UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Commission File Number: 33-77568
VALLEY FINANCIAL CORPORATION
VIRGINIA 54-1702380
(State of Incorporation) (I.R.S. Employer Identification Number)
36 CHURCH AVENUE, S.W.
ROANOKE, VIRGINIA 24011
(Address of principal executive offices)
(540) 342-2265
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock, No
Par Value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $9,113,000.
The aggregate market value of the voting stock held by non-affiliates of the
Company (669,751 shares) based on the $19.00 per share last trade price quoted
by the OTC Bulletin Board on March 15, 1999, was $12,725,269. At March 15, 2000,
1,013,207 shares of the registrant's common stock were issued and outstanding.
Documents incorporated by reference:
The issuer"s Proxy Statement dated March 22, 2000 is incorporated by reference
into Form 10-KSB Part III, Items 9, 10, 11 and 12.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
VALLEY FINANCIAL CORPORATION
FORM 10-KSB
DECEMBER 31, 1999
INDEX
PART I.
Item 1. Description of Business. 3
Item 2. Description of Property. 11
Item 3. Legal Proceedings. 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
PART II.
Item 5. Market for Common Equity and Related 12
Stockholder Matters.
Item 6. Management's Discussion and Analysis or Plan 13
of Operation.
Item 7. Financial Statements. 27
Item 8. Changes in and Disagreements With Accountants on 55
Accounting and Financial Disclosure.
PART III.
Item 9. Directors, Executive Officers, Promoters and Control 55
Persons; Compliance with Section 16(a) of the
Exchange Act.
Item 10. Executive Compensation. 55
Item 11. Security Ownership of Certain Beneficial Owners and 55
Management.
Item 12. Certain Relationships and Related Transactions. 56
Item 13. Exhibits and Reports on Form 8-K. 56
SIGNATURES 58
EXHIBIT INDEX 60
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PART I.
ITEM 1. DESCRIPTION OF BUSINESS.
Valley Financial Corporation (the "Company") was incorporated as a Virginia
stock corporation on March 15, 1994, primarily to own and control all of the
capital stock of Valley Bank (the "Bank"). The Bank opened for business on May
15, 1995 at its main office in the City of Roanoke, opened its second office on
September 11, 1995 in the County of Roanoke, its third office on January 15,
1997 in the City of Roanoke, and its fourth office in the City of Salem on April
5, 1999.
As of December 31, 1999, the Bank was a national banking association organized
under the laws of the United States, and engages in the business of commercial
banking. Effective March 1, 2000 the Bank began operating under a state charter
issued by the Commonwealth of Virginia. Its deposits are insured by the FDIC and
it is a member of the Federal Reserve System. The Company presently engages in
no business other than owning and managing the Bank.
LOCATION AND SERVICE AREA
The Bank's primary service area consists of the cities of Roanoke and Salem and
Roanoke County, Virginia where it conducts a general commercial banking business
while emphasizing the needs of small-to-medium sized businesses, professional
concerns and individuals. The Bank operates from its main office at 36 Church
Avenue, SW in the City of Roanoke, and its branch offices at 4467 Starkey Road,
SW in the County of Roanoke, 2203 Crystal Spring Avenue, SW in the City of
Roanoke, and 8 East Main Street in the City of Salem.
The Roanoke Metropolitan Statistical Area is the regional center for southwest
Virginia, and is located approximately 165 miles west of Richmond, Virginia, 178
miles northwest of Charlotte, North Carolina, 178 miles east of Charleston, West
Virginia and 222 miles southwest of Washington, D.C. Hollins University and
Roanoke College, with student enrollments of approximately 1,100 and 1,700,
respectively, are located in the Roanoke MSA. Virginia Polytechnic Institute &
State University, with a student body of some 22,500, is approximately a
45-minute drive away.
The population in the Roanoke MSA was estimated at 230,200 in 1998, of whom
125,669 were employed. Although the Roanoke MSA's growth typically is slower
than that in the Commonwealth overall and in other key Virginia markets in
particular, the Virginia Employment Commission reported in 1997 that the area in
the previous three years enjoyed a 5.5% job growth rate compared with a 4.7%
growth rate for the state as a whole. The Roanoke MSA had an unemployment rate
of 1.5% in December 1999, compared with 4.1% nationally and 2.8% for Virginia.
With 6,754 businesses in 1997, Roanoke City, Roanoke County and Salem City
combined ranked fourth in the Commonwealth in terms of the number of businesses.
The business community in the Roanoke MSA is well diversified by industry group.
The principal components of the economy are retail trade, services,
transportation, manufacturing and finance, insurance and real estate. The
Roanoke MSA's position as a regional center creates a strong medical, legal and
business professional community. Carilion Health System and Lewis-Gale Hospital
are among Roanoke's largest employers. Other large employers include Norfolk
Southern Corporation, General Electric Co., First Union Corporation, The Kroger
Co., Veterans Administration Hospital and American Electric Power.
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BANKING SERVICES
The Bank offers a full range of deposit services that are typically available in
most banks and savings and loan associations, including checking accounts, NOW
accounts, savings accounts and other time deposits of various types, ranging
from daily money market accounts to longer-term certificates of deposit. The
transaction accounts and time certificates are tailored to the Bank's principal
market area at rates competitive to those offered in the area. In addition, the
Bank offers certain retirement account services, such as Individual Retirement
Accounts. All deposit accounts are insured by the FDIC up to the maximum amount
allowed by law (generally, $100,000 per depositor, subject to aggregation
rules). The Bank solicits accounts from individuals, businesses, associations
and organizations and governmental authorities.
The Bank additionally offers a full range of short to medium term commercial and
personal loans. Commercial loans include both secured and unsecured loans for
working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements) and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans for
financing automobiles, home improvements, education and personal investments.
The Bank also originates and holds fixed and variable rate mortgage loans and
real estate construction and acquisition loans.
The Bank's lending activities are subject to a variety of lending limits imposed
by federal laws and regulations. While differing limits apply in certain
circumstances based on the type of loan or the nature of the borrower (including
the borrower's relationship to the Bank), in general the Bank is subject to a
loan-to-one borrower limit of an amount equal to (i) 15% of the Bank's
unimpaired capital and surplus in the case of loans which are not fully secured
by acceptable collateral, or (ii) 30% of the unimpaired capital and surplus if
the excess over 15% is fully secured by acceptable collateral. The Bank may not
make any extensions of credit to any director, executive officer, or principal
shareholder of the Bank or the Company, or to any related interest of such
person, unless the extension of credit is approved by the Board of Directors of
the Bank and is made on terms not more favorable to such person than would be
available to an unaffiliated party.
Other Bank services include safe deposit boxes, certain cash management services
including overnight repurchase agreements, merchant purchase and management
programs, travelers checks, direct deposit of payroll and social security checks
and automatic drafts for various accounts. The Bank is associated with the
Honor, Cirrus and The Exchange shared networks of automated teller machines that
may be used by Bank customers throughout Virginia and other regions. The Bank
also offers VISA and MasterCard credit card services as well as a debit-check
card, which was introduced to its customers in 1999.
The Bank does not plan to exercise trust powers during its initial years of
operation. The Bank may in the future offer a full-service trust department, but
cannot do so without the prior approval of its primary regulators, the Federal
Reserve Bank of Richmond and the Virginia State Corporation Commission before
exercise of trust powers.
COMPETITION
The banking business is highly competitive. The Bank competes as a financial
intermediary with other commercial banks, savings and loan associations, credit
unions, mortgage banking firms,
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consumer finance companies, securities brokerage firms, insurance companies,
money market mutual funds and other institutions operating in the Roanoke MSA
and elsewhere. In addition, large borrowers increasingly are obtaining financing
directly by issuing commercial paper without the involvement of banks.
The Bank's market area is a highly concentrated, highly branched banking market.
As of March 15, 2000, there were fifteen commercial banks and savings
associations operating a total of approximately 100 offices in Roanoke City,
Roanoke County and Salem City. The only locally owned and operated commercial
banks are the Bank, and Salem Bank & Trust Company. Most competitors are
subsidiaries of holding companies headquartered in North Carolina, Georgia,
Tennessee, and Northern Virginia. In addition, three out-of-town Virginia based
community banks have branched into the Bank's market area.
Numerous credit unions in the aggregate operate additional offices in the
Roanoke MSA. Further, various other financial companies, ranging from local to
national firms, provide financial services to residents of the Bank's market
area.
The Company believes that the Bank will be able to compete effectively in this
market, and that the community will react favorably to the Bank's community bank
focus and emphasis on service to small businesses, individuals and professional
concerns.
EMPLOYEES
At December 31, 1999 the Bank had forty-one full-time employees and two
part-time employees, including its officers. The Company does not have any
regular employees other than its officers.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on and provide
for general regulatory oversight with respect to virtually all aspects of
operations. The following is a brief summary of certain statutes, rules and
regulations affecting the Company and the Bank.
THE COMPANY
Because it owns all of the outstanding common stock of the Bank, the Company is
a bank holding company within the meaning of the federal Bank Holding Company
Act of 1956, as amended (the "BHCA"), and Chapter 13 of the Virginia Banking
Act, as amended (the "Virginia Act").
THE BHCA. The BHCA is administered by the Board of Governors of the Federal
Reserve System (the "Federal Reserve"), and the Company is required to file with
the Federal Reserve periodic reports and such additional information as the
Federal Reserve may require. The BHCA, with limited exceptions, requires every
bank holding company to obtain the prior approval of the Federal Reserve before,
(i) it or any of its subsidiaries (other than a bank) acquires substantially all
the assets of any bank, (ii) it acquires ownership or control of any voting
shares of any bank if after such acquisition it would own or control, directly
or indirectly, more than 5% of the voting shares of such bank, or (iii) it
merges or consolidates with any other bank holding company.
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The BHCA and the Change in Bank Control Act, together with regulations
promulgated by the Federal Reserve, require that, depending on the particular
circumstances, either Federal Reserve Board approval must be obtained or notice
must be furnished to the Federal Reserve and not disapproved prior to any person
or company acquiring "control" of a bank holding company, such as the Company,
subject to certain exemptions for certain transactions. Control is conclusively
presumed to exist if an individual or company acquires 25% or more of any class
of voting securities of the bank holding company. Control is rebuttably presumed
to exist if a person acquires 10% or more but less than 25% of any class of
voting securities and either the company has registered securities under Section
12 of the Securities Exchange Act of 1934 (the "Exchange Act") or no other
person will own a greater percentage of that class of voting securities
immediately after the transaction. Under the BHCA, the Company is generally
prohibited from engaging in, or acquiring direct or indirect control of more
that 5% of the voting shares of any company engaged in nonbanking activities
unless the Federal Reserve, by order or regulation, has found those activities
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto.
The Federal Reserve imposes certain capital requirements on the Company under
the BHCA, including a minimum leverage ratio and a minimum ratio of "qualifying"
capital to risk-weighted assets. Subject to its capital requirements and certain
other restrictions, the Company is able to borrow money to make a capital
contribution to the Bank, and such loans may be repaid from dividends paid from
the Bank to the Company, although the ability of the Bank to pay dividends is
subject to regulatory restrictions. The Company is also able to raise capital
for contribution to the Bank by issuing securities without having to receive
regulatory approval, subject to compliance with federal and state securities
laws.
