be established based on management’s calculation of the loss embedded in the individual loan. In addition to impairment testing, the banking subsidiaries have an eight point grading system for each non-homogeneous loan in the portfolio. Loans meeting the criteria for impairment are segregated for analysis from performing loans within the portfolio. Loans are then grouped by loan type and, in the case of commercial and construction loans, by risk rating. Each loan type is assigned an allowance factor based on historical loss experience, economic conditions, and overall portfolio quality including delinquency rates. 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.
19
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment.
Goodwill
The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), effective January 1, 2002. Accordingly, goodwill is no longer subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, under SFAS 142, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented, or exchanged, and amortized over their useful life. Branch acquisition transactions were outside the scope of SFAS 142 and, accordingly, intangible assets related to such transactions continued to amortize upon the adoption of SFAS 142. The cost of purchased deposit relationships and other intangible assets, based on independent valuation, are being amortized over their estimated lives not to exceed fifteen years. Amortization expense charged to operations was $325 thousand and $257 thousand for the six months ended June 30, 2007 and 2006, respectively.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Stock-Based Compensation
The Company has a stock-based employee compensation plan under which nonqualified stock options may be granted periodically to certain employees. The Company’s stock options typically have an exercise price equal to at least the fair value of the stock on the date of grant, and vest based on continued service with the Company for a specified period, generally five years. The Company has adopted SFAS 123R, which requires that compensation cost relating to share-based payment transactions be recognized in financial statements. The cost is measured based on the fair value of the equity or liability instruments issued.
SFAS 123R also requires that new awards to employees eligible for retirement prior to the award becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award.
20
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 second quarter 2007 earnings were $4.5 million, down 13.3% from $5.2 million for the second quarter of 2006, and up sequentially 13.0% from $4.0 million in the first quarter of 2007. Net income per diluted share was $.42, down 12.5% from $.48 for the same period in 2006 and up 13.5% from $.37 in the first quarter of 2007. VFG’s earnings for the second quarter of 2007 produced an annualized return on average assets (ROA) of 1.15% and an annualized return on average equity (ROE) of 11.82%, compared to prior year ratios of 1.35% and 14.74%, respectively. For the first six months of 2007, net income was $8.6 million, down 11.8% from $9.7 million for the same period in 2006. Net income per diluted share was $.79, down 11.2% from $.89 for the first six months of 2006. ROA and ROE for the six month period was 1.08% and 11.31%, respectively, compared to 1.27% and 13.93% for the same period in 2006.
Net Interest Income
Net interest income amounted to $14.9 million for the second quarter of 2007, down $327 thousand or 2.1% compared with $15.2 million for the same quarter in 2006. Net interest margin compression of thirteen basis points when compared to the same quarter in the prior year, coupled with an acceleration of funding costs, led to this decrease. The net interest margin for the second quarter of 2007 was 4.22%, up seventeen basis points, compared to 4.05% for the first quarter of 2007, and down thirteen basis points when compared to 4.35% for the second quarter of 2006. Normalizing the net interest margin for an interest adjustment on a participation loan recorded during the period would have resulted in a net interest margin of 4.13% for the current quarter. Asset yields rose sequentially, with an average yield on assets of 6.99% for the second quarter of 2007, compared to 6.92% for the first quarter of 2007 and 6.62% for the second quarter of 2006. On a linked quarter basis, the average cost of interest bearing liabilities decreased to 3.43% for the second quarter of 2007, as compared to 3.51% for the first quarter of 2007, and increased fifty-nine basis points when compared to 2.84% for the second quarter of 2006. Average balances in VFG commercial paper increased to $69.6 million for the second quarter of 2007 at a cost of 4.50%, compared to $48.5 million at a cost of 4.40% for the second quarter of 2006 and increased on a linked quarter basis as compared to $63.8 million at a cost of 4.73% for the first quarter of 2007. Average balances in FHLB advances increased to $73.6 million for the second quarter of 2007 at a cost of 5.20%, compared to $55.5 million at a cost of 4.50% for the second quarter of 2006, and increased on a linked quarter basis compared to $62.2 million at a cost of 5.00%. For the six months ended June 30, 2007, net interest income was $29.3 million, a decrease of $837 thousand or 2.8% from $30.1 million for the same period in 2006. The net interest margin for the six month period ended June 30, 2007 was 4.14%, compared to 4.35% for the same period in 2006. Continuing pressures of a flat yield curve affecting the entire industry and our increased costs related to short-term wholesale funding are key reasons for the decline in our margin.
