UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, No Par Value
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 issuer was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $2,703,724.
The aggregate market value of the voting stock held by non-affiliates
of the Company (554,959 shares based on the $10.25 per share last trade
price quoted by the OTC Bulletin Board on March 17, 1997, was $5,688,330.
At March 17, 1997, 964,040 shares of the registrant's common stock
were issued and outstanding.
Documents incorporated by reference:
The issuer's Proxy Statement dated March 11, 1997 is incorporated
by reference into Form 10-KSB Part III, Items 9, 10, 11 and 12.
Transitional Small Business Disclosure Format (check one): Yes No X
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VALLEY FINANCIAL CORPORATION
FORM 10-KSB
December 31, 1996
INDEX
<TABLE>
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S> <C> <C> <C>
PART I.
Item 1. Description of Business. 3
Item 2. Description of Property. 12
Item 3. Legal Proceedings. 13
Item 4. Submission of Matters to a
Vote of Security Holders. 13
PART II.
Item 5. Market for Common Equity
and Related Stockholder
Matters. 13
Item 6. Management's Discussion
and Analysis or Plan
of Operation. 14
Item 7. Financial Statements. 16
Item 8. Changes in and Disagreements
With Accountants on
Accounting and Financial
Disclosure. 45
PART III.
Item 9. Directors, Executive Officers,
Promoters and Control
Persons; Compliance with
Section 16(a) of the
Exchange Act. 45
Item 10. Executive Compensation. 45
Item 11. Security Ownership of Certain
Beneficial Owners and
Management. 45
Item 12. Certain Relationships and
Related Transactions. 45
Item 13. Exhibits and Reports on
Form 8-K. 46
SIGNATURES 48
EXHIBIT INDEX 50
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PART I.
Item 1. Description of Business.
Valley Financial Corporation (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, N.A.
(the "Bank"). Prior to the formation of the Company, the Company's
founding shareholders (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 Company dissolved the Organizational L.C. during 1996.
The Bank opened for business on May 15, 1995, at its main
office in the City of Roanoke, and opened its first branch office on
September 11, 1995, in the County of Roanoke. The Bank's second
branch office opened January 15, 1997, in the City of Roanoke.
The Bank is a national banking association organized under the
laws of the United States, and engages in the business of commercial
banking. Its deposits are insured by the FDIC and it is a member of
the Federal Reserve System. The Company presently engages in no business
other than owning and managing the Bank.
Location and Service Area
The Bank's primary service area consists of the cities of
Roanoke and Salem and Roanoke County, Virginia (collectively, the
"Roanoke Service Area"), where it conducts a general commercial banking
business while emphasizing the needs of small-to-medium sized
businesses, professional concerns and individuals. The Bank operates
from its main office at 36 Church Avenue, SW in the City of Roanoke,
and its branch offices at 4467 Starkey Road, SW in the County of Roanoke
and at 2203 Crystal Spring Avenue, SW in the City of Roanoke.
The Roanoke Service Area, which covers approximately 319
square miles, is the regional center for southwest Virginia, and is
located approximately 165 miles west of Richmond, Virginia, 178 miles
northwest of Charlotte, North Carolina, 178 miles east of Charleston,
West Virginia and 222 miles southwest of Washington, D.C. Hollins
College and Roanoke College, with student enrollments of approximately
1,100 and 1,700, respectively, are located in the Roanoke Service Area.
Virginia Polytechnic Institute & State University, with a student
body of 22,500, is approximately a 45-minute drive away.
The population in the Roanoke Service Area was 199,925 in
1990 and included over 80,000 households. Although the Roanoke Service
Area's growth generally has been slower than that in the Commonwealth
overall and in other key Virginia markets in particular, the Roanoke
Service Area has kept pace in such measures of economic health as growth
in housing values (6.5% in 1980-1990) and taxable sales (3.6% in 1988-1990).
The Roanoke metropolitan area (which includes the counties of Bedford,
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Botetourt and Franklin in addition to the Roanoke Service Area)
enjoyed an unemployment rate of 2.5% in December, 1996, the lowest
in Virginia among major metropolitan areas.
With over 6,000 businesses in 1990, the Roanoke Service Area
ranked fourth in the Commonwealth in terms of the number of businesses
and had a total market payroll of approximately $2.2 billion. The
business community in the Roanoke Service Area is well diversified
by industry group. The principal components of the economy are
retail trade, services, transportation, manufacturing and finance,
insurance and real estate. The Roanoke Service Area's position as a
regional center creates a strong medical, legal and business professional
community. Carilion Health System and Lewis-Gale Hospital are among
Roanoke's largest employers. Other large employers include Norfolk
Southern Corporation, General Electric Co., First Union Corporation,
The Kroger Co. and Allstate Insurance.
Banking Services
The Bank offers a full range of deposit services that are
typically available in most banks and savings and loan associations,
including checking accounts, NOW accounts, savings accounts and other
time deposits of various types, ranging from daily money market
accounts to longer-term certificates of deposit. The transaction
accounts and time certificates are tailored to the Bank's principal
market area at rates competitive to those offered in the area. In
addition, the Bank offers certain retirement account services, such
as Individual Retirement Accounts. All deposit accounts are insured
by the FDIC up to the maximum amount allowed by law (generally,
$100,000 per depositor, subject to aggregation rules). The Bank
solicits accounts from individuals, businesses, associations
and organizations and governmental authorities.
The Bank additionally offers a full range of short to medium
term commercial and personal loans. Commercial loans include
both secured and unsecured loans for working capital (including
inventory and receivables), business expansion (including acquisition
of real estate and improvements) and purchase of equipment and
machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education and personal
investments. The Bank also originates and holds fixed and variable
rate mortgage loans and real estate construction and acquisition loans.
The Bank's lending activities are subject to a variety of lending
limits imposed by federal laws and regulations. While differing
limits apply in certain circumstances based on the type of loan or
the nature of the borrower (including the borrower's relationship to
the Bank), in general the Bank is subject to a loan-to-one borrower
limit of an amount equal to (i) 15% of the Bank's unimpaired capital
and surplus in the case of loans which are not fully secured by readily
marketable collateral, or (ii) 25% of the unimpaired capital and surplus
if the excess over 15% is fully secured by readily marketable collateral.
The Bank may not make any extensions of credit to any director,
executive officer, or principal shareholder of the Bank, or to any
related interest of such person, unless the extension of credit is
approved by the Board of Directors of the Bank and is made on terms
not more favorable to such person than would be available to an
unaffiliated party.
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Other Bank services include safe deposit boxes, certain cash
management services, travelers checks, direct deposit of payroll
and social security checks and automatic drafts for various accounts.
The Bank is associated with the Most, Cirrus and The Exchange shared
networks of automated teller machines that may be used by Bank
customers throughout Virginia and other regions. The Bank also
offers VISA and MasterCard credit card services.
The Bank does not plan to exercise trust powers during its initial
years of operation. The Bank may in the future offer a full-service trust
department, but cannot do so without the prior approval of its primary
federal regulator, the Office of the Comptroller of the Currency (the
"OCC"). However, the Bank has entered into an arrangement to refer its
customers to an outside vendor for the provision of trust services,
under which arrangement the Bank receives fees for referring its
customers to the vendor.
Competition
The banking business is highly competitive. The Bank competes as a
financial intermediary with other commercial banks, savings and loan
associations, credit unions, mortgage banking firms, consumer finance
companies, securities brokerage firms, insurance companies, money market
mutual funds and other institutions operating in the Roanoke Service Area
and elsewhere. In addition, large borrowers increasingly are obtaining
financing directly by issuing commercial paper without the involvement
of banks.
The Bank's market area is a highly concentrated, highly branched
banking market. As of June 30, 1996, there were twelve commercial banks
operating a total of approximately eighty offices in the Roanoke Service
Area. The only locally owned and operated commercial banks are the Bank,
and Salem Bank & Trust Company. Crestar Bank and Signet Bank, with
fifteen and seven offices, respectively, in the Roanoke Service Area, are
statewide banks based in Richmond. First Virginia Bank-Southwest,
with thirteen offices in the Roanoke Service Area, is a subsidiary of a
holding company headquartered in Falls Church, Virginia. NationsBank
and First Union National Bank of Virginia with seven and twelve offices,
respectively, in the Roanoke Service Area, are subsidiary banks of holding
companies headquartered in Charlotte, North Carolina. In addition,
three out-of-town Virginia based community banks, Bank of Floyd,
First National Bank of Rocky Mount and The Bank of Fincastle, each has
opened one branch in the Roanoke Service Area. Finally, First Citizens
Bank of Virginia, a subsidiary of a Raleigh, North Carolina-based holding
company, has established a loan production office and has announced plans
to open at least three branch offices.
Also, savings and loan associations and numerous credit unions in
the aggregate operate dozens of additional offices in the Roanoke Service
Area. In addition, various other financial companies, ranging from local
to national firms, provide financial services to residents of the Roanoke
Service Area.
The Company believes that the Bank will be able to compete effectively
in this market, and that the community will react favorably to the
Bank's community bank focus and emphasis on service to small businesses,
individuals and professional concerns.
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Employees
At December 31, 1996, the Bank had twenty-three full-time employees,
including its officers. The Company does not have any regular employees
other than its officers.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on and
provide for general regulatory oversight with respect to virtually all
aspects of operations. The following is a brief summary of certain
statutes, rules and regulations affecting the Company and the Bank.
The Company
Because it owns all of the outstanding common stock of the Bank,
the Company is a bank holding company within the meaning of the federal
Bank Holding Company Act of 1956, as amended (the "BHCA"), and Chapter
13 of the Virginia Banking Act, as amended (the "Virgina Act").
The BHCA. The BHCA is administered by the Board of Governors of the
Federal Reserve System (the "Federal Reserve"), and the Company is
required to file with the Federal Reserve periodic reports and such
additional information as the Federal Reserve may require. The BHCA,
with limited exceptions, requires every bank holding company to obtain
the prior approval of the Federal Reserve before, (i) it or any of its
subsidiaries (other than a bank) acquires substantially all the assets
of any bank, (ii) it acquires ownership or control of any voting shares
of any bank if after such acquisition it would own or control, directly
or indirectly, more than 5% of the voting shares of such bank, or (iii)
it merges or consolidates with any other bank holding company.
The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve, require that, depending on the
particular circumstances, either Federal Reserve Board approval must be
obtained or notice must be furnished to the Federal Reserve and not
disapproved prior to any person or company acquiring "control" of a bank
holding company, such as the Company, subject to certain exemptions for
certain transactions. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed
to exist if a person acquires 10% or more but less than 25% of any class
of voting securities and either the company has registered securities
under Section 12 of the Securities Exchange Act of 1934 (the "Exchange
Act") or no other person will own a greater percentage of that class
of voting securities immediately after the transaction. Under the BHCA,
the Company is generally prohibited from engaging in, or acquiring direct
or indirect control of more than 5% of the voting shares of any company
engaged in nonbanking activities unless the Federal Reserve, by order or
regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a proper incident
thereto.
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The Federal Reserve imposes certain capital requirements on the
Company under the BHCA, including a minimum leverage ratio and a minimum
ratio of "qualifying" capital to risk-weighted assets. Subject to its
capital requirements and certain other restrictions, the Company is able
to borrow money to make a capital contribution to the Bank, and such loans
may be repaid from dividends paid from the Bank to the Company, although the
ability of the Bank to pay dividends is subject to regulatory restrictions.
The Company is also able to raise capital for contribution to the Bank by
issuing securities without having to receive regulatory approval, subject
to compliance with federal and state securities laws.
The Virginia Act. All Virginia bank holding companies must register
with the Bureau of Financial Institutions of the State Corporation
Commission of Virginia (the "Virginia Commission") under the Virginia Act.
A registered bank holding company must provide the Virginia Commission with
information with respect to the financial condition, operations, management
and inter-company relationships of the holding company and its subsidiaries.
The Virginia Commission also may require such other information as is
necessary to keep itself informed about whether the provisions of Virginia
law and the regulations and orders issued thereunder by the Virginia
Commission have been complied with, and may make examinations of any
Virginia holding company and its subsidiaries. Under the Virginia Act,
it is generally unlawful, without the prior approval of the Virginia
Commission, for any Virginia bank holding company to acquire direct or
indirect ownership or control of more than 5% of the voting shares of any
Virginia bank or any other bank holding company.
Glass-Steagall Act. The Company also is restricted in its activities
by the provisions of the Glass-Steagall Act, which prohibit the Company from
owning subsidiaries that are engaged principally in the issue, flotation,
underwriting, public sale or distribution of securities. The interpretation,
scope and application of the provisions of the Glass-Steagall Act currently
are being considered and reviewed by regulators and legislators, and the
interpretation and application of those provisions have been challenged in
the federal courts. The Company does not presently contemplate engaging in
securities-related activities in any material respect.
The Bank
General. The Bank operates as a national banking association
organized under the laws of the United States and is subject to examination
by the OCC. The OCC regulates or monitors all areas of the Bank's
operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rates
payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations and maintenance of
books and records. The Bank must maintain certain minimum capital ratios
and is subject to certain limits on aggregate investments in real estate,
bank premises and furniture and fixtures. The Bank is required to prepare
quarterly reports on the Bank's financial condition and to conduct an annual
audit of its financial affairs in compliance with minimum standards and
procedures prescribed by the OCC. The Bank also is required by the OCC
to adopt internal control structures and procedures in order to
safeguard assets and monitor and reduce risk exposure. While considered
appropriate for the safety and soundness of banks, these requirements
adversely impact overhead costs.
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The FDIC establishes rates for the payment of premiums by federally
insured banks for deposit insurance. A Bank Insurance Fund (the "BIF")
is maintained for commercial banks with insurance premiums from the
industry used to offset losses from insurance payouts when banks fail.