THE VIRGINIA ACT. All Virginia bank holding companies must register with the
Bureau of Financial Institutions of the State Corporation Commission of Virginia
(the "Virginia Commission") under the Virginia Act. A registered bank holding
company must provide the Virginia Commission with information with respect to
the financial condition, operations, management and intercompany relationships
of the holding company and its subsidiaries. The Virginia Commission also may
require such other information as is necessary to keep itself informed about
whether the provisions of Virginia law and the regulations and orders issued
thereunder by the Virginia Commission have been complied with, and may make
examinations of any Virginia holding company and its subsidiaries. Under the
Virginia Act, it is generally unlawful, without the prior approval of the
Virginia Commission, for any Virginia bank holding company to acquire direct or
indirect ownership or control of more than 5% of the voting shares of any
Virginia bank or any other bank holding company.
THE BANK
GENERAL. Effective March 1, 2000 the Bank converted from a national banking
association organized under the laws of the United States to a state-chartered
commercial bank organized under the laws of the Commonwealth of Virginia, and is
subject to examination by the Federal Reserve and the Virginia Commission. The
regulators monitor all areas of the Bank's operations, including security
devices and procedures, adequacy of capitalization and loss reserves, loans,
investments, borrowings, deposits, mergers, issuances of securities, payment of
dividends, interest rates payable on deposits,
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interest rates or fees chargeable on loans, establishment of branches, corporate
reorganizations and maintenance of books and records. The Bank must maintain
certain minimum capital ratios and is subject to certain limits on aggregate
investments in real estate, bank premises and furniture and fixtures. The Bank
is required to prepare quarterly reports on the Bank's financial condition and
to conduct an annual audit of its financial affairs in compliance with
prescribed minimum standards and procedures. The Bank also is required to adopt
internal control structures and procedures in order to safeguard assets and
monitor and reduce risk exposure. While considered appropriate for the safety
and soundness of banks, these requirements adversely impact overhead costs.
The FDIC establishes rates for the payment of premiums by federally insured
banks for deposit insurance. A Bank Insurance Fund (the "BIF") is maintained for
commercial banks with insurance premiums from the industry used to offset losses
from insurance payouts when banks fail. Also, the Bank is charged a
deposit-based assessment by the FDIC in connection with the so-called FICO bonds
issued by the federal government to finance the savings and loan industry
bailout. The total BIF and FICO assessment combined was approximately $11,000 in
1999. Future deposit insurance premiums will vary with the strength of the
banking industry, the level of the BIF insurance fund and the Bank's individual
risk rating as determined by the FDIC, and there can be no assurance that
premiums will remain at their current level.
TRANSACTIONS WITH AFFILIATES. The Federal Reserve Act restricts the amount and
prescribes conditions with respect to loans, investments, asset purchases and
other transactions (collectively, "Covered Transactions") between banks and
their affiliates. In addition to limitations as to amount, each Covered
Transaction must meet specified collateral requirements. Compliance also is
required with certain provisions designed to avoid the taking of low quality
assets. Additionally, transactions, including Covered Transactions and service
contracts entered into between banks and certain affiliates must be on terms and
under circumstances that are substantially the same as those prevailing at the
time for comparable transactions involving nonaffiliated companies. The
foregoing restrictions and conditions apply to certain transactions between the
Company and the Bank.
The Bank is subject to restrictions on extensions of credit to executive
officers, directors, principal shareholders, and their related interests. Such
extensions of credit are limited in their aggregate amount and (i) must be made
on substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
unaffiliated parties and (ii) must not involve more than the normal risk of
repayment or present other unfavorable features.
BRANCHING. The Bank may branch without geographic restriction in Virginia since
the Virginia Act permits statewide branching for state banks in Virginia. The
federal Interstate Banking and Branching Efficiency Act of 1994 allows bank
holding companies to acquire banks in any state, without regard to state law,
except for state laws relating to the minimum amount of time a bank must be in
existence to be acquired. Under the Virginia Act, a Virginia bank or all the
subsidiaries of a Virginia bank holding company sought to be acquired must have
been in continuous operation for more than two years before the date of such
proposed acquisition.
COMMUNITY REINVESTMENT ACT. The federal Community Reinvestment Act ("CRA")
requires that, in connection with examinations of financial institutions within
their jurisdiction, the federal banking regulators evaluate the record of the
financial institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those institutions. These factors are also considered in
evaluating mergers, acquisitions
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and applications to open a branch or facility. Recent legislative and regulatory
changes have reduced the paperwork and regulatory burden of CRA on smaller
institutions such as the Bank. The Bank received a "Satisfactory" rating
pursuant to its latest CRA examination.
OTHER REGULATIONS. Interest and certain other charges collected or contracted
for by the Bank are subject to state usury laws and certain federal laws
concerning interest rates. These laws restrict the interest and charges which
the Bank may impose for certain loans and thereby affect the Bank's interest
income. The Bank's loan operations also are subject to certain federal laws
applicable to credit transactions, such as the Truth in Lending Act governing
disclosures of credit terms to consumer borrowers, the Home Mortgage Disclosure
Act requiring financial institutions to provide information concerning their
obligation to help meet the housing needs of the local community, the Equal
Credit Opportunity Act prohibiting discrimination on the basis of race, creed or
other prohibited factors in extending credit, the Fair Credit Reporting Act
governing the use and provision of information to credit reporting agencies, and
the rules and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. The deposit operations of the
Bank also are subject to the Truth in Savings Act, which governs disclosure and
advertisement of yields and costs of deposits and deposit accounts, the Right to
Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, the Electronic Funds Transfer Act
and Regulation E issued by the Federal Reserve to implement that Act, which
govern automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services, the Expedited Funds Availability
Act and Regulation CC issued by the Federal Reserve to implement that Act, which
govern the availability of funds, return of checks, the settlement of checks,
check endorsement and presentment and notification of nonpayment, and the Bank
Secrecy Act, which requires reporting to the federal government of certain cash
transactions. These and other similar laws result in significant costs to
financial institutions and create the potential for liability to consumers and
regulatory authorities.
DIVIDENDS. At present, the Company's revenues consist of interest and dividends
on investments, and interest income on purchased loan participations. In the
future, it is expected that the principal source of the Company's revenues will
be dividends received from the Bank. The amount of dividends that may be paid by
the Bank to the Company will depend on the Bank's earnings and capital position
and is limited by state law, regulations and policies. A Virginia bank may not
pay dividends from its capital; all dividends must be paid out of net undivided
profits then on hand, after providing for all expenses, losses, interest and
taxes accrued, or due by the Bank. Before any dividend is declared, any deficit
in capital funds originally paid in shall have been restored by earnings to
their initial level, and no dividend shall be declared or paid by any bank which
would impair the paid-in-capital of the bank. To ascertain the net undivided
profits before any dividend shall be declared, all debts due to such bank on
which interest is past due and unpaid for a period of twelve months, unless the
same are well secured and in process of collection by law, shall be deducted
from the undivided profits in addition to all expenses, losses, interest and
taxes accrued, and the balance shall be deemed to be the net undivided profits.
The Commission may limit or approve the payment of dividends by the board of
directors of any bank when the Commission determines that such limitation or
approval is warranted by the financial condition of the bank. The Company does
not anticipate paying cash dividends to shareholders in the near term. The
Company however did declare a 1.05 for 1 stock split on January 20, 2000 payable
on February 15, 2000 to shareholders of record on January 31, 2000. See "Capital
Regulations" below, "Item 5. Market for Common Equity and Related Stockholder
Matters" and Note 9 to the Consolidated Financial
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Statements.
CAPITAL REGULATIONS. The federal bank regulatory authorities impose certain
capital requirements on the Company and the Bank. The requirements apply to a
bank holding company with more than $150 million in consolidated assets on a
bank-only basis with limited exceptions. In addition to minimum capital levels
prescribed by regulation, the Virginia Commission and the Federal Reserve have
authority to require higher capital levels on a case-by-case basis as part of
their supervisory and enforcement powers, including approval of expansion
programs.
In an effort to achieve a measure of capital adequacy that is more sensitive to
the individual risk profiles of financial institutions, the federal bank
regulatory authorities have adopted risk-based capital adequacy guidelines that
redefine traditional capital ratios to take into account assessments of risks
related to each balance sheet category, as well as off-balance sheet financing
activities. Under the guidelines, banks' and bank holding companies' assets are
given risk weightings based on assumptions as to the relative risk inherent in
each asset category. The total risk-weighted assets are equal to the sum of the
aggregate dollar value of assets and certain off-balance sheet items (such as
currency or interest rate swaps) in each category, multiplied by the weight
assigned to that category. The qualifying total capital base is divided by the
total risk-weighted assets to derive a ratio.
An institution's qualifying total capital consists of two components - Core or
Tier 1 capital and Supplementary or Tier 2 capital. Tier 1 capital is
essentially equal to common stockholders' equity, qualifying perpetual preferred
stock and minority interests in equity accounts of consolidated subsidiaries,
less disallowed intangibles. Tier 2 capital, generally includes certain types of
preferred stock and debt securities, hybrid capital instruments and a limited
amount, not to exceed 1.25% of gross risk-weighted assets, of the reserves for
loan and lease losses.
To supplement the risk-based capital guidelines, the federal bank regulatory
agencies also have imposed a leverage ratio, which is Tier 1 capital as a
percentage of certain average quarterly assets. The principal objective of the
leverage ratio is to place a constraint on the maximum degree to which a bank or
bank holding company may leverage its equity capital base. Institutions
receiving less than the highest composite examination ratings are required to
maintain a leverage ratio of at least 100 basis points above the regulatory
minimum.
At December 31, 1999 the Company and the Bank had the following risk-based
capital and leverage ratios relative to regulatory minimums:
Ratio Company Bank Minimum
----- ------- ---- -------
Tier 1 9.79% 9.19% 4%
Total 10.68% 10.08% 8%
Leverage 7.55% 7.14% 4%
The regulations define five categories of compliance with regulatory capital
requirements, ranging
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from "well capitalized" to "critically undercapitalized." To qualify as a "well
capitalized" institution, a bank must have a leverage ratio of no less than 5%,
a Tier 1 risk-based ratio of no less than 6%, and a total risk-based ratio of no
less than 10%, and the bank must not be under any order or directive from the
appropriate regulatory agency to meet and maintain a specific capital level. As
of December 31, 1999 the Company and the Bank qualified as "well-capitalized"
institutions (see Note 9 to the Consolidated Financial Statements).
The applicable federal bank regulatory agency can treat an institution as if it
were in the next lower category if the agency determines (after notice and an
opportunity for hearing) that the institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice. The degree of
regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to submit a capital restoration
plan, raise additional capital, restrict their growth, deposit interest rates
and other activities, improve their management, eliminate management fees to
parent holding companies, and even divest themselves of all or a part of their
operations. Bank holding companies can be called upon to boost their subsidiary
banks' capital and to partially guarantee the institutions' performance under
their capital restoration plans. If this occurs, capital which otherwise would
be available for holding company purposes, including possible distribution to
shareholders, would be required to be downstreamed to one or more subsidiary
banks.
