VFGI Virginia Financial Grp. (MM)

CHARLOTTESVILLE, Va., Oct. 23 /PRNewswire-FirstCall/ -- Virginia Financial Group, Inc. (NASDAQ:VFGI) announced today that the Federal Reserve Board has approved its merger application with FNB Corporation. Approvals from the State Corporation Commission and Stockholders of VFG and FNB are pending. The merger is expected to close late in the fourth quarter, subject to remaining approvals and other customary closing conditions. "Receiving this Federal Reserve approval is a significant event that will assist us in moving ahead with the merger in a timely manner," said O. R. Barham, Jr. President and Chief Executive Officer of VFG. "Integration planning teams are making very good progress and we look forward to delivering the benefits of this merger to our shareholders, customers, and communities." VFG also today reported its third quarter 2007 earnings of $4.3 million, down 14.7% from $5.1 million for the third quarter of 2006. Net income per diluted share was $0.40, down 14.9% from $0.47 for the same period in 2006. For the first nine months of 2007, net income was $12.9 million, down 12.8% from $14.8 million for the same period in 2006. Net income per diluted share was $1.19, down 12.5% from $1.36 for the first nine months of 2006. O.R. Barham, Jr., President and CEO, commented, "We are pleased with our earnings in the face of a difficult operating environment for banks during the quarter. The quarter saw some improvement in loan production in spite of continuing high levels of pre-payment activity. More importantly, a substantial portion of the loan growth for the period was to commercial and industrial clients, an area of focus for our lending platform. We had a very successful third quarter with our High Performance Checking Program, originating over 3,600 new DDA accounts with balances approaching $12 million. These accounts will continue to add balances and fee income in the future. Asset quality in general remains very good, although we did experience an increase in nonperforming assets and watch list credits which necessitated some additional loan loss provisioning for the quarter." Financial Performance Net Interest Income Net interest income amounted to $14.4 million for the third quarter of 2007, down $767 thousand or 5.1% compared with $15.2 million for the same quarter in 2006. The net interest margin for the third quarter of 2007 was 4.06%, down fifteen basis points when compared to 4.21% for the third quarter of 2006. Higher funding costs associated with competition for deposits in local markets and greater use of wholesale funding, coupled with a lower rate of growth in loans receivable and average earning assets, led to this decrease in net interest margin and revenues for the period. On a sequential basis, the net interest margin was down seven basis points from the 4.13% for the second quarter (normalized for previously disclosed interest adjustment on a participation loan). This drop was due in most part to a drop in asset yields sequentially, with an average yield on assets of 6.87% for the third quarter of 2007, compared to 6.99% for the second quarter of 2007 and 6.78% for the third quarter of 2006. Loan yields were impacted by prepayment activity, the Federal Open Market Committee recent reduction of the Fed funds target rate which led to a fifty basis point decrease in the prime rate and an increase in non-accruals for the period. On a linked quarter basis, the average cost of interest bearing liabilities remained stable at 3.43% for the both the second and third quarters of 2007 and increased twenty- four basis points when compared to 3.19% for the third quarter of 2006. The net interest margin for the nine month period ended September 30, 2007 was 4.11%, compared to 4.31% for the same period in 2006. Continuing pressures of a flat yield curve, loan prepayment activity, strong competition for deposits and increased use of wholesale funding contributed to this contraction. Given that approximately 34% of VFG's loan portfolio immediately repriced with the fifty basis point decrease in the prime rate during the third quarter, and the fact that VFG's balance sheet is a slightly asset sensitive balance sheet, some