Due to the high rate of failures in the late 1980's and early 1990's,
the fees that commercial banks paid to the BIF increased significantly.
In 1995, in light of the banking industry's improved health and
recapitalization of the FDIC insurance fund, the FDIC announced a
proposal to lower banks' deposit insurance premiums to a rate of as low
as $.04 per $100 of insured deposits, and the Bank was assessed at that
rate in 1995. For 1996, the Bank was assessed for deposit insurance at
a rate of $.00 per $100 of insured deposits, but was subject to a
statutory minimum payment of $2,000. The statutory minimum has now been
eliminated, so the Bank's deposit insurance premium for 1997 will be
zero; however, the Bank in 1997 will be assessed approximately $4,000
in connection with interest on the so-called FICO bonds issued by the
federal government to finance the savings and loan industry bailout.
Transactions with Affiliates. The Federal Reserve Act restricts the
amount and prescribes conditions with respect to loans, investments,
asset purchases and other transactions (collectively, "Covered
Transactions") between banks and their affiliates. In addition to
limitations as to amount, each Covered Transaction must meet specified
collateral requirements. Compliance also is required with certain
provisions designed to avoid the taking of low quality assets.
Additionally, transactions, including Covered Transactions and service
contracts entered into between banks and certain affiliates must be on
terms and under circumstances that are substantially the same as those
prevailing at the time for comparable transactions involving
nonaffiliated companies. The foregoing restrictions and conditions apply
to certain transactions between the Company and the Bank.
The Bank is subject to restrictions on extensions of credit to
executive officers, directors, principal shareholders, and their related
interests. Such extensions of credit are limited in their aggregate
amount and (i) must be made on substantially the same terms and conditions,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with unaffiliated parties and (ii) must not
involve more than the normal risk of repayment or present other unfavorable
features.
Branching. The Bank may branch without geographic restriction in
Virginia. The Virginia Act permits statewide branching for Virginia state
banks and, as a national bank located in Virginia, these state branch
banking laws also apply to the Bank. On September 29, 1994, the federal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate
Act") was enacted. The Interstate Act allowed bank holding companies to
acquire banks in any state, without regard to state law, except that if
the state has a minimum requirement for the amount of time a bank must be in
existence, that law must be preserved. Under the Virginia Act, a
Virginia bank or all the subsidiaries of a Virginia bank holding company
sought to be acquired must have been in continuous operation for more
than two years before the date of such proposed acquisition. The
Interstate Act permits banks to acquire out-of-state branches through
interstate mergers, beginning June 1, 1997. States can elect to permit,
or alternatively not to permit, interstate branching earlier prior to
that provision of the Interstate Act's June 1, 1997 effective date.
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Virginia elected to "opt-in" early to interstate branching, effective
July 1, 1995.
Community Reinvestment Act. The federal Community Reinvestment
Act ("CRA") requires that, in connection with examinations of financial
institutions within their jurisdiction, the federal banking regulators
evaluate the record of the financial institutions in meeting the credit
needs of their local communities, including low and moderate income
neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions and applications to open a branch or facility. Recent
legislative and regulatory changes have reduced the paperwork and
regulatory burden of CRA on smaller institutions such as the Bank. The
Bank received a "Satisfactory" CRA rating in 1996 from the OCC
pursuant to its first CRA examination.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain
federal laws concerning interest rates. These laws restrict the interest
and charges which the Bank may impose for certain loans and thereby
affect the Bank's interest income. The Bank's loan operations also are
subject to certain federal laws applicable to credit transactions, such
as the Truth in Lending Act governing disclosures of credit terms to
consumer borrowers, the Home Mortgage Disclosure Act requiring financial
institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling
its obligation to help meet the housing needs of the community it
serves, the Equal Credit Opportunity Act prohibiting discrimination on
the basis of race, creed or other prohibited factors in extending credit,
the Fair Credit Reporting Act governing the use and provision of
information to credit reporting agencies, and the rules and regulations
of the various federal agencies charged with the responsibility of
implementing such federal laws. The deposit operations of the Bank
also are subject to the Truth in Savings Act, which governs disclosure
and advertisement of yields and costs of deposits and deposit accounts,
the Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures
for complying with administrative subpoenas of financial records, the
Electronic Funds Transfer Act and Regulation E issued by the Federal
Reserve to implement that Act, which govern automatic deposits to and
withdrawals from deposit accounts and customers' rights and liabilities
arising from the use of automated teller machines and other electronic
banking services, the Expedited Funds Availibility Act and Regulation
CC issued by the Federal Reserve to implement that Act, which govern
the availability of funds, return of checks, the settlement of checks,
check endorsement and presentment and notification of nonpayment, and
the Bank Secrecy Act, which requires reporting to the federal
government of cash transactions exceeding $10,000.
Dividends. At present, the Company's cash revenues consist of
interest and dividends on investments. In the future, it is expected
that the principal source of the Company's cash revenues will be dividends
received from the Bank. The amount of dividends that may be paid by the
Bank to the Company will depend on the Bank's earnings and capital
position and is limited by federal law, regulations and policies. A
national bank may not pay dividends from its capital; all dividends must
be paid out of undivided profits then on hand, after deducting expenses,
including reserves for losses and bad debts. In addition, a national
bank is prohibited from declaring a dividend on its shares of common
stock until its surplus equals its stated capital, unless there has
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been transferred to surplus no less than one-tenth of the bank's net
profits of (i) the preceding two consecutive half-year periods (in the
case of an annual dividend) or (ii) the preceding half-year period (in
the case of a quarterly or semi-annual dividend). The approval of the
OCC is required if the total of all dividends declared by a national
bank in any calendar year exceeds the total of its net profits for that
year combined with its retained net profits for the preceding two years,
less any required transfers to surplus. The Bank may not pay a dividend
if, after giving effect to the dividend, the Bank would be undercapitalized.
The Company does not anticipate paying any cash dividends to shareholders
during the initial years following the opening of the Bank. See "Capital
Regulations" below, "Item 5. Market for Common Equity and Related Matters"
and Note 9 to the consolidated financial statements.
Capital Regulations. The federal bank regulatory authorities impose
certain capital requirements on the Company and the Bank. Under current
regulations of the Federal Reserve, the Company will not be subject to
these regulations until its total assets, on a consolidated basis with
the Bank, are $150 million or more. In addition to minimum capital
levels prescribed by regulation, the Federal Reserve and the OCC have
authority to require higher capital levels on a case-by-case basis as part
of their supervisory and enforcement powers. The federal regulators have
stated that banks and bank holding companies contemplating significant
expansion programs should not allow expansion to diminish their capital
ratios and should maintain capital ratios well in excess of the stated
minimums.
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. Under the guidelines,
banks' and bank holding companies' assets are given risk weights of 0%,
20%, 50% or 100%, based on assumptions as to the relative risk inherent
in each asset category. Most loans are assigned a 100% risk weighting,
except for first mortgage loans fully secured by residential property
and, under certain circumstances, residential construction loans, both
of which carry a 50% risk weighting. Most investment securities are
assigned a 20% risk weighting, except for state and municipal revenue
bonds, which carry a 50% risk weighting, and obligations of the United
States Treasury or United States Government agencies, which have a 0%
risk weighting.
The risk-weighted asset base is equal to the sum of the aggregate
dollar value of assets and certain off-balance sheet items (such as
currency or interest rate swaps) in each of the four separate risk
categories, multiplied by the weight assigned to each specific asset
category. After the items in each category have been totaled and
multiplied by the category's risk factor, category totals are aggregated
to derive the total risk-weighted assets, and the total adjusted qualifying
capital base is divided by the total risk-weighted assets to derive a ratio.
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
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subsidiaries, less goodwill. Banking institutions may include only
noncumulative perpetual preferred stock, and holding companies may include
only limited amounts of cumulative perpetual preferred stock, in Tier 1
capital, and must exclude certain types of noncumulative preferred stock
on which the dividend is reset periodically based to some degree on the
bank's credit rating. 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.
To supplement the risk-based capital guidelines, the federal bank
regulatory agencies also have imposed a leverage ratio, which is Tier 1
capital as a percentage of average quarterly assets less intangible
assets. The principal objective of the leverage ratio is to place a
constraint on the maximum degree to which a bank or bank holding company
may leverage its equity capital base. Institutions receiving less than
the highest composite examination ratings are required to maintain a
leverage ratio of at least 100 basis points above the regulatory minimum.
At December 31, 1996, the Company and the Bank had the following
risk-based capital and leverage ratios relative to regulatory minimums:
Ratio Company Bank Minimum
Tier 1 19.5% 16.6% 4%
Total 20.4% 17.5% 8%
Leverage 15.0% 13.3% 3%
The regulations define five categories of compliance with regulatory
capital requirements, ranging from "well capitalized" to "critically
undercapitalized." To qualify as a "well capitalized" institution, a
bank must have a leverage ratio of no less than 5%, a Tier 1 risk-based
ratio of no less than 6%, and a total risk-based ratio of no less than
10%, and the bank must not be under any order or directive from the
appropriate regulatory agency to meet and maintain a specific capital
level. As of December 31, 1996, both the Company and the Bank qualified
as "well-capitalized" institutions (see Note 9 to the consolidated
financial statements).
The applicable federal bank regulatory agency can treat an institution
as if it were in the next lower category if the agency determines (after
notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound
practice. The degree of regulatory scrutiny of a financial institution
will increase, and the permissible activities of the institution will
decrease, as it moves downward through the capital categories.
Institutions that fall into one of the three undercapitalized categories
may be required to submit a capital restoration plan, raise additional
capital, restrict their growth, deposit interest rates and other
activities, improve their management, eliminate management fees to parent
holding companies, and even divest themselves of all or a part of their
operations. Bank holding companies can be called upon to boost their
subsidiary banks' capital and to partially guarantee the institutions'
performance under their capital restoration plans. If this occurs,
capital which otherwise would be available for holding company purposes,
including possible distribution to shareholders, would be required to
be downstreamed to one or more subsidiary banks.
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Effect of Governmental Monetary Policies
The earnings of the Bank are affected by domestic economic conditions
and the monetary and fiscal policies of the United States government
and its agencies. The Federal Reserve's monetary policies have had,
and will likely continue to have, an important impact on the operating
results of commercial banks through its power to implement national
monetary policy in order, among other things, to curb inflation or combat
a recession. The monetary policies of the Federal Reserve have major
effects upon the levels of bank loans, investments, deposits, interest
income and interest expense through its open market operations in United
States government securities and through its regulation of interest rates
and the reserve requirements against member bank deposits. It is not
possible to predict the nature or impact of future changes in monetary
and fiscal policies.
Item 2. Description of Property.
The Bank's main office is located in a seven story office building at
36 Church Avenue, S.W., in downtown Roanoke, Virginia, 24011. The Bank
leases approximately 8,148 square feet of newly-renovated office space on
the first floor of this facility. The lease commenced April 1, 1995, and
has an initial base term expiring December 31, 1999, renewable for two
five-year terms at the Bank's option. Annual base rent on the leased
space is $82,370, payable in equal monthly installments of $6,864. The
Bank also is responsible for paying a pro rata share of certain operating
costs associated with the leased space. Under the lease, the Bank is
granted a right of first refusal to lease approximately 2,900 square feet
of space on the mezzanine level. The cost of leasehold improvements to
the leased premises, net of accumulated amortization, was $249,148 at
December 31, 1996.
The Bank's Starkey Road office is a newly-constructed 2,700 square
foot building located on a one acre site at 4467 Starkey Road in southwest
Roanoke County (Tanglewood Mall area). The Company acquired the site
for cash in the amount of $272,250, and total cost of the facility
constructed thereon, net of accumulated depreciation, was $456,168 at
December 31, 1996.
The Bank's South Roanoke Office is a newly-renovated 914 square
foot facility that the Bank leases at a 1997 annual rate of $10,260,
payable in equal monthly installments of $855. The Bank is also responsible
for utilities. The lease commenced January 1, 1997, and has an initial term
of twelve years with one five-year renewal option. The initial cost of
leasehold improvements when the office opened January 15, 1997 was $10,484.
In the opinion of management of the Company, its properties are
adequate for its operations and adequately covered by insurance.
12
<PAGE>
Item 3. Legal Proceedings.
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any pending legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
PART II.
Item 5. Market for Common Equity and Related Stockholder Matters.
Market information. The Company's Articles of Incorporation authorize
it to issue up to 10,000,000 shares of Common Stock, no par value, of
which 964,040 shares were issued and outstanding at March 15, 1997.
The Common Stock is quoted under the symbol VYFC on the OTC Bulletin
Board, an electronic quotation and trade reporting service of the
National Association of Securities Dealers.
According to information obtained from the OTC Bulletin Board, the
quarterly range of prices per share since the Common Stock began trading
in July, 1995 was as follows:
1996 Quarter Ended High Trade Low Trade
03/31/96 $11.25 $9.50
06/30/96 $10.625 $7.75
09/30/96 $11.00 $8.75
12/31/96 $11.00 $9.00
1995 Quarter Ended High Trade Low Trade
03/31/95 N/A N/A
06/30/95 N/A N/A
09/30/95 $11.00 $10.25
12/31/95 $11.50 $ 9.375
Holders. At March 14, 1997, there were approximately 700 holders of
record of the Company's outstanding Common Stock.
Dividends. The Company has not paid any dividends and does not
anticipate paying any dividends during the initial years following the
13
<PAGE>
opening of the Bank. The Bank's and the Company's earnings will be
retained for several years, and perhaps longer, to expand the Bank's
capital base and to support future growth. See "Supervision and Regulation"
and Note 9 to the consolidated financial statements for restrictions on the
payment of dividends.
Item 6. Management's Discussion and Analysis or Plan of Operation
(000's omitted, except for share and per share information).
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.
