UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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 November 11, 1997, 964,040 shares of the issuer's common stock, no par value,
were outstanding.
Transitional small business disclosure format: Yes ___ No x.
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VALLEY FINANCIAL CORPORATION
FORM 10-QSB
September 30, 1997
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income (Loss) 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. OTHER INFORMATION
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES 15
2
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VALLEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
____________ ___________
(In thousands, except share data)
<S> <C> <C>
Assets
Cash and due from banks (note 2) $ 2,168 $ 2,149
Money market investments:
Federal funds sold 750 2,762
Interest-bearing deposits 1 29
_______ _______
Total money market investments 751 2,791
Securities available for sale (note 3) 21,357 11,584
Loans:
Commercial loans 14,497 10,591
Commercial real estate loans 11,772 8,182
Residential real estate loans 17,170 13,829
Loans to individuals 1,306 880
Total loans 44,745 33,482
Less unearned fees (37) (33)
Less allowance for loan losses (note 4) (447) (328)
_______ _______
Total net loans 44,261 33,121
Premises and equipment 1,351 1,397
Organizational costs 150 193
Other assets 651 508
_______ _______
Total assets $70,689 $51,743
======= =======
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits 6,093 3,514
Interest bearing demand deposits 14,809 9,063
Savings deposits 607 299
Certificates of deposits > $100,000 6,607 4,442
Other time deposits 33,928 26,299
_______ _______
Total deposits 62,044 43,617
Short term borrowings 121 0
Other liabilities 846 773
_______ _______
Total liabilities 63,011 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 September 30,
1997 and December 31, 1996 (note 5) 9,089 9,089
Accumulated deficit (1,454) (1,749)
Unrealized gains (losses) on securities
available-for-sale, net of deferred
tax expense (benefit) 43 13
Total shareholders' equity 7,678 7,353
_______ _______
Total liabilities and shareholders'
equity $70,689 $51,743
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
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VALLEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
For the Period For the Period
January 1, 1997 January 1, 1996
Through Through
September 30, 1997 September 30, 1996
__________________ __________________
(In thousands, except share data)
<S> <C> <C>
Interest Income:
Interest and fees on loans $2,565 $1,361
Interest on money market
investments 58 73
Interest on securities available-
for-sale 824 309
_____ ______
Total interest income 3,447 1,74
Interest Expense:
Interest on certificates of
deposit >$100,000 218 123
Interest on other deposits 1,587 692
Interest on borrowed funds 6 0
_____ ______
Total interest expense 1,811 815
_____ ______
Net interest income 1,636 928
Provision for loan losses (note 4) 119 141
_____ ______
Net interest income after provision
for loan losses 1,517 787
_____ ______
Noninterest Income:
Service charges on deposit accounts 84 39
Other fee income 42 18
Securities gains 2 1
_____ ______
Total noninterest income 128 58
Noninterest Expense:
Compensation expense 667 928
Occupancy and equipment expense, net 213 201
Data processing expense 64 55
Marketing and advertising expense 80 68
Office supply expense 35 24
Other expense 248 244
Amortization of organizational
expense 44 43
_____ ______
Total noninterest expense 1,351 1,563
Net income (loss) $ 294 ($718)
====== ======
Net income (loss) per share (note 6) $0.30 ($0.74)
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
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VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
<TABLE>
<CAPTION>
For the Period For the Period
July 1, 1997 July 1, 1996
Through Through
September 30, 1997 September 30, 1996
__________________ __________________
(In thousands, except share data)
<S> <C> <C>
Interest Income:
Interest and fees on loans $ 948 $ 561
Interest on money market
investments 14 31
Interest on securities available-
for-sale 320 143
_____ ______
Total interest income 1,282 735
Interest Expense:
Interest on certificates of
deposit >$100,000 85 49
Interest on other deposits 595 319
Interest on borrowed funds 2 0
_____ ______
Total interest expense 682 368
_____ ______
Net interest income 600 367
Provision for loan losses (note 4) 37 43
_____ ______
Net interest income after provision
for loan losses 563 324
_____ ______
Noninterest Income:
Service charges on deposit accounts 31 14
Other fee income 12 8
Securities gains 2 0
_____ ______
Total noninterest income 45 22
Noninterest Expense:
Compensation expense 221 191
Occupancy and equipment expense, net 72 69
Data processing expense 22 19
Marketing and advertising expense 26 10
Office supply expense 8 10
Other expense 79 96
Amortization of organizational
expense 15 14
_____ ______
Total noninterest expense 443 409
Net income (loss) $ 165 ($63)
====== ======
Net income (loss) per share (note 6) $0.17 ($0.07)
====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
5
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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
September 30, 1997 September 30, 1996
__________________ __________________
(In thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 294 ($ 718)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Provision for loan losses 119 141
Depreciation and amortization
