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 March 31, 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_.
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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 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis 9
Part II. OTHER INFORMATION
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
1998 1997
-------- -----------
(in thousands, except share data)
<S> <C> <C>
Assets
Cash and due from banks (note 2) $ 2,249 $ 3,324
Money market investments:
Federal funds sold 0 1,440
Interest-bearing deposits 196 33
------- -------
Total money market investments 196 1,473
Securities available for sale (note 3) 28,034 21,144
Loans:
Commercial loans 13,968 12,997
Commercial real estate loans 12,933 10,812
Residential real estate loans 13,427 13,502
Loans to individuals 11,096 9,336
------- -------
Total loans 51,424 46,647
Less unearned income (35) (38)
Less allowance for loan losses (note 4) (490) (459)
------- -------
Total net loans 50,899 46,150
Premises and equipment 1,290 1,315
Organizational costs 120 134
Other assets 967 1,137
------- -------
Total assets $83,755 $74,677
======= =======
Liabilities and Shareholders' Equity
Deposits:
Non-interest bearing demand deposits 8,640 7,956
Interest bearing demand deposits 21,584 18,395
Savings deposits 802 653
Certificates of deposits > $100,000 6,769 6,481
Other time deposits 31,764 32,103
------- -------
Total deposits 69,559 65,588
Short-term borrowings 56 0
Federal Home Loan Bank advances 5,000 0
Other liabilities 797 810
------- -------
Total liabilities 75,412 66,398
-------- --------
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, 1998 and March 31,
1997 (note 5) 9,089 9,089
Accumulated deficit (736) (866)
Accumulated other comprehensive income (loss) (10) 56
------- -------
Total shareholders' equity 8,343 8,279
------- -------
Total liabilities and shareholders'
equity $83,755 $74,677
======= =======
See accompanying notes to consolidated financial statements
</TABLE>
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<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
For the Period For the Period
January 1, 1998 January 1, 1997
Through Through
March 31, 1998 March 31, 1997
--------------- ---------------
(in thousands, except per share data)
<S> <C> <C>
Interest Income:
Interest and fees on loans $1,035 $ 740
Interest on money market investments 36 32
Interest on securities available for sale 362 225
------ -----
Total interest income 1,433 997
Interest Expense:
Interest on certificates of deposit >
$100,000 92 61
Interest on other deposits 619 463
Interest on borrowed funds 19 0
Total interest expense 730 524
------ -----
Net interest income 703 473
Provision for loan losses (note 4) 31 36
------ -----
Net interest income after provision for
loan losses 672 437
Noninterest income:
Service charges on deposit accounts 35 23
Other fee income 23 16
Securities gains 10 0
------ -----
Total noninterest income: 68 39
Noninterest Expense:
Salaries and employee benefits 286 212
Occupancy and equipment expense, net 72 69
Data processing expense 26 21
Marketing and advertising expense 18 33
Office supply expense 14 18
Other expense 117 81
Amortization of organizational expense 14 15
------ -----
Total noninterest expense 547 449
------ -----
Net income before taxes $ 193 $ 27
------ -----
Provision for income taxes $ 63 $ 0
------ -----
Net income $ 130 $ 27
====== =====
Net income per share (note 5) $ 0.13 $0.03
====== =====
See accompanying notes to consolidated financial statements
</TABLE>
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<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
March 31, 1998 March 31, 1997
- --------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Cash Flows From Operating Activities:
Net income $ 130 $ 27
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for loan losses 31 36
Depreciation and amortization of
bank premises and equipment 37 35
Amortization of organizational
expenses 14 15
Amortization/accretion of premiums/
discounts, net (6) (1)
Gain on sale of securities (10) 0
Increase (decrease) in unearned fees (3) 6
(Increase) decrease in other assets 170 (49)
Increase (decrease) in other liabilities 21 121
- --------------------------------------------------------------------------------
Net cash provided by (used in) operating
activities 384 190
- --------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Net decrease in money market investments 1,333 1,540
Purchases of premises and equipment (12) (63)
Purchases of securities available-
for-sale (13,932) (6,183)
Proceeds from sales, calls and maturities
of securities available-for-sale 6,958 1,165
Net increase in loans (4,777) (3,894)
- --------------------------------------------------------------------------------
Net cash used in investing activities (10,430) (7,435)
- --------------------------------------------------------------------------------
Cash Flows From Financing Activities
Increase in time deposits greater than
$100,000 288 586
Increase in other time deposits (339) 2,295
Net increase in other deposits 4,022 3,710
Proceeds from Federal Home Loan Bank
advances 5,000
- --------------------------------------------------------------------------------
Net cash provided by financing activities 8,971 6,591
- --------------------------------------------------------------------------------
Net Decrease in Cash and Due From Banks (1,075) (654)
Cash and Due From Banks at Beginning of Period 3,324 2,149
- --------------------------------------------------------------------------------
Cash and Due From Banks at End of Period $ 2,249 $1,495
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
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VALLEY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
March 31, 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.