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, opened its Starkey Road office on September 11, 1995, in the
County of Roanoke and opened its South Roanoke office on January 15, 1997,
in the City 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, reduced by $551 of direct stock issuance costs
associated with the Offering, for net proceeds of $9,089. Of the net
proceeds of the Offering, $7,900 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 December 31, 1996 were $51,743, up from $24,355 at
December 31, 1995, reflecting the Bank's first full year of operations.
The principal components of the Company's assets at the end of the period
were $2,149 in cash and due from banks, $2,791 in money market investments,
$11,584 in securities available-for-sale, $33,482 in loans and $1,397 in
premises and equipment. Total liabilities at December 31, 1996 were
$44,390, up from $16,290 one year earlier, with the increase almost
entirely represented by $27,500 growth in deposits. Total shareholders'
equity at December 31, 1996 was $7,353, consisting of $9,089 in net
proceeds from the Company's initial public offering, reduced by the
accumulated deficit of $1,749 and including $13 of unrealized gains
on securities available-for-sale, net of related deferred tax expense.
At December 31, 1995, total shareholder's equity was $8,065.
The Company's net loss was $714 in the year ended December 31, 1996,
down $25 or 3.4% from the $739 net loss recorded for the year ended
December 31, 1995. The decrease results from higher net interest income
partially offset by increased noninterest expenses in virtually all
categories as the Bank operated for a full year in 1996 versus only 7 1/2
months in 1995. The 1996 net loss would have been significantly less
except for total severance costs of $326 associated with the termination
of employment on June 20, 1996 of the Company's former President and Chief
Executive Officer.
14
<PAGE>
As previously mentioned, the Bank opened for business on May 15, 1995.
Accordingly, comparison of 1996's full year of operations with 1995, which
included a 4 1/2 month preopening period, significantly impacts comparability
between the periods so the following discussion is intended to focus on
the results for 1996. In addition, the dramatic growth attributable to
startup operations also affects comparability.
Net interest income was $1,361 for 1996 compared with $692 in 1995
and is attributable to interest income from securities, loans and money
market investments exceeding the cost associated with interest paid on
deposits and federal funds purchased. Interest income was $2,615 for 1996,
up $1,715 or 191% over 1995's $900. The increase is a result of the Bank's
reinvestment of deposit growth. Interest expense went up at a faster rate
than interest income, increasing $1,046 or 505% to $1,254 for 1996 from its
$208 level during 1995. In addition to the 1995 inclusion of stock escrow
earnings in interest income affecting the relative movement of net interest
income, interest expense in 1996 was affected by the greater growth rate of
deposits versus loans (171% and 142%, respectively) as the Bank sought to
reduce its loan-to-deposit ratio from the year-end 1995 level of 86% and
as consumer certificates of deposit became a higher proportion of total
deposits.
A provision for loan losses of $191 was provided in recognition of
management's estimate of inherent risks associated with lending activities.
Due to the Bank's limited operating history, this estimate is primarily
based on industry practices and consideration of local economic factors.
The allowance for loan losses was $328 as of December 31, 1996 and
represents approximately .98% of total loans outstanding. The Bank had
only $4 in nonperforming assets at December 31, 1996, and no loans still
accruing that were past due more than thirty days. Management believes
the allowance is adequate to provide for any inherent losses in the
portfolio as of December 31, 1996 and periodically evaluates 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 of $89 in 1996 consisted 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 $1,973, an increase of $667
over 1995, is the most significant factor contributing to the net loss of
$714 for 1996. As previously mentioned, the increase in noninterest expense
is attributable to the Bank being open a full year in 1996 versus 7 1/2
months in 1995, and to the recognition of $326 in expense to reflect the
Company's severance obligation to its former President. 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 and
nonrecurring severance expense.
The Company's financial position at December 31, 1996 reflects
liquidity and capital levels currently adequate to fund all anticipated
future business expansion. Capital ratios are well in excess of required
regulatory minimums for a well-capitalized institution (see "Supervision
and Regulation - Capital Regulations" and Note 9 to the consolidated
financial statements). 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.
15
<PAGE>
All investment securities at December 31, 1996 were classified as
available for sale, thereby affording the Company maximum flexibility in
managing liquidity and funding future business growth.
Impact of Inflation
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles, which requires the measurement of financial position and
operating results in terms of historical dollars without considering
changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, nearly all the assets and
liabilities of the Company and the Bank are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance
than do the effects of changes in the general rate of inflation and
changes in prices. In addition, interest rates do not necessarily move
in the same direction or in the same magnitude as do the prices of goods
and services. Management seeks to manage the relationship between
interest-sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from inflation.
Item 7. Financial Statements and Supplementary Data.
Index to Financial Statements
Independent Auditors' Report. 18
Consolidated Balance Sheets as of December 31, 1996 and 1995. 19
Consolidated Statements of Loss for the Years Ended
December 31, 1996 and 1995. 21
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1996 and 1995. 22
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995. 23
Notes to Consolidated Financial Statements 24
16
<PAGE>
VALLEY FINANCIAL CORPORATION
(A Development Stage Enterprise Through May 15, 1995)
Consolidated Financial Statements
December 31, 1996 and 1995
(With Independent Auditors' Report Thereon)
17
<PAGE>
Independent Auditors' Report
The Board of Directors
Valley Financial Corporation:
We have audited the accompanying consolidated balance sheets of Valley
Financial Corporation and subsidiary (a development stage enterprise through
May 15, 1995) as of December 31, 1996 and 1995, and the related consolidated
statements of loss, shareholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Valley Financial Corporation and subsidiary (a development stage enterprise
through May 15, 1995) as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Roanoke, Virginia
January 24, 1997
18
<PAGE>
VALLEY FINANCIAL CORPORATION
(A Development Stage Enterprise Through
May 15, 1995)
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
(In thousands, except share data) 1996 1995
-------------- ---------------
Assets
Cash and due from banks (notes 3 and 13) $2,149 1,016
Money market investments (note 13):
Federal funds sold 2,762 2,336
Interest-bearing deposits in other banks 29 55
Securities available-for-sale (notes 4 and 13) 11,584 5,283
Loans (notes 5 and 13):
Commercial loans 10,591 4,235
Commercial real estate loans 8,182 4,346
Residential real estate loans 13,829 4,841
Loans to individuals 880 401
Total loans 33,482 13,823
Less unearned fees 33 --
Less allowance for loan losses 328 137
Loans, net 33,121 13,686
Premises and equipment, net (note 6) 1,397 1,452
Accrued interest receivable 374 140
Other assets 134 137
Organizational expenses 193 250
Total assets 51,743 24,355
See accompanying notes to consolidated financial statements.
19
<PAGE>
Liabilities and Shareholders' Equity 1996 1995
-------------- --------------
Noninterest-bearing deposits $ 3,514 3,214
Interest-bearing deposits 9,063 3,713
Savings deposits 299 143
Time deposits greater than $100,000 (note 15) 4,442 1,671
Other time deposits (note 15) 26,299 7,376
Total deposits (note 13) 43,617 16,117
Accrued interest payable 432 126
Other liabilities (note 14) 341 47
Total liabilities 44,390 16,290
Shareholders' equity (notes 2, 4, 8 and 9):
Preferred stock, no par value.
Authorized 10,000,000 shares; none
issued -- --
Common stock, no par value.
Authorized 10,000,000 shares; issued
and outstanding 964,040 shares 9,089 9,089
Accumulated deficit (1,749) (1,035)
Unrealized gains on securities
available-for-sale, net of deferred
tax expense of $7 and $5 for 1996
and 1995, respectively 13 11
Total shareholders' equity 7,353 8,065
Commitments and other matters
(notes 4, 6, 8, 9, 12 and 14)
Total liabilities and shareholders' equity $ 51,743 24,355
20
<PAGE>
VALLEY FINANCIAL CORPORATION
(A Development Stage Enterprise Through
May 15, 1995)
CONSOLIDATED STATEMENTS OF LOSS
Years Ended December 31, 1996 and 1995
(In thousands, except share and per share data)
1996 1995
-------------- --------------
Interest income:
Interest and fees on loans $ 2,031 373
Interest on money market investments 79 113
Interest on securities available-
for-sale 505 414
Total interest income 2,615 900
Interest expense:
Interest on certificates of deposit
of $100,000 or more 175 32
Interest on other deposits 1,074 176
Interest on other borrowed funds 5 --
Total interest expense 1,254 208
Net interest income 1,361 692
Provision for loan losses (note 5) 191 137
Net interest income after
provision for loan losses 1,170 555
Noninterest income:
Service charges on deposit accounts 57 10
Gain on sale of securities 1 --
Other income 31 2
Total noninterest income 89 12
Noninterest expense:
Personnel (note 14) 1,117 717
Occupancy 144 106
Data processing and equipment
expenses 187 92
Advertising and promotion 79 118
Supplies 37 55
Insurance 35 28
Professional fees 45 49
Amortization of organizational
expenses 57 39
Other expense 272 102
Total noninterest expense 1,973 1,306
Net loss $ (714) (739)
Net loss per share $ (.74) (.90)
Weighted average common shares
outstanding 964,040 824,831
See accompanying notes to consolidated financial statements.
21
<PAGE>
VALLEY FINANCIAL CORPORATION
(A Development Stage Enterprise Through
May 15, 1995)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996 and 1995
(In thousands, except share data)
Unrealized
Gains on
Securities Total
Common Common Accumulated Available- Shareholders'
Shares Stock Deficit for-Sale Equity
Balances at
December 31, 1994 14 $ -- (296) -- (296)
Proceeds from sale
of common stock
(note 2) 964,040 9,640 -- -- 9,640
Redemption of
organizer's shares
note 2) ( 14) -- -- -- --
Common stock
issuance costs
netted against
proceeds (note 2) -- (551) -- -- (551)
Net loss -- -- (739) -- (739)
Unrealized gains
on securities
available-for-sale,
net of deferred
tax expense of $5 -- -- -- 11 11
Balances at December
31, 1995 964,040 9,089 (1,035) 11 8,065
Net loss -- -- (714) -- (714)
Unrealized gains
on securities
available-for-sale,
net of deferred
tax expense of $2 -- -- -- 2 2
Balances at December
31, 1996 964,040 $9,089 (1,749) 13 7,353
See accompanying notes to consolidated financial statements.
22
<PAGE>
VALLEY FINANCIAL CORPORATION
(A Development Stage Enterprise Through
May 15, 1995)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 and 1995
(In thousands)
1996 1995
-------------- --------------
Cash flows from operating activities:
Net loss $ (714) (739)
Adjustments to reconcile net loss
to net cash provided by (used in)
operating activities:
Provision for loan losses 191 137
Depreciation and amortization
of premises and equipment 131 72
Amortization of organizational
expenses 57 39
Gain on sale of securities (1) --
Amortization/accretion of
premiums/discounts, net 16 (17)
Increase in unearned fees 33 --
Increase in accrued interest
receivable (234) (140)
(Increase) decrease in other
assets 3 (136)
Increase in accrued interest
payable 306 126
Increase (decrease) in other
liabilities 292 (15)
Net cash provided by (used in)
operating activities 80 (673)
Cash flows from investing activities:
Net increase in money market
investments (400) (2,391)
Purchases of premises and equipment (76) (1,453)
Purchases of securities available-
for-sale (9,623) (38,592)
Proceeds from sales, calls and
maturities of securities
available-for-sale 3,311 33,342
Purchases of securities held-to-
maturity -- (735)
Proceeds from maturities of
securities held-to-maturity -- 735
Organizational expenses -- (10)
Net increase in loans (19,659) (13,823)
Net cash used in investing
activities (26,447) (22,927)
Cash flows from financing
activities:
Increase in time deposits greater
than $100,000 2,771 1,671
Increase in other time deposits 18,923 7,376
Net increase in other deposits 5,806 7,070
Decrease in advances from
related parties -- (817)
Proceeds from common stock issued -- 9,640
Common stock issuance costs -- (351)
Net cash provided by financing
activities 27,500 24,589
Net increase in cash and due from
banks 1,133 989
Cash and due from banks at
beginning of year 1,016 27
Cash and due from banks at end of
year $ 2,149 1,016
Supplemental disclosure of cash
flows information:
Cash paid during the year for:
Interest $ 948 82
See accompanying notes to consolidated financial statements.
23
<PAGE>
VALLEY FINANCIAL CORPORATION
(A Development Stage Enterprise
Through May 15, 1995)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996 and 1995
(In thousands, except share and per share data)
(1) Summary of Significant Accounting Policies
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 shareholders
(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 financial
statements reflect the operations of the Company and the Organizational
L.C. since the date of inception, 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 May 15, 1995 and a branch
was opened September 11, 1995. Accordingly, the Company is no longer
considered to be in the development stage. The Bank provides
traditional commercial banking services concentrated primarily in the
Roanoke Valley. The Bank does not currently offer trust services,
however, the Bank does refer customers to a provider of trust services
in exchange for a fee.
The accounting and reporting policies of the Company and the Bank
conform to generally accepted accounting principles and to general
banking industry practices. In preparing consolidated financial
statements, management is required to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities
as of the date of the balance sheet and revenues and expenses for the
year. Actual results could differ from those estimates.
The following is a summary of the more significant accounting policies:
Consolidation
The consolidated financial statements include the accounts of Valley
Financial Corporation and its wholly-owned subsidiary, Valley Bank N.A.,
collectively referred to hereinafter as the Corporation. All significant
intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks.
(Continued)
24
<PAGE>
(1) (Continued)
Securities
Investments are classified in three categories and accounted for as
follows: (1) debt securities that the Corporation has the positive
intent and ability to hold to maturity are classified as "securities
held-to-maturity" and reported at amortized cost; (2) debt and equity
securities that are bought and held principally for the purpose of
selling them in the near term are classified as "trading
securities" and reported at fair value, with unrealized gains and
losses included in net income; and (3) debt and equity securities
not classified as either held-to-maturity securities or trading
securities are classified as "securities available-for-sale" and
reported at fair value, with unrealized gains and losses excluded
from net loss and reported in a separate component of
shareholders' equity.