additional margin contraction is anticipated in the fourth quarter. Non-Interest Income Total non-interest income was $4.3 million for both the second and third quarters of 2007 and up 4.7% compared with $4.1 million for the third quarter of 2006. Retail banking fee income increased $215 thousand or 12.0% to $2.0 million, compared to $1.8 million in the third quarter of 2006. The increase in retail banking fee income is attributable to increased NSF fees and debit card fee income, partly attributable to the High Performance Checking Account Program. Mortgage banking revenue amounted to $602 thousand, a decrease of $84 thousand or 12.2%, as compared to $686 thousand for the third quarter of 2006, and down sequentially $43 thousand or 6.7% from the second quarter of 2007. Revenues from trust and brokerage for the third quarter were $1.0 million, up $143 thousand or 15.9% compared to $897 thousand in the third quarter of 2006, and down sequentially $111 thousand or 9.6% from the second quarter of 2007. Fiduciary and brokerage assets under management were $617 million at September 30, 2007, down from $633 million at June 30, 2007. Included in other non- interest income during third quarter 2007 was income associated with an investment in bank owned life insurance of $135 thousand for the third quarter 2007 and $379 thousand for the nine month period, compared to $119 thousand in 2006 for each period, respectively. Non-interest Expense Non-interest expense for the third quarter of 2007 amounted to $12.4 million, up $463 thousand or 3.9% from $11.9 million for the same period in 2006, and down sequentially $466 thousand or 3.6% from the second quarter of 2007. Compensation and benefits decreased $402 thousand or 5.7% sequentially from second quarter 2007 and $72 thousand or 1.0% compared to third quarter 2006, reflecting reductions associated with five branch closings during the quarter and previous initiatives to improve efficiency. Marketing increases of $87 thousand or 22.1% sequentially, and $148 thousand or 44.6% as compared to the third quarter of 2006 are attributable to the previously announced High Performance Checking Account Program. Other expense increased $102 thousand or 5.6% from second quarter 2007, and $220 thousand or 12.56% compared to third quarter 2006, reflecting an increase in various fraud related losses ($198 thousand) incurred during the quarter in the normal course of business. For the nine month period ended September 30, 2007, non-interest expense amounted to $37.5 million, an increase of $2.7 million or 7.7% over $34.9 million for the same period in 2006. This increase reflects incremental operating costs primarily in compensation, occupancy and supplies of $1.3 million associated with four branches and two loan production offices during 2006 and 2007, respectively. Additionally, the DDA account acquisition initiative mentioned previously contributed approximately $355 thousand to this increase during the nine month period. VFG's efficiency ratio was 64.7% for the quarter, compared to 60.8% for the same quarter in 2006. For the nine month period ended September 30, 2007, the efficiency ratio was 65.0%, compared to 59.6% for the same period in 2006. Loan Portfolio Average loans for the third quarter were $1.20 billion, up $7.3 million or 0.6% from the third quarter of 2006, and down sequentially from $1.21 billion from the second quarter of 2007. Loans receivable at the end of the quarter were up $16.4 million or 1.4% for the quarter and up $6.3 million or 0.5% over the last twelve months. Loan growth has improved in the third quarter largely due to positive results from our new loan production office in Richmond, Virginia. The commercial and industrial segment of the portfolio increased $17.0 million or 17.0% sequentially from the second quarter of 2007. The real estate construction component of the portfolio increased $10.1 million or 4.7% from the second quarter of 2007. Commercial real estate continued to see accelerated payoff activity, with that component down $17.4 million or 3.3% sequentially. While pay-offs are consistent with market conditions, this decrease is also consistent with VFG's strategy to improve the diversification in the loan