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(3) Securities
The carrying values, unrealized gains, unrealized losses and
approximate fair values of investment securities at March 31, 1998 are
shown in the table below. As of March 31, 1998, investments with an
amortized cost of $199 were pledged as collateral for public deposits.
<TABLE>
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 ($1) $ 198
U.S. Government agencies $18,863 $49 ($71) $18,841
Mortgage-backed securities $ 3,940 $32 ($9) $ 3,963
States and political
subdivisions $ 4,225 $ 6 ($33) $ 4,198
Corporate debt securities $ 99 $ 4 $0 $ 103
Equity securities $ 723 $ 8 $0 $ 731
------- --- ----- -------
Total securities available
for sale $28,049 $99 ($114) $28,034
- ---------------------------- -----------------------------------------------
Total securities $28,049 $99 ($114) $28,034
======= === ===== =======
</TABLE>
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(4) Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
Balance at January 1, 1998 $459
Provision for loan losses 31
Recoveries 0
Charged off loans 0
----
Balance at March 31, 1998 $490
====
(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.
8
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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 three
months ended March 31, 1998 and 1997, total comprehensive income
(loss) was $64 and ($45), 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 three months ended
March 31, 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 March 31, 1998 were $83,755, up 12% from $74,677 at December 31,
1997. The principal components of the Company's assets at the end of the period
were $28,034 in securities available-for-sale and $51,424 in gross loans. Total
liabilities at March 31, 1998 were $75,412, up 14% from $66,398 at December 31,
1997, with the increase almost entirely represented by $3,971 growth in deposits
and $5,000 in advances from the Federal Home Loan Bank of Atlanta.
Total shareholders' equity at March 31, 1998 was $8,343, consisting of $9,089 in
net proceeds from the Company's initial public offering, reduced by the
accumulated deficit of $736 and $10 of unrealized losses on securities
available-for-sale, net of related deferred tax benefit. At December 31, 1997,
total shareholder's equity was $8,279.
The Company had net income of $130 for the quarter ended March 31, 1998,
compared with $27 recorded for the quarter ended March 31, 1997. The
significant improvement in profitability results from higher net interest income
partially offset by increased noninterest expenses in virtually all categories.
Profitability as measured by the Company's return on average assets ("ROA") was
.69% for the three months ended March 31, 1998, compared to .20% for the same
period in 1997. Return on average equity ("ROE") for the first quarter of the
year was 6.37% in 1998 and 1.49% in 1997.
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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 $703 for the three months ended March 31, 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 1998's
first quarter increased 49% from $473 for the same period in 1997. Total
interest income was $1,433 for the quarter, up $436 or 44% over $997 in the
first quarter of 1997. The increase is a result of the Bank's reinvestment of
deposit growth and borrowed funds into loans and securities. The net interest
margin was 3.93% for the first three months of 1998, an increase of 21 basis
points from the 3.72% 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.
Provision for Loan Losses. A provision for loan losses of $31 was provided
during the three months ended March 31, 1998 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 $490 as of March 31, 1998 and represents approximately .96% of net
loans outstanding (see Note 4 to the Consolidated Financial Statements).
Provision expense was $36 for the three months ended March 31, 1997, and the
allowance stood at .99% of net loans at March 31, 1997. The decline in
provision expense is due to a slowing in the rate of loan growth.
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 $68 in the three months ended March
31, 1998 consisted of service charges and fees on accounts, gains on securities
sold and other miscellaneous income, and represented an increase of $29 or 74%
over the level reported for the same period one year earlier. Future levels of
noninterest income are expected to increase as a direct result of business
growth and expansion.
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Noninterest Expense. Noninterest expense for the first quarter of 1998 was
$547, an increase of $98 or 22% over the comparable quarter 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 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 an advantage with respect to Year 2000 issues in that its
hardware and software are newer versions better 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 is continuing to review its operating systems
and obtain compliance representations from vendors, but does not expect Year
2000 expenses to be material. However, 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 $63 was recognized in the first quarter of 1998 to
reflect the Company's anticipated federal income tax liability for the period.
This equated to an effective tax rate of 32.8%. The Company recorded no expense
in 1997 for federal or state income taxes, due to the availability of net
operating loss carryforwards.
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 institution's 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 44% at March 31, 1998 and 40%
at December 31, 1997. The Company sells excess funds as overnight federal funds
sold to provide an immediate source of liquidity. Federal funds sold at March
31, 1998 was zero compared to $1,440 at December 31, 1997.
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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).
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 a given 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
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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 Bank's "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.
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 March 31, 1998 were $28,034, an increase of $6,890 or
33% from their level of $21,144 on December 31, 1997. The increase was due to
funds available from deposit growth exceeding loan growth and the purchase of
investment securities with the proceeds of a $5,000 advance from the Federal
Home Loan Bank of Atlanta.