The Corporation does not currently maintain a trading securities
portfolio and there were no securities classified as held-to-
maturity at December 31, 1996 or 1995. Gains or losses on
disposition, if any, are based on the net proceeds
and adjusted carrying values of the securities called or sold,
using the specific identification method. A decline in value of
any available-for-sale or held-to-maturity security below cost
deemed other than temporary is charged directly to net loss,
resulting in the establishment of a new cost basis for
the security.
Loans, Allowance for Loan Losses, Loan Fees and Costs
Loans are stated at the amount of unpaid principal, reduced by
unearned fees on loans, and an allowance for loan losses. Income
is recognized over the terms of the loans using methods which
approximate the level yield method. The allowance for loan
losses is a valuation allowance consisting of the cumulative
effect of the provision for loan losses, plus any amounts
recovered on loans previously charged off, minus loans
charged off. The provision for loan losses charged to operating
expenses is the amount necessary in management's judgment to
maintain the allowance for loan losses at a level it believes
sufficient to cover losses in the collection of its
loans. Management determines the adequacy of the allowance based
upon reviews of individual credits, recent loss experience,
delinquencies, current economic conditions, the risk
characteristics of the various categories of loans and other
pertinent factors. Loans are charged against the allowance for
loan losses when management believes the collectibility of the
principal is unlikely. While management uses available
information to recognize losses on loans, future additions to the
allowance for loan losses may be necessary based on changes in
economic conditions. In addition, various regulatory agencies,
as an integral part of their examination process, periodically
review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance for loan
losses based on their judgments about information available to
them at the time of their examinations.
(Continued)
25
<PAGE>
(1) (Continued)
Interest related to nonaccrual loans is recognized on the cash
basis. Loans are generally placed in nonaccrual status when the
collection of principal and interest is 90 days or more past due,
unless the obligation is both well-secured and in the process of
collection.
Impaired loans are presented in the financial statements at the
present value of the expected future cash flows or at the fair
value of the loan's collateral. Homogeneous loans such as real
estate mortgage loans, individual consumer loans, home equity
loans and bankcard loans are evaluated collectively for
impairment. Management, considering current information and events
regarding the borrowers ability to repay their obligations,
considers a loan to be impaired when it is probable that the
Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. Impairment losses are
included in the allowance for loan losses through a charge to the
provision for loan losses. Cash receipts on impaired loans
receivable are applied first to reduce interest on such loans to
the extent of interest contractually due and any remaining amounts
are applied to principal.
Loan origination and commitment fees and certain direct loan
origination costs charged by the Bank are deferred and the net
amount amortized as an adjustment of the related loan's yield
over the contractual life of the related loan or, in the case of
demand loans, over the estimated life. Net fees related
to letters of credit are recognized over the commitment period.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation on buildings,
equipment, furniture and fixtures, and amortization of leasehold
improvements is computed by straight-line or accelerated methods
over the shorter of the estimated useful lives of the assets or
the related lease term. Estimated useful lives for assets
include land improvements and leasehold improvements, 3 to 15
years, buildings, 31.5 years, and furniture, fixtures and
equipment, 3 to 10 years. The cost of assets retired and sold
and the related accumulated depreciation and amortization are
eliminated from the accounts and the resulting gains or losses
are included in determining net loss. Expenditures for maintenance
and repairs are charged to expense as incurred, and improvements
and betterments are capitalized.
Organizational Costs
Organizational costs incurred during the development stage of the
Corporation have been capitalized and are being amortized using the
straight-line method over five years.
(Continued)
26
<PAGE>
(1) (Continued)
Stock Issuance Costs
Costs incurred in connection with the Corporation's initial stock
offering, consisting principally of direct sales, professional
and promotional costs were charged against the gross proceeds
received from the sale of common stock (see note 2).
Income Taxes
Income taxes are accounted for under the asset and liability
method, whereby deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in net loss in the period that
includes the enactment date.
Stock Options
The Corporation accounts for its stock option plan in accordance
with the provisions of Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to Employees, and related
interpretations. As such, compensation expense is recorded on
the date of grant only if the current market price of the
underlying stock exceeded the exercise price. On January 1, 1996,
the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation, which permits
entities to recognize as expense over the vesting period the fair value
of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in
SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and
provide the pro forma disclosure provisions of SFAS No. 123.
Net Loss Per Share
Net loss per share of common stock is computed based on the
weighted average number of common shares outstanding for the
year. The weighted average number of common shares outstanding
was 964,040 and 824,831 for 1996 and 1995, respectively. Options
representing common stock equivalents have been excluded from the
computation due to their antidilutive effect on net loss per share.
(Continued)
27
<PAGE>
(1) (Continued)
Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into off-
balance-sheet financial instruments consisting of commitments to
extend credit and standby letters of credit. Such financial
instruments are recorded in the financial statements when they
become payable.
(2) Common Stock Offering
During 1995, the Corporation completed its initial common stock
offering. The Corporation sold a total of 964,040 shares with
the gross proceeds of $9,640 reduced by direct stock issuance
costs of $551. Subsequent to initial closing, the 14 shares
owned by the original Organizers were redeemed at the par value
of one dollar per share. The offering was terminated in July
1995.
(3) Restrictions on Cash
To comply with Federal Reserve regulations, the Bank will be
required to maintain certain average reserve balances. There
were no daily reserve requirements for the weeks including
December 31, 1996 and 1995, as the Bank had not met minimum
average deposit levels under the current provisions of the
regulations.
(4) Securities
The amortized costs, gross unrealized gains and losses, and
approximate market values of securities available-for-sale as
of December 31, 1996 and 1995 were as follows:
1996
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Costs Gains Losses Values
U.S. Treasury $ 951 1 --- 952
U.S. Government agencies
and corporations 8,599 37 (21) 8,615
States and political
subdivisions 748 2 (1) 749
Corporate obligations 1,005 2 --- 1,007
Other securities 261 --- --- 261
Total securities available
for-sale $ 11,564 42 (22) 11,584
(Continued)
28
<PAGE>
(4) (Continued)
1995
Gross Gross Approximate
Amortized Unrealized Unrealized Market
Costs Gains Losses Values
U.S. Treasury $ 2,718 10 --- 2,728
U.S. Government agencies
and corporations 2,202 6 --- 2,208
States and political
subdivisions 110 --- --- 110
Other securities 237 --- --- 237
Total securities available-
for-sale $ 5,267 16 --- 5,283
The amortized costs and approximate market values of available-for-
sale securities as of December 31, 1996, by contractual maturity,
are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Approximate
Amortized Market
Costs Values
Due in one year or less $ 2,211 2,213
Due after one year through five years 9,153 9,171
Due after ten years 200 200
Total $ 11,564 11,584
Securities with amortized costs of $200 and $202 as of December 31, 1996
and 1995, respectively, were pledged as collateral for public deposits
and for other purposes as required or permitted by law.
(5) Loans and Allowance for Loan Losses
In the normal course of business, the Bank has made loans to officers,
directors and/or related interests. At December 31, 1996 and 1995,
$3,713 and $2,332, respectively, represented direct loans to officers
and directors and $1,324 and $1,234, respectively, represented loans
made to related interests of officers or directors and/or endorsed by
officers or directors.
(Continued)
29
<PAGE>
(5) (Continued)
The following table will summarize activity and amounts receivable
from officers, directors and/or related interests:
1996 1995
Balance at beginning of year $ 3,566 ---
Additions 2,360 3,739
Repayments (889) 173
Balance at end of year $ 5,037 3,566
Activity in the allowance for loan losses is summarized as follows:
1996 1995
Balance at beginning of year $ 137 ---
Provision for loan losses 191 137
Balance at end of year $ 328 137
As of December 31, 1996 and 1995, the Bank had no significant past due
loans greater than 90 days and no loans considered to be impaired.
During 1996 and 1995, there were no loan amounts charged off.
(6) Premises and Equipment
Components of premises and equipment and total accumulated
depreciation and amortization as of December 31, 1996 and 1995 are
as follows:
1996 1995
Land and improvements $ 293 293
Building 477 435
Furniture, fixtures and equipment 523 498
Leasehold improvements 298 298
Construction in progress 9 ---
1,600 1,524
Less accumulated depreciation and amortization 203 72
$ 1,397 1,452
(Continued)
30
<PAGE>
(6) (Continued)
The Corporation currently leases its main office location and formerly
leased certain temporary office space under noncancellable operating
leases. The lease for the main office has an original term of five
years with the option of two additional renewal terms of five years
each. Rental expenses under operating leases were approximately $82
and $75 for 1996 and 1995, respectively. In addition, the Corporation
has entered into a lease for a branch location which opened in January
1997. The property under lease is owned by a family member of a
director, however, the terms of the agreement are comparable to current
market rates. The original lease term is for twelve years with an
option to renew for one additional five-year term.
Future minimum lease payments under noncancellable operating leases were
as follows at December 31, 1996:
1997 $ 93
1998 93
1999 93
2000 32
2001 12
Subsequent years 96
$ 419
(7) Income Taxes
The Corporation has sustained net operating losses since its inception
and, accordingly, there is no income tax expense recorded for the years
ending December 31, 1996 and 1995, respectively.
Total income tax benefit differed from the "expected" amount computed
by applying the U.S. Federal income tax rate of 34 percent to loss
before income taxes as a result of the following:
1996 1995
Computed "expected" tax benefit $ (243) (251)
Increase (decrease) in income taxes resulting
from:
Nondeductible meals and entertainment expense 1 1
Nondeductible officer's life insurance premiums 2 1
Increase in beginning-of-the-year balance of the
valuation allowance for deferred tax assets 240 249
Reported income tax expense $ --- --
(Continued)
31
<PAGE>
(7) (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are as follows:
1996 1995
Deferred tax assets:
Net operating loss carryforwards $ 307 160
Loans, principally due to allowance for
loan losses 77 30
Preopening expenses due to capitalization for
tax purposes 127 165
Other 95 2
Total gross deferred tax assets 606 357
Less valuation allowance 585 345
Net deferred tax assets $ 21 12
Deferred tax liabilities:
Net unrealized gains on
available-for-sale securities 7 5
Other 14 7
Total gross deferred tax liabilities $ 21 12
Net deferred tax asset $ --- ---
The net change in the total valuation allowance for 1996 and 1995
was an increase of $240 and $249, respectively. In assessing the
realizability of deferred tax assets, management considers whether it
is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible and
loss carryforwards become utilized. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income
and tax planning strategies in making this assessment. Based upon the
level of historical taxable losses and projections for future taxable
income over the periods in which the deferred tax assets are deductible,
management is not able to conclude it is more likely than not the
Corporation will realize the benefits of these deductible differences
and loss carryforwards in excess of the amount which can be offset by
the reversal of future taxable items and, accordingly, net deferred
tax assets are reduced to zero by a corresponding valuation allowance.
(Continued)
32
<PAGE>
(7) (Continued)
At December 31, 1996, the Corporation has net operating loss
carryforwards for income tax purposes of approximately $903 available
to offset future taxable income. If not utilized, these loss
carryforwards will expire as follows:
Expiration
Dates Amounts
2009 $ 13
2010 458
2011 432
$ 903
(8) Stock Options
In January 1995, the Corporation's Board of Directors adopted an
Incentive Stock Option Plan (the Plan) pursuant to which the
Corporation's Board of Directors may grant stock options to officers
and key employees. The Plan authorizes grants of options to purchase
up to 99,000 shares of the Corporation's authorized, but unissued
common stock. Accordingly, 99,000 shares of authorized, but
unissued common stock are reserved for use in the Plan. All stock
options have been granted with an exercise price equal to the
stock's fair market value at the date of grant. All stock options
have 10-year terms, vest at the rate of 20 percent per year, and
become fully exercisable five years from the date of grant.
The per share weighted average fair value of stock options granted
during 1996 and 1995 was $5.24 and $5.01, respectively, on the date of
grant utilizing the Black-Scholes option-pricing model with the
following weighted average assumptions:
1996 1995
Expected dividend yield 0% 0%
Risk-free interest rate 6.5% 7%
Expected life of options 7.5 years 7.5 years
Expected volatility of stock price 30% 30%
As previously mentioned, the Corporation applies APB Opinion No. 25 in
accounting for its Plan and, accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial
statements. Had the Corporation determined compensation cost based
(Continued)
33
<PAGE>
(8) (Continued)
on the fair value of its stock options at the grant date under SFAS No.
123, the Corporation's net loss and net loss per share would have
increased to the pro forma amounts indicated below:
1996 1995
Net loss:
As reported $ (714) (739)
Pro forma (729) (747)
Net loss per share:
As reported $ (.74) (.90)
Pro forma (.75) (.91)
Stock option activity during the years ended December 31, 1996 and 1995
is as follows:
Weighted Average
Number of Shares Exercise Price
Balance at January 1, 1995 --- ---
Granted 10,750 $10
Expired/forfeited (3,000) $10
Balance at December 31, 1995 7,750 $10
Granted 9,000 $ 9.03
Expired/forfeited (2,000) $10
Balance at December 31, 1996 14,750 $ 9.24
At December 31, 1996, the range of exercise prices and weighted
average remaining contractual life of outstanding options was
$8.75-$10.00 and 8.6 years, respectively.
At December 31, 1996 and 1995, the number of options exercisable was
4,100 and 1,550, respectively, and the weighted average exercise
price of those options was $9.57 and $10.00, respectively.
In addition, under terms of employment and option agreements, two
officers will each be entitled to receive nontransferable options to
purchase up to 9,640 shares of common stock per year for three years,
if certain performance criteria are met. These options have a purchase
price of $10 per share which is equivalent to the initial common stock
offering price and the current estimated fair market value. These
options vest and are exercisable, assuming performance criteria are met,
for the first four anniversary dates from May 15, 1995, the initial
opening date of the Bank. The options may be exercised within a period
of ten years from the initial date of vesting. These options have not
vested as of December 31, 1996 as performance criteria have not been
met.
