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 June 30, 1997
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 August 11, 1997, 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
June 30, 1997
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income (Loss) 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 9
Part II. OTHER INFORMATION
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
VALLEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
---------- -------------
(in thousands, except share data)
<S> <C> <C>
Assets
Cash and due from banks (note 2) $1,722 $2,149
Money market investments:
Federal funds sold 800 2,762
Interest-bearing deposits 69 29
Total money market investments 869 2,791
Securities available for sale (note 3) 17,773 11,584
Loans:
Commercial loans 12,360 10,591
Commercial real estate loans 11,923 8,183
Residential real estate loans 16,098 13,828
Loans to individuals 1,184 880
Total loans 41,565 33,482
Less unearned income (38) (33)
Less allowance for loan losses
(note 4) (410) (328)
Total net loans 41,117 33,121
Premises and equipment 1,388 1,397
Organizational costs 164 193
Other assets 659 508
Total assets $63,692 $51,743
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits 5,104 3,514
Interest bearing demand deposits 12,788 9,063
Savings deposits 507 299
Certificates of deposits>$100,000 5,580 4,442
Other time deposits 30,989 26,299
Total deposits 54,968 43,617
Short term borrowings 318 0
Other liabilities 939 773
Total liabilities 56,225 44,390
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,
1997 and December 31, 1996 (note 5) 9,089 9,089
Accumulated deficit (1,620) (1,749)
Unrealized gains (losses) on securities
available-for-sale, net of deferred
tax expense (benefit) (2) 13
Total shareholders' equity 7,467 7,353
Total liabilities and
shareholders' equity $63,692 $51,743
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
For the Period For the Period
January 1, 1997 January 1, 1996
Through Through
June 30, 1997 June 30, 1996
(in thousands, except per share data)
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,617 $800
Interest on money market
investments 44 42
Interest on securities available
for sale 504 166
Total interest income 2,165 1,008
Interest Expense:
Interest on certificates of
deposit>$100,000 133 74
Interest on other deposits 992 373
Interest on borrowed funds 4 0
Total interest expense 1,129 447
Net interest income 1,036 561
Provision for loan losses (note 4) 82 98
Net interest income after provision
for loan losses 954 463
Noninterest income:
Service charges on deposit accounts 53 25
Other fee income 30 10
Securities gains 0 1
Total noninterest income: 83 36
Noninterest Expense:
Compensation expense 446 737
Occupancy and equipment expense, net 141 132
Data processing expense 42 36
Marketing and advertising expense 54 57
Office supply expense 27 14
Other expense 169 148
Amortization of organizational expense 29 29
Total noninterest expense 908 1,153
Net income (loss) $129 ($654)
Net income (loss) per share (note 6) $0.13 ($0.68)
See accompanying notes to consolidated financial statements
4
<PAGE>
For the Period For the Period
April 1, 1997 April 1, 1996
Through Through
June 30, 1997 June 30, 1996
(in thousands, except per share data)
<S> <C> <C>
Interest Income:
Interest and fees on loans $877 $472
Interest on money market
investments 12 17
Interest on securities available
for sale 279 93
Total interest income 1,168 582
Interest Expense:
Interest on certificates of
deposit>$100,000 72 43
Interest on other deposits 529 218
Interest on borrowed funds 4 0
Total interest expense 605 261
Net interest income 563 321
Provision for loan losses (note 4) 46 44
Net interest income after provision
for loan losses 517 277
Noninterest income:
Service charges on deposit accounts 30 15
Other fee income 14 9
Securities gains 0 0
Total noninterest income: 44 24
Noninterest Expense:
Compensation expense 234 532
Occupancy and equipment expense, net 72 68
Data processing expense 21 18
Marketing and advertising expense 21 31
Office supply expense 9 7
Other expense 88 72
Amortization of organizational expense 14 15
Total noninterest expense 459 743
Net income (loss) $102 ($442)
Net income (loss) per share (note 6) $0.11 ($0.46)
</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, 1997 January 1, 1996
Through Through
June 30, 1997 June 30, 1996
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $129 ($654)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Provision for loan losses 82 98
Depreciation and amortization of
bank premises and equipment 72 71
Amortization of organizational
expenses 29 29
Amortization/accretion of premiums/
discounts, net 4 12
Gain on sale of securities 0 (1)
Increase in unearned fees 5 0
Increase in other assets (150) (135)
Increase in other liabilities 186 428
Net cash provided by (used in) operating
activities 357 (152)
Cash Flows From Investing Activities:
Net decrease in money market investments 1,922 582
Purchases of premises and equipment (63) (65)
Purchases of securities available-
for-sale (8,794) (1,976)
Proceeds from sales, calls and
maturities of securities available-
for-sale 2,565 1,551
Net increase in loans (8,083) (9,791)
Net cash used in investing activities (12,453) (9,699)
Cash Flows From Financing Activities
Increase in time deposits greater
than $100,000 1,138 1,656
Increase in other time deposits 4,690 6,749
Net increase in other deposits 5,523 2,120
Increase in short-term borrowings 318 0
Net cash provided by financing activities 11,669 10,525
Net Increase (Decrease) in Cash and
Due From Banks (427) 674
Cash and Due From Banks at Beginning of
Period 2,149 1,016
Cash and Due From Banks at End of Period $1,722 $1,690
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
VALLEY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
June 30, 1997
(Unaudited)
(In thousands, except share and per share data)
Organization and Summary of Significant Accounting Policies
(1) General
Valley Financial Corporation (the "Company") 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"), which opened for business on May 15, 1995. 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 1996 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 amortized costs, unrealized gains, unrealized losses and
approximate fair values of investment securities at June 30,
1997 are shown in the table below. As of June 30, 1997,
investments with an amortized cost of $200 were pledged as
collateral for public deposits.
