UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
Commission File Number: 33-77568
VALLEY FINANCIAL CORPORATION
VIRGINIA 54-1702380
(State of Incorporation) (I.R.S. Employer
Identification Number)
36 Church Avenue, S.W.
Roanoke, Virginia 24011
(Address of principal executive offices)
(540) 342-2265
(Issuer's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
At May 12, 1997, 964,040 shares of the issuer's common stock, no par value,
were outstanding.
Transitional small business disclosure format: Yes No x .
1
<PAGE>
VALLEY FINANCIAL CORPORATION
FORM 10-QSB
March 31, 1997
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income (Loss) 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8
Part II. OTHER INFORMATION
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
VALLEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
---------- -------------
<S> <C> <C>
Assets
Cash and due from banks (note 2) $1,495 $2,149
Money market investments:
Federal funds sold 1,211 2,762
Interest-bearing deposits 40 29
Total money market investments 1,251 2,791
Securities available for sale (note 3) 16,494 11,584
Loans:
Commercial loans 11,786 10,591
Commercial real estate loans 9,559 8,182
Residential real estate loans 14,876 13,829
Loans to individuals 1,155 880
Total loans 37,376 33,482
Less unearned income (39) (33)
Less allowance for loan losses
(note 4) (364) (328)
Total net loans 36,973 33,121
Premises and equipment 1,425 1,397
Organizational costs 178 193
Other assets 587 508
Total assets $58,403 $51,743
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits 4,182 3,514
Interest bearing demand deposits 12,014 9,063
Savings deposits 390 299
Certificates of deposits>$100,000 5,028 4,442
Other time deposits 28,594 26,299
Total deposits 50,208 43,617
Other liabilities 887 773
Total liabilities 51,095 44,390
Preferred stock, no par value.
Authorized 10,000,000 shares; none
issued and outstanding
Common stock, no par value.
Authorized 10,000,000 shares; issued
and outstanding 964,040 at March 31,
1997 and December 31, 1996 (note 5) 9,089 9,089
Accumulated deficit (1,722) (1,749)
Unrealized gains (losses) on securities
available-for-sale, net of deferred
tax expense (benefit) (59) 13
Total shareholders' equity 7,308 7,353
Total liabilities and
shareholders' equity $58,403 $51,743
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
For the Period For the Period
January 1, 1997 January 1, 1995
Through Through
March 31, 1997 March 31, 1996
(in thousands, except per share data)
<S> <C> <C>
Interest Income:
Interest and fees on loans $740 $327
Interest on money market
investments 32 26
Interest on securities available
for sale 225 73
Total interest income 997 426
Interest Expense:
Interest on certificates of
deposit>$100,000 61 31
Interest on other deposits 463 155
Total interest expense 524 186
Net interest income 473 240
Provision for loan losses (note 4) 36 54
Net interest income after provision
for loan losses 437 186
Noninterest income:
Service charges on deposit accounts 23 10
Other fee income 16 1
Securities gains 0 1
Total noninterest income: 39 12
Noninterest Expense:
Salaries and employee benefits 212 205
Occupancy and equipment expense, net 69 64
Data processing expense 21 18
Marketing and advertising expense 33 27
Office supply expense 18 7
Other expense 81 75
Amortization of organizational expense 15 14
Total noninterest expense 449 410
Net income (loss) $27 ($212)
Net income (loss) per share (note 5) $0.03 ($0.22)
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
For the Period For the Period
January 1, 1997 January 1, 1996
Through Through
March 31, 1997 March 31, 1996
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $27 ($212)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Provision for loan losses 36 54
Depreciation and amortization of
bank premises and equipment 35 34
Amortization of organizational
expenses 15 14
Amortization/accretion of premiums/
discounts, net (1) 6
Gain on sale of securities 0 (1)
Increase in unearned fees 6 0
Increase in other assets (49) (125)
Increase (decrease) in other liabilities 121 147
Net cash provided by (used in) operating
activities 190 (83)
Cash Flows From Investing Activities:
Net decrease in money market investments 1,540 58
Purchases of premises and equipment (63) (56)
Purchases of securities available-
for-sale (6,183) (1,752)
Proceeds from sales, calls and
maturities of securities available-
for-sale 1,165 851
Net increase in loans (3,894) (5,426)
Net cash used in investing activities (7,435) (6,325)
Cash Flows From Financing Activities
Increase in time deposits greater
than $100,000 586 1,349
Increase in other time deposits 2,295 4,049
Net increase in other deposits 3,710 790
Net cash provided by financing activites 6,591 6,188
Net Decrease in Cash and Due From Banks (654) (220)
Cash and Due From Banks at Beginning of
Period 2,149 1,016
Cash and Due From Baks at End of Period $1,495 $796
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
VALLEY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 1997
(Unaudited)
(In thousands, except share and per share data)
Organization and Summary of Significant Accounting Policies
(1) General
Valley Financial Corporation (the "Company") was incorporated under
the laws of the Commonwealth of Virginia on March 15, 1994,
primarily to serve as a holding company for Valley Bank, N.A.
