UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
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, 1998, 964,040 shares of the issuer's common stock, no par value, were
outstanding.
Transitional small business disclosure format: Yes ___ No _x_.
<PAGE>
VALLEY FINANCIAL CORPORATION
FORM 10-QSB
June 30, 1998
INDEX
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets 3
Consolidated Statements of Income 4
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis 10
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of
Security Holders 18
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30 December 31
1998 1997
-------- -----------
(in thousands, except share data)
<S> <C> <C>
Assets
Cash and due from banks (note 2) $ 3,234 $ 3,324
Money market investments:
Federal funds sold 0 1,440
Interest-bearing deposits 8 33
------- -------
Total money market investments 8 1,473
Securities available for sale (note 3) 24,499 21,144
Loans:
Commercial loans 15,417 12,997
Commercial real estate loans 19,493 10,812
Residential real estate loans 14,353 13,502
Loans to individuals 11,479 9,336
------- -------
Total loans 60,742 46,647
Less unearned income (44) (38)
Less allowance for loan losses (note 4) (587) (459)
------- -------
Total net loans 60,111 46,150
Premises and equipment 1,283 1,315
Organizational costs 106 134
Other assets 1,145 1,137
------- -------
Total assets $90,386 $74,677
======= =======
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits 8,251 7,956
Interest bearing demand deposits 20,112 18,395
Savings deposits 898 653
Certificates of deposits greater
than $100,000 7,074 6,481
Other time deposits 36,218 32,103
------- -------
Total deposits 72,553 65,588
Short-term borrowings 3,479 0
Federal Home Loan Bank advances 5,000 0
Other liabilities 857 810
------- -------
Total liabilities 81,889 66,398
-------- --------
Preferred stock, no par value. Authorized
10,000,000 shares; none issued and
outstanding
Common stock, no par value. Issued and
outstanding 964,040 at June 30, 1998
and December 31, 1997 (note 5) 9,089 9,089
Accumulated deficit (606) (866)
Accumulated other comprehensive income 14 56
------- -------
Total shareholders' equity 8,497 8,279
------- -------
Total liabilities and shareholders'
equity $90,386 $74,677
======= =======
See accompanying notes to consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Period For the Period
January 1, 1998 January 1, 1997
Through Through
June 30, 1998 June 30, 1997
--------------- ---------------
(in thousands, except per share data)
<S> <C> <C>
Interest Income:
Interest and fees on loans $2,239 $1,617
Interest on money market investments 40 44
Interest on investment securities
available-for-sale 763 504
------ -----
Total interest income 3,042 2,165
Interest Expense:
Interest on certificates of deposit
greater than $100,000 188 133
Interest on other deposits 1,275 992
Interest on borrowed funds 109 4
------ -----
1,572 1,129
------ -----
Net interest income 1,470 1,036
Provision for loan losses (note 4) 128 82
------ -----
Net interest income after provision for
loan losses 1,342 954
------ -----
Noninterest Income:
Service charges on deposit accounts 73 53
Other fee income 39 30
Securities gains 10 0
------ -----
Total noninterest income: 122 83
Noninterest Expense:
Salaries and employee benefits 579 446
Occupancy and equipment expense, net 147 141
Data processing expense 55 42
Marketing and advertising expense 37 54
Office supply expense 30 27
Other expense 220 169
Amortization of organizational expense 28 29
------ -----
Total noninterest expense 1,096 908
------ -----
Income before income taxes $ 368 $ 129
------ -----
Provision for income taxes $ 108 $ 0
------ -----
Net income $ 260 $ 129
====== =====
Net income per share (note 5) $ 0.27 $0.13
====== =====
See accompanying notes to consolidated financial statements
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Period For the Period
April 1, 1998 April 1, 1997
Through Through
June 30, 1998 June 30, 1997
--------------- ---------------
(in thousands, except per share data)
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,204 $ 877
Interest on money market investments 4 12
Interest on investment securities
available-for-sale 401 279
------ -----
Total interest income 1,609 1,168
Interest Expense:
Interest on certificates of deposit
greater than $100,000 96 72
Interest on other deposits 656 529
Interest on borrowed funds 90 4
------ -----
842 605
------ -----
Net interest income 767 563
Provision for loan losses (note 4) 97 46
------ -----
Net interest income after provision for
loan losses 670 517
------ -----
Noninterest Income:
Service charges on deposit accounts 38 30
Other fee income 16 14
Securities gains 0 0
------ -----
Total noninterest income: 54 44
Noninterest Expense:
Salaries and employee benefits 293 234