portfolio. Deposits and Borrowings Average deposits for the third quarter were $1.20 billion, down $81.8 million or 6.4% from the third quarter of 2006, and down sequentially $42.8 million from the second quarter of 2007. Period end deposits were also down $62.9 million or 5.1% sequentially. Decreases were noted in each category. Average noninterest bearing deposits have decreased $31.1 million or 12.3% from the third quarter of 2006. Average certificates of deposits were down $17.6 million or 2.9% sequentially, with the average cost of such funding improving from 4.35% to 4.18% for the period. Average borrowings for the third quarter amounted to $203.5 million, an increase of $55.3 million or 37.3% compared to the same period in 2006, and up sequentially $30.6 million or 17.7% from the second quarter of 2007. If this trend of decrease in deposits, and increased reliance on wholesale funding continues, the net interest margin could be negatively impacted in future quarters. Capital At both September 30, 2007 and 2006 VFG had total assets of $1.59 billion. Shareholder's equity at September 30, 2007 was $159.2 million, an increase of $12.0 million or 8.2% compared to September 30, 2006. Shareholder's equity represented 10.03% of total assets at September 30, 2007, while tangible equity capital represented 9.04% of tangible assets at September 30, 2007. Book value at September 30, 2007 was $14.74 per share, compared to $13.67 at September 30, 2006. Asset Quality VFG's ratio of non-performing assets as a percentage of total assets amounted to 0.47% as of September 30, 2007, compared to 0.18% at September 30, 2006 and 0.20% at June 30, 2007. Net charge-offs as a percentage of average loans receivable amounted to 0.03% for the quarter ended September 30, 2007, compared to net recoveries of (0.02%) for the same period in 2006. At September 30, 2007, the allowance for loan losses was approximately two times the level of non-performing assets, while the allowance as a percentage of total loans amounted to 1.21%. VFG recorded a provision for loan losses of $200 thousand for the third quarter, compared to no provision for the three months ended September 30, 2006. The increase in non-performing assets and provision for loan losses is a result of a $4.1 million commercial credit that was put on nonaccrual status during the quarter coupled with a continuing decline in the real estate market conditions in VFG's primary markets. For the nine month period, the provision for loan losses amounted to $365 thousand, compared to net charge-offs of $248 thousand for the period. Merger with FNB Corporation VFG announced the signing of an agreement to combine in a merger of equals transaction with FNB Corporation on July 26, 2007 to create the largest independent bank holding company headquartered in the Commonwealth of Virginia. VFG and FNB have received approval of the merger from the Federal Reserve Board. Approvals from the Virginia State Corporation Commission and stockholders of VFG and FNB are pending. The merger process is expected to be completed late in the fourth quarter of 2007. Additionally, merger and integration teams have been formed and are making significant progress on specific initiatives related to the combination and integration of the two companies. In connection with the proposed merger, VFG filed with the Securities and Exchange Commission (the "SEC") a registration statement on Form S-4 on September 21, 2007 to register the shares of VFG common stock to be issued to the shareholders of FNB. The registration statement included a joint proxy statement/prospectus which will be sent to the shareholders of VFG and FNB seeking their approval of the merger. In addition, each of VFG and FNB may file other relevant documents concerning the proposed merger with the SEC. WE URGE INVESTORS AND SECURITY HOLDERS TO READ THE REGISTRATION STATEMENT ON FORM S-4 AND THE JOINT PROXY STATEMENT/PROSPECTUS INCLUDED WITHIN THE REGISTRATION STATEMENT AND ANY OTHER RELEVANT DOCUMENTS TO BE FILED WITH THE SEC IN CONNECTION WITH THE PROPOSED MERGER, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT VFG, FNB AND THE PROPOSED TRANSACTION. Investors and security holders may obtain free copies of