(Continued)
34
<PAGE>
(9) Restrictions on Payments of Dividends and Capital Requirements
The Corporation's principal source of funds for dividend payments
is dividends received from its subsidiary. Under applicable federal
laws, the Comptroller of the Currency, without prior approval, restricts
the total dividend payments of the Bank in any calendar year to the net
profits of that year, as defined, combined with the retained net
profits for the two preceding years. As of December 31, 1996, the Bank
is in a deficit position, and, accordingly, no amounts are available for
dividends without prior approval of the Comptroller of the Currency.
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital guidelines
that involve quantitative measures of the Bank's assets, liabilities
and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Corporation's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1996, that the Corporation meets
all capital adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from Office of
the Comptroller of the Currency categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Corporation must
maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the table below. There are no conditions or
events since that notification that management believes have changed
the Corporation's category.
(Continued)
35
<PAGE>
(9) (Continued)
The Corporation's and the Bank's actual capital amounts and ratios
are also presented in the table below.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996:
Total Capital
(to Risk Weighted
Assets):
Consolidated $7,475 20.4% 2,931 >=8.0% N/A N/A
Valley Bank,
N.A. 6,339 17.5% 2,901 >=8.0% 3,626 >=10.0%
Tier I Capital
(to Risk Weighted
Assets):
Consolidated 7,147 19.5% 1,466 >=4.0% N/A N/A
Valley Bank,
N.A. 6,011 16.6% 1,450 >=4.0% 2,176 >=6.0%
Tier I Capital (Leverage)
(to Average Assets):
Consolidated 7,147 15.0% 1,912 >=4.0% N/A N/A
Valley Bank,
N.A. 6,011 13.3% 1,813 >=4.0% 2,266 >=5.0%
As of December 31, 1995:
Total Capital
(to Risk Weighted
Assets):
Consolidated $7,941 50.1% 1,268 >=8.0% N/A N/A
Valley Bank,
N.A. 6,531 41.9% 1,248 >=8.0% 1,561 >=10.0%
Tier I Capital
(to Risk Weighted
Assets):
Consolidated 7,804 49.3% 634 >=4.0% N/A N/A
Valley Bank,
N.A. 6,394 41.0% 624 >=4.0% 936 >=6.0%
Tier I Capital (Leverage)
(to Average Assets):
Consolidated 7,804 38.4% 814 >=4.0% N/A N/A
Valley Bank,
N.A. 6,394 34.2% 748 >=4.0% 935 >=5.0%
(Continued)
36
<PAGE>
(10) Parent Company Financial Information
Condensed financial information of Valley Financial Corporation
is presented below:
Condensed Balance Sheets
December 31, 1996 and 1995
December 31,
Assets 1996 1995
Cash $ 179 139
Securities available-for-sale 1,183 1,210
Investment in subsidiary, at equity 6,183 6,615
Other assets 70 143
Total assets $ 7,615 8,107
Liabilities and Shareholders' Equity
Other liabilities 262 42
Total liabilities 262 42
Shareholders' equity (notes 2, 8 and 9):
Preferred stock, no par value. Authorized
10,000,000 shares; none issued --- ---
Common stock of no par value. Authorized
10,000,000 shares; issued and outstanding
964,040 shares 9,089 9,089
Accumulated deficit (1,749) (1,035)
Unrealized gains on securities available-for
sale, net 13 11
Total shareholders' equity 7,353 8,065
Commitments and other matters (notes 4, 6, 8, 9 and 12)
Total liabilities and shareholders' equity $ 7,615 8,107
(Continued)
37
<PAGE>
(10) (Continued)
Condensed Statements of Loss
Years Ended December 31, 1996 and 1995
1996 1995
Income:
Interest income $ 85 302
Expenses:
Other expenses 367 43
367 43
Income (loss) before equity in undistributed
net loss of subsidiary (282) 259
Equity in net loss of subsidiary (432) (998)
Net loss $ (714) (739)
(Continued)
38
<PAGE>
(10) (Continued)
Condensed Statements of Cash Flows
Years Ended December 31, 1996 and 1995
1996 1995
Cash flows from operating activities:
Net loss $ (714) (739)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Equity in net loss of subsidiary 432 998
Amortization of other assets 10 6
Decrease in other assets 63 ---
Increase (decrease) in other liabilities 218 (14)
Net cash provided by operating activities 9 251
Cash flows from investing activities:
Investment in subsidiary --- (7,900)
Purchases of securities available-for-sale (522) (1,202)
Sales, maturities and calls of
securities available-for-sale 553 ---
Reimbursement of organizational expenses by
subsidiary --- 491
Net cash provided by (used in) investing activities 31 (8,611)
Cash flows from financing activities:
Decrease in advances from related
parties --- (817)
Proceeds from issuance of common stock --- 9,640
Common stock issuance costs --- (351)
Net cash provided by financing activities --- 8,472
Net increase in cash 40 112
Cash at beginning of year 139 27
Cash at end of year $ 179 139
(Continued)
39
<PAGE>
(11) Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments may
involve, to varying degrees, credit risk in excess of the amount
recognized in the balance sheets. The contract amounts of these
instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
Credit risk is defined as the possibility of sustaining a loss because
the other parties to a financial instrument fail to perform in
accordance with the terms of the contract. The Bank's maximum
exposure to credit loss under commitments to extend credit and
standby letters of credit is represented by the contractual amount
of these instruments. The Bank uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance-sheet instruments.
The Bank requires collateral to support financial instruments when
it is deemed necessary. The Bank evaluates customers' creditworthiness
on a case-by-case basis. The amount of collateral obtained upon
extension of credit is based on management's credit evaluation of the
customer. Collateral may include deposits held in financial
institutions, U.S. Treasury securities, other marketable securities,
real estate, accounts receivable, inventory, and property, plant and
equipment.
Financial instruments whose contract amounts represent credit risk
as of December 31 are as follows:
1996 1995
Commitments to extend credit $ 7,296 3,886
Standby letters of credit $ 482 9
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Commitments
may be at fixed or variable rates and generally expire within one
year. Since many of the commitments are expected to expire without
being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
These guarantees are primarily issued to support public and private
borrowing arrangements, including bond financing and similar
(Continued)
40
<PAGE>
(11) (Continued)
transactions. Unless renewed, substantially all of the Bank's
credit commitments at December 31, 1996 will expire within one
year. Management does not anticipate any material losses as a
result of these transactions. The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending
loans to customers.
(12) Concentrations of Credit Risk
The Bank grants commercial, residential and consumer loans to
customers primarily in the Roanoke Valley area. The Bank has
a diversified loan portfolio which is not dependent upon any
particular economic or industry sector. As a whole, the portfolio
could be affected by general economic conditions in the Roanoke
Valley region.
A detailed composition of the Bank's loan portfolio is provided in the
consolidated financial statements. The Bank's commercial loan portfolio
is diversified, with no significant concentrations of credit. The
residential real estate loan portfolio consists principally of loans
collateralized by 1-4 family residential property. The loans to
individuals portfolio consists of consumer loans primarily for
automobiles and other personal property. These loans are generally
collateralized by the related property. Overall, the Bank's loan
portfolio is not concentrated within a single industry or group of
industries, the loss of any one or more of which would generate a
materially adverse impact on the business of the Bank.
The Bank has established operating policies relating to the
credit process and collateral in loan originations. Loans to
purchase real and personal property are generally collateralized
by the related property. Credit approval is principally a function
of collateral and the evaluation of the creditworthiness of the borrower
based on available financial information.
(13) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments, requires the Corporation
to disclose estimated fair values of its financial instruments.
The following methods and assumptions were used to estimate the
approximate fair value of each class of financial instrument for
which it is practicable to estimate that value:
Cash and Due from Banks
The carrying amount is a reasonable estimate of fair value.
(Continued)
41
<PAGE>
(13) (Continued)
Money Market Investments
The carrying amount is a reasonable estimate of fair value.
Securities
The fair value of securities, except certain state and municipal
securities, is estimated based on bid prices published in financial
newspapers or bid quotations received from securities dealers. The
fair value of certain state and municipal securities is not readily
available through market sources other than dealer quotations, so
fair value estimates are based on quoted market prices of similar
instruments, adjusted for differences between the quoted instruments
and the instruments being valued.
Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as
commercial, commercial real estate, residential real estate and
loans to individuals. Each loan category is further segmented
into fixed and adjustable rate interest terms.
The fair value of loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated market
discount rates that reflect the credit and interest rate risk inherent
in the loan as well as estimates for operating expenses and prepayments.
The estimate of maturity is based on the Bank's industry experience
with repayments for each loan classification, modified, as required,
by an estimate of the effect of current economic and lending conditions.
Deposits
The fair value of noninterest-bearing deposits, interest-bearing
deposits and savings deposits is the amount payable on demand.
The fair value of fixed maturity time deposits and certificates
of deposit is estimated using the rates currently offered for deposits
with similar remaining maturities.
Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend credit and
standby letters of credit are the deferred fees arising from
these unrecognized financial instruments. These deferred fees are
not deemed significant at December 31, 1996 and 1995, and as such,
the related fair values have not been estimated.
(Continued)
42
<PAGE>
(13) (Continued)
The carrying amounts and approximate fair values of the
Corporation's financial instruments are as follows at December 31, 1996
and 1995:
1996 1995
Carrying Approximate Carrying Approximate
Amounts Fair Values Amounts Fair Values
Financial assets:
Cash and due
from banks $ 2,149 2,149 1,016 1,016
Money market
investments 2,791 2,791 2,391 2,391
Securities
available-
for-sale 11,584 11,584 5,283 5,283
Loans, net 33,482 33,664 13,823 13,898
Total financial
assets $50,006 50,188 22,513 22,588
Financial liabilities:
Deposits 43,617 43,854 16,117 16,105
Total financial
liabilities $43,617 43,854 16,117 16,105
Fair value estimates are made at a specific point in time,
based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium
or discount that could result from offering for sale at one time
the Corporation's entire holdings of a particular financial
instrument. Because no market exists for a significant portion
of the Corporation's financial instruments, fair value estimates
are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various
financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect
the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments. Significant assets
that are not considered financial assets include deferred tax assets
and premises and equipment. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a
significant effect on fair value estimates and have not been considered
in the estimates.
(Continued)
43
<PAGE>
(14) Other Matters
In connection with the termination of the former president, the
Corporation recognized severance expense of $326 in 1996 which
is to be paid monthly over three years. At December 31, 1996,
$256 is recorded in other liabilities and related to these future
payments.
(15) Time Deposits
At December 31, 1996, the scheduled maturities of time deposits are
as follows:
Years Ending December 31,
1997 $26,881
1998 1,478
1999 779
2000 153
2001 1,450
$30,741
44
<PAGE>
Item 8. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III.
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required by Item 401 of Regulation S-B is set forth
under the caption "Information Concerning Directors and Nominees" on
pages 3-6 of the Company's Proxy Statement dated March 11, 1997 and is
incorporated herein by reference.
The information required by Item 405 of Regulation S-B is set forth
under the caption "Section 16(a) Beneficial Ownership Reporting Compliance"
on page 7 of the Company's Proxy Statement dated March 11, 1997 and is
incorporated herein by reference.
Item 10. Executive Compensation.
The information required by Item 402 of Regulation S-B is set forth
under the caption "Executive Compensation" on pages 7-10 of the Company's
Proxy Statement dated March 11, 1997 and is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and
Management.
The information required by Item 403 of Regulation S-B is set forth
under the caption "Security Ownership of Certain Beneficial Owners" on page
3 of the Company's Proxy Statement dated March 11, 1997 and under the caption
"Information Concerning Directors and Nominees" on pages 3-6 of the Company's
Proxy Statement dated March 11, 1997 and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions.
The information required by Item 404 of Regulation S-B is set forth
under the caption "Certain Relationships and Related Transactions" on page 6
of the Company's Proxy Statement dated March 11, 1997 and is incorporated
herein by reference.
45
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements:
Independent Auditors' Report.
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Loss for the Years Ended December
31, 1996 and 1995.
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1996 and 1995.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
All schedules are omitted as the required information is
inapplicable or the information is presented in the Financial
Statements or related notes.
3. Exhibits:
3.1 Articles of Incorporation (incorporated herein by
reference to Exhibit No. 3.1 of Registration Statement
No. 33-77568, on form S-1, as amended).
3.2 Bylaws (incorporated herein by reference to Exhibit
No. 3.2 of Registration Statement No. 33-77568, on
form S-1, as amended).
*10.1 Employment Agreement dated April 8, 1994, by and
between the Company and Guy W. Byrd, Jr. (incorporated
herein by reference to Exhibit No. 10.1 of Registration
Statement No. 33-77568, on Form S-1, as amended).
*10.2 Employment Agreement dated April 8, 1994, by and
between the Company and A. Wayne Lewis (incorporated
herein by reference to Exhibit No. 10.2 of Registration
Statement No. 33-77568, on Form S-1, as amended).
*10.3 Severance Agreement dated December 19, 1996, by and
between the Company and Ellis L. Gutshall.
*10.4 Stock Option Agreement dated December 19, 1996, by and
between the Company and Ellis L. Gutshall.
10.5 Office Lease dated February 28, 1994, by and between
First Federal Building, L.C. and Valley Financial
Enterprises, L.C. (incorporated herein by reference
to Exhibit No. 10.5 of Registration Statement
No. 33-77568, on Form S-1, as amended).
10.10 First amendment dated August 5, 1994, to the Office
Lease dated February 28, 1994, by and between First
Federal Building, L.C. and Valley Financial
Enterprises, L.C. (incorporated herein by reference
to Exhibit No. 10.10 of Form 10-K filed March 30,
1995, File No. 33-77568).