Occupancy and equipment expense, net 75 72
Data processing expense 29 21
Marketing and advertising expense 19 21
Office supply expense 16 9
Other expense 103 88
Amortization of organizational expense 14 14
------ -----
Total noninterest expense 549 459
------ -----
Income before income taxes $ 175 $ 102
------ -----
Provision for income taxes $ 45 $ 0
------ -----
Net income $ 130 $ 102
====== =====
Net income per share (note 5) $ 0.13 $0.11
====== =====
See accompanying notes to consolidated financial statements
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
For the Period For the Period
January 1, 1998 January 1, 1997
Through Through
June 30, 1998 June 30, 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 260 $ 129
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 128 82
Depreciation/amortization of
premises/equipment 52 72
Amortization or organizational
expenses 28 29
Amortization/accretion of premiums/
discounts, net (3) 4
Gain on sale of securities 10 0
Increase in unearned fees 6 5
Increase in other assets (8) (150)
Increase in other liabilities 69 186
- --------------------------------------------------------------------------------
Net cash provided by operating activities 542 357
- --------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net decrease in money market investments 1,465 1,922
Purchases of premises and equipment (20) (63)
Purchases of securities (14,723) (8,794)
Proceeds from sales, calls and maturities
of securities 11,297 2,565
Net increase in loans (14,095) (8,083)
- --------------------------------------------------------------------------------
Net cash used in investing activities (16,076) (12,453)
- --------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Increase (decrease) in time deposits
greater than $100,000 (1,407) 1,138
Increase in other time deposits 4,115 4,690
Net increase in other deposits 4,257 5,523
Increase in short-term borrowings 3,479 318
Proceeds from Federal Home Loan Bank
advances 5,000 0
- --------------------------------------------------------------------------------
Net cash provided by financing activities 15,444 11,669
- --------------------------------------------------------------------------------
Net Decrease in Cash and Due From Banks (90) (427)
Cash and Due From Banks at Beginning of Period 3,324 2,149
- --------------------------------------------------------------------------------
Cash and Due From Banks at End of Period $ 3,234 $ 1,722
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
6
<PAGE>
VALLEY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
(In thousands, except share and per share data)
(1) Organization and Summary of Significant Accounting Policies
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 consolidated 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 consolidated financial statements herein have
been included. The consolidated financial statements herein should be
read in conjunction with the Company's 1997 Annual Report on Form 10-
KSB.
(2) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks.
7
<PAGE>
(3) Securities
The carrying values, unrealized gains, unrealized losses and
approximate fair values of investment securities at June 30, 1998 are
shown in the table below. As of June 30, 1998, investments with an
amortized cost of $199 were pledged as collateral for public deposits.
<TABLE>
<CAPTION>
Carrying Unrealized Unrealized Approximate
Securities held to maturity: Values Gains Losses Fair Values
- ---------------------------- -----------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury 0 0 0 0
U.S. Government agencies 0 0 0 0
Mortgage-backed securities 0 0 0 0
States and political
subdivisions 0 0 0 0
Corporate debt securities 0 0 0 0
Equity securities 0 0 0 0
- - - -
Total securities held to
maturity 0 0 0 0
- ---------------------------- -----------------------------------------------
Securities available for sale:
U.S. Treasury $ 199 $ 0 $ 0 $ 199
U.S. Government agencies $15,179 $48 ($32) $15,195
Mortgage-backed securities $ 3,574 $26 ($8) $ 3,592
States and political
subdivisions $ 4,692 $13 ($35) $ 4,670
Corporate debt securities $ 99 $ 2 $0 $ 101
Equity securities $ 735 $ 7 $0 $ 742
------- --- ----- -------
Total securities available
for sale $24,478 $96 ($75) $24,499
- ---------------------------- -----------------------------------------------
Total securities $24,478 $96 ($75) $24,499
======= === ===== =======
</TABLE>
8
<PAGE>
(4) Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at January 1, 1998 $459 $328
Provision for loan losses 128 82
Recoveries 0 0
Charged off loans 0 0
---- ----
Balance at June 30 $587 $410
==== ====
</TABLE>
(5) Net Income Per Share
Net income per share is based upon the weighted average number of
common shares outstanding during the period.