EFFECT OF GOVERNMENTAL MONETARY POLICIES
The earnings of the Bank are affected by domestic economic conditions and the
monetary and fiscal policies of the United States government and its agencies.
The Federal Reserve's monetary policies have had, and will likely continue to
have, an important impact on the operating results of commercial banks through
its power to implement national monetary policy in order, among other things, to
curb inflation or combat a recession. The monetary policies of the Federal
Reserve have major effects upon the levels of bank loans, investments, deposits,
interest income and interest expense through its open market operations in
United States government securities and through its regulation of interest rates
and the reserve requirements against member bank deposits. It is not possible to
predict the nature or impact of future changes in monetary and fiscal policies.
ITEM 2. DESCRIPTION OF PROPERTY.
The Bank's main office is located in a seven story office building at 36 Church
Avenue, S.W., in downtown Roanoke, Virginia 24011. At December 31, 1999 the Bank
leased approximately 8,148 square feet of recently-renovated office space on the
first floor of this facility. The lease commenced April 1, 1995 and had an
initial base term of five years, which expired December 31, 1999. The lease was
renewed on December 23, 1999 for the period beginning January 1, 2000 and ending
December 31, 2004 with options to renew for two additional five-year terms at
the end of the December 31, 2004 extension period. Annual base rent on the
leased space is $90,607 payable in equal monthly installments of $7,551. The
Bank also is responsible for paying a pro rata share of certain operating costs
associated with the leased space. Under the original lease, the Bank was granted
a right of first refusal to lease approximately 2,400 square feet of space on
the mezzanine level, which right it exercised effective March 1, 1999. Annual
base rent on the mezzanine level is $23,699 payable in equal monthly
installments of $1,975. The same terms and conditions exist with the mezzanine
level lease as with the original lease from which the right of first refusal was
granted, including renewal periods. The cost of the leasehold improvements to
the leased premises, net of
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accumulated amortization, was $175,491 at December 31, 1999.
The Bank's Starkey Road office is a 2,700 square foot building constructed in
1995 on a one acre site at 4467 Starkey Road in southwest Roanoke County
(Tanglewood Mall area). The Company acquired the site for cash in the amount of
$272,250, and total cost of the facility constructed thereon, net of accumulated
depreciation, was $408,366 at December 31, 1999.
The Bank's South Roanoke office is a recently-renovated 914 square foot facility
that the Bank leased at a 1999 annual rate of $11,040, payable in equal monthly
installments of $920. For 2000, the annual rental has increased to $11,460,
payable in equal monthly installments of $955. The Bank is also responsible for
utilities. The lease commenced January 1, 1997, and has an initial term of
twelve years with one five-year renewal option. The cost of leasehold
improvements to the leased premises, net of accumulated amortization, was $8,804
at December 31, 1999.
The Bank's Salem office is a newly-constructed Colonial Williamsburg style
building with two floors containing 6,000 square feet, of which the Bank
occupies the first story and leases the second story. The structure is located
on an approximately one-half acre site at 8 East Main Street in the City of
Salem. The Company acquired the land for a contract price of $325,000 and the
total land cost after all necessary grading, structure removal, and closing
costs is $361,839. The total cost of the facility construction, net of
accumulated depreciation, was $762,652 at December 31, 1999. Total monthly
rental income from leasing the second story is $2,356, which directly reduces
occupancy expense.
The Bank has entered into a contract with First Union National Bank to purchase
for $485,000 that bank's existing Hershberger Road branch office near Crossroads
Mall in Roanoke. At present, the Bank plans to take possession of the property
in late summer, remodel it and open for business in early 2001. In addition to
the purchase price, renovations are expected to approximate $200,000.
In the opinion of management of the Company, its properties are adequate for its
current operations and adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS.
Neither the Company nor the Bank is a party to, nor is any of their property the
subject of, any pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
PART II.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION. The Company's Articles of Incorporation authorize it to
issue up to 10,000,000 shares of Common Stock, no par value, of which 1,013,207
shares were issued and outstanding at March 15, 2000.
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The Common Stock is quoted under the symbol VYFC on the OTC Bulletin Board, an
electronic quotation and trade reporting service of the National Association of
Securities Dealers. According to information obtained by Company management and
believed to be reliable, the quarterly range of closing prices per share
(not adjusted for the 1.05 for 1 stock split declared January 20, 2000) for the
Common Stock during the last two fiscal years was as follows:
1999 Quarter Ended High Close Low Close
------------- ---------- ---------
03/31/99 $16.50 $15.00
06/30/99 $17.50 $15.50
09/30/99 $18.63 $15.50
12/31/99 $20.00 $16.75
1998 Quarter Ended High Close Low Close
------------- ---------- ---------
03/31/98 $15.00 $12.00
06/30/98 $15.25 $13.75
09/30/98 $16.00 $14.00
12/31/98 $15.50 $14.00
HOLDERS. At March 15, 2000 there were approximately 579 holders of record of the
Company's outstanding Common Stock.
DIVIDENDS. The Company has not declared any cash dividends to date and does not
anticipate paying any cash dividends to shareholders in the near term. However,
a 1.05 for 1 stock split was declared on January 20, 2000 payable February 15,
2000 to shareholders of record on January 31, 2000. See "Supervision and
Regulation" and Note 9 to the Consolidated Financial Statements for restrictions
on the payment of dividends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS (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 years ended December
31, 1999 and 1998. 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. In July 1995, the Company completed its
initial public offering of 964,040 shares (1,012,242 shares after the effect of
the 1.05 for 1 stock split declared January 20, 2000) of its common stock, no
par value, at a price of $10.00 per share. The Offering resulted in gross
proceeds to the Company of $9,640, reduced by $551 of direct stock issuance
costs associated with the offering, for net proceeds of $9,089. As of December
31, 1999, $8,600 has been invested in the Bank as equity capital and the
remainder retained at the parent company for working capital needs and future
financial flexibility.
12
<PAGE>
flexibility.
Total assets at December 31, 1999 were $137,156, up 30% from $105,186 at
December 31, 1998. The principal components of the Company's assets at the end
of the period were $31,964 in securities available-for-sale and $91,390 in gross
loans. Total liabilities at December 31, 1999 were $128,101, up from $96,029 at
December 31, 1998, an increase of $32,072 or 33%. Total deposits were $115,477,
up $25,451 or 28% from $90,026 at December 31, 1998. The largest component of
the remaining $6,621 increase in total liabilities was a second long-term FHLB
advance in 1999 in the amount of $5,000. The introduction of an overnight
repurchase agreement program with appropriate commercial customers in 1999
increased total liabilities by $992. Total shareholders' equity at December 31,
1999 was $9,055, consisting of $9,089 in net proceeds from the Company's initial
public offering, $4 in proceeds from the exercise of stock options during 1999,
$6 in proceeds from the exercise of stock options during 1998, increased by
retained earnings of $934 and including $978 of unrealized losses on securities
available-for-sale, net of related deferred tax benefit. Exclusive of the
unrealized losses on securities available-for-sale, shareholders' equity was
$10,033 at December 31, 1999. At December 31, 1998 total shareholders' equity
was $9,157.
The Company had net income of $1,042 for the year ended December 31, 1999
compared with $758 for the year ended December 31, 1998. The substantial
improvement in profitability results from an improved net interest margin and a
substantial increase in noninterest income, partially offset by increased
noninterest expenses in all major categories.
Profitability as measured by the Company's return on average assets ("ROA") was
.86% in 1999 and return on average equity ("ROE") was 10.98% in 1999. The ROA
and ROE ratios were .83% and 8.87% in 1998, respectively.
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 $4,327 for 1999 and is attributable to interest income
from loans and securities exceeding the cost of interest paid on deposits and
borrowed funds. Net interest income increased $1,069 or 33% over the same period
in 1998. Total interest income was $8,759 for 1999 as compared to $6,770 in
1998, an increase of $1,989 or 29%. This increase is attributable to the Bank's
reinvestment of deposit growth into loans and securities. The net interest
margin was 3.92% for the year ended 1999 as compared to 3.86% for the year ended
1998. This increase in the net interest margin for the year ended December 31,
1999 is largely attributable to controlling deposit costs in relation to income
generated on earning assets, as the cost of funds ratio decreased 26 basis
points from 4.28% in 1998 to 4.02% in 1999.
The following table presents the major categories of interest-earning assets,
interest-bearing liabilities and shareholders' equity with corresponding average
balances, related interest income or expense and resulting yields and rates for
the periods indicated.
13
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
Average Interest Rate Average Interest Rate
ASSETS Balance Income Earned Balance Income Earned
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans (2) $ 81,962 6,823 8.32% $ 59,175 5,059 8.55%
Investment securities
Taxable 23,415 1,476 6.30% 20,888 1,365 6.53%
Nontaxable (3) 6,815 497 7.29% 4,104 295 7.19%
Money market investments 2,600 135 5.19% 2,892 151 5.22%
------------------- -------------------
Total interest-earning assets 114,792 8,931 7.78% 87,059 6,870 7.89%
Other Assets:
Reserve for loan losses (813) (571)
Cash and due from banks 3,336 2,451
Other assets, net 3,307 2,624
--------- --------
Total assets $120,622 $91,563
========= =========
Years Ended December 31
------------------------------------------------------------
1999 1998
----------------------------- -----------------------------
LIABILITIES AND SHAREHOLDERS' Average Interest Rate Average Interest Rate
EQUITY Balance Expense Paid Balance Expense Paid
- -----------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings and NOW $ 33,058 1,062 3.21% $25,461 866 3.40%
Time 55,570 2,932 5.28% 42,995 2,391 5.56%
FHLB advances 8,233 415 5.04% 4,137 208 5.03%
Other borrowings 414 23 5.56% 839 47 5.60%
------------------- ------------------
Total interest-bearing liabilities 97,275 4,432 4.56% 73,432 3,512 4.78%
Noninterest-bearing liabilities:
Demand deposits 13,044 8,602
Other liabilities 820 910
--------- --------
Total liabilities 111,139 82,944
Shareholders' equity 9,483 8,619
--------- --------
Total liabilities and shareholders'
equity $120,622 $91,563
========= ========
Net interest income $4,499 $3,358
======= =======
Net interest margin (4) 3.92% 3.86%
====== ======
</TABLE>
14
<PAGE>
Legends for the table are as follows:
(1) Averages are daily averages.
(2) Loan interest income includes loan fees of $230 and $156 for the years ended
1999 and 1998, respectively.
(3) Nontaxable interest income is adjusted to its fully taxable equivalent basis
using a federal tax rate of 34 percent.
(4) The net interest margin is calculated by dividing net interest income (tax
equivalent basis) by average total earning assets.
