CULPEPER, Va., April 24 /PRNewswire-FirstCall/ -- Virginia Financial Group, Inc. (NASDAQ:VFGI) today reported first quarter 2006 earnings of $4.5 million, an increase of 11.2% compared to earnings of $4.0 million for the first quarter of 2005. Net income per diluted share was $.62, up 10.7% compared to $.56 for the same period in 2005. VFG'S earnings for the first quarter of 2006 produced an annualized return on average assets (ROA) of 1.19% and an annualized return on average equity (ROE) of 13.08%, compared to prior year ratios of 1.13% and 12.74%, respectively. O.R. Barham, Jr., President and CEO, commented, "We are pleased with our financial results for the first quarter, with stronger than expected loan growth, solid core revenue growth and a continuation of excellent asset quality. Our results were positive in spite of several reorganization events that impacted earnings during the period and are discussed below. Our net interest margin was down slightly on a sequential basis, as interest bearing liability costs continue to catch up to short term rate movements over the past year. Double digit growth in fees from fiduciary and brokerage operations were a highlight, as was continued strength in mortgage revenue for the period. Our efficiency ratio began to increase as anticipated, but came in at a respectable 59.50%. We had our first branch open in Lynchburg during the quarter, and plan to open one additional branch in both Charlottesville and Lynchburg during the second quarter." REVENUE GROWTH Total revenue, comprised of net interest income and noninterest income, was $18.1 million for the first quarter of 2006, an increase of $1.2 million or 7.4% over $16.9 million in 2005. The largest component, net interest income, amounted to $14.9 million for the first quarter, up $1.7 million or 12.7% compared with $13.2 million for the same quarter in 2005. Improvements in the growth and mix of average earning assets, coupled with net interest margin expansion over the past year, were primarily contributors to this growth. The net interest margin for the first quarter of 2006 was 4.35%, down five basis points sequentially compared to 4.40% for the fourth quarter of 2005, and up twenty basis points when compared to 4.15% for the first quarter of 2005. As interest rates have continued to increase over the past year, interest costs associated with interest bearing liabilities have accelerated. The average rate on interest bearing liabilities for the first quarter was 2.60%, up 21 basis points sequentially compared to 2.39% for the fourth quarter of 2005, and up 56 basis points when compared to the first quarter of 2005. Management anticipates the net interest margin to decline modestly for the foreseeable future as continuing pressures on deposit pricing in VFG's markets are anticipated. Total noninterest income was $3.3 million for the first quarter of 2006, a decrease of $431 thousand or 11.7% compared to $3.7 million for the first quarter of 2005. The 2006 results include a loss of $181 thousand on sale of securities available for sale associated with branch realignment within the company. Approximately $20 million in securities sold were reinvested at a yield pickup of approximately 120 basis points. Included in the 2005 results is a net gain of $408 thousand in connection with the sales of two branches located in Tazewell County. Trust and brokerage fee income rose to $1.04 million for the quarter, an increase of $133 thousand or 14.7% over the same period in 2005. Gross mortgage banking fees amounted to $633 thousand, an increase of $158 thousand or 33.3% when compared to $475 thousand for the first quarter of 2005, but down sequentially $277 thousand or 30.4% from the fourth quarter of 2005. NONINTEREST EXPENSE AND EFFICIENCY Noninterest expense for the first quarter of 2006 amounted to $11.2 million, up $649 thousand or 6.2% from $10.5 million for the same period in 2005. Compensation and employee benefits increased $554 thousand or 9.2% over the same quarter a year ago. This increase reflects new positions for the openings