UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
Commission File Number: 33-77568
VALLEY FINANCIAL CORPORATION
VIRGINIA 54-1702380
(State of Incorporation) (I.R.S. Employer
Identification Number)
36 Church Avenue, S.W.
Roanoke, Virginia 24011
(Address of principal executive offices)
(540) 342-2265
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
At November 12, 1996, 964,040 shares of the issuer's common
stock, no par value, were outstanding.
Transitional small business disclosure format: Yes No X .
1
<PAGE>
VALLEY FINANCIAL CORPORATION
FORM 10-QSB
September 30, 1996
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Loss 4-5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis or Plan
of Operation 10
Part II. OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
VALLEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1996 1995
----------------- -----------------
<S> <C> <C>
Assets
Cash and due from banks (note 2) $1,689,241 $1,016,076
Money market investments:
Federal funds sold 70,000 2,336,000
Interest-bearing deposits 175,030 55,039
Total money market
investments 245,030 2,391,039
Securities available for
sale (note 3) 12,085,156 5,282,614
Loans:
Commercial loans 8,276,143 4,234,885
Commercial real estate loans 7,368,835 4,346,540
Residential real estate loans 11,927,195 4,840,781
Loans to individuals 818,508 401,519
Total loans 28,390,681 13,823,725
Less allowance for loan losses
(note 4) (278,444) (137,341)
Total net loans 28,112,237 13,686,384
Premises and equipment 1,410,623 1,451,754
Organizational costs 207,015 250,344
Other assets 534,603 276,500
Total assets $44,283,905 $24,354,711
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand
deposits 3,441,467 3,213,830
Interest bearing demand
deposits 7,637,159 3,712,803
Savings deposits 220,934 143,511
Certificates of deposits
> $100,000 3,623,026 1,670,927
Other time deposits 21,383,759 7,375,795
Total deposits 36,306,345 16,116,866
Other liabilities 693,502 173,153
Total liabilities 36,999,847 16,290,019
Preferred stock, no par value.
Authorized 10,000,000 shares;
none issued and outstanding
Common stock, no par value.
Authorized 10,000,000
shares; issued and outstanding
964,040 at June 30, 1996 and
December 31, 1995
(note 5) 9,089,330 9,089,330
Accumulated deficit (1,752,723) (1,035,064)
Unrealized gains (losses)
on securities available-for-sale,
net of deferred
tax expense (benefit) (52,549) 10,426
Total shareholders' equity 7,284,058 8,064,692
Total liabilities
and shareholders' equity $44,283,905 $24,354,711
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
For the Period For the Period
January 1, 1996 January 1, 1995
Through Through
September 30, 1996 September 30, 1995
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,360,869 $138,300
Interest on money market
investments 72,668 73,441
Interest on securities
available for sale 309,241 340,807
Total interest income 1,742,778 552,548
Interest Expense:
Interest on certificates of
deposit > $100,000 122,605 10,807
Interest on other deposits 691,998 62,941
Interest on borrowed funds 255 0
Total interest expense 814,858 73,748
Net interest income 927,920 478,800
Provision for loan losses (note 4) 141,103 80,161
Net interest income after
provision for loan losses 786,817 398,639
Noninterest income:
Service charges on deposit accounts 38,730 3,272
Other fee income 18,276 871
Securities gains 887 0
Total noninterest income: 57,893 4,143
Noninterest Expense:
Compensation expense 927,705 311,106
Occupancy and equipment expense, net 200,596 76,333
Data processing expense 55,313 22,749
Marketing and advertising expense 67,676 64,487
Office supply expense 23,985 46,326
Other expense 243,765 340,556
Amortization of organizational
expense 43,329 24,071
Total noninterest expense 1,562,369 885,628
Net loss ($717,659) ($482,846)
Net loss per share (note 6) ($0.74) ($0.62)
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
<TABLE>
<CAPTION>
For the Period For the Period
July 1, 1996 July 1, 1995
Through Through
September 30, 1996 September 30, 1995
<S> <C> <C>
Interest Income:
Interest and fees on loans $561,243 $123,597