As discussed above, the Company's net interest income is affected by the change
in the amount and mix of interest-earning assets and interest-bearing
liabilities (referred to as "volume change") as well as by changes in yields
earned on interest-earning assets and rates paid on deposits and borrowed funds
(referred to as "rate change"). The following table presents, for the periods
indicated, a summary of changes in interest income and interest expense for the
major categories of interest-earning assets and interest-bearing liabilities and
the amounts of change attributable to variations in volumes and rates. Changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
RATE/VOLUME ANALYSIS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 compared to 1998
---------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest earned on interest-earning assets:
Loans $1,593 $171 $1,764
Investment securities:
Taxable 106 5 111
Nontaxable 175 17 202
Money market investments (15) 0 (15)
---- --- ----
Total interest earned on interest-earning assets 1,859 193 2,062
----- --- -----
Interest paid on interest-bearing liabilities:
Savings and NOW 217 (21) 196
Time Deposits 556 (14) 542
FHLB Borrowings 207 0 207
Other Borrowings (24) 0 (24)
---- ---- ----
Total interest paid on interest-bearing liabilities 956 (35) 921
--- ---- ---
Change in net interest income $903 $228 $1,141
==== ==== ======
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
1998 compared to 1997
---------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest earned on interest-earning assets:
Loans $1,547 $(46) $1,501
Investment securities:
Taxable 181 4 185
Nontaxable 295 0 295
Money market investments 85 (2) 83
-- --- --
Total interest earned on interest-earning assets 2,108 (44) 2,064
----- ---- -----
Interest paid on interest-bearing liabilities:
Savings and NOW 417 (36) 381
Time Deposits 355 19 374
FHLB Borrowings 208 0 208
Other Borrowings 38 0 38
-- - --
Total interest paid on interest-bearing liabilities 1,018 (17) 1,001
----- ---- -----
Change in net interest income $1,090 $(27) $1,063
====== ===== ======
</TABLE>
PROVISION FOR LOAN LOSSES. A provision for loan losses of $216 and $249 was
provided during 1999 and 1998, respectively, 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 charges against the allowance for loan losses. The allowance for loan
losses was $910 and $708 as of December 31, 1999 and 1998, respectively, and
represented approximately 1.01% and 1.00%, respectively, of net loans
outstanding (see Note 4 to the Consolidated Financial Statements). The decrease
in provision expense is due to the decrease in the rate of loan growth from 54%
for 1998 to 28% for 1999.
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 $354 in 1999 consisted of service
charges and fees on accounts, securities gains and losses, and other
miscellaneous income, and represented an increase of $90 or 34% over the 1998
level. Future levels of noninterest income are expected to increase as a direct
result of business growth and expansion.
NONINTEREST EXPENSE. Noninterest expense for 1999 was $3,029, an increase of
$777 or 35% over 1998, which includes costs associated with the opening of the
Bank's Salem office on April 5, 1999. Noninterest expenses are expected to
continue to increase in future years as a direct result of business growth and
expansion.
YEAR 2000. The Year 2000 issue arises from computer programs being written using
two digits rather than four to abbreviate the year portion of dates. Computer
hardware, software and devices
16
<PAGE>
with imbedded technology that are time-sensitive may not recognize the
abbreviation "0" as meaning the year 2000, but instead read it as the year 1900.
This could result in system failures or miscalculations causing disruption of
normal operations including, among other things, a temporary impairment of the
ability to process transactions, calculate interest payments correctly or engage
in normal routine business activities.
The Company has undertaken various initiatives intended to ensure that its
computer equipment and software will function properly with respect to dates in
the year 2000 and thereafter. Included in the initiatives are information
technology ("IT") systems such as accounting, data processing, financial
transaction processing, ATM and telephone, and non-IT systems such as alarm
systems, fax machines, copiers, heating and air conditioning controls and
elevator controls. Both IT and non-IT systems may contain imbedded technology.
The Company's initiatives include awareness of the problem, assessing the size
and complexity of the effort in the context of the Company's systems, renovation
of non-compliant systems through upgrade or replacement, validation through
testing of Year 2000 compliance and implementation of compliant systems. The
Company also has taken steps to ascertain the Year 2000 compliance status of its
major customers and vendors, and to develop contingency plans in the event of
unexpected failure of one or more of its mission-critical systems.
The Company does not operate its own mainframe computer system and has not
developed/supported software code for its information systems, so remediation
efforts have focused on achieving compliance from outside servicers and vendors,
and on internal testing of hardware and software systems. The Company's banking
operations are highly dependent on one external service bureau for its data
processing and on one vendor for loan/deposit software. The Company is
monitoring the Year 2000 compliance status of both these third-party providers,
and has validated their compliance through its own testing efforts. A
comprehensive contingency plan has been developed for dealing with the most
reasonably likely worst case scenario in the event of failure by the Company or
its primary third-party providers to achieve Year 2000 compliance on a timely
basis. The Company continued contingency plan analysis and testing through
December 31, 1999.
The Company also has taken 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, it operations
could be jeopardized and its ability to repay its loan threatened. All
commercial borrowers in significant amounts were sent questionnaires concerning
their Year 2000 preparedness. Completed questionnaires have been evaluated to
identify moderate and high-risk credits. Year 2000 risk factors are being
incorporated into the overall risk ratings for all new and renewed commercial
loans and, where appropriate, more stringent standards imposed in underwriting
criteria, loan covenants and required collateral. As of December 31, 1999, the
Company considers virtually all commercial borrowers to be low Year 2000 risk.
As part of its board approved Year 2000 Action Plan, the Company established a
budget for Year 2000 compliance. For the year ended December 31, 1999 total
expenditures were $58, with $11 expensed and $47 recorded as capital
expenditures with useful lives of 3-5 years. Actual expenditures were $16 for
the year ended December 31, 1998, recorded as a reduction to net income. Total
Year 2000 costs for the years 1999 and 1998 were $74, approximately $26 under
budget for the project. Total expenditures, primarily for testing, software
upgrades and consultants, are not expected to exceed $100. The costs of Year
2000 identification, assessment, remediation and testing efforts and the dates
on which the Company currently believes it will complete such efforts are based
upon management's best estimates, which were derived using numerous assumptions
regarding
17
<PAGE>
future events, including the continued availability of certain resources,
third-party remediation plans and other factors. There is no assurance that
these estimates will prove to be accurate, and actual results may differ
materially from those currently anticipated. Specific factors that could cause
such material differences include, but are not limited to, the availability and
cost of personnel trained in Year 2000 issues, the ability to identify, assess,
remediate and test all relevant IT systems and imbedded technology, and similar
uncertainties.
The failure by the Company or a primary third-party provider to correct a
material Year 2000 problem could result in the interruption in, or failure of,
certain normal business activities or operations. Such failure could have a
material adverse effect on the Company's results of operations, liquidity and
financial condition. Due to the general uncertainty inherent in the Year 2000
problem, resulting in part from the uncertainty of the Year 2000 readiness of
third-party providers and customers, the Company presently is unable to provide
assurances that such material adverse impact will not be the case. The Year 2000
project is expected to significantly reduce the Company's level of uncertainty
about the Year 2000 problem and, in particular, about the Year 2000 compliance
and readiness of it primary third-party providers. The Company believes that,
with the implementation of remediated IT systems and completion of the Year 2000
project as scheduled, the possibility of significant interruptions of normal
business operations should be reduced.
The Company spent a significant amount of time planning, testing, and upgrading
for the changeover of information technology systems to January 1, 2000 and
other identified sensitive dates. The planning and preparation was successful,
as January 1 and February 29, 2000 arrived and departed with no identified
problems with any Bank IT system.
INCOME TAXES. During 1999 and 1998 the Company recorded federal income tax
provision in the amounts of $394 and $263, respectively.
ASSET/LIABILITY MANAGEMENT AND LIQUIDITY
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.
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, and through the management of
investment maturities/prepayments and loan repayments. The Company's ratio of
liquid assets to deposits and short-term borrowings was 36% at December 31, 1999
and 35% at December 31, 1998. The ratio increased due to a 34% growth rate in
liquid assets as compared to a 29% growth rate in deposits and short-term
borrowings in 1999 over 1998. The Company sells excess funds as overnight
federal funds sold to provide an immediate source of liquidity. Federal funds
sold at December 31, 1999 were $6,034 compared to $1,699 at December 31, 1998.
The level of deposits may fluctuate, perhaps significantly so, due to seasonal
cycles of depositing
18
<PAGE>
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 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
19
<PAGE>
to changes in the Prime Rate. Utilizing this methodology and assuming a 100
basis point increase in Prime, the Bank at December 31, 1999 had a negative
one-year gap of ($12,115) or 8.87% of total assets. At that same date and
assuming a 100 basis point decrease in Prime, the Bank had a positive one-year
gap of $2,641 or 1.93 of total assets. The one-year gaps under both interest
rate scenarios are well within Company policy parameters.
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 December 31, 1999 were $31,964, an increase of $5,846
or 22% from their level of $26,118 on December 31, 1998. The increase was
primarily due to the purchase of investment securities with the proceeds from a
$5,000 FHLB advance in the second quarter of 1999.
INVESTMENT PORTFOLIO - MATURITY DISTRIBUTION
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------
Amortized Fair
Available-for-sale Costs Value Yield
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U. S. Treasury securities and obligations of U. S.
Government corporations:
After one but within five years 6,328 6,144 6.14%
After five but within ten years 15,491 14,673 6.43%
After ten years 562 559 6.44%
20
<PAGE>
Obligations of states and subdivisions:
After one but within five years 300 297 7.37%
After five but within ten years 839 816 7.19%
After ten years 6,153 5,761 7.74%
Corporate securities:
After one but within five years 100 99 7.05%
Other securities:
Within one year 60 60 --
After one but within five years 500 500 7.50%
After ten years 437 412 6.86%
Mortgage-backed securities: 2,675 2,643
- ---------------------------------------------------------------------------------------
Total available-for-sale $ 33,445 31,964
- ---------------------------------------------------------------------------------------
</TABLE>
For more information on the investment portfolio, see Note 3 to the consolidated
financial statements.
LOAN PORTFOLIO
The Company's net loans were $90,448 at December 31, 1999, an increase of
$19,573 or 28% from the $70,875 reported one year earlier. The Company's ratio
of net loans to total deposits was 78.3% at December 31, 1999 and 78.7% at
December 31, 1998. 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 December 31, 1999 and stood at $24,651 versus $17,794 one year
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 37% of total loans at
December 31, 1999. Outstanding loans in this category
21
<PAGE>
equaled $33,485 and $22,040 at December 31, 1999 and 1998, respectively. The
Company prefers to make commercial real estate loans secured by owner-occupied
properties. Such borrowers are generally 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
$19,773 in loans (21% of total loans) at December 31, 1999 and $19,140 in such
loans at December 31, 1998. 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 $13,481 (15% of total loans) at December 31, 1999 compared
to $12,648 one year earlier.
LOAN MATURITY AND INTEREST RATE SENSITIVITY. The following table presents loan
portfolio information related to the maturity distribution of commercial loans
and real estate construction loans based on scheduled repayments at December 31,
1999.
LOAN MATURITY
<TABLE>
<CAPTION>
Due Within Due One to Due After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Commercial and industrial loans $13,080 8,475 3,541 25,096
Real estate - construction 3,205 56 1,964 5,225
</TABLE>
The following table presents the interest rate sensitivity of commercial loans
and real estate construction loans maturing after one year as of December 31,
1999.