21
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three months ended June 30, | ||||||||||||||||||
(unaudited) | ||||||||||||||||||
2007 | 2006 | |||||||||||||||||
Dollars in thousands | Average Balance | Interest Inc/Exp | Average Rates | Average Balance | Interest Inc/Exp | Average Rates | ||||||||||||
Assets | ||||||||||||||||||
Loans receivable, net | $ | 1,209,394 | $ | 22,317 | 7.40 | % | $ | 1,188,071 | $ | 20,886 | 7.05 | % | ||||||
Investment securities | ||||||||||||||||||
Taxable | 164,210 | 1,849 | 4.45 | % | 154,145 | 1,622 | 4.22 | % | ||||||||||
Tax exempt | 93,876 | 1,425 | 6.01 | % | 84,328 | 1,300 | 6.18 | % | ||||||||||
Total investments | 258,086 | 3,274 | 5.02 | % | 238,473 | 2,922 | 4.91 | % | ||||||||||
Interest bearing deposits | 378 | 4 | 4.19 | % | 3,842 | 29 | 3.03 | % | ||||||||||
Federal funds sold | 667 | 9 | 5.34 | % | 22,605 | 133 | 2.36 | % | ||||||||||
259,131 | 3,287 | 5.02 | % | 264,920 | 3,084 | 4.67 | % | |||||||||||
Total earning assets | 1,468,525 | 25,604 | 6.99 | % | 1,452,991 | 23,970 | 6.62 | % | ||||||||||
Total nonearning assets | 114,050 | 106,274 | ||||||||||||||||
Total assets | $ | 1,582,575 | $ | 1,559,265 | ||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||
Interest checking | $ | 164,391 | $ | 70 | 0.17 | % | $ | 175,080 | $ | 243 | 0.56 | % | ||||||
Money market | 149,997 | 898 | 2.40 | % | 156,687 | 679 | 1.74 | % | ||||||||||
Savings | 95,490 | 325 | 1.37 | % | 109,907 | 173 | 0.63 | % | ||||||||||
Time deposits: | ||||||||||||||||||
Less than $100,000 | 397,884 | 4,199 | 4.23 | % | 392,281 | 3,609 | 3.69 | % | ||||||||||
$100,000 and more | 204,382 | 2,351 | 4.61 | % | 184,713 | 1,890 | 4.10 | % | ||||||||||
Total interest-bearing deposits | 1,012,144 | 7,843 | 3.11 | % | 1,018,668 | 6,594 | 2.60 | % | ||||||||||
Federal funds purchased and securities sold under agreements to repurchase | 8,352 | 117 | 5.54 | % | 18,884 | 64 | 1.36 | % | ||||||||||
Federal Home Loan Bank advances | 73,643 | 968 | 5.20 | % | 55,496 | 623 | 4.50 | % | ||||||||||
Subordinated debt | 20,619 | 421 | 8.08 | % | 20,619 | 402 | 7.82 | % | ||||||||||
Commercial paper | 69,605 | 791 | 4.50 | % | 48,451 | 531 | 4.40 | % | ||||||||||
Other borrowings | 715 | 11 | 6.09 | % | 468 | 8 | 6.86 | % | ||||||||||
172,934 | 2,308 | 5.28 | % | 143,918 | 1,628 | 4.54 | % | |||||||||||
Total interest-bearing liabilities | 1,185,078 | 10,151 | 3.43 | % | 1,162,586 | 8,222 | 2.84 | % | ||||||||||
Total noninterest-bearing liabilities | 243,452 | 254,096 | ||||||||||||||||
Total liabilities | 1,428,530 | 1,416,682 | ||||||||||||||||
Stockholders’ equity | 154,045 | 142,583 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,582,575 | $ | 1,559,265 | ||||||||||||||
Net interest income (tax equivalent) | $ | 15,453 | $ | 15,748 | ||||||||||||||
Average interest rate spread | 3.57 | % | 3.78 | % | ||||||||||||||
Interest expense as percentage of average earning assets | 2.77 | % | 2.27 | % | ||||||||||||||
Net interest margin | 4.22 | % | 4.35 | % |
22
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Six months ended June 30, | ||||||||||||||||||
(unaudited) | ||||||||||||||||||
2007 | 2006 | |||||||||||||||||
Dollars in thousands | Average Balance | Interest Inc/Exp | Average Rates | Average Balance | Interest Inc/Exp | Average Rates | ||||||||||||
Assets | ||||||||||||||||||
Loans receivable, net | $ | 1,214,647 | $ | 44,343 | 7.36 | % | $ | 1,173,227 | $ | 40,338 | 6.93 | % | ||||||
Investment securities | ||||||||||||||||||
Taxable | 169,495 | 3,809 | 4.47 | % | 153,548 | 3,236 | 4.25 | % | ||||||||||
Tax exempt | 94,363 | 2,876 | 6.06 | % | 82,485 | 2,553 | 6.24 | % | ||||||||||