Interest on money market
investments 30,489 36,386
Interest on securities
available for sale 142,912 74,159
Total interest income 734,644 234,142
Interest Expense:
Interest on certificates of
deposit > $100,000 48,609 8,474
Interest on other deposits 319,200 51,575
Interest on borrowed funds 3 0
Total interest expense 367,812 60,049
Net interest income 366,832 174,093
Provision for loan losses (note 4) 43,404 64,244
Net interest income after
provision for loan losses 323,428 109,849
Noninterest income:
Service charges on deposit
accounts 13,586 2,724
Other fee income 8,133 621
Securities gains 0 0
Total noninterest income: 21,719 3,345
Noninterest Expense:
Compensation expense 191,051 195,123
Occupancy and equipment expense,
net 68,644 49,100
Data processing expense 18,823 18,439
Marketing and advertising expense 10,189 12,394
Office supply expense 9,712 17,006
Other expense 95,820 43,201
Amortization of organizational
expense 14,337 14,442
Total noninterest expense 408,576 349,705
Net loss ($63,429) ($236,511)
Net income loss per share (note 6) ($0.07) ($0.25)
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Period For the Period
January 1, 1996 January 1, 1995
Through Through
September 30, 1996 September 30, 1995
<S> <C> <C>
Cash Flows From Operating
Activities:
Net income (loss) ($717,659) ($482,846)
Adjustments to reconcile
net loss to net cash
used in operating activities:
Provision for loan losses 141,103 80,161
Depreciation and
amortization of bank
premises and equipment 107,816 35,401
Amortization of organizational
expenses 43,329 24,071
Amortization/accretion of
premiums/discounts, net 15,141 (15,814)
Gain on sale of securities (887) 0
Increase in other assets (231,032) (244,591)
Increase (decrease) in other
liabilities 525,720 5,577
Net cash used in operating
activities (116,469) (598,041)
Cash Flows From Investing Activities:
Net decrease in money market
investments 2,146,009 (1,899,866)
Purchases of premises and equipment (66,685) (1,393,918)
Purchases of securities available-
for-sale (9,023,526) (36,969,519)
Proceeds from sales, calls and
maturities of securities
available-for-sale 2,111,313 32,524,716
Net increase in loans (14,566,956) (8,095,537)
Organizational costs 0 (9,518)
Net cash used in investing
activities (19,399,845) (15,843,642)
Cash Flows From Financing
Activities
Increase in time deposits greater
than $100,000 1,952,099 900,927
Increase in other time deposits 14,007,964 4,036,211
Net increase in other deposits 4,229,416 3,533,158
Increase (decrease) in advances
from related parties 0 (817,000)
Proceeds from common stock issued 0 9,640,400
Redemption of common stock 0 (14)
Common stock issuance costs 0 (330,245)
Net cash provided by financing
activities 20,189,479 16,963,437
Net Increase (Decrease) in Cash and
Due From Banks 673,165 521,754
Cash and Due From Banks at Beginning
of Period 1,016,076 26,970
Cash and Due From Banks at End of
Period $1,689,241 $548,724
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
VALLEY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1996
(Unaudited)
Organization and Summary of Significant Accounting Policies
(1) General
Valley Financial Corporation (the "Company"), a development stage
enterprise through May 15, 1995, was incorporated under the laws
of the Commonwealth of Virginia on March 15, 1994, primarily to
serve as a holding company for Valley Bank, N.A. (the "Bank"),
upon formation of the Bank. Prior to the formation of
the Company, the Company's organizers (the "Organizers") formed a
limited liability company (the "Organizational L.C.") to organize the
Company and the Bank and to provide for financing of organizational
and other costs. The consolidated financial statements reflect the
operations of the Company and the Organizational L.C. since the date
of formation of the Organizational L.C. on January 6, 1994. During
1995, all necessary applications and approvals were completed with
appropriate regulatory authorities to allow the formation and
opening of the Bank. The Bank's main office opened for business on
May 15, 1995 and a branch office was opened September 11, 1995.