(the "Bank"), which opened for business on May 15, 1995. The
Company's fiscal year end is December 31.
The consolidated financial statements of the Company conform to
generally accepted accounting principles and to general banking
industry practices. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments
of a normal recurring nature which are necessary for a fair
presentation of the financial statements herein have been included.
The financial statements herein should be read in conjunction with
the Company's 1996 Annual Report on Form 10-KSB.
(2) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks.
6
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(3) Securities
The carrying values, unrealized gains, unrealized losses and
approximate market values of investment securities at March 31,
1997 are shown in the table below. As of March 31, 1997,
investments with an amortized cost of $200,000 were pledged as
collateral for public deposits.
<TABLE>
<CAPTION>
Securities held Amortized Unrealized Unrealized Approximate
to maturity: Costs Gains Losses Fair Values
- ---------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury 0 0 0 0
U.S. Government
agencies 0 0 0 0
Total securities
held to maturity 0 0 0 0
Securities available for sale:
- -----------------------------
U.S. Treasury $750 $0 $0 $750
U.S. Government
agencies $13,037 $8 ($94) $12,951
States and
political
subdivisions $1,532 $1 ($4) $1,529
Corporate debt
securities $803 $0 $0 $803
Equity securities $461 $0 $0 $461
Total securities
available for
sale $16,583 $9 ($98) $16,494
- ---------------- ---------- ---------- ---------- -----------
Total securities $16,583 $9 ($98) $16,494
- ---------------- ---------- ---------- ---------- -----------
</TABLE>
(4) Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
Balance at January 1, 1997 $328
Provision for loan losses 36
Recoveries 0
Charged off loans 0
Balance at March 31, 1997 $364
(5) Net Income (Loss) Per Share
Net income (loss) per share is based upon the weighted average
number of common shares outstanding during the period.
7
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (in thousands, except share and per
share data)
General. The Company was incorporated as a Virginia stock corporation
on March 15, 1994, primarily to own and control all of the capital stock
of Valley Bank (the "Bank"). The Bank opened for business on May 15, 1995
at its main office in the City of Roanoke, opened its first branch office
on September 11, 1995 in the County of Roanoke and opened its second branch
office on January 15, 1997 in the City of Roanoke.
ANALYSIS OF FINANCIAL CONDITION
Overview. Total assets at March 31, 1997 were $58,403, up $6,660 or
12.9% from $51,743 at December 31, 1996. The principal components of the
Company's increase in assets were loans, which grew during the quarter by
$3,894 or 11.6% to $37,376 at March 31 from $33,482 at December 31, and
investments, which were $16,494 at March 31, up $4,910 or 42.4% from
$11,584 three months earlier. Compared with March 31, 1996, total assets
increased by $27,950 or 91.8%, total loans by $18,127 or 94.2% and
investments by $10,435 or 168.2%. Large percentage increases in the
Bank's various asset and deposit categories from the year-earlier period
are reflective of the Bank's relative newness and cannot reasonably be
expected to continue over the long term.
The majority of the increase in loans during the first quarter occurred
in the commercial, commercial real estate and home equity line categories.
In late 1996, for reasons of asset/liability management and interest rate
risk, management determined to restrict the growth of fixed-rate
residential real estate loans. Accordingly, this loan category grew only
7.6% during the quarter ended March 31, 1997 over year-end levels.
Total liabilities at March 31, 1997 were $51,095, up $6,705 or 15.1%
from $44,390 at December 31, 1996, with the increase almost entirely
represented by growth of $6,591 or 15.1% in deposits. Non-interest
bearing demand deposits increased $668 or 19.0% since December 31, and
represented 8.3% of total deposits compared with 8.1% three months earlier.
Total transaction account deposits increased $3,710 or 28.8% during the
quarter, and represented 33% of total deposits at March 31 compared with
29.5% of total deposits at December 31. Management has attempted to
reduce the Bank's relative proportion of certificates of deposit in order
to enhance the net interest margin. The Bank has no brokered deposits and
jumbo certificates, almost all from local customers, represented only 10%
of total deposits at March 31, 1997. Compared with March 31, 1996, total
deposits increased by $27,903 or 125.1% from their level of $22,305 one
year earlier.