(6) Comprehensive Income
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income." Statement 130 establishes standards for
reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general
purpose financial statements. Statement 130 was issued to address
concerns over the practice of reporting elements of comprehensive
income directly in equity.
This statement requires that all items recognized under accounting
standards as components of comprehensive income be reported in a
financial statement that is displayed in equal prominence with the
other financial statements. It does not require a specific format for
that financial statement but requires that an enterprise display an
amount representing total comprehensive income for the period in that
financial statement. Enterprises are required to classify items of
"other comprehensive income" by their nature in the financial
statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in
capital in the equity section of the balance sheet. It does not
require per share amounts of comprehensive income to be disclosed.
Statement 130 is effective for fiscal years beginning after December
15, 1997. Comparative financial statements provided for earlier
periods are required to be reclassified to reflect the provisions
of this statement. Publicly traded enterprises that issue
condensed financial statements for interim periods are required to
report a total for comprehensive income in those financial
statements.
9
<PAGE>
Adoption of Statement 130 on January 1, 1998 did not have any
effect on the consolidated financial position, results of
operations or liquidity of the Company. However, Statement 130
does have an effect on financial statement displays presented by
the Company since the Company has net unrealized gains (losses) on
available-for-sale securities, an item of other comprehensive
income. For the six months ended June 30, 1998 and 1997, total
comprehensive income was $218 and $114, respectively. For the three
months ended June 30, 1998 and 1997, total comprehensive income was
$154 and $159, respectively.
Item 2. Management's Discussion and Analysis (000's omitted, except for share
and per share information).
The following is management's discussion and analysis of the financial
condition and results of operations of the Company as of and for the six
months and three months ended June 30, 1998 and 1997. The discussion should
be read in conjunction with the Company's Consolidated Financial Statements
and Notes thereto.
Overview
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. The Bank
opened for business on May 15, 1995.
Total assets at June 30, 1998 were $90,386, up 21% from $74,677 at December 31,
1997. The principal components of the Company's assets at the end of the
period were $24,499 in securities available-for-sale and $60,742 in gross
loans. Total liabilities at June 30, 1998 were $81,899, up 23% from $66,398
at December 31, 1997, with the increase almost entirely represented by $6,965
growth in deposits, $3,479 in federal funds purchased and $5,000 in advances
from the Federal Home Loan Bank of Atlanta.
Total shareholders' equity at June 30, 1998 was $8,497, consisting of $9,089
in net proceeds from the Company's initial public offering, reduced by the
accumulated deficit of $606 and increased by $14 of unrealized gains on
securities available-for-sale, net of related deferred tax liability. At
December 31, 1997, total shareholder's equity was $8,279.
The Company had net income of $260 for the six months ended June 30, 1998,
compared with $129 recorded for the six months ended June 30, 1997, a 102%
increase. The significant improvement in profitability results from higher
net interest income partially offset by increased noninterest expenses in
virtually all categories. Net income for the three months ended June 30,
1998 was $130, a 28% increase over the $102 recorded for the second quarter
of 1997. Comparability of net income is affected by the income tax provision
of $108 and $45 booked for the six month and three month periods ended June
30, 1998, respectively, versus no income tax expense booked in the same
periods in 1997.