Accordingly, the Company is no longer considered to be in the
development stage. The Company's fiscal year end is December 31.
The consolidated financial statements of the Company conform to
generally accepted accounting principles and to general banking
industry practices. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments
of a normal recurring nature which are necessary for a fair
presentation of the financial statements herein have been included.
The financial statements herein should be read in conjunction with
the Company's 1995 Annual Report on Form 10-KSB.
(2) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks.
7
<PAGE>
(3) Securities
The carrying values and approximate market values of investment
securities at September 30, 1996, are shown in the table below.
As of September 30, 1996, investments with an amortized cost
of $200,000 were pledged as collateral for public deposits.
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Approximate
Securities held Costs Gains Losses Fair Values
to maturity: ---------- ---------- ---------- -------------
- - ----------------
<S> <C> <C> <C> <C>
U.S. Treasury 0 0 0 0
U.S. Government agencies 0 0 0 0
Total securities
held to maturity 0 0 0 0
Securities available for sale:
- - ------------------------------
U.S. Treasury $1,352,885 $64 ($1,876) $1,351,073
U.S. Government
agencies $8,895,925 $9,135 ($55,592) 8,849,468
States and political
subdivisions $648,833 $0 ($10,176) $638,657
Corporate debt
securities $806,133 $0 ($2,777) $803,356
Equity securities $461,000 $0 $0 $461,000
Total securities
available
for sale $12,164,776 $9,199 ($70,421) $12,103,554
- - ------------------- ------------ ---------- ------------ --------------
Total securities $12,164,776 $9,199 ($70,421) $12,085,156
- - ------------------- ------------ ---------- ------------ --------------
</TABLE>
(4) Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
Balance at January 1, 1996 $137,341
Provision for loan losses 141,103
Recoveries 0
Charged off loans 0
Balance at September 30, 1996 $278,444
(5) Common Stock Offering
The Company commenced a public offering of its Common Stock
in July 1994, which offering terminated on July 14, 1995.
The offering sold 964,040 shares of Common Stock at $10 per
share, representing total gross proceeds to the Company of
$9,640,400, reduced by $551,070 of direct stock issuance costs
associated with the offering, resulting in net proceeds of
$9,089,330.
8
<PAGE>
(6) Net Loss Per Share
Net loss per share is based upon the weighted average number of
common shares outstanding during the period.
9
<PAGE>
Item 2. Management's Discussion and Analysis or Plan of Operation.
General. The Company was incorporated as a Virginia stock corporation
on March 15, 1994, primarily to own and control all of the capital stock
of the Bank. Prior to the formation of the Company, the Organizers
formed the Organizational L.C. to organize the Company and the Bank, and
to provide for financing of organizational and other costs. Any financial
information for the period ended September 30, 1995, contained herein,
reflects the operations of the Company and the Organizational L.C. for a
portion of the development period since the date of formation of the
Organizational L.C. on January 6, 1994.
The Organizers received final approval of their application to charter
the Bank from the OCC on May 15, 1995, and final approval of their
application for deposit insurance from the FDIC on May 15, 1995. The Bank
opened for business on May 15, 1995, at its main office in the City of
Roanoke, and opened its branch office on September 11, 1995, in the County
of Roanoke. In July 1995, the Company completed its initial public
offering of 964,040 shares of its common stock, no par value, at a price
of $10.00 per share. The Offering resulted in gross proceeds to the
Company of $9,640,400, reduced by $551,070 of direct stock issuance costs
associated with the Offering, for net proceeds of $9,089,330. Of the net
proceeds of the Offering, $7,900,000 has been invested in the Bank as
equity capital and the remainder retained at the parent company for
working capital needs and future financial flexibility.