of the Seminole Trail and Graves Mill branches during the fourth quarter 2005 and first quarter 2006, respectively. It also reflects approximately $160 thousand in non-recurring severance benefits associated with a reorganization of management within our Virginia Commonwealth Trust Company affiliate during the first quarter. Management would anticipate some increase in operating expenses as two new branches open middle to late second quarter. VFG's efficiency ratio was 59.5% for the quarter, compared to 60.8% for the same quarter in 2005. BALANCE SHEET Average loans for the first quarter were $1.16 billion, up $85.8 million or 8.0% from the first quarter of 2005. Loans receivable were $1.19 billion at March 31, 2006, up $46.1 million or 4.0% from December 31, 2005. The first quarter growth occurred in real estate construction, non-residential real estate and commercial loan portfolios. Average deposits for the first quarter were $1.25 billion, up $10 million or .8% from the first quarter of 2005. Excluding the impact of the sale of branches in Tazewell, Virginia during first quarter 2005, the growth rate was 2.0%. Sequentially, deposits increased $17.5 million or 1.4% to $1.27 billion from December 31, 2005. Certificate of deposit balances were up $45.4 million or 8.7% for the quarter, reflecting consumer preferences in the current rate environment as well as promotions conducted during the period. Savings, money market and interest checking accounts all experienced decreases during the period. Noninterest bearing demand deposits were up $7.1 million or 2.9% for the quarter, and represent 20.2% of total deposits at March 31, 2006. At March 31, 2006 VFG had total assets of $1.55 billion, compared to $1.45 billion at March 31, 2005. Shareholder's equity at March 31, 2006 was $139.3 million, an increase of $10.3 million or 8.0% compared to March 31, 2005. Shareholder's equity represented 8.98% of total assets at March 31, 2006, while tangible equity capital represented 7.90% of tangible assets at March 31, 2006. Book value at March 31, 2006 was $19.40 per share, compared to $18.00 at March 31, 2005. ASSET QUALITY Asset quality remains strong, with VFG's ratio of non-performing assets as a percentage of total assets amounting to .13% as of March 31, 2006, compared to .15% at March 31, 2005 and .12% at December 31, 2005. Net charge-offs as a percentage of average loans receivable amounted to .01% for the quarter, unchanged when compared to the same period in 2005. At March 31, 2006, the allowance for loan losses was approximately seven times the level of non- performing assets, while the allowance as a percentage of total loans amounted to 1.17%. VFG decreased its provision for loan losses by $36 thousand or 6.6%, from $546 thousand for the three months ended March 31, 2005 to $510 thousand for the three months ended March 31, 2006. ABOUT VFG VFG is the holding company for Planters Bank & Trust Company of Virginia - - in Staunton; Second Bank & Trust -- in Culpeper; Virginia Heartland Bank -- in Fredericksburg and Virginia Commonwealth Trust Company -- in Culpeper. The 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-six branches serving Central and Southwest Virginia and 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 noninterest expense by the sum of net interest income on a tax equivalent basis and noninterest income excluding gain (loss) on sale of securities and other real estate owned. 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". 