<TABLE>
<CAPTION>
Securities held Amortized Unrealized Unrealized Approximate
to maturity: Costs Gains Losses Fair Values
- ---------------- --------- ---------- ---------- -----------
<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 $200 $0 $0 $200
U.S. Government
agencies $12,890 $26 ($28) $12,888
Mortgage-backed $2,028 $0 $0 $2,028
securities
States and $1,382 $0 ($3) $1,379
political
subdivisions
Corporate debt
securities $803 $2 $0 $805
Equity securities $473 $0 $0 $473
Total securities
available for
sale $17,776 $28 ($31) $17,773
- ---------------- ---------- ---------- ---------- -----------
Total securities $17,776 $28 ($31) $17,773
- ---------------- ---------- ---------- ---------- -----------
</TABLE>
(4) Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
Balance at January 1, 1997 $328
Provision for loan losses 82
Recoveries 0
Charged off loans 0
Balance at June 30, 1997 $410
(5) Net Income (Loss) Per Share
8
<PAGE>
Net income (loss) per share is based upon the weighted average
number of common shares outstanding during the period.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (in thousands, except share and per
share data)
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 Valley Bank (the "Bank"). The Bank opened for business on May 15, 1995
at its main office in the City of Roanoke, opened its first branch office
on September 11, 1995 in the County of Roanoke and opened its second branch
office on January 15, 1997 in the City of Roanoke.
ANALYSIS OF FINANCIAL CONDITION
Overview. Total assets at June 30, 1997 were $63,692, up $11,949 or
23.1% from $51,743 at December 31, 1996. The principal components of the
Company's increase in assets were loans, which grew during the first half by
$8,083 or 24.1% to $41,565 at June 30 from $33,482 at December 31, and
investments, which were $17,773 at June 30, up $6,189 or 53.4% from
$11,584 six months earlier. Compared with June 30, 1996, total assets
increased by $29,108 or 84.2%, total loans by $17,950 or 76.0% and
investments by $12,175 or 217.5%. The large percentage increases in the
Bank's various asset and deposit categories from the year-earlier period
are reflective of the Bank's relative newness and cannot reasonably be
expected to continue over the long term.
The majority of the increase in loans during the second quarter occurred
in the commercial, commercial real estate and home equity line categories.
In late 1996, for reasons of asset/liability management and interest rate
risk, management determined to restrict the growth of fixed-rate
residential real estate loans. Accordingly, this loan category grew only
12.8% during the six months ended June 30, 1997, while total loans were
up 24.1%.
Total liabilities at June 30, 1997 were $56,225, up $11,835 or 26.7%
from $44,390 at December 31, 1996, with the increase almost entirely
represented by growth of $11,351 or 26.0% in deposits. Non-interest
bearing demand deposits increased $1,590 or 45.2% since December 31, and
represented 9.3% of total deposits compared with 8.1% six months earlier.
Total transaction account deposits increased $5,523 or 27.3% during the
six months, and represented 33.5% of total deposits at June 30 compared with
29.5% of total deposits at December 31. Management has attempted to
reduce the Bank's relative proportion of certificates of deposit in order
to enhance the net interest margin. The Bank has no brokered deposits, and
jumbo certificates, almost all from local customers, represented only 10.2%
of total deposits at June 30, 1997. Compared with June 30, 1996, total
deposits increased by $28,326 or 106.3% from their level of $27,238 one
year earlier.