10
<PAGE>
Profitability as measured by the Company's return on average assets ("ROA")
was .64% for the six months ended June 30, 1998, compared to .45% for the
same period in 1997. ROA for the second quarter of 1998 was .60% versus .66%
in the second quarter of 1997. Return on average equity ("ROE") was 6.26% for
the six months ended June 30, 1998 compared to 3.53% for the same period in
1997. ROE for the second quarter of the year was 6.16% in 1998 and 5.47% in
1997.
Results of Operations
Net Interest Income. Net interest income is the amount by which interest and
fees generated from loans and investments exceeds the interest expense
associated with funding those assets, and represents the principal source of
earnings for the Company. Changes in the volume and mix of earning assets
and interest-bearing liabilities, as well as their respective yields and
rates, have a significant impact on the level of net interest income.
Changes in the interest rate environment and the Company's cost of funds also
affect net interest income.
Net interest income was $1,470 for the six months ended June 30, 1998 and is
attributable to interest income from loans and securities exceeding the cost of
interest paid on deposits and borrowed funds. Net interest income for the
first half of 1998 increased 42% from $1,036 for the same period in 1997.
The net interest margin on a fully taxable equivalent ("FTE") basis was 3.91%
for the first six months of 1998, an increase of 10 basis points from the
3.81% reported for the same period in 1997. The increase in the margin from
year to year is attributable to higher yields on earning assets and lower
deposit costs, partly offset by a smaller relative share of the Company's
total funds being provided by interest-free capital funds as rapid growth has
occurred.
For the three months ended June 30, 1998 net interest income was $767 and the
FTE net interest margin was 3.86%. Net interest income was $563 and the net
interest margin was 3.85% for the second quarter of 1997.
Provision for Loan Losses. A provision for loan losses of $128 was provided
during the six months ended June 30, 1998, an increase of $46 or 56% over the
same period in 1997, 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 amount of the provision for
loan losses is a charge against current earnings, and actual loan losses are
charged against the allowance for loan losses. The allowance for loan losses
was $587 as of June 30, 1998 and represented approximately .98% of net loans
outstanding versus .99% of net loans at December 31, 1997 (see Note 4 to
the Consolidated Financial Statements).
Provision expense was $97 for the three months ended June 30, 1998 compared to
$46 for the same period in 1997, a 111% increase. The increase in provision
expense is due to growth in average loans outstanding.
11
<PAGE>
No assurance can be given that unforeseen adverse economic conditions or other
circumstances will not result in increased provisions in the future.
Additionally, regulatory examiners may require the Company to recognize
additions to the allowance based upon their judgment about the loan portfolio
and other information available to them at the time of their examinations.
Noninterest Income. Noninterest income of $122 in the six months ended June
30, 1998 consisted of service charges and fees on accounts, gains on
securities sold and other miscellaneous income, and represented an increase
of $39 or 47% over the $83 reported for the same period one year earlier.
For the three months ended June 30, 1998 noninterest income was $54, an
increase of $10 or 23% over the $44 reported for the second quarter of 1997.
Future levels of noninterest income are expected to increase as a direct
result of business growth and expansion.
Noninterest Expense. Noninterest expense for the first six months of 1998 was
$1,096, an increase of $188 or 21% over the same period in 1997. The largest
components of the increase were compensation expense as additional employees
were hired due to growth, and loan closing costs incurred in a successful
home equity line of credit promotion. Noninterest expense for the quarter
ended June 30, 1998 was $549, an increase of $90 or 20% over the second
quarter of 1997. Noninterest expenses are expected to increase in future
years as a direct result of business growth and expansion.
Year 2000. Many banks and other companies are encountering various degrees of
difficulty and expense in modifying or replacing computer software and
hardware to adapt to the coming date changeover from 1999 to 2000. The
Company, being relatively new, enjoys certain advantages with respect to Year
2000 issues in that much of its hardware and software are newer versions
requiring less remediation to be able to cope with the century change.
Additionally, the Company's major software applications are either operated
or maintained by outside vendors whose responsibility it is to ensure Year
2000 compliance. The Company has adopted a formal Year 2000 Action Plan
pursuant to which it is reviewing and testing its operating systems.