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 3/31/2006 3/31/2005 (Decrease) INCOME STATEMENT Interest income - taxable equivalent $22,631 $18,991 19.17% Interest expense 7,308 5,398 35.38% Net interest income - taxable equivalent 15,323 13,593 12.73% Less: taxable equivalent adjustment 458 407 12.53% Net interest income 14,865 13,186 12.73% Provision for loan and lease losses 510 546 -6.59% Net interest income after provision for loan and lease losses 14,355 12,640 13.57% Noninterest income 3,263 3,694 -11.67% Noninterest expense 11,183 10,534 6.16% Provision for income taxes 1,971 1,787 10.30% Net income $4,464 $4,013 11.24% PER SHARE DATA Basic earnings $0.62 $0.56 10.71% Diluted earnings $0.62 $0.56 10.71% Shares outstanding 7,178,964 7,163,735 Weighted average shares - Basic 7,176,815 7,163,198 Diluted 7,231,617 7,210,848 Dividends paid on common shares $0.22 $0.20 PERFORMANCE RATIOS Return on average assets 1.19% 1.13% 5.31% Return on average equity 13.08% 12.74% 2.67% Return on average realized equity (A) 12.95% 12.88% 0.54% Net interest margin (taxable equivalent) 4.35% 4.15% 4.82% Efficiency (taxable equivalent) (B) 59.50% 60.79% -2.12% ASSET QUALITY Allowance for loan losses Beginning of period $13,581 $11,706 Provision for loan losses 510 546 Charge offs (173) (189) Recoveries 23 118 End of period $13,941 $12,181 Non-performing assets: Non-accrual loans $1,787 $1,917 Loans 90+ days past due and still accruing - - Other real estate owned 79 55 Troubled debt restructurings 134 218 Total non-performing assets $2,000 $2,190 to total assets: 0.13% 0.15% to total loans plus OREO: 0.17% 0.20% Allowance for loan losses to total loans 1.17% 1.12% Net charge-offs (recoveries) $149 $71 Net charge-offs to average loans outstanding 0.01% 0.01% NOTES: Applicable ratios are annualized (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. QUARTERLY PERFORMANCE SUMMARY Virginia Financial Group, Inc. (NASDAQ:VFGI) (Dollars in thousands, except per share data) Percent For the Three Months Ended Increase 3/31/2006 3/31/2005 (Decrease) SELECTED BALANCE SHEET DATA End of period balances Cash and cash equivalents $40,923 $59,775 -31.54% Securities available for sale 228,462 242,774 -5.90% Securities held to maturity 3,321 5,853 -43.26% Total securities 231,783 248,627 -6.77% Real estate - construction 166,924 127,248 31.18% Real estate - 1-4 family residential 303,639 310,062 -2.07% Real estate - commercial and multifamily 586,054 517,913 13.16% Commercial, financial and agricultural 93,503 85,745 9.05% Consumer loans 36,909 40,942 -9.85% All other loans 1,558 3,205 -51.39% Total loans 1,188,587 1,085,115 9.54% Deferred loan costs 659 493 33.67% Allowance for loan losses (13,941) (12,181) 14.45% Net loans 1,175,305 1,073,427 9.49% Other assets 103,109 71,550 44.11% Total assets 1,551,120 1,453,379 6.73% Noninterest bearing deposits 256,910 239,660 7.20% Money market & interest checking 337,063 369,922 -8.88% Savings 112,905 133,919 -15.69% CD's and other time deposits 566,174 492,950 14.85% Total deposits 1,273,052 1,236,451 2.96% Federal Home Loan Bank advances 60,000 14,040 327.35% Trust preferred capital notes 20,619 20,619 0.00% Other borrowed funds 46,167 42,955 7.48% Other liabilities 11,995 10,349 15.90% Total liabilities 1,411,833 1,324,414 6.60% Total stockholders' equity $139,287 $128,965 8.00% Accumulated comprehensive income (loss) $(1,794) $861 -308.36% Average balances Percent For the Three Months Ended Increase 3/31/2006 3/31/2005 (Decrease) Total assets $1,525,345 $1,446,263 5.47% Total stockholders' equity $138,364 $127,751 8.31% QUARTERLY PERFORMANCE SUMMARY Virginia Financial Group, Inc. (NASDAQ:VFGI) (Dollars in thousands) Percent For the Three Months Ended Increase 3/31/2006 3/31/2005 (Decrease) Interest Income Interest and fees on loans $19,433 $16,043 21.13% Interest on deposits in other banks 35 4 775.00% Interest and dividends on securities: Taxable 1,499 1,806 -17.00% Tax-exempt 815 656 24.24% Dividends 115 67 71.64% Interest income on federal funds sold 276 8 3350.00% Total interest income 22,173 18,584 19.31% Interest Expense Interest on deposits 5,960 4,752 25.42% Interest on federal funds repurchased and securities sold under agreements to repurchase 86 144 -40.28% Interest on Federal Home Loan Bank advances 582 180 223.33% Interest on trust preferred capital notes 374 265 41.13% Interest on other borrowings 306 57 436.84% Total interest expense 7,308 5,398 35.38% Net interest income 14,865 13,186 12.73% Provision for loan losses 510 546 -6.59% Net interest income after provision for loan losses 14,355 12,640 13.57% Noninterest Income Retail banking fees 1,607 