Total investments | 263,858 | 6,685 | 5.04 | % | 236,033 | 5,789 | 4.95 | % | ||||||||||
Interest bearing deposits | 501 | 10 | 3.97 | % | 4,895 | 65 | 2.68 | % | ||||||||||
Federal funds sold | 2,241 | 61 | 5.41 | % | 26,627 | 409 | 3.10 | % | ||||||||||
266,600 | 6,756 | 5.04 | % | 267,555 | 6,263 | 4.72 | % | |||||||||||
Total earning assets | 1,481,247 | 51,099 | 6.96 | % | 1,440,782 | 46,601 | 6.52 | % | ||||||||||
Total nonearning assets | 113,922 | 101,616 | ||||||||||||||||
Total assets | $ | 1,595,169 | $ | 1,542,398 | ||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||
Interest-bearing deposits | ||||||||||||||||||
Interest checking | $ | 161,918 | $ | 133 | 0.17 | % | $ | 177,160 | $ | 443 | 0.50 | % | ||||||
Money market | 164,755 | 2,154 | 2.64 | % | 161,649 | 1,380 | 1.72 | % | ||||||||||
Savings | 96,002 | 627 | 1.32 | % | 114,970 | 369 | 0.65 | % | ||||||||||
Time deposits: | ||||||||||||||||||
Less than $100,000 | 406,338 | 8,632 | 4.28 | % | 382,272 | 6,794 | 3.58 | % | ||||||||||
$100,000 and more | 209,001 | 4,827 | 4.66 | % | 180,040 | 3,570 | 4.00 | % | ||||||||||
Total interest-bearing deposits | 1,038,014 | 16,373 | 3.18 | % | 1,016,091 | 12,556 | 2.49 | % | ||||||||||
Federal funds purchased and securities sold under agreements to repurchase | 8,118 | 225 | 5.51 | % | 17,281 | 148 | 1.73 | % | ||||||||||
Federal Home Loan Bank advances | 67,956 | 1,745 | 5.11 | % | 55,959 | 1,205 | 4.34 | % | ||||||||||
Subordinated debt | 20,619 | 838 | 8.08 | % | 20,619 | 776 | 7.59 | % | ||||||||||
Commercial paper | 66,721 | 1,545 | 4.61 | % | 39,576 | 833 | 4.24 | % | ||||||||||
Other borrowings | 531 | 16 | 5.99 | % | 361 | 12 | 6.70 | % | ||||||||||
163,945 | 4,369 | 5.30 | % | 133,796 | 2,974 | 4.48 | % | |||||||||||
Total interest-bearing liabilities | 1,201,959 | 20,742 | 3.47 | % | 1,149,887 | 15,530 | 2.72 | % | ||||||||||
Total noninterest-bearing liabilities | 240,525 | 252,026 | ||||||||||||||||
Total liabilities | 1,442,484 | 1,401,913 | ||||||||||||||||
Stockholders’ equity | 152,685 | 140,485 | ||||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,595,169 | $ | 1,542,398 | ||||||||||||||
Net interest income (tax equivalent) | $ | 30,357 | $ | 31,071 | ||||||||||||||
Average interest rate spread | 3.49 | % | 3.80 | % | ||||||||||||||
Interest expense as percentage of average earning assets | 2.82 | % | 2.17 | % | ||||||||||||||
Net interest margin | 4.14 | % | 4.35 | % |
23
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Noninterest Income
Total non-interest income was $4.3 million for the second quarter of 2007, up compared with $3.9 million for the second quarter of 2006 and up sequentially compared with $3.8 million for the first quarter of 2007. Retail banking fee income increased $153 thousand or 8.7% to $1.9 million, compared to $1.8 million in the second quarter of 2006. Mortgage banking revenue amounted to $645 thousand, a decrease of $208 thousand or 24.4%, as compared to $853 thousand for the second quarter of 2006, and up sequentially $46 thousand or 7.7% from the first quarter of 2007. Revenues from trust and brokerage for the second quarter were $1.2 million, up $200 thousand or 21.0% compared to $1.0 million in the second quarter of 2006, and up sequentially $67 thousand or 6.2% from the first quarter of 2007. Fiduciary and brokerage assets under management were $633 million at June 30, 2007, up slightly from $628 million at March 31, 2007. Included in other non-interest income during second quarter 2007 was income associated with an investment in bank owned life insurance of $121 thousand for second quarter 2007 and $240 thousand for the six month period, compared to none in 2006 for both periods.