of bank premises and equipment 123 108
Amortization of organizational
expenses 43 43
Amortization/accretion of
premiums/discounts, net 5 15
Gain on sale of securities (2) (1)
Increase in unearned fees 4 -
Increase in other assets (142) (231)
Increase (decrease) in other
liabilities 51 526
_______ _______
Net cash used in operating activities 495 (117)
_______ _______
Cash Flows From Investing Activities:
Net decrease in money market
investments 2,040 2,146
Purchases of premises and equipment (77) (67)
Purchases of securities available-
for-sale (15,997) (9,023)
Proceeds from sales, calls and
maturities of securities available-
for-sale 6,235 2,111
Net increase in loans (11,263) (14,567)
_______ _______
Net cash used in investing activities (19,062) (19,400)
_______ _______
Cash Flows From Financing Activities
Increase in time deposits greater
than $100,000 2,165 1,952
Increase in other time deposits 7,629 14,008
Net increase in other deposits 8,633 4,230
Increase in short-term borrowings 121 0
_______ _______
Net cash provided by financing activities 18,548 20,190
_______ _______
Net Increase (Decrease) in Cash and Due
From Banks (19) 673
Cash and Due From Banks at Beginning of
Period 2,149 1,016
_______ _______
Cash and Due From Banks at End of Period $ 2,168 $ 1,689
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
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VALLEY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
September 30, 1997
(Unaudited)
(In thousands, except share and per share data)
Organization and Summary of Significant Accounting Policies
(1) General
Valley Financial Corporation (the "Company") was incorporated under
the laws of the Commonwealth of Virginia on March 15, 1994, primarily
to serve as a holding company for Valley Bank, N.A. (the "Bank"),
which opened for business on May 15, 1995. The Company's fiscal year
end is December 31.
The consolidated financial statements of the Company conform to
generally accepted accounting principles and to general banking
industry practices. The interim period financial statements are
unaudited; however, in the opinion of management, all adjustments of a
normal recurring nature which are necessary for a fair presentation of
the financial statements herein have been included. The financial
statements herein should be read in conjunction with the Company's
1996 Annual Report on Form 10-KSB.
(2) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks.
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(3) Securities
The amortized costs, unrealized gains, unrealized losses and
approximate fair values of investment securities at September 30, 1997
are shown in the table below. As of September 30, 1997, investments
with an amortized cost of $200 were pledged as collateral for public
deposits.
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Approximate
Securities held to maturity Costs Gains Losses Fair Values
___________________________ _________ __________ __________ ___________
<S> <C> <C> <C> <C>
U.S. Treasury 0 0 0 0
U.S. Government agencies 0 0 0 0
_______ ___ ___ _______
Total securities held to
maturity 0 0 0 0
Securities available for sale:
U.S. Treasury $ 200 $ 0 $ 0 $ 200
U.S. Government agencies $15,844 $57 ($15) $15,886
Mortgage-backed securities $ 2,476 $14 ($ 1) $ 2,489
States and political
subdivisions $ 1,612 $ 4 $ 0 $ 1,616
Corporate debt. securities $ 500 $ 2 $ 0 $ 502
Equity securities $ 660 $ 4 $ 0 $ 664
_______ ___ ___ _______
Total securities
available for sale $21,292 $81 ($16) $21,357
_______ ___ ___ _______
Total securities $21,292 $18 ($16) $21,357
======= === === =======
</TABLE>
(4) Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<S> <C>
Balance at January 1, 1997 $328
Provision for loan losses 119
Recoveries 0
Charges off loans 0
____
Balance at September 30, 1997 $447
====
</TABLE>
8
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(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.
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 September 30, 1997 were $70,689, up $18,946 or
37% from $51,743 at December 31, 1996. The principal components of the
Company's increase in assets were loans, which grew during the first nine months
by $11,263 or 34% to $44,745 at September 30 from $33,482 at December 31, and
investments, which were $21,357 at September 30, up $9,773 or 84% from $11,584
nine months earlier. Compared with September 30, 1996, total assets increased
by $26,405 or 60%, total loans by $16,354 or 58% and investments by $9,272 or
77%. The large percentage increases in the Bank's various asset and deposit
categories from the year-earlier period are reflective of the Bank's relative
newness and cannot reasonably be expected to continue over the long term.
The majority of the increase in loans during the first nine months 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 19% during the nine
months ended September 30, 1997, while total loans were up 34%.
Total liabilities at September 30, 1997 were $63,011, up $18,621 or 42%
from $44,390 at December 31, 1996, with the increase almost entirely represented
by growth of $18,427 or 42% in deposits. Non-interest bearing demand deposits
increased $2,579 or 73% since December 31, and represented 9.8% of total
deposits compared with 8.1% nine months earlier. Total non-maturity deposit
accounts increased $8,633 or 67% during the nine months, and represented 35% of
total deposits at September 30 compared with 30% 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 11% of total deposits at September 30, 1997.