these documents through the website maintained by the SEC at http://www.sec.gov/. Free copies of the joint proxy statement/prospectus also may be obtained by directing a request by telephone or mail to Virginia Financial Group, Inc., 1807 Seminole Trail, Suite 104 Charlottesville, Virginia 22901, Attention: Investor Relations (telephone: (434) 964-2217) or by accessing VFG's website at http://www.vfgi.net/ under "SEC Filings and Other Documents". The information on VFG's website is not, and shall not be deemed to be, a part of this release or incorporated into other filings either company makes with the SEC. VFG and FNB and their directors and certain of their executive officers are participants in the solicitation of proxies from the shareholders of VFG and/or FNB in connection with the merger. Information about the directors and executive officers of VFG is set forth in the proxy statement for VFG's 2007 annual meeting of shareholders filed with the SEC on March 28, 2007. Information about the directors and executive officers of FNB is set forth in the proxy statement for FNB's 2007 annual meeting of shareholders filed with the SEC on March 30, 2007. Additional information regarding these participants in the proxy solicitation and their direct and indirect interests, by security holdings or otherwise, will be contained in the joint proxy statement/prospectus and other relevant materials to be filed with the SEC when they become available. About VFG VFG is the holding company for Planters Bank & Trust Company of Virginia - in Staunton; Second Bank & Trust - in Fredericksburg and Virginia Commonwealth Trust Company - in Culpeper. The Company is a traditional community banking provider, offering a full range of business and consumer banking services including trust and asset management service via its trust company affiliate. The organization maintains a network of thirty-five branches and two loan production offices serving Northern, Central and Southwest Virginia. It also maintains five trust and investment service offices in its markets. 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. Comparison of our efficiency ratio with those of other companies may not be possible, because other companies may calculate the efficiency ratio differently. 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." Caution Regarding Forward-Looking Statements In addition to historical information, this press release 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: (i) expected cost savings from VFG's acquisitions and dispositions, (ii) competitive pressure in the banking industry or in VFG's markets may increase significantly, (iii) changes in the interest rate environment may reduce margins, (iv) general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, credit quality deterioration, (v) changes may occur in banking legislation and regulation (vi) changes may occur in general business conditions and (vii) changes may occur in the securities markets. Please refer to VFG's filings with the Securities and Exchange Commission for additional information, which may be accessed at http://www.vfgi.net/. QUARTERLY PERFORMANCE SUMMARY Virginia Financial Group, Inc. (NASDAQ:VFGI) (Dollars in thousands, except per share data) Percent For the Three Months Ended Increase 09/30/2007 09/30/2006 (Decrease) INCOME STATEMENT Interest income - taxable equivalent $25,250 $25,246 0.02% Interest expense 10,312 9,582 7.62% Net interest income - taxable equivalent 14,938 15,664 -4.63% Less: taxable equivalent adjustment 536 495 8.28% Net interest income 14,402 15,169 -5.06% Provision for loan and lease losses 200 - N/A Net interest income after provision for loan and lease losses 14,202 15,169 -6.37% Noninterest income 4,257 4,065 4.72% Noninterest expense 12,388 11,926 3.87% Provision for income taxes 1,748 2,239 -21.93% Net income $4,323 $5,069 -14.72% PER SHARE DATA Basic earnings $0.40 $0.47 -14.89% Diluted earnings $0.40 $0.47 -14.89% Shares outstanding 10,795,097 10,771,272 Weighted average shares - Basic 10,794,322 10,771,661 Diluted 10,816,799 10,856,835 Dividends paid on common shares $0.16 $0.15 PERFORMANCE RATIOS Return on average assets 1.10% 1.27% -13.39% Return on average equity 10.96% 