Noninterest Expense
Non-interest expense for the second quarter of 2007 amounted to $12.9 million, up $1.4 million or 12.2% from $11.5 million for the same period in 2006, and up sequentially $567 thousand or 4.6% from the first quarter of 2007. Marketing and professional fee increases noted from first quarter 2007 are attributable to a company-wide direct mail marketing initiative. Total nonrecurring costs associated with the previously announced asset reallocation initiative and charter consolidation amounted to $152 thousand during the second quarter. For the six month period ended June 30, 2007, non-interest expense amounted to $25.1 million, an increase of $2.5 million or 11.1% over $22.6 million for the same period in 2006. This increase reflects incremental operating costs primarily in compensation, occupancy and supplies of $1.2 million associated with four branches and two loan production offices during 2006 and 2007, respectively. VFG’s efficiency ratio was 64.9% for the quarter, compared to 58.5% for the same quarter in 2006. For the six month period ended June 30, 2007, the efficiency ratio was 65.2%, compared to 59.0% for the same period in 2006. Excluding the impact of nonrecurring revenue and expense items noted above, the efficiency ratio was 65.2% and 64.8% for the quarter and six month period, respectively.
Income Taxes
Income tax expense for the second quarter of 2007 was $1.9 million resulting in an effective tax rate of 29.0% compared to $2.3 million, or 30.7%, for the second quarter of 2006. For the six month period ended June 30, 2007, income tax expense amounted to $3.6 million, resulting in an effective tax rate of 29.4% compared to $4.3 million, or 30.7% for the same period in 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 second quarter of 2007 increased by $9.5 million over the same period last year, resulting in an increase in related tax-exempt interest income.
24
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Asset Quality
VFG’s ratio of non-performing assets as a percentage of total assets amounted to 0.20% as of June 30, 2007, compared to 0.16% at June 30, 2006 and 0.17% at March 31, 2007. Net charge-offs as a percentage of average loans receivable amounted to none on an annualized basis for the quarter and 0.03% for the six month period ended June 30, 2007, compared to none and 0.03% for the same periods in 2006. At June 30, 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 1.21%. VFG did not record a provision for loan losses for the second quarter, compared to $100 thousand for the three months ended June 30, 2006. The reduction in provision is a result of loan contraction experienced during the quarter and continuing strength in asset quality. For the six month period ended June 30, 2007, the provision for loan losses was $165 thousand, a decrease of $445 thousand or 72.9% compared to the same period in 2006.
The following table provides information on asset quality statistics for the periods presented (In thousands):
June 30, 2007 | December 31, 2006 | June 30, 2006 | ||||||||||
(unaudited) | (unaudited) | |||||||||||
Non-accrual loans | $ | 3,139 | $ | 2,999 | $ | 2,339 | ||||||
Troubled debt restructurings | — | — | 113 | |||||||||
Foreclosed assets | — | 38 | 38 | |||||||||
Loans past due 90 days accruing interest | — | — | — | |||||||||
Total non-performing assets | $ | 3,139 | $ | 3,037 | $ | 2,490 | ||||||
Nonperforming assets to total assets | 0.20 | % | 0.19 | % | 0.16 | % | ||||||
Nonperforming assets to loans and foreclosed property | 0.26 | % | 0.25 | % | 0.21 | % | ||||||
Allowance for loan losses as a percentage of loans receivable | 1.21 | % | 1.19 | % | 1.17 | % | ||||||
Allowance for loan losses as a percentage of nonperforming assets | 461.77 | % | 477.44 | % | 563.98 | % | ||||||
Annualized net charge-offs (recoveries) as a percentage of average loans receivable | 0.03 | % | (0.01 | %) | 0.03 | % | ||||||
25
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 six months ended June 30, 2007, the Company retained $5.1 million, or 59.5% of its net income. Stockholders’ equity increased by $4.4 million, reflecting the earnings retention and a decrease of $946 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 June 30, 2007, the Company and the subsidiary banks met all minimum capital adequacy requirements to which they are subject and are categorized as “well capitalized.” There are no conditions or events that management believes have changed the subsidiary banks’ well capitalized position.