INTEREST RATE SENSITIVITY
Fixed interest rates $ 8,884
Variable interest rates 5,152
- --------------------------------------------------------------------------------
Total maturing after one year $14,036
- --------------------------------------------------------------------------------
NONPERFORMING ASSETS. The Company had nonaccrual loans in the amount of $87 and
$0 at December 31, 1999 and December 31, 1998, respectively. If the nonaccrual
loans had performed in accordance with their original terms, additional interest
income in the amount of $4 would have been recorded for the year ended December
31, 1999.
22
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses was $910 as of December
31, 1999 and represented approximately 1.01% of net loans outstanding. The Bank
had nonperforming assets in the amount of $87 at December 31, 1999 and no loans
greater than ninety days past due. At December 31, 1998, the Bank had no
nonperforming assets but had one loan in the amount of $200 greater than ninety
days past due. Management believes the allowance is adequate to provide for any
inherent losses in the portfolio as of December 31, 1999 and periodically
evaluates the adequacy of the allowance considering the specific nature of the
portfolio, historical operating trends as available and other economic and
industry factors. See Note 4 to the consolidated financial statements.
DEPOSITS
As of December 31, 1999 total deposits were $115,477, an increase of $25,451 or
28% from their level of $90,026 one year earlier. Average deposits were $101,672
for 1999, an increase of $24,614 or 32% over 1998's average deposits of $77,058.
The increase in average deposits during 1999 was primarily due to increases in
previously existing accounts as well as new accounts opened during the year.
For the year ended December 31, 1999, average noninterest bearing demand
deposits were $13,044 or 13% of average total deposits. For the prior year,
average noninterest bearing demand deposits were $8,602 or 11% of average total
deposits. Nonmaturity deposits (noninterest bearing demand deposits, interest
bearing demand deposits, money market accounts and savings accounts) averaged
$46,102 or 45% of average total deposits in 1999, up from $34,063 or 44% of
average total deposits in 1998. Total interest bearing deposits averaged $88,628
for the year ended December 31, 1999, an increase of $20,172 or 29% over their
level of $68,456 for the year ended December 31, 1998.
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. Despite these pricing and market
strategies, the ratio of certificates of deposit to total deposits increased
from 51% at December 31, 1998 to 59% at December 31, 1999. However, management
was able to reduce the cost of funds ratio by 26 basis points from 1998,
primarily by controlling the rates paid on time deposits.
The following table presents the maturity schedule of certificates of deposit of
$100,000 or more as of December 31, 1999.
CERTIFICATES OF DEPOSIT OVER $100,000
Three months or less $1,793
Over three through six months 3,366
Over six through 12 months 4,911
Over 12 months 2,904
- --------------------------------------------------------------------------------
Total $12,974
- --------------------------------------------------------------------------------
23
<PAGE>
FINANCIAL RATIOS
The following table presents certain financial ratios for the periods indicated.
RETURN ON EQUITY AND ASSETS
Years Ended
December 31,
------------
1999 1998
- ---------------------------------------------------------------------
Return on average assets .86% .83%
Return on average equity 10.98% 8.87%
Average equity to average assets 7.86% 9.32%
CAPITAL RESOURCES
The Company's financial position at December 31, 1999 reflects liquidity and
capital levels currently adequate to fund anticipated future business expansion.
Capital ratios are in excess of required regulatory minimums for a
well-capitalized institution. The proceeds from the initial public stock
offering have been invested in securities, loans, premises and equipment and
used to fund expenses associated with the operations of the Company. All
investment securities at December 31, 1999 were classified as
available-for-sale, thereby affording the Company maximum flexibility in
managing liquidity and funding future business growth. 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. The Company's rapid
growth since inception has consistently outpaced the rate of internal capital
generation. It is currently anticipated that within 1-2 years, the Company may
have to slow its asset growth or raise additional capital funds. See
"Supervision and Regulation - Capital Regulations" and Note 9 to the
consolidated financial statements.
Total shareholders' equity was $9,055 at December 31, 1999 compared with $9,157
at December 31, 1998, a decrease of $102 or 1%. Exclusive of accumulated other
comprehensive income, which is comprised exclusively of the unrealized gains
(losses) on available-for-sale securities, total shareholders' equity would have
been $10,033 and $8,987, an increase of $1,046 or 12%. The $102 decrease is
attributable to 1999's net income of $1,042, a $1,148 decrease in unrealized
gains (losses) on available-for-sale investment securities over their level at
December 31, 1998 and proceeds from the issuance of common stock under the
Company's Incentive Stock Plan in the amount of $4 during 1999.
RECENT AND FUTURE ACCOUNTING CONSIDERATIONS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. In October 1998, SFAS No. 134, ACCOUNTING
FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE
LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE, was issued. In June 1999,
the Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
24
<PAGE>
HEDGING ACTIVITIES-DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133-AN
AMENDMENT OF FASB STATEMENT NO. 33. SFAS No. 133 provides guidance for
accounting for all derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
134 amends SFAS No. 65 to conform the subsequent accounting (under SFAS No. 115)
for securities retained after the securitization of mortgage loans by a mortgage
banking enterprise to the accounting applicable to nonmortgage banking
enterprises. SFAS No. 137 amends SFAS No. 133 to defer the effective date of the
pronouncement to June 15, 2000. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, which has been amended by SFAS No. 137. SFAS No.
134 is effective for the first fiscal quarter beginning after December 15, 1998.
The statements are not expected to have a material effect on the consolidated
financial position or results of operations of the Company.
25
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
Index to Financial Statements
Independent Auditors' Report on 1999 Consolidated Financial Statements. 28
Independent Auditors' Report on 1998 Consolidated Financial Statements. 29
Consolidated Balance Sheets as of December 31, 1999 and 1998. 30
Consolidated Statements of Income and Comprehensive Income (Loss)
for the Years Ended December 31, 1999 and 1998. 31
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1999 and 1998. 32
Consolidated Statements of Cash Flows for the Years Ended December 31,
1999 and 1998. 33
Notes to Consolidated Financial Statements. 34
26
<PAGE>
Independent Auditors' Report
The Board of Directors
Valley Financial Corporation:
We have audited the accompanying consolidated balance sheet of Valley Financial
Corporation and subsidiary as of December 31, 1999 and the related consolidated
statements of income and comprehensive loss, changes in shareholders' equity
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit. The consolidated financial statements of Valley Financial Corporation
and subsidiary for the year ended December 31, 1998 were audited by other
auditors whose report dated January 22, 1999 expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1999 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
Financial Corporation and subsidiary as of December 31, 1999 and the results of
its operations and cash flows for the year then ended in conformity with
generally accepted accounting principles.
Larrowe & Company, PLC
Galax, Virginia
January 14, 2000, except for Note 15, as to which the date is February 2, 2000
and Note 18, as to which the date is January 20,2000.
28
<PAGE>
Independent Auditors' Report
The Board of Directors
Valley Financial Corporation:
We have audited the accompanying consolidated balance sheet of Valley Financial
Corporation and subsidiary as of December 31, 1998, and the related consolidated
statements of income and comprehensive income, changes in shareholders' equity,
and cash flows for the year then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Valley Financial
Corporation and subsidiary as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
KPMG LLP
Roanoke, Virginia
January 22, 1999
29
<PAGE>
<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1999 and 1998
(In thousands, except share data)
1999 1998
------------- --------------
<S> <C> <C>
Assets
Cash and due from banks $ 4,027 $ 3,462
Money market investments
Federal funds sold 6,034 1,699
Interest-bearing deposits in other banks 71 44
Securities available-for-sale 31,964 26,118
Loans
Commercial loans 24,651 17,794
Commercial real estate loans 33,485 22,040
Residential real estate loans 19,773 19,140
Loans to individuals 13,481 12,648
------------- --------------
Total loans 91,390 71,622
Less unearned fees (32) (39)
Less allowance for loan losses (910) (708)
------------- --------------
Loans, net 90,448 70,875
Premises and equipment, net 2,629 1,830
Accrued interest receivable 989 804
Other assets 994 277
Organizational expenses, net - 77
------------- --------------
Total assets $ 137,156 $ 105,186
============= ==============
Liabilities and Shareholders' Equity
Noninterest-bearing deposits $ 14,328 $ 10,437
Interest-bearing demand deposits 9,423 7,687
Savings deposits 1,357 1,106
Money market deposits 22,178 24,826
Time deposits greater than $100,000 12,974 8,048
Other time deposits 55,217 37,922
------------- --------------
Total deposits 115,477 90,026
Securities sold under agreements to repurchase 992 -
Accrued interest payable 1,034 679
Other liabilities 598 324
Federal Home Loan Bank advances 10,000 5,000
------------- --------------
Total liabilities 128,101 96,029
------------- --------------
Commitments and other matters
Shareholders' equity:
Preferred stock, no par value. Authorized
10,000,000 shares; none issued and outstanding - -
Common stock, no par value. Authorized
10,000,000 shares; none issued and outstanding
1,013,207 shares and 964,590 shares in 1999 and
1998, respectively 9,099 9,095
Retained earnings (deficit) 934 (108)
Accumulated other comprehensive income (loss) (978) 170
------------- --------------
Total shareholders' equity 9,055 9,157
------------- --------------
Total liabilities and shareholders' equity $ 137,156 $ 105,186
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
Consolidated Statements of Income and Comprehensive Income (Loss)
Years Ended December 31, 1999 and 1998
(In thousands, except share and per share data)
1999 1998
------------- --------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 6,823 $ 5,059
Interest on securities - taxable 1,476 1,365
Interest on securities - nontaxable 325 195
Interest on money market investments 135 151
------------- --------------
Total interest income 8,759 6,770
------------- --------------
Interest expense:
Interest on certificates of deposit of
$100,000 or more 549 397
Interest on other deposits 3,445 2,860
Interest on Federal Home Loan Bank advances 415 208
Interest on other borrowed funds 23 47
------------- --------------
Total interest expense 4,432 3,512
------------- --------------
Net interest income 4,327 3,258
Provision for loan losses 216 249
------------- --------------
Net interest income after provision
for loan losses 4,111 3,009
------------- --------------
Noninterest income:
Service charges on deposit accounts 220 165
Gain on sale of securities - 10
Other income 134 89
------------- --------------
Total noninterest income 354 264
------------- --------------
Noninterest expense:
Personnel 1,649 1,177
Occupancy 213 168
Data processing and equipment 348 260
Advertising and promotion 115 90
Supplies 82 57
Amortization of organizational expenses 77 57
Other expense 545 443
------------- --------------
Total noninterest expense 3,029 2,252
------------- --------------
Income before income taxes 1,436 1,021
Income tax expense 394 263
------------- --------------
Net income 1,042 758
Other comprehensive income (loss), net of deferred tax (expense) benefit:
Net unrealized gains (losses) on securities
available-for-sale (1,148) 114
------------- --------------
Comprehensive income (loss) $ (106) $ 872
============= ==============
Net income per share:
Basic net income per share $ 1.03 $ .75
============ ============
Diluted net income per share $ .99 $ .73
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1999 and 1998
(In thousands, except share data)
Accum-
ulated
Other Total
Compre- Share-
Common Common Retained hensive holders'
Shares Stock Earnings Income Equity
(Deficit) (Loss)
------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 964,040 $ 9,089 $ (866) $ 56 $ 8,279
Net income - - 758 - 758
Stock options exercised 550 6 - - 6
Unrealized gains on
securities available-
for-sale, net of
deferred tax expense
of $59 - - - 114 114
------------- -------------- ------------- ------------- --------------
Balances at December 31, 1998 964,590 9,095 (108) 170 9,157
Net income - - 1,042 - 1,042
Stock options exercised 400 4 - - 4
Stock split 48,217 - - - -
Unrealized losses on
securities available-
for-sale, net of
deferred tax benefit
of $591 - - - (1,148) (1,148)
------------- -------------- ------------- ------------- ---------
Balances at December 31, 1999 1,013,207 $ 9,099 $ 934 $ (978) $ 9,055
============= ============== ============= ============= ========
</TABLE>
See accompanying notes to consolidated financial statements.