13.88% -21.04% Return on average realized equity (A) 10.88% 13.75% -20.87% Net interest margin (taxable equivalent) 4.06% 4.21% -3.50% Efficiency (taxable equivalent) (B) 64.71% 60.77% 6.48% ASSET QUALITY Allowance for loan losses Beginning of period $14,495 $14,043 Provision for loan losses 200 - Charge-offs (188) (88) Recoveries 110 357 Net (charge-offs) recoveries (78) 269 End of period $14,617 $14,312 Non-performing assets: Non-accrual loans $7,487 $2,757 Loans 90+ days past due and still accruing - - Foreclosed assets - 123 Troubled debt restructurings - - Total non-performing assets $7,487 $2,880 to total assets: 0.47% 0.18% to total loans plus foreclosed assets: 0.62% 0.24% Allowance for loan losses to total loans 1.21% 1.19% Net charge-offs (recoveries) $78 $(269) Net charge-offs (recoveries) to average loans outstanding 0.03% (0.02)% NOTES: (A) Excludes the effect on average stockholders' equity of unrealized gains (losses) that result from changes in market values of securities and other comprehensive pension expense. (B) Excludes gains or losses on securities, fixed assets and foreclosed assets. (C) Individual amounts shown above are calculated from actual, not rounded amounts in the thousands, which appear above. QUARTERLY PERFORMANCE SUMMARY Virginia Financial Group, Inc. (NASDAQ:VFGI) (Dollars in thousands, except per share data) Percent For the Nine Months Ended Increase 09/30/2007 09/30/2006 (Decrease) INCOME STATEMENT Interest income - taxable equivalent $76,348 $71,847 6.26% Interest expense 31,054 25,112 23.66% Net interest income - taxable equivalent 45,294 46,735 -3.08% Less: taxable equivalent adjustment 1,621 1,459 11.10% Net interest income 43,673 45,276 -3.54% Provision for loan and lease losses 365 610 -40.16% Net interest income after provision for loan and lease losses 43,308 44,666 -3.04% Noninterest income 12,420 11,503 7.97% Noninterest expense 37,529 34,862 7.65% Provision for income taxes 5,317 6,535 -18.64% Net income $12,882 $14,772 -12.79% PER SHARE DATA Basic earnings $1.19 $1.37 -13.14% Diluted earnings $1.19 $1.36 -12.50% Shares outstanding 10,795,097 10,771,272 Weighted average shares - Basic 10,792,268 10,769,170 Diluted 10,817,731 10,851,158 Dividends paid on common shares $0.48 $0.45 PERFORMANCE RATIOS Return on average assets 1.09% 1.27% -14.17% Return on average equity 11.19% 13.88% -19.38% Return on average realized equity (A) 11.12% 13.74% -19.07% Net interest margin (taxable equivalent) 4.11% 4.31% -4.64% Efficiency (taxable equivalent) (B) 65.04% 59.60% 9.13% ASSET QUALITY Allowance for loan losses Beginning of period $14,500 $13,581 Provision for loan losses 365 610 Charge-offs (433) (315) Recoveries 185 436 Net charge-offs (248) 121 End of period $14,617 $14,312 Allowance for loan losses to total loans 1.21% 1.19% Net charge-offs $248 $(121) Net charge-offs (recoveries) to average loans outstanding 0.03% (0.01)% NOTES: (A) Excludes the effect on average stockholders' equity of unrealized gains (losses) that result from changes in market values of securities and other comprehensive pension expense. (B) Excludes securities gains (losses) and foreclosed property expense for all periods. (C) Individual amounts shown above are calculated from actual, not rounded amounts in the thousands, which appear above. QUARTERLY PERFORMANCE SUMMARY Virginia Financial Group, Inc. (NASDAQ:VFGI) (Dollars in thousands, except per share data) Percent Increase 09/30/2007 09/30/2006 (Decrease) SELECTED BALANCE SHEET DATA (Dollars in thousands) End of period balances Cash and cash equivalents $42,645 $44,803 -4.82% Securities available for sale 249,746 267,789 -6.74% Securities held to maturity 2,655 3,326 -20.17% Total securities 252,401 271,115 -6.90% Real estate - construction 225,268 192,113 17.26% Real estate - 1-4 family residential 326,858 302,706 7.98% Real estate - commercial and multifamily 507,096 566,497 -10.49% Commercial, financial and agricultural 117,490 101,920 15.28% Consumer loans 27,544 34,134 -19.31% All other loans 6,021 6,585 -8.56% Total loans 1,210,277 1,203,955 0.53% Deferred loan costs 1,036 858 20.75% Allowance for loan losses (14,617) (14,312) 2.13% Net loans 1,196,696 1,190,501 0.52% Bank owned life insurance 10,597 