Management currently expects Year 2000 expenses will total less than $100,
but there can be no assurance that the actual total will not be greater.
Should one or more of the Company's major software vendors fail to make good
on its representation to be Year 2000 compliant, there could be significant
adverse consequences to the Company's operations. The Company also is taking
steps to assess the potential impacts of Year 2000 issues on its major
commercial borrowers. Should a commercial borrower fail to deal adequately
with Year 2000's impact on its computer systems, its operations could be
jeopardized and its ability to repay its loan threatened.
Income Taxes. An expense of $108 was recognized in the six months ended June
30, 1998 to reflect the Company's anticipated federal income tax liability
for the period. This equated to an effective tax rate of 29%. Provision for
income taxes was $45 for the second quarter of 1998, an effective tax rate of
26%. The Company recorded no expense in 1997 for federal or state income
taxes, due to the availability of net operating loss carryforwards.
12
<PAGE>
Liquidity and Asset/Liability Management
Asset/liability management activities are designed to ensure that adequate
liquidity 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.
Liquidity. Liquidity measures the ability of the Company to meet its maturing
obligations and existing commitments, to withstand fluctuations in deposit
levels, to fund its operations and to provide for customers credit needs.
Liquidity represents a financial institutions ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds from alternative funding sources.
The Company's asset liquidity is provided by cash and due from banks, federal
funds sold, investments available for sale, managing investment maturities/
prepayments and loan repayments. The Company's ratio of liquid assets to
deposits and short term borrowings was 36% at June 30, 1998 and 40% at
December 31, 1997. The Company sells excess funds as overnight federal funds
sold to provide an immediate source of liquidity. The Company had no Federal
funds sold at June 30, 1998 compared to $1,440 at December 31, 1997.
The level of deposits may fluctuate, perhaps significantly so, due to
seasonal cycles of depositing customers and the promotional activities of
competitor financial institutions. Similarly, the level of demand for loans
may vary significantly and at any given time may increase or decrease
substantially. However, unlike the level of deposits, management has more
direct control over lending activities and if necessary can adjust the level
of those activities according to the amounts of available funds.
In addition to asset liquidity, the Company would have liquidity available to
it through increasing certain categories of liabilities. It could purchase
overnight federal funds, borrow from correspondent banks, sell securities
under a repurchase agreement or obtain advances from the Federal Home Loan
Bank. As a result of the Company's management of liquid assets and the
ability to generate liquidity through alternative funding sources, management
believes the Company maintains overall liquidity sufficient to meet its
depositors requirements and satisfy its customers credit needs.
Interest Rate Risk
Interest rate risk is the risk to earnings or capital generated by movement of
interest rates. It can come from differences between the timing of rate
changes and the timing of cash flows (repricing risk); from changing rate
relationships among yield curves that affect bank activities (basis risk);
from changing rate relationships across the spectrum of maturities (yield
curve risk); and from interest rate related options imbedded in bank products
(option risk).
13
<PAGE>
While no single measure can completely identify the impact of changes in
interest rates on net interest income, a commonly-used technique within the
industry is to assess the differences in the amounts of rate-sensitive assets
and rate-sensitive liabilities. These differences or "gaps" provide an
indication of the extent to which net interest income may be affected by
future changes in interest rates. A "positive gap" exists when rate-
sensitive assets exceed rate-sensitive liabilities and indicates that a
greater volume of assets than liabilities will reprice during agiven period.
A positive gap may enhance earnings in a rising interest rate environment
and may inhibit earnings in a declining interest rate environment.
Conversely, when rate-sensitive liabilities exceed rate-sensitive assets (a
"negative gap"), a greater volume of liabilities than assets will reprice
within the period. In such a case, a rising interest rate environment may
inhibit earnings and a declining interest rate environment may enhance
earnings.