Total assets at September 30, 1996 were $44,283,905, up 81.8% from
$24,354,711 at December 31, 1995, reflecting growth in the Bank's deposits
and earning assets. The principal components of the Company's assets at
the end of the period were $1,689,241 in cash and due from banks, $245,030
in money market investments, $12,085,156 in securities available-for-sale,
$28,390,681 in loans and $1,410,623 in premises and equipment. During the
nine month period, loans increased 105.4% or $14,566,956 and investment
securities grew by 128.8% or $6,802,542.
Total liabilities at September 30, 1996 were $36,999,847, up from
$16,290,019 at December 31, 1995, with the increase almost entirely
represented by $20,189,479 or 125.3% growth in deposits. Non-interest
bearing demand deposits increased $227,637 or 7.1%, and represented 9.5%
of total deposits compared with 19.9% nine months earlier.
Total shareholders' equity at September 30, 1996 was $7,284,058,
consisting of $9,089,330 in net proceeds from the Company's initial public
offering, reduced by the accumulated deficit of $1,752,723 and $52,549 of
unrealized losses on securities available-for-sale, net of the related
deferred tax benefit. At December 31, 1995, total shareholder's equity
was $8,064,692.
The Company had a net loss of $717,659 for the nine months ended
September 30, 1996, compared with a net loss of $482,846 for the
comparable period in 1995. The loss results from higher noninterest
expenses in virtually all categories as the Bank in 1996 maintained
properties, staffed two offices and sustained a provision for an
Allowance for Loan and Lease Losses. For the nine months ended
September 30, 1995, these expenses were either nonexistent or at
much-reduced levels as the Bank did not open for business until May 15,
1995. Also, the Company enjoyed interest income of $552,548 in the
period ended September 30, 1995, a significant portion of which
represented interest on escrowed stock subscription funds which the
Company could not record as income until the conditions to the breaking
of escrow on the stock subscription proceeds were satisfied and the
Company took possession of those funds on January 27, 1995. Included
in compensation expense for the first nine months of 1996 is the
present value of future severance payments the Company is obligated to
make to Guy W. Byrd, Jr., who resigned as President and Chief Executive
Officer of the Company and the Bank on June 20, 1996.
10
<PAGE>
As previously mentioned, the Bank opened for business on May 15, 1995.
Accordingly, comparison of operations for the first nine months of 1996
with the first nine months of 1995, which included a significant
preopening period, is not considered meaningful. The following
discussion is intended to focus on the results for 1996 as well as
discussing future factors of significance to the Company.
Net interest income was $927,920 for the nine months ended September
30, 1996 and is attributable to interest income from securities, loans
and money market investments exceeding the cost associated with interest
paid on deposits. The Company benefitted from the investment income
derived from these sources while interest expense increased at a slower
rate as deposits were taken by the Bank.
A provision for loan losses of $141,103 was provided in recognition
of management's estimate of risks inherent with lending activities.
The allowance for loan losses was $278,444 as of September 30, 1996 and
represents approximately .98% of total loans outstanding. The Bank did
not have any nonperforming assets as of September 30, 1996; nor did it
have any loans past due more than thirty days. Due to the Bank's
limited operating history, management's estimates on which the loan
loss provision is premised are based primarily on industry practices,
peer group comparisons, knowledge of the individual credits within the
loan portfolio and consideration of local economic factors. Although
these factors are subjective, management believes the allowance is
adequate as of September 30, 1996 and will periodically evaluate the
reasonableness of future provisions considering the specific nature of
the portfolio, historical operating trends as available and other
economic and industry factors.
Noninterest income consists of service charges and fees on accounts
and other miscellaneous income. Future levels of noninterest income are
expected to increase as a direct result of business growth and expansion.
Noninterest expense of $1,562,369 is a significant factor contributing to
the net loss of $717,659 for the nine months ended September 30, 1996.