For more information on the investment portfolio, see Note 3 to the Consolidated
Financial Statements.
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Loan Portfolio
The Company's total loans were $51,424 at March 31, 1998, an increase of $4,777
or 10% from the $46,647 reported at December 31, 1997. The Company's ratio of
net loans to total deposits stood at 73.2% at March 31, 1998 and 70.4% 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.
Commercial Loans. Commercial and industrial loans accounted for 27% of the loan
portfolio as of March 31, 1998, and stood at $13,968 versus $12,997 three 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 25% of total
loans at March 31, 1998. Outstanding loans in this category equaled $12,933 and
$10,812 at March 31, 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
$13,427 in loans (26% of total loans) at March 31, 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.
14
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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 $11,096 (22% of total loans) at March 31, 1998 compared to
$9,336 at December 31, 1997.
Nonperforming Assets. The Company had no nonperforming assets at March 31, 1998
or December 31, 1997.
Deposits
As of March 31, 1998, total deposits were $69,559, an increase of $3,971 or 6%
from their level of $65,588 at December 31, 1997. The increase in total
deposits during the quarter was primarily due to increases in previously-
existing accounts as well as new accounts opened.
For the quarter ended March 31, 1998, noninterest bearing demand deposits were
$8,640 or 12% 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 $31,026 or 45% of total deposits at
March 31, 1998, up from $27,004 or 41% of total deposits at December 31, 1997.
Total interest bearing deposits stood at $60,919 at the end of the first quarter
of 1998, an increase of $3,287 or 6% 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 March 31, 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 $8,343 at March 31, 1998 compared with $8,279 at
December 31, 1997, an increase of $64 or 1%. The increase is attributable to
the first quarter's net income of $130 reduced by $66 in increased net
unrealized depreciation on available-for-sale investment securities over their
level at December 31, 1997.
15
<PAGE>
For the periods indicated, the Company had the following risk-based capital and
leverage ratios relative to regulatory minimums:
<TABLE>
Ratio 3/31/98 12/31/97 3/31/97 Minimum
----- ------- -------- ------- -------
<S> <C> <C> <C> <C>
Tier 1 14.4% 15.6% 17.7% 4%
Total 15.3% 16.5% 18.6% 8%
Leverage 10.8% 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.
16
<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,
1998:
27. Financial Data Schedule
(b) The Company filed one report on Form 8-K during the quarter ended March 31,
1998. The report, dated February 13, 1998, reported the Company's
consolidated financial results for the quarter and the year ended December
31, 1997.
17
<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, 1998 /s/ Ellis L. Gutshall
- ------------------------ -------------------------------------
Date Ellis L. Gutshall, President
and Chief Executive Officer
May 12, 1998 /s/ A. Wayne Lewis
- ------------------------ -------------------------------------
Date A. Wayne Lewis, Executive
Vice President and Chief
Financial Officer
18
<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] MAR-31-1998
[PERIOD-TYPE] 3-MOS
[CASH] 2,249
[INT-BEARING-DEPOSITS] 196
[FED-FUNDS-SOLD] 0
[TRADING-ASSETS] 0
[INVESTMENTS-HELD-FOR-SALE] 28,034
[INVESTMENTS-CARRYING] 0
[INVESTMENTS-MARKET] 0
[LOANS] 51,424
[ALLOWANCE] 490
[TOTAL-ASSETS] 83,755
[DEPOSITS] 69,559
[SHORT-TERM] 56
[LIABILITIES-OTHER] 797
19
<PAGE>
[LONG-TERM] 5,000
[COMMON] 9,089
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[OTHER-SE] 0
[TOTAL-LIABILITIES-AND-EQUITY] 83,755
[INTEREST-LOAN] 1,035
[INTEREST-INVEST] 362
[INTEREST-OTHER] 36
[INTEREST-TOTAL] 1,433
[INTEREST-DEPOSIT] 711
[INTEREST-EXPENSE] 730
[INTEREST-INCOME-NET] 703
[LOAN-LOSSES] 31
<SECURITIES-GAIN> 10
[EXPENSE-OTHER] 547
[INCOME-PRETAX] 193
[INCOME-PRE-EXTRAORDINARY] 193
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] 130
[EPS-PRIMARY] .13
[EPS-DILUTED] .13
[YIELD-ACTUAL] 3.93
[LOANS-NON] 0
20
<PAGE>
[LOANS-PAST] 0
[LOANS-TROUBLED] 0
[LOANS-PROBLEM] 0
[ALLOWANCE-OPEN] 459
[CHARGE-OFFS] 0
[RECOVERIES] 0
[ALLOWANCE-CLOSE] 490
[ALLOWANCE-DOMESTIC] 490
[ALLOWANCE-FOREIGN] 0
[ALLOWANCE-UNALLOCATED] 490
21
<PAGE>