10.12 Second amendment dated December 14, 1994, to the Office
Lease dated February 28, 1994, by and between First
Federal Building, L.C. and Valley Financial
Enterprises, L.C. (incorporated herein by reference
to Exhibit No. 10.12 of Form 10-K filed March 30,
1995, File No. 33-77568).
10.13 Lease Agreement for office building dated
September 20, 1996, by and between Valley Bank,
N.A. and Betty J. Burrows.
21. Subsidiaries of the Registrant.
24. Power of Attorney.
27. Financial Data Schedule.
____________
*Management contract or compensatory plan or agreement required to be filed
as an Exhibit to this Form 10-KSB pursuant to Item 13(a).
(b) Reports on Form 8-K filed during the last quarter of the period
covered by this report:
None.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on
March 25, 1997.
Valley Financial Corporation
By:______________________
Ellis L. Gutshall
President and Chief
Executive Officer
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
following persons in the capacities indicated as of March 25, 1997.
Signature Title
___________________ President, Chief Executive Officer
(Ellis L. Gutshall) and Director (Chief Executive Officer)
___________________ Executive Vice President, Chief
(A. Wayne Lewis) Operating Officer and Director
___________________ Chief Financial Officer
(A. Wayne Lewis) (Principal Financial Officer and
Principal Accounting Officer)
___________________ Director
(Abney S. Boxley, III)
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___________________* Director
(W. Jackson Burrows)
___________________* Director
(William D. Elliot)
___________________* Director
(Lawrence H. Hamlar)
___________________* Director
(Eddie F. Hearp)
___________________* Director
(Anna L. Lawson)
___________________ Director
(Barbara B. Lemon)
___________________* Director
(George W. Logan)
___________________* Director
(Dr. John W. Starr)
__________________ Director
(Dr. Ward W. Stevens)
__________________* Director
(Maury L. Strauss)
__________________* Director
(Michael E. Warner)
*By ___________________
A. Wayne Lewis
(Attorney in Fact)
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INDEX TO EXHIBITS
Exhibit Page
Number Description Number
3.1 Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1 of Registration Statement
No. 33-77568, on Form S-1, as amended).
3.2 Bylaws (incorporated herein by reference to Exhibit
No. 3.2 of Registration Statement No. 33-77568, on
Form S-1, as amended).
10.1 Employment Agreement dated April 8, 1994, by and
between the Company and Guy W. Byrd, Jr. (incorporated
herein by reference to Exhibit No. 10.1 of Registration
Statement No. 33-77568, on Form S-1, as amended).
10.2 Employment Agreement dated April 8, 1994, by and
between the Company and A. Wayne Lewis (incorporated
herein by reference to Exhibit No. 10.2 of Registration
Statement No. 33-77568, on Form S-1, as amended).
10.3 Severance Agreement dated December 19, 1996, by and 52
between the Company and Ellis L. Gutshall.
10.4 Stock Option Agreement dated December 19, 1996, by and 62
between the Company and Ellis L. Gutshall.
10.5 Office Lease dated February 28, 1994, by and between
First Federal Building, L.C. and Valley Financial
Enterprises, L.C. (incorporated herein by reference to
Exhibit No. 10.5 of Registration Statement No. 33-77568,
on Form S-1, as amended).
10.10 First amendment dated August 5, 1994, to the Office Lease
dated February 28, 1994, by and betwen First Federal
Building, L.C. and Valley Financial Enterprises, L.C.
(incorporated herein by reference to Exhibit No. 10.10
of Form 10-K filed March 30, 1995, File No. 33-77568).
10.12 Second amendment dated December 14, 1994, to the Office
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Lease dated February 28, 1994, by and between First Federal
Building, L.C. and Valley Financial Enterprises, L.C.
(incorporated herein by reference to Exhibit No. 10.12 of
Form 10-K filed March 30, 1995, File No. 33-77568).
10.13 Lease Agreement for office building dated 66
September 20, 1996, by and between
Valley Bank, N.A. and Betty J. Burrows.
21 Subsidiaries of the Registrant. 69
24 Power of Attorney. 70
27 Financial Data Schedule. 72
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EXHIBIT 10.3
SEVERANCE AGREEMENT BETWEEN
VALLEY FINANCIAL CORPORATION
AND ELLIS L. GUTSHALL
This Severance Agreement ("Agreement"), dated for purposes of
identification, December 19, 1996, is made and entered into between Valley
Financial Corporation ("Employer"), a Virginia corporation, and Ellis L.
Gutshall ("Employee").
WHEREAS, Employee is employed as President and Chief Executive Officer
of the Employer; and
WHEREAS, Employer desires to provide Employee with certain benefits in
the event that Employee's employment with Employer is terminated under the
circumstances specified in this Agreement;
WHEREAS, Employee desires to continue employment with Employer and to
accept Employer's offer of the benefits specified in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION I. DEFINITIONS. As used in this Agreement, the following
capitalized terms have the indicated meanings unless the context clearly
requires otherwise:
A. "Applicable Federal Rate" has the meaning ascribed to that term in
Section 1274(b)(2)(B) of the Code.
B. "Bank Board" means the Board of Directors of any Subsidiary Bank.
C. "Bank Subsidiary" means Valley Bank, N.A. and any other bank or
subsidiary as to which Employer is now or hereafter deemed a bank holding
company under the applicable regulations of the Board of Governors of the
Federal Reserve System.
D. "Board" means the Board of Directors of the Employer.
E. "Cause" means (i) the willful and continued failure by Employee to
substantially perform his duties hereunder (other than any such failure
resulting from his incapacity due to physical or mental illness) after a
written demand for substantial performance is delivered to the Employee by
the Board (excluding Employee) and which failure has not been cured as
hereinafter provided, which demand specifically identifies the manner in
which the Board believes that Employee has not substantially performed his
duties, except to the extent such conduct also constitutes "Cause" under
clause E.(ii) (in which case clause E.(ii) shall apply) or (ii) the willful
engaging by the Employee in illegal conduct or any conduct which is
demonstrably and materially injurious to the Employer or any Bank
Subsidiary. Without limiting the generality of the foregoing, Cause
shall include the issuance of a removal order or similar order by a
governmental regulatory agency with appropriate jurisdiction prohibiting
Employee from participating in the affairs of the Employer or any Bank
Subsidiary. Any act or failure to act based upon authority given pursuant
to a resolution duly adopted by the Board or any Bank Board or based upon
the advice of counsel for the Employer or Bank Subsidiary shall be
conclusively presumed to be done or omitted to be done by the Employee
in good faith and in the best interests of the Employer and Bank Subsidiary.
It is also expressly understood that the Employee's attention to matters
not directly related to the business of the Employer or any Bank Subsidiary
shall not provide a basis for termination for Cause so long as the Board
has approved Employee's engagement in such activities. After the
Effective Date, Employee's employment shall not be terminated for Cause
unless and until there shall have been delivered to Employee a copy of a
resolution duly adopted by the affirmative vote of not less than 75% of
the entire membership of the Board (excluding Employee if he is a Board
member) at a meeting of the Board called and held for such purpose (after
a reasonable notice to Employee and an opportunity for Employee, together
with his counsel, to be heard before the Board), finding that in the good
faith opinion of the Board the Employee was guilty of conduct set forth
above and specifying the particulars thereof in detail. In such event,
Employee shall have a reasonable period of time in which to correct the
alleged violation, provided, however, that the alleged violation is
neither dishonest nor criminal. For purposes of the immediately
preceding sentence as well as clause E(i), it is agreed that thirty (30)
days after written demand for performance is delivered to the Employee by
the Board (excluding Employee if Employee is a Board member) shall be
deemed a reasonable time to correct any such alleged violation but if
the Board (excluding Employee if Employee is a Board member) determines
that Employee is using his best efforts to make such correction and that
the alleged violation can be corrected, the Board shall extend the
thirty (30) day period by such time as is reasonably necessary for
the Employee to effect such correction.
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F. "Change in Control" or "Change in Control of the Employer"
means a change of control of a nature that would be required to be
reported (assuming such event has not been "previously reported") in
response to Item 1(a) of the current report on Form 8-K, as in effect
on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended ("Exchange Act"); provided that,
notwithstanding the foregoing and without limitation, such a change
in control shall be deemed to have occurred at such time as
(i) any Person is or becomes the "beneficial owner" (as defined in
Rule 13d-3 or Rule 13d-5 under the Exchange Act as in effect on January 1,
1994), directly or indirectly of 20% or more of the combined voting power
of Employer's voting securities; (ii) the Incumbent Board ceases for any
reason to constitute at least the majority of the Board, provided that
any person becoming a director subsequent to the Effective Date whose
election, or nomination for election by the Employer's shareholders, was
approved by a vote of at least 75% of the directors comprising the
Incumbent Board (either by a specific vote or by approval of the proxy
statement of the Employer in which such person is named as a nominee
for director, without objection to such nomination)
shall be, for purposes of this clause F.(ii) considered as though
such person were a member of the Incumbent Board; (iii) all or
substantially all of the assets of the Employer or the assets of
any Subsidiary Bank(s) which comprise substantially all of the assets
of Employer are sold, transferred or conveyed by any means, including
but not limited to direct purchase or merger, if the transferee is not
controlled by the Employer, control meaning the ownership of more than
50% of the combined voting power of such entity's voting securities; or
(iv) the Employer is merged or consolidated with another corporation
or entity and as a result of such merger or consolidation less than
75% of the outstanding voting securities of the surviving or resulting
corporation or entity shall be owned in the aggregate by the former
shareholders of the Employer. Notwithstanding anything in the foregoing
to the contrary, no change in control shall be deemed to have occurred
for purposes of this Agreement by virtue of any transaction (x)
which results in the Employee or a group of Persons which includes the
Employee, acquiring, directly or indirectly, 20% or more of the combined
voting power of the Employer's voting securities; (y) arranged or caused by
a federal bank regulatory agency possessing appropriate jurisdiction
on the grounds of failing financial condition of the Employer or any
Subsidiary Bank which results in the acquisition, directly or
indirectly, of 20% or more of the combined voting power of the
Employer's voting securities by any Person; or (z) which results in the
Employer, any subsidiary of the Employer or any profit-sharing plan,
employee stock ownership plan or employee benefit plan of the Employer
or any of its subsidiaries (or any trustee of or fiduciary with respect
to any such plan acting in such capacity) acquiring, directly or
indirectly, 20% or more of the combined voting power of the Employer's
voting securities.
G. "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
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H. "Date of Termination" means (i) if Employee's employment is
terminated by Employee for other than Good Reason, ninety (90) days
after Notice of Termination is given; (ii) if Employee's employment
is to be terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that the Employee shall not have
returned to the performance of his duties on a full-time basis during
such thirty (30) day period), or (iii) except as otherwise provided
in this paragraph, if Employee's employment is to be terminated by
the Employer for Cause or by the Employee for Good Reason, the date
specified in the Notice of Termination, (iv) the date of Employee's
death, or (v) if Employee's employment is to be terminated by the
Employer for any reason other than Cause or Disability, the date
specified in the Notice of Termination, which in no event shall be a
date earlier than ninety (90) days after the date on which such Notice
of Termination is given, unless an earlier date has been expressly
agreed to by the Employee in writing either in advance of, or after,
receiving such Notice of Termination. In the case of termination of
Employee's employment by Employer for Cause, if, after the Effective
Date, Employee has not previously expressly agreed in writing to the
termination, then within thirty (30) days after receipt by the Employee
of the Notice of Termination by Employer the Employee may notify the
Employer that a dispute exists concerning the termination, in which
event the Date of Termination shall be either the date set by mutual
written consent of the parties or the date the dispute is resolved.
During the pendency of any such dispute, the Employer will continue
to be paid his full compensation in effect prior to the time the Notice
of Termination is given and until the dispute is resolved.
I. "Disability" means (i) as a result of Employee's inability due
to physical or mental illness, Employee shall have been absent from the
full-time performance of his duties with the Employer for six (6)
consecutive months, and (ii) within thirty (30) days after Notice of
Termination is given Employee shall not have returned to the full-time
performance of his duties.
J. "Effective Date" means the date and time at which a Change
of Control occurs with respect to Employer.
K. "Employer" includes any corporation or other entity which is
the surviving or continuing entity in respect of any merger, consolidation
or form of business combination in which the Employer ceases to exist.
L. "Employment Year" means the 12-month period beginning with the
Effective Date and each 12-month period beginning on the annual
anniversary of such Effective Date thereafter.
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M. "Good Reason" means:
(i) An adverse change in Employee's status or position(s) as an
officer or director of the Employer or any Bank Subsidiary after a
Change of Control including, without limitation, any adverse change
in Employee's status or position as a result of a material diminution
of his duties or responsibilities (other than, if applicable, any such
change directly attributable solely to the fact that the Employer is
no longer publicly owned except that Employer or Successor may not use
the fact that Employer is no longer publicly owned to justify taking any
action mentioned in this Section M. which is detrimental to the Employee
or adverse to his best interests) or the assignment to Employee after a
Change of Control of any duties or responsibilities which, in Employee's
reasonable judgment, are inconsistent with such status or position(s),
or any removal of Employee from or any failure to reappoint or reelect
Employee after a Change of Control to such position(s) (except in
connection with the termination of Employee's employment for Cause,
Disability or Retirement or as a result of Employee's death or by
Employee other than for Good Reason);
(ii) When a Notice of Termination is required hereunder for
termination of Employee under this Agreement, any purported termination
by the Employer or Successor of the Employee's employment after a Change
of Control which is not effected pursuant to a Notice of Termination
satisfying the applicable requirements of Section I.O. hereof (and,
if applicable, Section I. E. hereof);
(iii) The failure by Employer or Successor to continue
in effect after a Change of Control any Plans in which Employee
participates at the time of the Change in Control (or Plans providing
Employee with at least substantially similar benefits) other than as
a result of the normal expiration of any such Plan in accordance with
its terms as in effect at the time of the Change in Control, or the
taking of any action, or the failure to act, by Employer or Successor
after a Change of Control which would adversely affect Employee's
continued participation in any of such Plans on at least as favorable a
basis as existing on the date of the Change in Control or which would
materially reduce Employee's benefits in the future under any such Plans
or deprive Employee of any material benefit enjoyed by the Employee at
the time of the Change in Control;
(iv) The failure by Employer or Successor after a Change of
Control to provide and credit Employee with number of paid
vacation days to which Employee would then be entitled in
accordance with the Employer's normal vacation policy as in
effect at the time of the Change in Control, whichever is greater;
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(v) Employer or Successor requiring the Employee after a Change
in Control to be based anywhere other than where his office is located
immediately prior to the Change in Control except for required travel
on business for the Employer or Successor to an extent substantially
consistent with the business travel obligations which Employee undertook
on behalf of Employer prior to the Change in Control; or
(vi) Any refusal by Employer or Successor after a Change in
Control to continue to allow Employee to attend to matters or engage
in activities not directly related to the business of the Employer or
Successor which, prior to the Change in Control of the Employer,
Employee was permitted by Employer to attend to or engage in.