Compared with September 30, 1996, total deposits increased by $25,378 or 71%
from their level of $36,306 one year earlier.
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<PAGE>
The level of investment securities owned has increased significantly,
largely reflecting the more rapid growth in the Bank's deposit base than in its
loan portfolio. Total investment securities were $21,357 at September 30, up
$9,773 or 84% from December 31, 1996. Compared with September 30, 1996,
investment securities increased by $9,272 or 77%. Of the total investment
portfolio at September 30, 1997, 87% consists of U.S. Treasury and Agency
securities and the weighted average maturity of the Bank's portfolio is 7.5
years. All investment securities at September 30 were classified as available-
for-sale. This classification in management's opinion is appropriate as it
affords maximum flexibility in managing liquidity and funding the Bank's future
business growth, although changes in interest rates result in unrealized gains
or losses on available-for-sale securities being reflected directly as a
component of shareholders' equity.
Asset Quality. The Company continues to enjoy excellent asset quality. At
September 30, 1997, there were no nonperforming assets, compared with $4 at
December 31, 1996 and none at September 30, 1996. There were no charge-offs in
the first nine months of either 1997 or 1996. The Bank did not have any loans
past due more than thirty days and still accruing as of September 30, 1997,
December 31, 1996 or September 30, 1996. The allowance for loan losses was $447
as of September 30, 1997, compared with $328 at December 31, 1996 and $279 at
September 30, 1996. The allowance represented 1.01% of net loans outstanding at
the end of the third quarter of 1997, and .99% and .99% at December 31,1996 and
September 30, 1996, respectively.
A provision for loan losses of $119 was provided for the first nine months
of 1997 in recognition of management's estimate of risks inherent with lending
activities. This compares with a provision of $141 for the same period in 1996,
when loans increased at a greater rate and a correspondingly larger provision
was deemed appropriate. Loan loss provision expense for the quarter ended
September 30, 1997 was $37, down $6 from the comparable period one year earlier.
Due to the Bank's limited operating history, management's estimates on which
the loan loss provision is premised are based primarily on industry practices,
peer group comparisons, knowledge of the individual credits within the loan
portfolio and consideration of local economic factors. Although these factors
are subjective, management believes the allowance is adequate as of September
30, 1997 and will periodically evaluate the reasonableness of future provisions
considering the specific nature of the portfolio, historical operating trends as
available and other economic and industry factors.
ASSET/LIABILITY MANAGEMENT
Asset/liability management activities are designed to ensure that adequate
liquidity is available to meet loan demand or deposit outflows and, through the
management of the Company's interest sensitivity position, to manage the impact
of interest rate fluctuations on net interest income. Management periodically
assesses interest rate and liquidity risk exposures in relation to present and
prospective market and business conditions, and adopts balance sheet management
and funding strategies that are intended to maintain potential impacts on
earnings and liquidity within acceptable parameters.
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A primary objective in interest rate risk management is the avoidance of
wide fluctuations in net interest income through balancing the impact of changes
in interest rates on interest-sensitive assets and interest-sensitive
liabilities. Management utilizes an outside firm to perform periodic
assessments of the impact on the Bank's liquidity and net interest income under
various interest rate assumptions.
Balance sheet repositioning is the most efficient and cost-effective means
of managing interest rate risk and is accomplished through strategic repricing
of loan and deposit accounts. The intended result of strategic repricing is
development of appropriate maturity and repricing streams in those accounts to
produce more consistent net interest income during adverse interest rate
environments. An example of strategic repricing is management's decision in the
latter part of 1996 to raise rates on fixed-rate residential real estate loans,
which had the desired effect of significantly slowing growth in that particular
loan category.
Derivatives and Off-Balance Sheet Financial Instruments. The Company to
date has not entered into any hedging transactions involving derivatives and
off-balance sheet financial instruments, although it may decide at some point in
the future that the use of such tools to hedge interest rate risk is an
appropriate supplement to balance sheet repositioning through strategic
repricing.
CAPITAL ADEQUACY AND RESOURCES
Total shareholders' equity at September 30, 1997 was $7,678, consisting of
$9,089 in net proceeds from the Company's initial public offering, reduced by
the accumulated deficit of $1,454 and increased by $43 of unrealized gains on
securities available-for-sale, net of the related deferred tax liability. Total
shareholders' equity was $7,353 at December 31, 1996 and $7,284 at September 30,
1996.