9
<PAGE>
The level of investment securities owned has increased significantly,
reflecting the more rapid growth in the Bank's deposit base than in its
loan portfolio. Total investment securities were $17,773 at June 30, up
$6,189 or 53.4% from December 31, 1996. Compared with June 30, 1996,
investment securities increased by $12,175 or 217.5%. Of the total
investment portfolio at June 30, 1997, 85% consists of U.S. Treasury and
Agency securities and the average maturity of the Bank's portfolio is
slightly less than 6.5 years. All investment securities at June 30 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.
Asset Quality. The Company continues to enjoy excellent asset quality.
At June 30, 1997, there were no nonperforming assets, compared with $4 at
December 31, 1996 and none at June 30, 1996. There were no charge-offs
in the first half of either 1997 or 1996. The Bank did not have any
loans past due more than thirty days and still accruing as of June 30,
1997, December 31, 1996 or June 30, 1996. The allowance for loan losses
was $410 as of June 30, 1997, compared with $328 at December 31, 1996 and
$235 at June 30, 1996. The allowance represented .99% of total loans
outstanding at the end of the second quarter of 1997, and .98% and .99%
at December 31,1996 and June 30, 1996, respectively.
A provision for loan losses of $82 was provided for the first half
of 1997 in recognition of management's estimate of risks inherent with
lending activities. This compares with a provision of $98 for the same
period in 1996, when loans increased at a greater rate and a
correspondingly larger provision was deemed appropriate. Loan
loss provision expense for the quarter ended June 30, 1997 was
$46, up $2 from the comparable period one year earlier. 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 June 30, 1997 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.
ASSET/LIABILITY MANAGEMENT
Asset/liability management activities are designed to ensure that
adequate liquidity is available to meet loan demand or deposit outflows
and, through the management of the Company's interest sensitivity position,
to manage the impact of interest rate fluctuations on net interest income.
Management periodically assesses interest rate and liquidity risk exposures
in relation to present and prospective market and business conditions, and
adopts balance sheet management and funding strategies that are intended
to maintain potential impacts on earnings and liquidity within acceptable
parameters.
10
<PAGE>
A primary objective in interest rate risk management is the avoidance
of wide fluctuations in net interest income through balancing the impact
of changes in interest rates on interest-sensitive assets and interest-
sensitive liabilities. Management utilizes an outside firm to perform
periodic assessments of the impact on the Bank's liquidity and net interest
income under various interest rate assumptions.
Balance sheet repositioning is the most efficient and cost-effective
means of managing interest rate risk and is accomplished through strategic
repricing of loan and deposit accounts. The intended result of strategic
repricing is development of appropriate maturity and repricing streams in
those accounts to produce more consistent net interest income during
adverse interest rate environments. An example of strategic repricing is
management's decision in the latter part of 1996 to raise rates on fixed-
rate residential real estate loans, which had the desired effect of
significantly slowing growth in that particular loan category.
Derivatives and Off-Balance Sheet Financial Instruments. The Company
to date has not entered into any hedging transactions involving derivatives
and off-balance sheet financial instruments, although it may decide at some
point in the future that the use of such tools to hedge interest rate risk
is an appropriate supplement to balance sheet repositioning through
strategic repricing.
CAPITAL ADEQUACY AND RESOURCES
Total shareholders' equity at June 30, 1997 was $7,467, consisting of
$9,089 in net proceeds from the Company's initial public offering, reduced
by the accumulated deficit of $1,620 and $2 of unrealized losses on
securities available-for-sale, net of the related deferred tax benefit.
Total shareholders' equity was $7,353 at December 31, 1996 and $7,346 at
June 30, 1996.
In an effort to achieve a measure of capital adequacy that is more
sensitive to the individual risk profiles of financial institutions, the
federal bank regulatory authorities have adopted risk-based capital
adequacy guidelines that redefine traditional capital ratios to take into
account assessments of risks related to each balance sheet category, as
well as off-balance sheet financing activities. At least 50% of an
institution's qualifying capital must be "Core" or "Tier 1" capital, and
the balance may be "Supplementary" or "Tier 2" capital. Tier 1 capital is
essentially equal to common stockholders' equity, retained earnings, a
limited amount of qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less goodwill.
Tier 2 capital includes the excess of any preferred stock not included in
Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, term subordinated debt and intermediate-term preferred stock
and general reserves for loan and lease losses, although the amount of
such reserves included in Tier 2 capital is limited to 1.25% of risk-
weighted assets.