(vii) Termination of employment hereunder by the Employee for
any reason other than death or Disability pursuant to a Notice of
Termination given during the thirty (30) day period immediately
following the first annual anniversary of such Change of Control.
N. "Incumbent Board" means the Board as constituted on the date hereof.
O. "Notice of Termination" means a written notice that indicates
the specific termination provision of this Agreement relied upon and
sets forth in reasonable detail the facts and circumstances claimed
to provide a basis for termination of Employee's employment under the
provision so indicated.
P. "Person" has the meaning ascribed to that term in Sections 3(a)(9)
and 13(d)(3) of the Securities Exchange Act of 1934, as amended.
Q. "Plan" means any compensation plan such as an incentive,
bonus, stock option or restricted stock plan, any pension or profit
sharing plan or any welfare benefit plan (including, but not limited
to health, life or disability insurance).
R. "Retirement" means Employee's voluntary termination of all
employment hereunder after the attainment of age sixty-five (65) or
the attainment of age fifty-five (55) having worked full time for the
Employer for a period of ten (10) consecutive years.
S. "Successor" means any Person that succeeds to, or has the
practical ability to control (either immediately or with the passage
of time) the Employer's business directly, by merger or consolidation,
or indirectly by purchase of the Employer's voting securities, all or
substantially all of its assets or otherwise.
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SECTION II. TERMINATION OF EMPLOYMENT AND SEVERANCE.
A. Termination For Death, Disability or Retirement or by Employer
For Cause or by Employee for Other Than Good Reason. Upon the Employee's
termination of his employment for Retirement or for other than Good
Reason after the Effective Date, upon the termination of Employee's
employment by the Employer for Cause after the Effective Date, upon
termination for Disability after the Effective Date, or upon Employee's
death after the Effective Date, the Employer shall pay the Employee his
full base salary through the Date of Termination at the rate in effect at
the time Notice of Termination is given (if required) and all other unpaid
amounts, if any, to which Employee is entitled as of the Date of Termination
under any Plan or arrangement of Employer or Bank at the time such payments
are due. No Notice of Termination is required hereunder in the event of
Employee's death and the foregoing amounts shall be determined on the date
of death, if applicable.
B. Termination Under Certain Other Circumstances. Upon termination
of Employee's employment within thirty-six (36) months after the Effective
Date, unless such termination is (i) because of Employee's death or
Retirement, (ii) by Employer for Cause or Disability; or (iii) by
Employee other than for Good Reason, Employer shall pay to Employee an
amount equal to 2.99 multiplied by the Employee's annualized includable
compensation for the base period, within the meaning of Section
280G(d)(1) of the Code, provided, however that if any of such payment is
or will be subject to the excise tax imposed by Section 4999 of the Code
or any similar tax that may hereafter be imposed ("Excise Tax") such
payment shall be reduced to a smaller amount, even to zero, which smaller
amount shall be the largest amount payable under this paragraph that
would not be subject in whole or in part to the Excise Tax after
considering all other payments to Employee required to be considered under
Section 4999 or 280G of the Code. Such payment shall be referred to as
the "Severance Payment."
In the event that the Severance Payment is subsequently determined
to be less than the amount actually paid hereunder, the Employee shall
repay the excess to the Employer at the time that the proper amount
is finally determined, plus interest on the amount of such repayment
at the Applicable Federal Rate. In the event that the Severance Payment
is determined to exceed the amount actually paid hereunder, the Employer
shall pay Employee such difference plus interest on the amount of
such additional payment at the Applicable Federal Rate at the time that
the amount of such difference is finally determined.
In the event that the amount of the Severance Payment exceeds
or is less than the amount initially paid, such difference shall
constitute a loan by the Employer to the Employee, or by the Employee
to the Employer, as the case may be, payable on the fifth (5th) day
after demand (together with interest at the Applicable Federal Rate).
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C. Offset. The amount of any payment provided for in this
Section II shall not be reduced, offset or subject to recovery by the
Employer or Successor by reason of any compensation earned by Employee as
the result of employment by another employer after the Date of Termination,
or otherwise.
SECTION III. EFFECTIVE DATE.
No provision of this Agreement other than the applicable definitions
in Section I, this Section III, Section IV, Section V, Section VII.B.
through D., Section IX and Section X shall take effect and no Person shall
have any rights or duties under or in connection with this Agreement until
the Effective Date occurs. At the Effective Date, the rights and duties of
the parties hereunder shall automatically vest and become fully enforceable
in accordance with the terms of this Severance Agreement so long as
Employee is, immediately preceding the Effective Date, employed by Employer.
SECTION IV. BINDING AGREEMENT.
This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee
should die while any amount would still be payable to Employee hereunder
if the Employee had continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this
Agreement to Employee's beneficiary designated in writing and delivered to
Employer, if any, and if none to Employee's estate.
SECTION V. FEES AND EXPENSES.
Each party shall pay its own legal fees and related or other expenses
incurred in connection with this Agreement, whether or not such party
prevails, including, without limitation all such fees and expenses, if any,
incurred in contesting or disputing any termination or seeking to obtain or
enforce any right or benefit provided by this Agreement; provided, however,
that, after the Effective Date, the Employer shall pay all legal fees and
related expenses incurred by Employee in connection with this Agreement,
whether or not Employee prevails, including without limitation all such
fees and expenses incurred by Employee in contesting or disputing any
termination of Employee or in seeking to obtain or enforce any right or
benefit provided by this Agreement.
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SECTION VI. TAXES.
All payments to be made to Employee under this Agreement will be
subject to required withholding of federal, state and local and employment
and other taxes.
SECTION VII. MISCELLANEOUS.
A. Survival. The respective obligations of, and benefits afforded
to, Employer and Employee in Sections II, IV.V., VI, VII., VIII., and IX
of this Agreement shall survive termination of this Agreement.
B. Notice. For the purposes of this Agreement, notices and all
other communications provided for in the Agreement shall be in writing and
shall be deemed to have been duly given when delivered to Employee or the
Chairman of the Board of Employer or mailed by United States registered
mail, return receipt requested, postage prepaid and addressed, in the case
of Employer, to the attention of the Chairman of the Board at the
following address:
Valley Financial Corporation
36 W. Church Avenue
Roanoke, Virginia 24011
or, in the case of Employee, to the address set forth below the Employee's
signature, provided that all notices may be sent to such other address as
either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only
upon receipt.
C. Modification; Waiver. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or
discharge is agreed to in writing signed by Employee and the Chairman of
the Board of Employer. No waiver by either party hereto at any time of
any breach by the other party hereto of, or compliance with, any condition
or provision of this Agreement to be performed by such other party shall
be deemed a waiver of a similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to
the subject matter hereof have been made by either party which are not
expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the
laws of the Commonwealth of Virginia.
D. Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
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SECTION VIII. CONFIDENTIALITY; COVENANT NOT TO COMPETE.
A. Confidentiality. Employee agrees that subsequent to his period
of employment with Employer and/or any Bank Subsidiary, he will not at any
time communicate or disclose to any unauthorized person, without the
written consent of the Employer, any proprietary or other confidential
information concerning the Employer or any subsidiary of the Employer, it
being understood, however, that the obligations of this Section shall not
apply to the extent that the aforesaid matters (i) are disclosed in
circumstances where Employee is legally required to do so or (ii) become
generally known to and available for use by the public otherwise than by
the Employee's wrongful act or omission.
B. Covenant Not to Compete. If the Employee's employment with the
Employer is terminated after the Effective Date by Employee other than for
Good Reason or by Employer other than for Cause, the Employee agrees that
for a period of 3 years from the date his employment is terminated, he
will not, without the consent in writing of the Chairman of the Board of
the Employer, become an officer, employee, agent, partner, director or
substantial stockholder of any entity engaged in the commercial or retail
banking, lending, leasing or trust business within a 100 mile radius of
the City of Roanoke, Virginia, or become associated in any substantial
manner with any entity in the process of formation to engage in the retail
or commercial banking, lending, leasing or trust business, or any group
that intends to form any such entity in the geographical area described
above.
C. Relief. In the event of Employee's actual or threatened breach
of this Section, the Employer shall be entitled to a preliminary
restraining order and an injunction restraining the Employee from
violating its provisions. In the event the Employee terminates his
employment after the Effective Date for other than Good Reason and his
actual date of terminating his employment is less than ninety (90) days
after his Notice of Termination, the Employee will pay to the Employer,
as liquidated damages and not as a penalty, an amount equal to the
Employee's base salary then in effect, computed on a per diem basis,
multiplied by ninety (90).
D. Other Remedies. Nothing in this Agreement shall be construed
to prohibit the Employer from pursuing any other available remedies for
such breach or threatened breach, including the recovery of damages from
the Employee. If at the time of enforcement of this Section a court holds
that the duration, scope or area restrictions stated herein are
unreasonable under the circumstances then existing and, thus,
unenforceable, the Employer and Employee agree that the maximum duration,
scope or area reasonable under such circumstances shall be substituted
for the stated duration, scope or area.
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SECTION IX. RELATED AGREEMENTS.
To the extent that any provision of any other agreement between
Employer or any of its subsidiaries and Employee shall limit, qualify or
be inconsistent with any provision of this Agreement, then for purposes of
this Agreement, while the same shall remain in force, the provision of
this Agreement shall control and such provision of such other agreement
shall be deemed to have been superseded, and to be of no force or effect,
as if such other agreement had been formally amended to the extent
necessary to accomplish such purpose.
SECTION X. COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original but all of which together will constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as
of December 19, 1996.
VALLEY FINANCIAL CORPORATION
___________________________
By:/S/William D. Elliot
Its: Chairman, Human Resources Committee
Employee:
__________________________
/S/Ellis L. Gutshall
Address:
_____________________________________
_____________________________________
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EXHIBIT 10.4
STOCK OPTION AGREEMENT
This Agreement ("Agreement") dated for purposes of identification
December 19, 1996, is made and entered into between Valley Financial
Corporation ("Employer"), a Virginia bank holding company, and
Ellis L. Gutshall ("Employee").
Whereas, Employer has employed Employee as its President and Chief
Executive Officer;
Whereas, Employer desires to provide a certain benefit to the Employee
related to the performance of the Employer and its wholly owned banking
subsidiary, Valley Bank, National Association (the "Bank") in the form of
a grant of stock options on the terms and conditions herein specified;
Whereas, Employee is willing to accept the stock options on the terms
and conditions provided for herein.
NOW, THEREFORE, Employer hereby grants to Employee and Employee hereby
accepts from Employer the following options to purchase Employer common
stock under the following terms and conditions at a purchase price of
$10.00 per share:
1. The Options
(a) The option to acquire that number of shares of Employer common
stock equal to 1% of the shares of Employer common stock sold pursuant to
its initial public offering, rounded to the nearest whole number,
exercisable only if the following criteria are met or if the Board of
Directors of Employer without the participation of Employee or, in the
event Section 4 hereof is effective, any other officer or employee of the
Corporation who is a director and who would not be considered disinterested
for purposes of Rule 16b-3 of the Securities and Exchange Commission (the
"Board") determines, in its sole discretion, that the Bank has
substantially met the following criteria: (A) that the Bank has achieved
the final projections contained in the proforma submitted in the Bank's
charter application process and approved by the Office of the Comptroller
of the Currency insofar as those projections relate to (a) return on
average assets, (b) average balance of all deposits, and (c) average
balance of all loans; and (B) that the ratio of the Bank's noncurrent
loans and leases to its total loans and leases does not exceed that
same ratio as determined in the Uniform Bank Performance Report ("UBPR")
for the fiscal quarter ending with or immediately prior to a year of
operations of the Bank for the banks in the Bank's peer group as
defined in the UBPR (the "Option Exercise Criteria") for the Bank's
second year of operations.
(b) The option to acquire that number of shares of Employer common
stock equal to 1% of the shares of Employer common stock sold pursuant to
its initial public offering, rounded to the nearest whole number,
exercisable only if the Board determines, in its sole discretion, that the
Bank has substantially achieved the Option Exercise Criteria for its third
year of operations.
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(c) The option to acquire that number of shares of Employer common
stock equal to 1% of the shares of Employer common stock sold pursuant to
its initial public offering, rounded to the nearest whole number,
exercisable only if the Board determines, in its sole discretion, that the
Bank has substantially achieved the Option Exercise Criteria for its fourth
year of operations.
Each of the three grants of options above are exercisable only after
the conditions precedent applicable to such grant have been met. The date
upon which the Option Exercise Criteria are in fact met or the date the
Board determines that the Option Exercise Criteria have been met with
respect to one of the grants for its respective year of operation shall be
the "First Date of Exercise" with respect to such grant.