Some financial institutions evaluate their "gaps" strictly from a balance
sheet perspective, calculating the absolute difference between the volumes of
assets and liabilities that have the contractual ability to reprice within a
given period in response to changes in interest rates. Company management
believes this "balance sheet gap" methodology does not adequately take into
consideration the differences in the way various balance sheet items react to
changing interest rates. For example, the rate on savings accounts does not
move in direct tandem with changes in the prime rate, but typically increases
or decreases to a much lesser extent. On the other hand, home equity lines
and many commercial loans are tied directly to prime and immediately reprice
to the full extent of any changes in the prime rate. Accordingly, the
Company utilizes an "income statement gap" methodology that analyzes the
various asset and liability categories and assigns them a "change ratio" that
estimates their relative change in response to a change in the prime rate,
based on industry trends and the Company's own experience. At least
quarterly, the Company calculates the Banks "income statement gap" to
estimate how many assets and liabilities would reprice and to what extent
within a one year period in response to changes in the prime rate, and
compares the results to internal policy guidelines.
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.
14
<PAGE>
Investment Portfolio
The Company's investment portfolio is used both for investment income and
liquidity purposes. Funds not used for capital expenditures or lending
activities are invested in securities of the U.S. Government and its
agencies, mortgage-backed securities, municipal bonds, corporate bonds and
equity securities. Obligations of the U.S. Government and its agencies
include treasury notes and callable or noncallable agency bonds. Mortgage-
backed securities include pools issued by government agencies. Municipal
bonds include taxable and tax-exempt general obligation and revenue issues.
Corporate bonds are investment grade issue. Equity securities include shares
of the Federal Reserve Bank of Richmond, Federal Home Loan Bank of Atlanta,
Community Bankers Bank and corporate preferred stocks. The Company does not
invest in derivatives or other types of high-risk securities. The entire
investment portfolio is classified as available-for-sale in order to provide
maximum liquidity for funding needs.
Investment securities at June 30, 1998 were $24,499, an increase of $3,355 or
16% from their level of $21,144 on December 31, 1997. The increase was
attributable to investment of funds available from deposit growth and the
purchase of investment securities with the proceeds of a $5,000 advance from
the Federal Home Loan Bank of Atlanta, partially offset by the liquidation of
investment securities to fund strong loan growth in the second quarter.
For more information on the investment portfolio, see Note 3 to the Consolidated
Financial Statements.
Loan Portfolio
The Company's total loans were $60,742 at June 30, 1998, an increase of $14,095
or 30% from the $46,647 reported at December 31, 1997. The Company's ratio of
net loans to total deposits stood at 83% at June 30, 1998 and 70% at December
31, 1997. Management seeks to maintain the ratio of loans to deposits in a
range of 70% to 85%.
The loan portfolio primarily consists of commercial, real estate (including
real estate term loans, construction loans and other loans secured by real
estate) and loans to individuals for household, family and other consumer
purposes. The Company adjusts its mix of lending and the terms of its loan
programs according to economic and market conditions, asset/liability
management considerations and other factors. Loans typically (in excess of
90%) are made to businesses and individuals located within the Company's
primary market area, most of whom maintain deposit accounts with the Bank.
There is no concentration of loans exceeding 10% of total loans which is not
disclosed in the Consolidated Financial Statements and the Notes thereto or
discussed below. The Company has not made any loans to any foreign entities,
including governments, banks, businesses or individuals. Commercial and
construction loans and home equity lines of credit in the loan portfolio are
primarily variable rate loans and have little interest rate risk.
15
<PAGE>
Commercial Loans. Commercial and industrial loans accounted for 25% of the
loan portfolio as of June 30, 1998 and stood at $15,417 versus $12,997 six
months earlier. Such loans generally are made to provide operating lines of
credit, to finance the purchase of inventory or equipment, and for other
business purposes. The creditworthiness of the borrower is analyzed and
re-evaluated on a periodic basis. Most commercial loans are collateralized
with business assets such as accounts receivable, inventory and equipment.
Even with substantial collateral such as all the assets of the business and
personal guarantees, commercial lending involves considerable risk of loss
in the event of a business downturn or failure of the business.