1,665 -3.48% Commissions and fees from fiduciary activities 811 724 12.02% Brokerage fee income 227 181 25.41% Other operating income 170 241 -29.46% Loss on sale of fixed assets (4) - - Loss on securities available for sale (181) - - Gain on sale of branches - 408 - Gain on sale of mortgage loans 633 475 33.26% Total noninterest income 3,263 3,694 -11.67% Noninterest Expense Compensation and employee benefits 6,601 6,047 9.16% Net occupancy expense 766 751 2.00% Supplies and equipment expenses 977 1,114 -12.30% Amortization-intangible assets 100 168 -40.48% Marketing 125 144 -13.19% State franchise taxes 248 199 24.62% Data processing 383 314 21.97% Telecommunications 274 268 2.24% Professional fees 130 130 0.00% Other operating expenses 1,579 1,399 12.87% Total noninterest expense 11,183 10,534 6.16% Income before income taxes 6,435 5,800 10.95% Income tax expense 1,971 1,787 10.30% Net income $4,464 $4,013 11.24% VIRGINIA FINANCIAL GROUP INC. CONSOLIDATED AVERAGE BALANCES, YIELDS AND RATES THREE MONTHS ENDED MARCH 31, 2006 AND 2005 (Dollars in thousands) Three months ended March 31, 2006 Average Interest Average Dollars in thousands Balance Inc/Exp Rates Assets Loans receivable, net $1,157,736 $19,453 6.81% Investment securities Taxable 152,945 1,614 4.28% Tax exempt 80,623 1,253 6.30% Total investments 233,568 2,867 4.98% Interest bearing deposits 5,961 35 2.38% Federal funds sold 30,691 276 3.65% 270,220 3,178 4.77% Total earning assets 1,427,956 22,631 6.43% Total nonearning assets 96,907 Total assets $1,524,863 Liabilities and Stockholders' Equity Interest-bearing deposits Interest checking $180,122 $198 0.45% Money market 166,666 701 1.71% Savings 120,090 195 0.66% Time deposits: Less than $100,000 372,152 3,185 3.47% $100,000 and more 175,314 1,681 3.89% Total interest-bearing deposits 1,014,344 5,960 2.38% Federal funds purchased and securities sold under agreements to repurchase 14,801 86 2.36% Federal Home Loan Bank advances 56,427 582 4.18% Trust preferred capital notes 20,619 374 7.36% Other borrowings 30,856 306 4.02% 122,703 1,348 4.46% Total interest-bearing liabilities 1,137,047 7,308 2.60% Total noninterest-bearing liabilities 249,452 Total liabilities 1,386,499 Stockholders' equity 138,364 Total liabilities and stockholders' equity $1,524,863 Net interest income (tax equivalent) $15,323 Average interest rate spread 3.82% Interest expense as percentage of average earning assets 2.08% Net interest margin 4.35% Three months ended March 31, 2005 Average Interest Average Dollars in thousands Balance Inc/Exp Rates Assets Loans receivable, net $1,071,992 $16,096 6.09% Investment securities Taxable 191,766 1,873 3.96% Tax exempt 62,326 1,010 6.57% Total investments 254,092 2,883 4.60% Interest bearing deposits 521 4 3.11% Federal funds sold 1,122 8 2.89% 255,735 2,895 4.59% Total earning assets 1,327,727 18,991 5.80% Total nonearning assets 118,536 Total assets $1,446,263 Liabilities and Stockholders' Equity Interest-bearing deposits Interest checking $198,834 $195 0.40% Money market 174,238 481 1.12% Savings 135,578 223 0.67% Time deposits: Less than $100,000 369,507 2,761 3.03% $100,000 and more 128,145 1,092 3.46% Total interest-bearing deposits 1,006,302 4,752 1.92% Federal funds purchased and securities sold under agreements to repurchase 23,018 144 2.54% Federal Home Loan Bank advances 14,058 180 5.19% Trust preferred capital notes 20,619 265 5.21% Other borrowings 9,618 57 2.40% 67,313 646 3.89% Total interest-bearing liabilities 1,073,615 5,398 2.04% Total noninterest-bearing liabilities 244,897 Total liabilities 1,318,512 Stockholders' equity 127,751 Total liabilities and stockholders' equity $1,446,263 Net interest income (tax equivalent) $13,593 Average interest rate spread 3.76% Interest expense as percentage of average earning assets 1.65% Net interest margin 4.15% DATASOURCE: Virginia Financial Group, Inc. CONTACT: Jeffrey W. Farrar, Executive Vice President and CFO of Virginia Financial Group, Inc., +1-540-829-1603, Web site: http://www.vfgi.net/

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