If the Board determines that the Option Exercise Criteria were not
met for the Bank's second year of operation, but subsequently determines
that the Option Exercise Criteria were met for either its third or fourth
year of operations, then the grant of options pursuant to (a) above shall
become exercisable, and the date of such Board determination shall be the
First Date of Exercise with respect to such grant. Similarly, should the
Board determine that the Option Exercise Criteria for the Bank's third year
of operations were not met but that the Option Exercise Criteria for the
Bank's fourth year of operation were met, then the options granted
pursuant to (b) above shall become exercisable as of the date of such
Board determination and such date shall be the First Date of Exercise with
respect to such grant.
2. Term. Each of the three grants of options above are exercisable,
in whole or in part, only during a period which begins with the First Date
of Exercise with respect to such grant and ends on the ten-year anniversary
date thereof, provided, however, that all unexercised options shall expire
thirty (30) days after the termination of Employee's employment if such
employment is terminated by Employee other than for Good Reason or by
Employer for Cause (as those terms are respectively defined in the
Severance Agreement of even date between Employer and Employee). In the
event of Employee's death, any options held by him which were exercisable
at the time of his death may be exercised by the person designated in
Employee's will or by the proper legal representative of the Employee.
Any option which is not exercisable at the time of Employee's termination
of employment for any reason, including death, shall expire on the date
Employee's employment terminates. No stock option granted hereunder
shall be transferable by Employee other than by will, the laws of descent
and distribution, pursuant to a qualified domestic relations order as
defined in the Internal Revenue Code of 1986, as amended, 26 USC 1,
et seq. or Title 1 of the Employee Retirement Income Security Act or the
rules thereunder.
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3. Restrictions. The options granted hereunder and the shares of
common stock issuable upon exercise of such options have not been
registered under the Securities Act of 1933 ("Securities Act"), or under
the Blue Sky or other securities laws of any state, and cannot be sold
or offered for sale unless subsequently so registered or an exemption
from registration is available. Employee understands that these
securities are being issued in reliance on Section 4 (2) of the
Securities Act and other available exemptions from registration under
federal and state securities laws and that he may be required to hold
the securities indefinitely. All certificates representing the
securities shall be subject to stop transfer orders and shall bear
an appropriate restrictive legend. Employee agrees that he will
not dispose of any of the securities except in a manner and fashion
which is in total compliance with the law and unless and until either
(i) Employer shall have received an opinion of legal counsel satisfactory
to it that such disposition does not violate the Securities Act and
regulations promulgated thereunder and any applicable state securities
laws or regulations, or (ii) the securities have been validly registered
under the Securities Act and any applicable state Blue Sky or securities
law. The foregoing notwithstanding, Employer shall, at its expense,
register any stock issuable pursuant to the exercise of an option
hereunder under the Securities Act and any applicable state Blue Sky
or securities law upon Employee's request, provided, however, that
the federal registration can be accomplished on Form S-8.
(4) Rule 16b-3. This Section 4 shall only be effective if this
Agreement is approved by the affirmative votes of the holders of the
majority of the securities of the Employer present, or represented,
and entitled to vote at a meeting duly held in accordance with the
laws of the Commonwealth of Virginia. Employer agrees to have its
shareholders consider this approval at the next following annual
meeting of shareholders. The transactions under this Agreement are
intended to comply with Rule 16b-3 (or its successor), as amended from
time to time, promulgated pursuant to the Exchange Act, and the Employer
may, but shall not be required to, submit any proposed amendment to
this Agreement to its shareholders for their approval to assure
continued compliance if such proposed amendment would (i) materially
increase the benefits accruing to Employee under this Agreement;
(ii) materially increase the number of securities which may be issued
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under this Agreement; or (iii) materially modify the requirements as
to eligibility for participation in this Agreement. Furthermore, any
portion of this Agreement dealing with the amount and price of securities
to be awarded or awarded to Employee, which specifies the timing of
awards to Employee, or which sets forth the formula that determines the
amount, price and timing using objective criteria such as earnings of
the issuer, value of the securities, years of service, job classification,
and compensation levels shall not be amended more than once every six
months other than to comply with changes in the Code, the Employee
Retirement Income Security Act of 1974, as amended, or the rules
promulgated thereunder.
5. Miscellaneous Considerations. The number of optioned shares
shall be adjusted from time to time to prevent dilution or enlargement
of Employee's rights caused by stock dividends, stock splits,
recapitalizations, mergers, consolidations, combinations or exchanges
of shares, reorganizations, liquidations and similar matters. An option
may be exercised by giving written notice of exercise to the Employer
specifying the number of shares to be purchased and by paying in full
in cash the exercise price. Upon notification of the amount due and prior
to, or concurrently with, the delivery to Employee of a certificate
representing any shares purchased pursuant to the exercise of an
Option, Employee shall promptly pay to Employer any amount necessary
to satisfy applicable federal, state or local tax requirements.
Valley Financial Corporation
____________________________
By: /S/William D. Elliot
____________________________
/S/Ellis L. Gutshall
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<PAGE>
EXHIBIT 10.13
LEASE AGREEMENT
THIS LEASE, made this 20th day of September, 1996, by and
between Betty J. Burrows, hereinafter called LESSOR, and Valley Bank,
N.A., a National Banking Association, hereinafter known as Lessee.
WITNESSETH:
That for and in consideration of the premises and mutual covenants
and agreements hereinafter set forth Lessor does hereby let and lease
unto Lessee that certain building and premises known as 2203 Crystal
Spring Avenue S.W. in the City of Roanoke, Virginia, for a period of
twelve (12) years commencing January 1, 1997, at the rental and under
the conditions set forth as follows:
1. Lessee will pay to Lessor as rent during the term of this lease,
the following amounts on or before the first day of each month in advance:
(a) for calendar year 1997, the sum of $855.00 per month;
(b) for calendar year 1998, the sum of $885.00 per month;
(c) for calendar year 1999, the sum of $920.00 per month;
(d) for calendar year 2000, the sum of $955.00 per month;
(e) for calendar year 2001, the sum of $990.00 per month;
(f) for calendar year 2002, the sum of $1,025.00 per month;
(g) for calendar year 2003, the sum of $1,060.00 per month;
(h) for calendar year 2004, the sum of $1100.00 per month;
(i) for calendar year 2005, the sum of $1,140.00 per month;
(j) for calendar year 2006, the sum of $1,180.00 per month;
(k) for calendar year 2007, the sum of $1,220.00 per month; and
(l) for calendar year 2008, the sum of $1,260.00 per month.
2. Lessee is hereby accorded the right and privilege to make such
changes, renovations, refurbishings and improvements to the said building
and premises as it may reasonably deem necessary or desirable to operate
a branch bank in said premises, but Lessee shall make no changes in the
basic structure of said building without first securing the written consent
of Lessor.
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3. Lessee hereby covenants that it will pay all public utility bills
incurred by it as the result of its occupation of said premises.
4. At the end of the initial term of this lease (December 31, 2008),
Lessee shall have at its sole discretion the option to extend the lease
for an additional five (5) years with the monthly rental paid to Lessor
to be agreed upon by both parties six (6) months prior to expiration of
the lease. This renewal option shall be binding upon Lessor only if
there has been no change in control of Lessor or Valley Financial
Corporation of a nature that would be required to be reported in response
to Item 1(a) of the Current Report on Form 8-K as in effect on the
date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended.
5. The respective obligations of Lessor and Lessee pursuant to this lease
shall be contingent upon the satisfaction on December 31, 1996 of both of
the following conditions:
(a) the tenant as of the date hereof, NationsBank of Virginia, N.A.
shall have vacated the premises; and
(b) Lessor shall have obtained approval from the Office of the
Comptroller of the Currency of the United States for it to operate a branch
bank in the subject premises, and it shall have not received notification
from any other bank regulatory agency that such other bank regulatory
agency objects to Lessor establishing a branch bank in the subject premises.
6. This lease shall be binding and enforceable by and on each of the
respective heirs, successors and assigns of Lessor and Lessee.
WITNESS the following signatures and seals:
LESSOR:
___________________________(SEAL)
/S/Betty J. Burrows
LESSEE:
___________________________(SEAL)
/S/Ellis L. Gutshall
President and Chief Executive Officer
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<PAGE>
STATE OF VIRGINIA )
) To Wit:
CITY OF SALEM )
I, Anne L. Patchan, a Notary Public in and for the City and State
aforesaid, do hereby certify that Betty J. Burrows, whose name is signed
to the foregoing writing bearing the date of September 20, 1996, has
this day appeared before me in the City and State aforesaid and
acknowledged the same.
Given under my hand this 1st day of October, 1996.
_______________________________
/S/Anne L. Patchan
Notary Public
My Commission expires: March 31, 1998
STATE OF VIRGINIA )
) To Wit:
CITY OF ROANOKE )
I, Diane L. Ross, a Notary Public in and for the City and State aforesaid,
do hereby certify that Ellis L. Gutshall, whose name is signed to the
foregoing writing bearing the date of September 20, 1996, has this day
appeared before me in the City and State aforesaid and acknowledged the same.
Given under my hand this 28th day of October, 1996.
_______________________________
/S/Diane L. Ross
Notary Public
My Commission expires: February 28, 1998
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<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Valley Bank, N.A. is a subsidiary of the registrant, Valley
Financial Corporation. Valley Financial Corporation owns 100% of the
Common Stock of the Bank.
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EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers
and/or directors of Valley Financial Corporation, a Virginia corporation
("Valley"), does hereby constitute and appoint Ellis L. Gutshall and A.
Wayne Lewis, and each of them (with full power to each of them to act
alone), his true and lawful Attorneys in Fact and Agents for him and on
his behalf and in his name, place and stead in any and all capacities and
particularly as an officer and/or director of Valley, to sign, execute and
affix his seal thereto and file any of the documents referred to below:
Annual Report for the calendar year ended December 31,
1996, on Form 10-K, and any amendments thereto, together
with all exhibits and any and all documents required to
be filed with respect thereto, with the Securities and
Exchange Commission and all other appropriate regulatory
authorities;
granting unto said Attorneys and each of them full power and
authority to do and perform every act and thing requisite and
necessary to be done in and about the premises in order to
effectuate the same as fully, to all intents and purposes, as he
himself might or could do if personally present, hereby ratifying
and affirming all that said Attorneys in Fact and Agents or each
of them may lawfully do or cause to be done by virtue hereof.
WITNESS the signatures and seals of the undersigned this 16th day
of January, 1997.
___________________________(SEAL)
/S/Eddie F. Hearp
___________________________(SEAL)
/S/Anna L. Lawson
___________________________(SEAL)
/S/Michael E. Warner
___________________________(SEAL)
/S/Lawrence H. Hamlar
___________________________(SEAL)
/S/John W. Starr
___________________________(SEAL)
/S/Maury L. Strauss
___________________________(SEAL)
/S/A. Wayne Lewis
___________________________(SEAL)
/S/W. Jackson Burrows
___________________________(SEAL)
/S/George W. Logan
___________________________(SEAL)
/S/Ellis L. Gutshall
___________________________(SEAL)
/S/William D. Elliot
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<PAGE>
COMMONWEALTH OF VIRGINIA )
) to wit:
CITY OF ROANOKE )
I, Diane L. Ross, a Notary Public in and for the jurisdiction aforesaid,
do hereby certify that W. Jackson Burrows, William D. Elliot, Ellis L.
Gutshall, Lawrence H. Hamlar, Eddie F. Hearp, Anna L. Lawson, A. Wayne
Lewis, George W. Logan, John W. Starr, Maury L. Strauss and Michael E.
Warner, whose names are signed to the foregoing writing bearing date the
16th day of January, 1997, this day personally appeared before me and
acknowledged the same in my City and State aforesaid.
GIVEN under my hand and seal this 16th day of January, 1997.
____________________________
/S/Diane L. Ross
Notary Public
My commission expires February 28, 1998
(SEAL)
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<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
[ARTICLE] 12
[LEGEND]
[RESTATED]
[CIK] 0000921590
[NAME] VALLEY FINANCIAL CORP /VA/
[MULTIPLIER] 1,000
[FISCAL-YEAR-END] DEC-31-1996
[PERIOD-START] JAN-01-1996
[PERIOD-END] DEC-31-1996
[PERIOD-TYPE] 12-MOS
[CASH] 2,149
[INT-BEARING-DEPOSITS] 40,103
[FED-FUNDS-SOLD] 2,762
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 11,584
[INVESTMENTS-CARRYING] 0
[INVESTMENTS-MARKET] 0
[LOANS] 33,482
[ALLOWANCE] 328
[TOTAL-ASSETS] 51,743
[DEPOSITS] 43,617
[SHORT-TERM] 0
[LIABILITIES-OTHER] 773
[LONG-TERM] 0
[COMMON] 9,089
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 0
[TOTAL-LIABILITIES-AND-EQUITY] 51,743
[INTEREST-LOAN] 2,031
[INTEREST-INVEST] 584
[INTEREST-OTHER] 0
[INTEREST-TOTAL] 2,615
[INTEREST-DEPOSIT] 1,249
[INTEREST-EXPENSE] 1,254
[INTEREST-INCOME-NET] 1,361
[LOAN-LOSSES] 191
<SECURITIES-GAIN> 1
[EXPENSE-OTHER] 1,973
[INCOME-PRETAX] (714)
[INCOME-PRE-EXTRAORDINARY] (714)
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (714)
[EPS-PRIMARY] (.74)
[EPS-DILUTED] (.74)
[YIELD-ACTUAL] 4.07
[LOANS-NON] 4
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 137
[CHARGE-OFFS] 0
[RECOVERIES] 0
[ALLOWANCE-CLOSE] 328
[ALLOWANCE-DOMESTIC] 328
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 0
72
</TABLE>