In an effort to achieve a measure of capital adequacy that is more
sensitive to the individual risk profiles of financial institutions, the federal
bank regulatory authorities have adopted risk-based capital adequacy guidelines
that redefine traditional capital ratios to take into account assessments of
risks related to each balance sheet category, as well as off-balance sheet
financing activities. At least 50% of an institution's qualifying capital must
be "Core" or "Tier 1" capital, and the balance may be "Supplementary" or "Tier
2" capital. Tier 1 capital is essentially equal to common stockholders' equity,
retained earnings, a limited amount of qualifying perpetual preferred stock and
minority interests in equity accounts of consolidated subsidiaries, less
goodwill. Tier 2 capital includes the excess of any preferred stock not
included in Tier 1 capital, mandatory convertible securities, hybrid capital
instruments, term subordinated debt and intermediate-term preferred stock and
general reserves for loan and lease losses, although the amount of such reserves
included in Tier 2 capital is limited to 1.25% of risk-weighted assets.
11
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For the periods indicated, the Company had the following risk-based capital
and leverage ratios relative to regulatory minimums:
<TABLE>
<CAPTION>
Ratio 9/30/97 12/31/96 9/30/96 Minimum
_____ _______ ________ _______ _______
<S> <C> <C> <C> <C>
Tier 1 15.4% 19.5% 22.7% 4%
Total 16.3% 20.4% 23.6% 8%
Leverage 11.2% 15.0% 17.8% 3%
</TABLE>
ANALYSIS OF RESULTS OF OPERATIONS
The Company had net income of $294 for the nine months ended September 30,
1997, compared with a net loss of $718 for the same period in 1996. On a per
share basis, the Company had net income of $.30 for the first nine months of
1997, compared with a loss of $.74 in the same period in 1996. The improvement
in profitability is attributable to growth in the Company's earning assets,
which generated sufficient interest income to more than offset increases in
interest expense and noninterest expenses, and to the recognition in June, 1996
of $317 in compensation expense associated with the Company's severance
obligation to its former President. Return on average total assets was 0.65%
for the nine months ended September 30, 1997 compared with -3.22% for the same
period in 1996. Return on average total equity for the first nine months of
1997 and 1996 was 5.30% and -13.64%, respectively.
For the third quarter of 1997, the Company had net income of $165, compared
with a loss of $63 for the same period in 1996, which equates to net income of
$0.17 per share in the 1997 period and a net loss of $0.07 per share in the
1996 period. Return on average total assets was 0.98% for the three months
ended September 30, 1997 compared to -0.62% for the same period in 1996. Return
on average total equity for the third quarter of 1997 and 1996 was 8.71% and -
3.42%, respectively.
Net Interest Income. Net interest income was $1,636 for the first nine
months of 1997 compared to $928 for the same period in 1996, an increase of 76%.
The increase is attributable to growth of 96% in average earning assets,
partially offset by a decline in the net interest margin from 4.18% to 3.77%.
Even though the yield on average earning assets increased from 7.85% to 7.95%,
the net interest margin went down due to an increase in the cost of funds from
4.46% to 4.58% and a decline from 33% to 20% in the relative portion of total
funds represented by average noninterest bearing demand deposits and capital.
For the third quarter, net interest income was $600, a 64% increase over the
$367 reported for the period in 1996. Average earning assets for the quarter
increased by 70% over the same quarter in 1996, and the net interest margin went
from 3.86% to 3.70%.
12
<PAGE>
Noninterest Income. Noninterest income consists of service charges and
fees on accounts and other miscellaneous income, and amounted to $128 for the
nine months ended September 30, 1997, compared with $58 for the comparable
period one year earlier, a 121% increase. Future levels of noninterest income
are expected to increase as a direct result of business growth and expansion.
For the three months ended September 30, 1997, noninterest income was $45, a
105% increase from the $22 recorded one year earlier.
Noninterest Expense. Noninterest expense was $1,351 for the first nine
months of 1997, a decrease of 14% or $212 over the same period in 1996.
Included in 1996's noninterest expense for the first nine months is $317 in
nonrecurring compensation expense associated with the Company's severance
obligation to its former President. Exclusive of that nonrecurring charge,
noninterest expense for the comparable periods would have increased 8% or $105,
a figure which includes expenses associated with the opening on January 15, 1997
of the Bank's new South Roanoke office. For the quarter ended September 30,
1997, noninterest expense was $443, an increase of only $34 or 8% from the
comparable quarter in 1996, even though the Company was managing approximately
$26,405 or 60% more in assets and added some $570 or 75% in revenue.
13
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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 September
30, 1997:
27. Financial Data Schedule
(b) The Company filed no reports on Form 8-K during the quarter ended September
30, 1997.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY FINANCIAL CORPORATION
November 12, 1997 /s/ Ellis L. Gutshall
Date ________________________________
Ellis L. Gutshall, President
and Chief Executive Officer
November 12, 1997 /s/ A. Wayne Lewis
Date ________________________________
A. Wayne Lewis, Executive
Vice President and Chief
Financial Officer
15
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