For the periods indicated, the Company had the following risk-based
capital and leverage ratios relative to regulatory minimums:
11
<PAGE>
Ratio 6/30/97 12/31/96 6/30/96 Minimum
Tier 1 16.0% 19.5% 28.3% 3%
Total 16.9% 20.4% 29.2% 8%
Leverage 12.0% 15.0% 22.8% 3%
ANALYSIS OF RESULTS OF OPERATIONS
The Company had net income of $129 for the six months ended June 30,
1997, compared with a net loss of $654 for the same period in 1996. On a
per share basis, the Company had net income of $.13 for the first half
of 1997, compared with a loss of $.68 in the first half of 1996. The
improvement in profitability is attributable to growth in the Company's
earning assets, which generated sufficient interest income to more than
offset increases in interest expense and noninterest expenses, and to
the recognition in June, 1996, of $317 in compensation expense
associated with the Company's severance obligation to its former
President. Return on average total assets was 0.45% for the six months
ended June 30, 1997 compared to -4.64% for the same period in
1996. First quarter returns on average total equity for the first six
months of 1997 and 1996 were 3.53% and -17.02%, respectively.
For the second quarter of 1997, the Company had net income of
$102, compared with a loss of $442 for the same period in 1996,
which equates to net income of $0.11 per share in the 1997 period
and a net loss of $0.46 per share in the 1996 period. Return on
average total assets was 0.66% for the three months ended June 30,
1997 compared to -5.58% for the same period in 1996. Return on
average total equity for the second quarter of 1997 and 1996 was
5.47% and -23.25%, respectively.
Net Interest Income. Net interest income was $1,036 for the first six
months of 1997 compared to $561 for the same period in 1996, an
increase of 84.7%. The increase is attributable to growth of 143% in
average earning assets, partially offset by a decline in the net interest
margin from 4.41% to 3.81%. Even though the yield on average earning
assets increased from 7.92% to 7.96%, the net interest margin went
down due to an increase in the cost of funds from 4.43% to 4.57%
and a decline from 30% to 20% in the relative portion of total funds
represented by noninterest bearing demand deposits and capital.
For the second quarter, net interest income was $563, a 75.4% increase
over the $321 reported for the period in 1996. Average earning
assets for the quarter increased by 99% over the same quarter in 1996,
and the net interest margin went from 4.42% to 3.85%.
Noninterest Income. Noninterest income consists of service charges and
fees on accounts and other miscellaneous income, and amounted to $83 for
the six months ended June 30, 1997, compared with $36 for the comparable
period one year earlier, a 131% increase. Future levels of noninterest
income are expected to increase as a direct result of business growth and
expansion. For the three months ended June 30, 1997, noninterest income
was $44, an 83% increase from the $24 recorded one year earlier.
12
<PAGE>
Noninterest Expense. Noninterest expense was $908 for the first six
months of 1997, a decrease of 21% or $245 over the same period in 1996.
Included in 1996's first-half noninterest expense is $317 nonrecurring
compensation expense associated with the Company's severance
obligation to its former President. Exclusive of that nonrecurring
charge, noninterest expense for the comparable periods would have
increased 9% or $72, a figure which includes expenses associated with
the opening on January 15, 1997 of the Bank's new South Roanoke office.
For the quarter ended June 30, 1997, noninterest expense was $459, a
decline of $284 or 38% from the comparable quarter in 1996. Excluding
the nonrecurring severance expense recorded in June, 1996, noninterest
expense increased only $33 or 8% on a quarter-to-quarter basis, even
though the Company was managing approximately $27,238 or 84% more
in assets and added some $606 or 100% in revenue.
13
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The Company filed the following exhibits for the quarter ended
June 30, 1997:
27. Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended
June 30, 1997.
14
<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
August 11, 1997 /S/ Ellis L. Gutshall
Date Ellis L. Gutshall, President
and Chief Executive Officer
August 11, 1997 /S/ A. Wayne Lewis
Date A. Wayne Lewis, Executive Vice
President and Chief Financial Officer
15
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,722
<INT-BEARING-DEPOSITS> 69
<FED-FUNDS-SOLD> 800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 17,773
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 41,565
<ALLOWANCE> 410
<TOTAL-ASSETS> 63,692
<DEPOSITS> 54,968
<SHORT-TERM> 318
<LIABILITIES-OTHER> 939
<LONG-TERM> 0
0
0
<COMMON> 9,089
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 63,692
<INTEREST-LOAN> 1,617
<INTEREST-INVEST> 548
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 2,165
<INTEREST-DEPOSIT> 1,125
<INTEREST-EXPENSE> 1,129
<INTEREST-INCOME-NET> 1,036
<LOAN-LOSSES> 82
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 908
<INCOME-PRETAX> 129
<INCOME-PRE-EXTRAORDINARY> 129
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 129
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
<YIELD-ACTUAL> 3.81
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 328
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 410
<ALLOWANCE-DOMESTIC> 410
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 410
</TABLE>