As previously mentioned, and with the exception of severance expense
associated with the resignation of the former President of the Company,
increases in virtually all categories are attributable to the opening of
the Bank and include hiring staff, acquiring and maintaining properties
and equipment and other normal expenses associated with the operations
of the Company. While expenses are expected to increase in future years,
it is anticipated that there will be a correlation to business growth
and expansion as opposed to the significant outlays involved with the
opening of a new business. Consistent with this expectation, noninterest
expenses for the third quarter of 1996 increased approximately 17% over
the level recorded in the third quarter of 1995, while deposits and
earning assets increased on a quarter-to-quarter basis at much higher
rates.
The Company's financial position at September 30, 1996 reflects
liquidity and capital levels currently adequate to fund anticipated
future business expansion. Capital ratios are well in excess of
required regulatory minimums for a well-capitalized institution. The
proceeds from the initial public stock offering have been invested in
securities, loans, premises and equipment and used to fund expenses
associated with the operations of the Company. All investment securities
at September 30, 1996 were classified as available for sale. This
classification in management's opinion is appropriate as it affords
maximum flexibility in managing liquidity and funding the Bank's
future business growth, although changes in interest rates result in
unrealized gains or losses on available-for-sale securities being
reflected directly as a component of shareholders' equity.
11
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information.
On October 25, 1996, Valley Bank announced its intent to file an
application with the Office of the Comptroller of the Currency for
permission to establish its third domestic office (the South Roanoke
Office) at 2203 Crystal Spring Avenue, SW, in the City of Roanoke, VA.
The Bank does not anticipate any regulatory objection to its plans to
establish the South Roanoke Office, but there can be no assurance that
such will be the case.
The site of the South Roanoke Office currently houses a branch
office of NationsBank, N.A. and is located in one of the most affluent
neighborhoods in Roanoke. The site consists of only approximately 914
square feet and can be occupied and operated by the Bank at relatively
modest cost. NationsBank has announced its intent to close the branch
in December, 1996, and Valley Bank plans to reopen the facility under
its name in January, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) The Company filed the following exhibits for the quarter
ended September 30, 1996:
27. Financial Data Schedule
(b) The Company filed one report on Form 8-K during the quarter
ended September 30, 1996. The report, dated July 19, 1996,
provided the details of the Company's severance obligation to
Guy W. Byrd, Jr., its former President and Chief Executive
Officer, pursuant to his employment agreement with the Company.
12
<PAGE>
SIGNATURES
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.
VALLEY FINANCIAL CORPORATION
November 7, 1996 /S/ Ellis L. Gutshall
Date Ellis L. Gutshall, President
and Chief Executive Officer
November 7, 1996 /S/ A. Wayne Lewis
Date A. Wayne Lewis, Executive Vice
President and Chief Financial Officer
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,689,241
<INT-BEARING-DEPOSITS> 32,864,878
<FED-FUNDS-SOLD> 70,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,085,156
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 28,390,681
<ALLOWANCE> 278,444
<TOTAL-ASSETS> 44,283,905
<DEPOSITS> 36,306,345
<SHORT-TERM> 0
<LIABILITIES-OTHER> 693,502
<LONG-TERM> 0
0
0
<COMMON> 9,089,330
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 44,283,905
<INTEREST-LOAN> 1,360,869
<INTEREST-INVEST> 381,909
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 1,742,778
<INTEREST-DEPOSIT> 814,603
<INTEREST-EXPENSE> 814,858
<INTEREST-INCOME-NET> 927,920
<LOAN-LOSSES> 141,103
<SECURITIES-GAINS> 887
<EXPENSE-OTHER> 243,765
<INCOME-PRETAX> (717,659)
<INCOME-PRE-EXTRAORDINARY> (717,659)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (717,659)
<EPS-PRIMARY> (.74)
<EPS-DILUTED> (.74)
<YIELD-ACTUAL> 4.46
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 137,341
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 278,444
<ALLOWANCE-DOMESTIC> 278,444
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