The level of investment securities owned has increased significantly,
reflecting the more rapid growth in the Bank's deposit base than in its
loan portfolio. Total investment securities were $16,494 at March 31, up
8
<PAGE>
$4,910 or 42.4% from December 31, 1996. Compared with March 31, 1996,
investment securities increased by $10,345 or 168.2%. Of the total
investment portfolio at March 31, 1997, 83% consists of U.S. Treasury and
Agency securities and the average maturity of the Bank's portfolio is
slightly less than 3.5 years. All investment securities at March 31 were
classified as available-for-sale. This classification in management's
opinion is appropriate as it affords maximum flexibility in managing
liquidity and funding the Bank's future business growth, although changes
in interest rates result in unrealized gains or losses on available-for-
sale securities being reflected directly as a component of shareholders'
equity.
Asset Quality. The Company continues to enjoy excellent asset quality.
At March 31, 1997, there were no nonperforming assets, compared with $4 at
December 31, 1996 and none at March 31, 1996. There were no charge-offs
in the first quarter of either 1997 or 1996. The Bank did not have any
loans past due more than thirty days and still accruing as of March 31,
1997, December 31, 1996 and March 31, 1996. The allowance for loan losses
was $364 as of March 31, 1997, compared with $328 at December 31, 1996 and
$191 at March 31, 1996. The allowance represented .98% of total loans
outstanding at the end of the first quarter of 1997, and .98% and .99%
at December 31,1996 and March 31, 1996, respectively.
A provision for loan losses of $36 was provided for the first quarter
of 1997 in recognition of management's estimate of risks inherent with
lending activities. This compares with a provision of $54 for the same
period in 1996, when loans increased at a greater rate and a
correspondingly larger provision was deemed appropriate. Due to the
Bank's limited operating history, management's estimates on which the loan
loss provision is premised are based primarily on industry practices, peer
group comparisons, knowledge of the individual credits within the loan
portfolio and consideration of local economic factors. Although these
factors are subjective, management believes the allowance is adequate as
of March 31, 1997 and will periodically evaluate the reasonableness of
future provisions considering the specific nature of the portfolio,
historical operating trends as available and other economic and industry
factors.
ASSET/LIABILITY MANAGEMENT
Asset/liability management activities are designed to ensure that
adequate liquidity is available to meet loan demand or deposit outflows
and, through the management of the Company's interest sensitivity position,
to manage the impact of interest rate fluctuations on net interest income.
Management periodically assesses interest rate and liquidity risk exposures
in relation to present and prospective market and business conditions, and
adopts balance sheet management and funding strategies that are intended
to maintain potential impacts on earnings and liquidity within acceptable
parameters.
A primary objective in interest rate risk management is the avoidance
of wide fluctuations in net interest income through balancing the impact
of changes in interest rates on interest-sensitive assets and interest-
sensitive liabilities. Management utilizes an outside firm to perform
periodic assessments of the impact on the Bank's liquidity and net interest
income under various interest rate assumptions.
9
<PAGE>
Balance sheet repositioning is the most efficient and cost-effective
means of managing interest rate risk and is accomplished through strategic
repricing of loan and deposit accounts. The intended result of strategic
repricing is development of appropriate maturity and repricing streams in
those accounts to produce more consistent net interest income during
adverse interest rate environments. An example of strategic repricing is
management's decision in the latter part of 1996 to raise rates on fixed-
rate residential real estate loans, which had the desired effect of
significantly slowing growth in that particular loan category.
Derivatives and Off-Balance Sheet Financial Instruments. The Company
to date has not entered into any hedging transactions involving derivatives
and off-balance sheet financial instruments, although it may decide at some
point in the future that the use of such tools to hedge interest rate risk
is an appropriate supplement to balance sheet repositioning through
strategic repricing.
CAPITAL ADEQUACY AND RESOURCES
Total shareholders' equity at March 31, 1997 was $7,308, consisting of
$9,089 in net proceeds from the Company's initial public offering, reduced
by the accumulated deficit of $1,722 and $59 of unrealized losses on
securities available-for-sale, net of the related deferred tax benefit.
Total shareholders' equity was $7,353 at December 31, 1996 and $7,833 at
March 31, 1996.