Commercial Real Estate Loans. Commercial real estate construction and
commercial real estate mortgages represent interim and permanent financing
of commercial properties that are secured by real estate, and were 32% of
total loans at June 30, 1998. Outstanding loans in this category equaled
$19,493 and $10,812 at June 30, 1998 and December 31, 1997, respectively.
The Company prefers to make commercial real estate loans secured by owner-
occupied properties. These borrowers are engaged in business activities
other than real estate, and the primary source of repayment is not solely
dependent on conditions in the real estate market.
Residential Real Estate Loans. Residential real estate loans are secured by
first deeds of trust on 1-4 family residential properties. This category
had $14,353 in loans (24% of total loans) at June 30, 1998 and $13,502 in
such loans at December 31, 1997. To mitigate interest rate risk, the
Company usually limits the final maturity of residential real estate loans
held for its own portfolio to 15-20 years and offers a bi-weekly payment
option to encourage faster repayment. Residential real estate lending
involves risk elements when there is lack of timely payment and/or a decline
in the value of the collateral.
Loans to Individuals. Loans to individuals include installment loans and home
equity lines of credit/loans secured by junior liens on residential real
estate. The loan proceeds typically are used to purchase vehicles, finance
home remodeling or higher education, or for other consumer purposes. Loans
to individuals totaled $11,479 (19% of total loans) at June 30, 1998 compared
to $9,336 at December 31, 1997.
Nonperforming Assets. The Company had no nonperforming assets at June 30,
1998 or December 31, 1997.
Deposits
As of June 30, 1998, total deposits were $72,553, an increase of $6,965 or
11% from their level of $65,588 at December 31, 1997. The increase in total
deposits was due to increases in previously-existing accounts as well as new
accounts opened.
16
<PAGE>
At June 30, 1998 noninterest bearing demand deposits were $8,251 or 11% of
total deposits. At December 31, 1997 noninterest bearing demand deposits
were $7,956 or 12% of total deposits. Nonmaturity deposits (noninterest
bearing demand deposits, interest bearing demand deposits, money market
accounts and savings accounts) were $29,261 or 40% of total deposits at June
30, 1998, up from $27,004 or 41% of total deposits at December 31, 1997.
Total interest bearing deposits stood at $64,302 at June 30, 1998, an
increase of $6,670 or 12% over their level of $57,632 at December 31, 1997.
The levels and mix of deposits are influenced by such factors as customer
service, interest rates paid, service charges and the convenience of banking
locations. Competition for deposits is intense from other depository
institutions and money market funds, some of which offer interest rates
higher than those paid by the Company. Management attempts to identify and
implement pricing and marketing strategies designed to control the overall
cost of deposits and to maintain a stable deposit mix.
Capital Resources
The Company's financial position at June 30, 1998 reflects liquidity and
capital levels currently adequate to fund anticipated future business
expansion. Capital ratios are well in excess of required regulatory
minimums for a well-capitalized institution. The adequacy of the Company's
capital is reviewed by management on an ongoing basis. Management seeks to
maintain a capital structure adequate to support anticipated asset growth
and serve as a cushion to absorb potential losses. Total shareholders equity
was $8,497 at June 30, 1998 compared with $8,279 at December 31, 1997, an
increase of $218 or 3%. The increase is attributable to the first half's
net income of $260 reduced by $42 in decreased accumulated other
comprehensive income from the level at December 31, 1997.
For the periods indicated, the Company had the following risk-based capital and
leverage ratios relative to regulatory minimums:
<TABLE>
<CAPTION>
Ratio 6/30/98 12/31/97 6/30/97 Minimum
----- ------- -------- ------- -------
<S> <C> <C> <C> <C>
Tier 1 12.7% 15.6% 17.7% 4%
Total 13.6% 16.5% 18.6% 8%
Leverage 9.7% 11.5% 13.2% 3%
</TABLE>
It is anticipated that the Company's capital adequacy ratios will continue to
decline as long as the rate of asset growth continues to outstrip the rate of
internal capital generation through retention of earnings. If this trend
continues, the Company in the future will have to raise additional capital
funds or curtail its rate of asset growth.