The following table includes information with respect to the Company’s risk-based capital and equity levels as of June 30, 2007 (In thousands):
Tier 1 capital | $ | 159,983 | ||
Tier 2 capital | 14,798 | |||
Total risk-based capital | 174,781 | |||
Total risk-weighted assets | 1,326,764 | |||
Average adjusted total assets | 1,567,520 | |||
Capital ratios: | ||||
Tier 1 risk-based capital ratio | 12.06 | % | ||
Total risk-based capital ratio | 13.17 | % | ||
Leverage ratio (Tier 1 capital to average adjusted total assets) | 10.21 | % | ||
Equity to assets ratio | 9.79 | % | ||
Tangible equity to assets ratio | 8.79 | % |
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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 Company also represents an important aspect of liquidity management. The Company’s cash outflows consist of overhead associated with corporate expenses, executive management, finance, marketing, human resources, loan and deposit operations, information technology, audit, compliance and loan review functions. It also includes outflows associated with dividends to shareholders. The main sources of funding for the Company are the management fees and dividends it receives from its banking and trust subsidiaries, a working line of credit with a correspondent bank, and availability of the subordinated debt security market as deemed necessary. The Company’s capital base provides the resource and ability to support the assets of the Company and provide capital for future expansion.
In the judgment of management, the Company maintains the ability to generate sufficient amounts of cash to cover normal requirements and any additional funds as needs may arise.
Off Balance Sheet Items
There have been no material changes to the off balance sheet items disclosed in “Management’s Discussion and Analysis” in VFG’s annual report on Form 10-K for the fiscal year ended December 31, 2006.
Contractual Obligations
There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in VFG’s annual report on Form 10-K for the fiscal year ended December 31, 2006.
Effects of Inflation
The effect of changing prices on financial institutions is typically different from other industries as the Company’s assets and liabilities are monetary in nature. Interest rates and thus the Company’s asset liability management is impacted by changes in inflation, but there is not a direct correlation between the two measures. Management monitors the impact of inflation on the financial markets.
27
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Access to Filings
The Company provides access to its SEC filings through the corporate Website 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, 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.
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 June 30, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting or control of assets.
28
VIRGINIA FINANCIAL GROUP, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
Please refer to the section above at the beginning of Part II captioned “Cautionary Statement Regarding Forward-Looking Statements” for a discussion of the risk factors applicable to VFG.
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.
The annual meeting of stockholders of the Company was held on May 14, 2007.
The following directors were elected for terms expiring in 2010, with the following votes:
For | Withheld | |||
Lee S. Baker | 7,937,996 | 166,737 | ||
O.R. Barham, Jr. | 7,983,129 | 121,604 | ||
P. William Moore, Jr. | 7,991,810 | 112,923 | ||
Thomas F. Williams, Jr. | 7,974,303 | 130,430 |
The following directors’ term of office continued after the meeting:
E. Page Butler | Gregory L. Fisher | |
Taylor E. Gore | Christopher M. Hallberg | |
Jan S. Hoover | Martin F. Lightsey | |
H. Wayne Parrish |
Votes were cast in favor of ratification of the appointment of Grant Thornton LLP as external auditors of the Company for fiscal 2007.
Not applicable.
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(a) The following exhibits either are filed as part of this Report or are incorporated herein by reference:
Exhibit No. 2.1 | Agreement and Plan of Reorganization, dated as of July 26, 2007, between Virginia Financial Group, Inc. and FNB Corporation, incorporated by reference to Exhibit 2.1 to Form 8-K filed July 30, 2007. | |
Exhibit No. 3.1 | Articles of Incorporation of Virginia Financial Group, Inc., as amended effective August 24, 2006. | |
Exhibit No. 3.2 | Bylaws of Virginia Financial Group, Inc., as amended effective January 20, 2004. | |
Exhibit No. 10.11 | Virginia Financial Group, Inc. Executive Incentive Plan, as amended May 14, 2007. | |
Exhibit No. 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended. | |
Exhibit No. 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, 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 |
August 9, 2007 |
/s/ Jeffrey W. Farrar |
Jeffrey W. Farrar, CPA |
Executive Vice President and Chief Financial Officer |
August 9, 2007 |
30