In an effort to achieve a measure of capital adequacy that is more
sensitive to the individual risk profiles of financial institutions, the
federal bank regulatory authorities have adopted risk-based capital
adequacy guidelines that redefine traditional capital ratios to take into
account assessments of risks related to each balance sheet category, as
well as off-balance sheet financing activities. At least 50% of an
institution's qualifying capital must be "Core" or "Tier 1" capital, and
the balance may be "Supplementary" or "Tier 2" capital. Tier 1 capital is
essentially equal to common stockholders' equity, retained earnings, a
limited amount of qualifying perpetual preferred stock and minority
interests in equity accounts of consolidated subsidiaries, less goodwill.
Tier 2 cspital includes the excess of any preferred stock not included in
Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, term subordinated debt and intermediate-term preferred stock
and general reserves for loan and lease losses, although the amount of
such reserves included in Tier 2 capital is limited to 1.25% of risk-
weighted assets.
For the periods indicated, the Company had the following risk-based
capital and leverage ratios relative to regulatory minimums:
Ratio 3/31/97 12/31/96 3/31/96 Minimum
Tier 1 17.7% 19.5% 34.5% 3%
Total 18.6% 20.4% 35.4% 8%
Leverage 13.2% 15.0% 30.8% 3%
10
<PAGE>
ANALYSIS OF RESULTS OF OPERATIONS
The Company had net income of $27 for the three months ended March 31,
1997, compared with a net loss of $212 for the same period in 1996. On a
per share basis, the Company had net income of $.03 in the first quarter
of 1997, compared with a loss of $.22 in the first quarter of 1996. The
improvement in profitability is attributable to growth in the Company's
earning assets, which generated sufficient interest income to more than
offset increases in interest expense and noninterest expenses. Return on
average total assets was 0.20% for the period ended March 31, 1997 compared
to -3.42% for the same period in 1996. First quarter returns on average
total equity for 1997 and 1996 were 1.49% and -10.67%, respectively.
Net Interest Income. Net interest income was $473 for the three months
ended March 31, 1997, compared to $240 for the same period in 1996, an
increase of 97.1%. The increase is attributable to growth of 133% in
average earning assets, partially offset by a decline in the net interest
margin from 4.35% to 3.72%. Even though the yield on average earning
assets increased from 7.72% to 7.83% and the cost of funds went up only
slightly from 4.55% to 4.56%, the net interest margin went down due to the
decline in the relative portion of total funds represented by noninterest
bearing demand deposits and capital.
Noninterest Income. Noninterest income consists of service charges and
fees on accounts and other miscellaneous income, and amounted to $39 for
the three months ended March 31, 1997, compared with $12 for the comparable
period one year earlier, a 225% increase. Future levels of noninterest
income are expected to increase as a direct result of business growth and
expansion.
Noninterest Expense. Noninterest expense was $449 for the first quarter
of 1997, an increase of 9.5% or $39 over the same period in 1996. On a
quarter-to-quarter basis, personnel expense, the largest component of
noninterest expense, increased only $7 or 3.4%, mostly in connection with
the opening of the Bank's new South Roanoke office on January 15, 1997.
Exclusive of expenses associated with the new South Roanoke office, total
noninterest expense for the first three months of 1997 would have been flat
from one year earlier, even though the Company was managing approximately
$26,000 more in assets and added some $600 in revenue.
11
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The Company filed the following exhibits for the quarter ended
March 31, 1997:
27. Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended
March 31, 1997.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY FINANCIAL CORPORATION
May 12, 1997 /S/ Ellis L. Gutshall
Date Ellis L. Gutshall, President
and Chief Executive Officer
May 12, 1997 /S/ A. Wayne Lewis
Date A. Wayne Lewis, Executive Vice
President and Chief Financial Officer
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,495
<INT-BEARING-DEPOSITS> 46,026
<FED-FUNDS-SOLD> 1,211
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,494
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 37,376
<ALLOWANCE> 364
<TOTAL-ASSETS> 58,403
<DEPOSITS> 50,208
<SHORT-TERM> 0
<LIABILITIES-OTHER> 887
<LONG-TERM> 0
0
0
<COMMON> 9,089
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 58,403
<INTEREST-LOAN> 740
<INTEREST-INVEST> 257
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 997
<INTEREST-DEPOSIT> 524
<INTEREST-EXPENSE> 524
<INTEREST-INCOME-NET> 473
<LOAN-LOSSES> 36
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 15
<INCOME-PRETAX> 27
<INCOME-PRE-EXTRAORDINARY> 27
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
<YIELD-ACTUAL> 3.72
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 328
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 364
<ALLOWANCE-DOMESTIC> 364
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 364
</TABLE>