10,119 4.72% Other assets 84,377 76,016 11.00% Total assets 1,586,716 1,592,554 -0.37% Noninterest bearing deposits 214,412 241,666 -11.28% Money market & interest checking 305,236 347,851 -12.25% Savings 84,505 100,462 -15.88% CD's and other time deposits 569,260 595,543 -4.41% Total deposits 1,173,413 1,285,522 -8.72% Federal funds purchased and securities sold under agreements to repurchase 35,500 - N/A Federal Home Loan Bank advances 107,000 65,000 64.62% Subordinated debt 20,619 20,619 0.00% Commercial paper 76,082 61,632 23.45% Other borrowed funds 4,213 1,335 >100.00% Other liabilities 10,737 11,306 -5.03% Total liabilities 1,427,564 1,445,414 -1.23% Total stockholders' equity $159,152 $147,140 8.16% Accumulated comprehensive loss $(586) $(1,137) -48.46% Average balances Percent For the Three Months Ended Increase 09/30/2007 09/30/2006 (Decrease) Total assets $1,566,391 $1,587,664 -1.34% Total stockholders' equity $156,458 $144,848 8.02% For the Nine Months Ended 09/30/2007 09/30/2006 Total assets $1,585,471 $1,557,652 1.79% Total stockholders' equity $153,957 $141,955 8.45% OTHER DATA End of period full time employees 512 569 -10.02% QUARTERLY PERFORMANCE SUMMARY Virginia Financial Group, Inc. (NASDAQ:VFGI) (Dollars in thousands) Percent For the Three Months Ended Increase 09/30/2007 09/30/2006 (Decrease) Interest Income Loans, including fees $21,891 $21,618 1.26% Deposits in other banks 4 5 -20.00% Investment securities: Taxable 1,738 1,772 -1.92% Tax-exempt 922 844 9.24% Dividends 150 131 14.50% Federal funds sold 9 381 -97.64% Total interest income 24,714 24,751 -0.15% Interest Expense Deposits 7,634 7,601 0.43% Federal funds purchased and securities sold under agreements to repurchase 190 25 >100.00% Federal Home Loan Bank advances 1,206 860 40.23% Subordinated debt 426 434 -1.84% Commercial paper 844 658 28.27% Other borrowings 12 4 >100.00% Total interest expense 10,312 9,582 7.62% Net interest income 14,402 15,169 -5.06% Provision for loan losses 200 - N/A Net interest income after provision for loan losses 14,202 15,169 -6.37% Noninterest Income Retail banking fees 2,008 1,793 11.99% Commissions and fees from fiduciary activities 855 728 17.45% Brokerage fee income 185 169 9.47% Other operating income 559 473 18.18% (Losses) gains on sale of premises and equipment (19) 216 >-100.00% Gains on securities available for sale 67 - N/A Mortgage banking-related fees 602 686 -12.24% Total noninterest income 4,257 4,065 4.72% Noninterest Expense Compensation and employee benefits 6,635 6,707 -1.07% Net occupancy 907 754 20.29% Supplies and equipment 1,017 1,053 -3.42% Amortization-intangible assets 161 161 0.00% Marketing 480 332 44.58% State franchise taxes 298 252 18.25% Data processing 451 333 35.44% Telecommunications 273 226 20.80% Professional fees 195 357 -45.38% Other operating expenses 1,971 1,751 12.56% Total noninterest expense 12,388 11,926 3.87% Income before income taxes 6,071 7,308 -16.93% Income tax expense 1,748 2,239 -21.93% Net income $4,323 $5,069 -14.72% QUARTERLY PERFORMANCE SUMMARY Virginia Financial Group, Inc. (NASDAQ:VFGI) (Dollars in thousands) Percent For the Nine Months Ended Increase 09/30/2007 09/30/2006 (Decrease) Interest Income Loans, including fees $66,154 $61,885 6.90% Deposits in other banks 14 70 -80.00% Investment securities: Taxable 5,287 4,782 10.56% Tax-exempt 2,792 2,504 11.50% Dividends 410 357 14.85% Federal funds sold 70 790 -91.14% Total interest income 74,727 70,388 6.16% Interest Expense Deposits 24,007 20,157 19.10% Federal funds purchased and securities sold under agreements to repurchase 415 173 >100.00% Federal Home Loan Bank advances 2,952 2,065 42.95% Subordinated debt 1,264 1,209 4.55% Commercial paper 2,388 1,491 60.16% Other borrowings 28 17 64.71% Total interest expense 31,054 25,112 23.66% Net interest income 43,673 45,276 -3.54% (1,603) Provision for loan losses 365 610 -40.16% Net interest income after provision for loan losses 43,308 44,666 -3.04% Noninterest Income Retail banking fees 5,671 5,166 9.78% Commissions and fees from fiduciary activities 2,541 2,321 9.48% Brokerage fee income 735 566 29.86% Other operating income 1,615 1,184 36.40% (Losses) Gains on sale of premises and equipment (23) 292