32
<PAGE>
<TABLE>
<CAPTION>
VALLEY FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1999 and 1998
(In thousands)
1999 1998
------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,042 $ 758
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 216 249
Depreciation and amortization of
premises and equipment 206 153
Deferred income tax (61) 189
Amortization of organizational expenses 77 57
Gain on sale of securities - (10)
Amortization (accretion) of premiums/discounts, net 29 1
Increase (decrease) in unearned fees (7) 1
Increase in accrued interest receivable (185) (168)
Increase in other assets (83) (24)
Increase in accrued interest payable 355 169
Increase in other liabilities 274 24
------------- --------------
Net cash provided by operating activities 1,863 1,399
------------- --------------
Cash flows from investing activities:
Net increase in money market investments (4,362) (270)
Purchases of premises and equipment (1,005) (668)
Purchases of securities available-for-sale (15,608) (34,587)
Proceeds from sales, calls and maturities of
securities available-for-sale 7,994 29,795
Increase in loans, net (19,764) (24,975)
------------- --------------
Net cash used in investing activities (32,745) (30,705)
------------- --------------
Cash flows from financing activities:
Increase in time deposits greater than $100,000 4,926 1,567
Increase in other time deposits 17,295 5,819
Net increase in other deposits 3,230 17,052
Federal Home Loan Bank advances 5,000 5,000
Increase in securities sold under
agreements to repurchase 992 -
Proceeds from exercise of stock options 4 6
------------- --------------
Net cash provided by financing activities 31,447 29,444
------------- --------------
Net increase in cash and due from banks 565 138
Cash and due from banks at beginning of year 3,462 3,324
------------- --------------
Cash and due from banks at end of year $ 4,027 $ 3,462
============= ==============
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $ 4,077 $ 3,343
============= ==============
Cash paid during the year for income taxes $ 243 $ 2
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
VALLEY FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(In thousands except share and per share data)
(1) Summary of Significant Accounting Policies
(a) General
The accounting and reporting policies of Valley Financial
Corporation ("the Company") and Valley Bank ("the Bank") conform
to generally accepted accounting principles and to general
banking industry practices. The Bank provides traditional
commercial banking services concentrated primarily in the Roanoke
Valley. The Bank does not currently offer trust services;
however, the Bank does refer customers to a provider of trust
services in exchange for a fee.
The following is a summary of the more significant accounting
policies:
(b) Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, the Bank, collectively
referred to hereinafter as the Corporation. All significant
inter-company balances and transactions have been eliminated.
(c) Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash and due from banks.
(d) Securities
Investments are classified in three categories and accounted for
as follows: (1) debt securities that the Corporation has the
positive intent and ability to hold to maturity are classified as
securities held-to-maturity" and reported at amortized cost; (2)
debt and equity securities that are bought and held principally
for the purpose of selling them in the near term are classified
as "trading securities" and reported at fair value, with
unrealized gains and losses included in net income; and (3) debt
and equity securities not classified as either held-to-maturity
securities or trading securities are classified as "securities
available-for-sale" and reported at fair value, with unrealized
gains and losses excluded from net income and reported in a
separate component of shareholders' equity.
The Corporation does not currently maintain a trading securities
portfolio and there were no securities classified as
held-to-maturity at December 31, 1999 or 1998. Gains or losses on
disposition, if any, are based on the net proceeds and adjusted
carrying values of the securities called or sold, using the
specific identification method. A decline in value of any
available-for-sale or held-to-maturity security below cost deemed
other than temporary is charged directly to net income, resulting
in the establishment of a new cost basis for the security.
(e) Required Investments
34
<PAGE>
As members of the Federal Reserve and the Federal Home Loan Bank
(FHLB) of Atlanta, the Bank is required to maintain certain
minimum investments in the common stock of those entities.
Required levels of investment are based upon the Bank's capital
and a percentage of qualifying assets. In addition, the Bank is
eligible to borrow from the FHLB with borrowings collateralized
by qualifying assets, primarily residential mortgage loans, and
the Bank's capital stock investment in the FHLB (see notes 3 and
4). At December 31, 1999, the Bank's available borrowing limit
was approximately $15,000. The Bank had $10,000 in borrowings
outstanding at December 31, 1999. Advances of $5,000 were
outstanding at December 31, 1998.
The borrowing consists of two $5,000 advances. One advance is due
in 2004 and bears interest at a fixed rate of 4.92 percent. The
other advance is due 2009 and bears interest at a fixed rate of
5.46 percent. After the first year, both advances are convertible
to variable rate at the prevailing three month LIBOR, at the
option of the FHLB.
(f) Loans, Allowance for Loan Losses, Loan Fees and Costs
Loans are stated at the amount of unpaid principal, reduced by
unearned fees on loans, and an allowance for loan losses. Income
is recognized over the terms of the loans using methods which
approximate the level yield method. The allowance for loan losses
is a valuation allowance consisting of the cumulative effect of
the provision for loan losses, plus any amounts recovered on
loans previously charged off, minus loans charged off. The
provision for loan losses charged to operating expenses is the
amount necessary in management's judgment to maintain the
allowance for loan losses at a level it believes sufficient to
cover losses in the collection of its loans. Management
determines the adequacy of the allowance based upon reviews of
individual credits, recent loss experience, delinquencies,
current economic conditions, the risk characteristics of the
various categories of loans and other pertinent factors. Loans
are charged against the allowance for loan losses when management
believes the collectibility of the principal is unlikely. While
management uses available information to recognize losses on
loans, future additions to the allowance for loan losses may be
necessary based on changes in economic conditions. In addition,
various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for
loan losses. Such agencies may require the Bank to recognize
additions to the allowance for loan losses based on their
judgments about information available to them at the time of
their examinations.
Interest related to nonaccrual loans is recognized on the cash
basis. Loans are generally placed in nonaccrual status when the
collection of principal and interest is 90 days or more past due,
unless the obligation is both well-secured and in the process of
collection.
Impaired loans are presented in the financial statements at the
present value of the expected future cash flows or at the fair
value of the loan's collateral. Homogeneous loans such as real
estate mortgage loans, individual consumer loans, home equity
loans and bankcard loans are evaluated collectively for
impairment. Management, considering current information and
events regarding the borrowers ability to repay their
obligations, considers a loan to be impaired when it is probable
that the Bank will be unable to collect all amounts due according
to the contractual terms of the loan agreement.
35
<PAGE>
Impairment losses are included in the allowance for loan losses
through a charge to the provision for loan losses. Cash receipts
on impaired loans receivable are applied first to reduce interest
on such loans to the extent of interest contractually due and any
remaining amounts are applied to principal.
Loan origination and commitment fees and certain direct loan
origination costs charged by the Bank are deferred and the net
amount amortized as an adjustment of the related loan's yield
over the contractual life of the related loan or, in the case of
demand loans, over the estimated life. Net fees related to
letters of credit are recognized over the commitment period.
(g) Premises and Equipment
Premises and equipment are stated at cost, net of accumulated
depreciation and amortization. Depreciation on buildings,
equipment, furniture and fixtures, and amortization of leasehold
improvements is computed by straight-line over the shorter of the
estimated useful lives of the assets or the related lease term.
Estimated useful lives for assets include land improvements and
leasehold improvements, 3 to 15 years, buildings, 30 years, and
furniture, fixtures and equipment, 3 to 10 years. The cost of
assets retired and sold and the related accumulated depreciation
and amortization are eliminated from the accounts and the
resulting gains or losses are included in determining net income.
Expenditures for maintenance and repairs are charged to expense
as incurred, and improvements are capitalized.
(h) Organizational Costs
Organizational costs incurred during the development stage of the
Corporation have been capitalized and are being amortized using
the straight-line method over five years.
(i) Income Taxes
Income taxes are accounted for under the asset and liability
method, whereby deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in net income in the period that includes
the enactment date.
(j) Stock Options
The Corporation accounts for its stock option plan in accordance
with the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on
the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion 25,
which requires compensation expense to be recorded on the date of
grant only if the current market price of the underlying stock
exceeds the exercise price, and provide pro forma net
36
<PAGE>
income and pro forma earnings per share disclosures for employee
stock option grants made in 1995 and future years as if the
fair-value-based method defined in SFAS No. 123 had been applied.
The Corporation has elected to continue to apply the provisions
of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS No. 123.
(k) Net Income Per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per
Share. Statement 128 establishes new standards for computing and
presenting earnings per share (EPS) and applies to entities with
publicly held common stock or potential common stock. It replaces
the presentation of primary EPS with a presentation of basic EPS.
It also requires dual presentation of basic and diluted EPS on
the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation to the numerator and
denominator of the diluted EPS computation.
Basic EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects
the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that
then shared in the earnings of the entity. The following is a
reconciliation of the numerators and denominators of the basic
and diluted EPS computations for the periods indicated:
<TABLE>
<CAPTION>
Per
Net Share
Income Shares Amount
============== ============= ==============
<S> <C> <C> <C>
Year Ended December 31, 1999
Basic net income per share $ 1,042 1,013,176 $ 1.03
==============
Effect of dilutive stock options - 37,094
-------------- -------------
Diluted net income per share $ 1,042 1,050,270 $ .99
============== ============= ==============
Year Ended December 31, 1998
Basic net income per share $ 758 1,012,323 $ .75
==============
Effect of dilutive stock options - 20,837
-------------- -------------
Diluted net income per share $ 758 1,033,160 $ .73
============== ============= ==============
</TABLE>
(l) Off-Balance-Sheet Financial Instruments
In the ordinary course of business, the Bank has entered into
off-balance-sheet financial instruments consisting of
commitments to extend credit and standby letters of credit. Such
financial instruments are recorded in the financial statements
when they become payable.
(m) Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
The Corporation adopted the provisions of Statement No. 125,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, on January 1, 1997. This
Statement provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments
of liabilities based on consistent application of a
financial-components approach that
37
<PAGE>
focuses on control. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement
provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured
borrowings. This Statement also provides implementation guidance
for assessing isolation of transferred assets and for accounting
for transfers of partial interests, servicing of financial
assets, securitizations, transfers of sales-type and direct
financing lease receivables, securities lending transactions,
repurchase agreements including "dollar rolls," "wash sales,"
loan syndications and participations, risk participations in
banker's acceptances, factoring arrangements, transfers of
receivables with recourse, and extinguishments of liabilities.