17
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its 1998 Annual Meeting of Shareholders on April 16, 1998,
at which meeting four Class A and one Class C directors were re-elected to
new three year terms. The following table indicates the total votes in
favor of, and withheld from voting on, the re-election of each nominee, and
provides certain information with respect to those directors not standing for
re-election whose term of office continued past the 1998 Annual Meeting of
Shareholders:
<TABLE>
<CAPTION>
Term of Affirmative Votes
Director Name Office Votes Withheld
------------- ------- ----------- --------
<S> <C> <C> <C>
Class A Directors
Eddie F. Hearp 1998-2001 766,132 2,800
Anna L. Lawson 1998-2001 764,177 4,000
John W. Starr, M.D. 1998-2001 764,732 4,200
Michael E. Warner 1998-2001 764,932 4,000
Class B Directors
Abney S. Boxley, III 1996-1999
W. Jackson Burrows 1996-1999
William D. Elliot 1996-1999
Barbara B. Lemon 1996-1999
Ward W. Stevens, M.D. 1996-1999
Class C Directors
Ellis L. Gutshall 1997-2000
Mason Haynesworth 1998-2000 764,432 4,500
A. Wayne Lewis 1997-2000
George W. Logan 1997-2000
Maury L. Strauss 1997-2000
</TABLE>
18
<PAGE>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) The Company filed the following exhibits for the quarter ended June 30,
1998:
27. Financial Data Schedule
(b) The Company filed one report on Form 8-K during the quarter ended June
30, 1998. The report, dated April 20, 1998, reported the Company's
consolidated financial results for the quarter ended March 31, 1998.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY FINANCIAL CORPORATION
August 13, 1998 /s/ Ellis L. Gutshall
- ------------------------ -------------------------------------
Date Ellis L. Gutshall, President
and Chief Executive Officer
August 13, 1998 /s/ A. Wayne Lewis
- ------------------------ -------------------------------------
Date A. Wayne Lewis, Executive
Vice President and Chief
Financial Officer
20
<PAGE>
Exhibit 27
Financial Data Schedule
[ARTICLE] 9
[MULTIPLIER] 1,000
[LEGEND]
[RESTATED]
[CIK] 0000921590
[NAME] VALLEY FINANCIAL CORP/VA/
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-START] JAN-01-1998
[PERIOD-END] JUN-30-1998
[PERIOD-TYPE] 6-MOS
[CASH] 3,234
[INT-BEARING-DEPOSITS] 8
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 24,499
[INVESTMENTS-CARRYING] 0
[INVESTMENTS-MARKET] 0
[LOANS] 60,742
[ALLOWANCE] 587
[TOTAL-ASSETS] 90,386
[DEPOSITS] 72,553
[SHORT-TERM] 3,479
[LIABILITIES-OTHER] 857
[LONG-TERM] 5,000
21
<PAGE>
[COMMON] 9,089
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 0
[TOTAL-LIABILITIES-AND-EQUITY] 90,386
[INTEREST-LOAN] 2,239
[INTEREST-INVEST] 763
[INTEREST-OTHER] 40
[INTEREST-TOTAL] 3,042
[INTEREST-DEPOSIT] 1,463
[INTEREST-EXPENSE] 1,572
[INTEREST-INCOME-NET] 1,470
[LOAN-LOSSES] 128
<SECURITIES-GAIN> 10
[EXPENSE-OTHER] 1,096
[INCOME-PRETAX] 368
[INCOME-PRE-EXTRAORDINARY] 368
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 260
[EPS-PRIMARY] 0.27
[EPS-DILUTED] 0.27
[YIELD-ACTUAL] 3.91
[LOANS-NON] 0
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
22
<PAGE>
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 459
[CHARGE-OFFS] 0
[RECOVERIES] 0
[ALLOWANCE-CLOSE] 587
[ALLOWANCE-DOMESTIC] 587
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 587
23
<PAGE>