Statement No. 127, Deferral of the Effective Date of Certain
Provisions of Statement 125, issued in December 1996, deferred
until January 1, 1998 the effective date (a) of paragraph 15 of
Statement 125 and (b) for repurchase agreement, dollar-roll,
securities lending, and similar transactions, of paragraphs 9 -
12 and 237(b) of Statement 125. Statement 125 was required to be
adopted on a prospective basis and its adoption did not have a
material impact on the Corporation's financial position, results
of operations or liquidity.
(n) Comprehensive Income
On January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income. This Statement establishes standards for reporting and
presentation of comprehensive income and its components in a full
set of general purpose financial statements. This Statement was
issued to address concerns over the practice of reporting
elements of comprehensive income directly in equity.
The Corporation is required to classify items of "Other
Comprehensive Income" (such as net unrealized gains (losses) on
securities available for sale) by their nature in a financial
statement and present the accumulated balance of other
comprehensive income (loss) separately from retained earnings and
additional paid-in-capital in the equity section of a statement
of financial position. It does not require per share amounts of
comprehensive income to be disclosed.
In accordance with the provisions of the Statement, the
Corporation has included Consolidated Statements of Income and
Comprehensive Income (Loss) in the accompanying consolidated
financial statements. Comprehensive income (loss) consists of net
income and net unrealized gains and losses on securities
available for sale. Also, accumulated other comprehensive income
is included as a separate disclosure within the Consolidated
Statements of Changes in Shareholders' Equity in the accompanying
consolidated financial statements. The adoption of Statement 130
did not have any effect on the Corporation's consolidated
financial position, results of operation or liquidity.
(o) Use of Estimates
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the dates of the
consolidated balance
38
<PAGE>
sheets and the reported amounts of revenues and expenses for the
years presented. Actual results could differ significantly from
those estimates.
A material estimate that is particularly susceptible to
significant change in the near term relates to the determination
of the allowance for loan losses. In connection with the
determination of the allowance for loan losses, management
obtains independent appraisals for significant properties.
Management believes the allowance for loan losses is adequate.
While management uses available information to recognize losses
on loans, future additions to the allowance for loan losses may
be necessary based on changes in economic conditions. In
addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's
allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance for loan losses based on
their judgments about information available to them at the time
of their examinations.
(p) Reclassifications
Certain reclassifications have been made to prior years'
consolidated financial statements to place them on a basis
comparable with the 1999 consolidated financial statements.
(q) Recent Accounting Developments
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities.
Statement 133 establishes standards for accounting and reporting
for derivative instruments, including certain instruments
embedded in other contracts and for hedging activities. It
requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. Statement 133 was issued
to establish guidelines over the accounting and reporting of
derivative instruments and hedging activities.
Statement 133 shall be effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000. Initial application
of this Statement shall be as of the beginning of an entity's
fiscal quarter. Earlier application of all of the provisions of
this Statement is encouraged but is permitted only as of the
beginning of any fiscal quarter that begins after issuance of
this Statement. Earlier application of selected provisions of
this Statement is not permitted. This Statement shall not be
applied retroactively to financial statements of prior periods.
Adoption of Statement 133 on January 1, 2000 did not have any
effect on the Bank's consolidated financial position, results of
operation or liquidity.
(2) Restrictions on Cash
To comply with Federal Reserve regulations, the Bank will be required
to maintain certain average reserve balances. There were no daily
reserve requirements for the weeks including December 31, 1999 and 1998
as the Bank had not met minimum average deposit levels under the
current provisions of the regulations.
39
<PAGE>
(3) Securities
The amortized costs, gross unrealized gains and losses, and proximate
fair values of securities available-for-sale as of December 31, 1999
and 1998 were as follows:
1999
========================================
Gross Gross Approx-
Amort- Unreal- Unreal- imate
ized ized ized Fair
Costs Gains Losses Values
======= ========== ======= =======
U.S. Treasury $ 200 $ -- $ 2 $ 198
U.S. Government agencies and
corporations 22,182 -- 1,003 21,179
Mortgage-backed securities 2,675 2 35 2,642
States and political subdivisions 7,292 -- 418 6,874
Corporate obligations 99 -- -- 99
Federal Home Loan Bank stock 500 -- -- 500
Other equity securities 497 -- 25 472
======= ========== ======= =======
Total securities $33,445 $ 2 $ 1,483 $31,964
======= ========== ======= =======
40
<PAGE>
<TABLE>
<CAPTION>
1998
=========================================
Gross Gross Approx-
Amort- Unreal- Unreal- imate
ized ized ized Fair
Costs Gains Losses Values
------- ------- ----------- -------
<S> <C> <C> <C> <C>
U.S. Treasury $ 199 $ 3 $ -- $ 202
U.S. Government agencies and
corporations 14,680 47 2 14,725
Mortgage-backed securities 3,841 10 -- 3,851
States and political subdivisions 6,105 193 -- 6,298
Corporate obligations 100 2 -- 102
Federal Home Loan Bank stock 450 -- -- 450
Other equity securities 485 5 -- 490
------- ------- ----------- -------
Total securities $25,860 $ 260 $ 2 $26,118
======= ======= =========== =======
</TABLE>
The amortized costs and approximate fair values of available-for-sale
securities as of December 31, 1999, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties.
Approx-
Amort- imate
ized Fair
Costs Values
======= =======
Due in one year or less $ -- $ --
Due after one year through five years 6,728 6,540
Due after five years through ten years 16,330 15,490
Due after ten years 6,715 6,320
Mortgage-backed securities 2,675 2,642
Equity securities 997 972
------- -------
Total $33,445 $31,964
======= =======
Securities with amortized costs of $4,596 and $1,220 as of December 31,
1999 and 1998, respectively, were pledged as collateral for public
deposits and for other purposes as required or permitted by law.
The Federal Home Loan Bank stock is carried at cost and collateralizes
lines of credit available from Federal Home Loan Bank.
(4) Loans and Allowance for Loan Losses
In the normal course of business, the Bank has made loans to officers,
directors and/or related interests. At December 31, 1999 and 1998,
$3,736 and $3,482, respectively, represented direct loans to officers
and directors and $691 and $1,109, respectively, represented loans made
to related interests of officers or directors and/or endorsed by
officers or directors.
41
<PAGE>
The following table will summarize activity and amounts receivable from
officers, directors and/or related interests:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Balances at beginning of year $ 4,591 $ 4,869
Additions 396 2,052
Repayments (560) (2,330)
------------- --------------
Balances at beginning of year $ 4,427 $ 4,591
============= ==============
</TABLE>
Activity in the allowance for loan losses is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Balances at beginning of year $ 708 $ 459
Provision for loan losses 216 249
Loan charge-offs (14) -
------------- --------------
Balances at end of year $ 910 $ 708
============= ==============
</TABLE>
Nonperforming assets at December 31, 1999 and 1998 are detailed
as follows:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Nonaccrual loans $ 87 $ -
Restructured loans - -
Loans past due 90 days or more - 200
------------- --------------
Total nonperforming loans 87 200
Foreclosed, repossessed and idled properties - -
------------- --------------
Total nonperforming assets $ 87 $ 200
============= ==============
</TABLE>
Gross interest income that would have been recognized for each year if
the nonaccrual loans and restructured loans had been current in
accordance with their original terms and had been outstanding
throughout the period or since origination, or if held part of the
period, is detailed below. Applicable interest income that was actually
collected and included in net income for each year is summarized below:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Interest income, original terms $ 5 $ -
Interest income, recognized $ 1 $ -
</TABLE>
The Bank has no restructured loans during the years ended December 31,
1999 or 1998.
An allowance determined in accordance with SFAS No. 114 and No. 118 is
provided for all impaired loans. The total recorded investment in
impaired loans and the related allowance for loan losses at December
31, the average annual recorded investment in impaired loans and
interest income recognized on impaired loans for the year (all
approximate) are summarized below:
42
<PAGE>
<TABLE>
<CAPTION>
1999 1998
------------- ---------------
<S> <C> <C> <C>
Recorded investment at December 31, $ 103 $ -
Allowance for loan losses $ 10 $ -
Average recorded investment for the year $ 187 $ -
Interest income recognized for the year $ 2 $ -
</TABLE>
The Bank is not committed to lend additional funds to debtors whose
loans have been modified.
Loans approximating $12,435 and $12,896 and consisting primarily of
residential mortgage loans collaterialized the line of credit available
from the Federal Home Loan Bank at December 31, 1999 and 1998,
respectively. In order to meet potential funding demands as a result
Y2K issues the Bank established a line of credit at the Federal Reserve
Bank of Richmond of approximately $22 million. The line of credit is
collaterialized by the Bank's commercial real estate loans of
approximately $34 million at December 31, 1999. The line was not drawn
against and was closed subsequent to year end.
(5) Premises and Equipment
Components of premises and equipment and total accumulated depreciation
and amortization as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Land and improvements $ 654 $ 293
Building 1,257 477
Furniture, fixtures and equipment 1,090 635
Leasehold improvements 328 310
Construction in progress - 618
------------- --------------
3,329 2,333
Less accumulated depreciation
and amortization 700 503
------------- --------------
$ 2,629 $ 1,830
============= ==============
</TABLE>
The Bank currently leases its main office location under a
non-cancelable operating lease. The lease for the main office has an
original term of five years with the option of two additional renewal
terms of five years each. In addition, the Bank has entered into a
lease for a branch location which opened in January 1997. The original
lease term is for twelve years with an option to renew for one
additional five-year term. Rental expenses under operating leases were
approximately $107 and $94 for 1999 and 1998, respectively. Future
minimum lease payments under non-cancelable operating leases were as
follows at December 31, 1999:
2000 $ 126
2001 126
2002 126
2003 126
2004 126
Subsequent years 45
-------------
$ 675
=============
43
<PAGE>
(6) Income Taxes
Total income tax expense (benefit) for the years ended December 31,
1999 and 1998 is allocated as follows:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Income $ 394 $ 263
Shareholders' equity for unrealized
gains (losses) on available-for-sale securities
recognized for financial statement purposes (591) 59
------------- --------------
$ (197) $ 322
============= ==============
Income tax expense (benefit) consists of:
Current $ 455 $ 74
Deferred (61) 189
------------- --------------
$ 394 $ 263
============= ==============
</TABLE>
Total income tax expense (benefit) differed from the "expected" amount
computed by applying the U.S. Federal income tax rate of 34 percent to
income before income taxes as a result of the following:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Computed "expected" tax expense $ 488 $ 347
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest income (110) (66)
Tax exempt interest disallowance 16 9
Other - (27)
------------- --------------
Reported income tax expense $ 394 $ 263
============= ==============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Deferred tax assets:
Net unrealized losses on available-
for-sale securities $ 503 $ -
Loans, principally due to allowance
for loan losses 275 207
Preopening expenses due to capitalization
for income tax purposes 14 50
Depreciation 11 -
------------- --------------
Deferred tax assets 803 257
Deferred tax liabilities:
Net unrealized gains on available-
for-sale securities - 88
Other 2 20
------------- --------------
Deferred tax liabilities 2 108
------------- --------------
Net deferred tax assets $ 801 $ 149
============= ==============
</TABLE>
44
<PAGE>
(7) Employee Benefit Plan
The Corporation has a defined contribution plan (the Plan) qualifying
under IRS Code Section 401(k). Eligible participants in the Plan can
contribute up to 15 percent of their total annual compensation to the
Plan. Employee contributions are matched by the Corporation based on a
percentage of 25 percent in 1998, and 75 percent in 1999 of the
employee's contribution up to a total of 6 percent of the employee's
salary. For the years ended December 31, 1999, and 1998 the Corporation
contributed $36 and $10 to the Plan, respectively.
(8) Stock Options
The Company has an Incentive Stock Plan (the Plan) pursuant to which
the Human Resource Committee of the Company's Board of Directors may
grant stock options to officers and key employees. The Plan authorizes
grants of options to purchase up to 103,950 shares (adjusted for stock
split) of the Company's authorized, but unissued common stock.
Accordingly, 103,950 shares of authorized, but unissued common stock
are reserved for use in the Plan. All stock options have been granted
with an exercise price equal to the stock's fair market value at the
date of grant. Stock options generally have 10-year terms, vest at the
rate of 20 percent per year, and become fully exercisable five years
from the date of grant. In addition, certain options for 10,122 and
20,244 shares (adjusted for stock split) based on meeting certain
performance criteria were granted to executive officers during 1999 and
1998, respectively.
The per share weighted average fair value of stock options granted
during 1999 and 1998 was $7.66 and $8.14, respectively, on the date of
grant utilizing the Black-Scholes option-pricing model with the
following weighted average assumptions:
1999 1998
---------- ----------
Expected split yield 0% 0%
Risk-free interest rate 7.0% 6.25%
Expected life of options (in years) 10 7.5
Expected volatility of stock price 12% 30%
As previously mentioned, the Company applies APB Opinion No. 25 in
accounting for its Plan and, accordingly, no compensation cost has been
recognized for its stock options in the consolidated financial
statements. Had the Company determined compensation cost based on the
fair value of its stock options at the grant date under SFAS No. 123,
the Company's net income and net income per share would have decreased
to the pro forma amounts indicated below:
45
<PAGE>
1999 1998
------------- ------------
Net income:
As reported $ 1,042 $ 758
Pro forma 971 716
Basic net income per share:
As reported $ 1.03 $ .75
Pro forma $ .96 $ .71
Diluted net income per share:
As reported $ .99 $ .73
Pro forma $ .92 $ .69
Stock option activity during the years ended December 31, 1999 and 1998
(adjusted for stock split) is as follows:
Exercise
Shares Prices
============ ============
Balance at December 31, 1997 55,304 9.36
Granted 25,494 10.19
Exercised (578) 9.76
Expired/forfeited (630) 9.76
------------
Balance at December 31, 1998 79,590 9.72
Granted 41,885 14.20
Exercised (420) 9.76
Expired/forfeited (1,260) 9.76
------------
Balance at December 31, 1999 119,795 11.29
============
At December 31, 1999, the range of exercise prices and weighted average
remaining contractual life of outstanding options was $8.33 - $16.67
and 7.5 years, respectively (adjusted for stock split).
At December 31, 1999 and 1998, the number of options exercisable was
74,487 and 59,241, respectively, and the weighted average exercise
price of those options was $9.51 and $9.49, respectively (adjusted for
stock split).
(9) Restrictions on Payments of Dividends and Capital Requirements
The Company's principal source of funds for dividend payments is
dividends received from the Bank. The amount of dividends that may be
paid by the Bank to the Company will depend on the Bank's earnings and
capital position and is limited by state law, regulations and policies.
A state bank may not pay dividends from its capital; all dividends must
be paid out of net undivided profits then on hand. Before any dividend
is declared, any deficit in capital funds originally paid in shall have
been restored by earnings to their initial level, and no dividend shall
be declared or paid by any bank which would impair the paid-in-capital
of the bank. As of December 31,1999, the amount available for payment
of dividends is $934. As of December 31, 1998, the Bank was in a
deficit position, and, accordingly, no amounts were available for
payment of dividends.
The Company and the Bank are subject to various regulatory capital
requirements administered by the federal and state banking agencies.
Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the
46
<PAGE>
Corporation's consolidated financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
the Company and the Bank must meet specific capital guidelines that
involve quantitative measures of their assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and
classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier I capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1999, that the Company and the
Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1999, the Company and the Bank were categorized as
well capitalized as defined by applicable regulations. To be
categorized as well capitalized the Company and Bank must maintain
minimum total risk-based, Tier I risk-based and Tier I leverage ratios
as set forth in the table below. There are no conditions or events
since that date that management believes have changed the Company's or
the Bank's category.
The Company's and the Bank's actual capital amounts and ratios are also
presented in the table below.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1999:
Total Capital
(to Risk Weighted
Assets):
Consolidated $10,943 10.68% 8,195 8.0% N/A N/A
Valley Bank 10,309 10.08% 8,185 8.0% 10,232 10.0%
Tier I Capital
(to Risk Weighted
Assets):
Consolidated 10,033 9.79% 4,098 4.0% N/A N/A
Valley Bank 9,399 9.19% 4,093 4.0% 6,139 6.0%
Tier I Capital (Leverage)
(to Average Assets):
Consolidated 10,033 7.55% 5,316 4.0% N/A N/A
Valley Bank 9,399 7.14% 5,264 4.0% 6,580 5.0%
47
<PAGE>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------- ----------------- -----------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
As of December 31, 1998:
Total Capital
(to Risk Weighted
Assets):
Consolidated $9,618 12.24% 6,288 8.0% N/A N/A
Valley Bank 8,320 10.68% 6,234 8.0% 7,793 10.0%
Tier I Capital
(to Risk Weighted
Assets):
Consolidated 8,910 11.34% 3,144 4.0% N/A N/A
Valley Bank 7,612 9.77% 3,117 4.0% 4,676 6.0%
Tier I Capital (Leverage)
(to Average Assets):
Consolidated 8,910 8.65% 4,122 4.0% N/A N/A
Valley Bank 7,612 7.47% 4,071 4.0% 5,094 5.0%
(10) Parent Company Financial Information
Condensed financial information of Valley Financial Corporation is
presented below:
Condensed Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Assets
Cash $ 69 $ 65
Securities available-for-sale 735 1,266
Investment in subsidiary, at equity 8,452 7,677
Other assets 316 597
------------- --------------
Total assets $ 9,572 $ 9,605
============= ==============
Liabilities and Shareholders' Equity
Total liabilities $ 517 $ 448
------------- --------------
Commitments and other matters - -
Shareholders' equity (notes 3, 7 and 8):
Preferred stock, no par value. Authorized
10,000,000 shares; none issued and outstanding - -
Common stock of no par value. Authorized
10,000,000 shares; issued and outstanding
1,013,207 shares and 964,590 shares in 1999
and 1998, respectively 9,099 9,095
Retained earnings (deficit) 934 (108)
Accumulated other comprehensive income (loss) (978) 170
------------- --------------
Total shareholders' equity 9,055 9,157
------------- --------------
Total liabilities and shareholders' equity $ 9,572 $ 9,605
============= ==============
</TABLE>
48
<PAGE>
Condensed Statements of Income and Comprehensive Income (Loss)
Year Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Income:
Interest income $ 105 $ 79
------------- --------------
Expenses:
Interest expense 41 6
Other expenses 48 40
------------- --------------
89 46
Income before income taxes and equity in
undistributed net income of subsidiary 16 33
Income tax expense (benefit) (5) 12
------------- --------------
Income before equity in undistributed
net income of subsidiary 21 21
Equity in net income of subsidiary 1,021 737
------------- --------------
Net income 1,042 758
Equity in other comprehensive income (loss), net of deferred
tax (expense) benefit:
Net unrealized gains(losses) on securities
available-for-sale (1,148) 114
------------- --------------
Comprehensive income(loss) $ (106) $ 872
============= ==============
Condensed Statements of Cash Flows
Years Ended December 31, 1999 and 1998
1999 1998
------------- --------------
Cash flows from operating activities:
Net income $ 1,042 $ 758
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Equity in net income of subsidiary (1,021) (737)
Amortization of other assets 9 9
(Increase) decrease in other assets 70 (542)
Increase in other liabilities 69 306
------------- --------------
Net cash provided by (used in)
operating activities 169 (206)
------------- --------------
Cash flows from investing activities:
Purchases of securities available-for-sale (125) (1,219)
Proceeds from sales, maturities and calls
of securities available-for-sale - 1,350
Investment in subsidiary (44) -
------------- --------------
Net cash provided by (used in) investing activities (169) 131
------------- --------------
Cash flows from financing activities:
Proceeds from exercise of stock options 4 6
------------- --------------
Net cash provided by financing
activities 4 6
------------- --------------
Net increase (decrease) in cash 4 (69)
Cash at beginning of year 65 134
------------- --------------
Cash at end of year $ 69 $ 65
============= ==============
</TABLE>
(11) Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of
its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments may
involve, to
49
<PAGE>
varying degrees, credit risk in excess of the amount recognized in the
balance sheets. The contract amounts of these instruments reflect the
extent of involvement the Bank has in particular classes of financial
instruments.
Credit risk is defined as the possibility of sustaining a loss because
the other parties to a financial instrument fail to perform in
accordance with the terms of the contract. The Bank's maximum exposure
to credit loss under commitments to extend credit and standby letters
of credit is represented by the contractual amount of these
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The Bank requires collateral to support financial instruments when it
is deemed necessary. The Bank evaluates customers' creditworthiness on
a case-by-case basis. The amount of collateral obtained upon extension
of credit is based on management's credit evaluation of the customer.
Collateral may include deposits held in financial institutions, U.S.
Treasury securities, other marketable securities, real estate, accounts
receivable, inventory, and property, plant and equipment. Financial
instruments whose contract amounts represent credit risk as of December
31 are as follows:
1999 1998
------------- --------------
Commitments to extend credit $ 24,904 $ 18,542
Standby letters of credit $ 659 $ 1,361
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Commitments may
be at fixed or variable rates and generally expire within one year.
Since many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent
future cash requirements.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. These
guarantees are primarily issued to support public and private borrowing
arrangements, including bond financing and similar transactions. Unless
renewed, substantially all of the Bank's credit commitments at December
31, 1999 will expire within one year. Management does not anticipate
any material losses as a result of these transactions. The credit risk
involved in issuing letters of credit is essentially the same as that
involved in extending loans to customers.
50
<PAGE>
(12) Concentrations of Credit Risk
The Bank grants commercial, residential and consumer loans to customers
primarily in the Roanoke Valley area. The Bank has a diversified loan
portfolio which is not dependent upon any particular economic or
industry sector. As a whole, the portfolio could be affected by general
economic conditions in the Roanoke Valley region.
A detailed composition of the Bank's loan portfolio is provided in the
consolidated financial statements. The Bank's commercial loan portfolio
is diversified, with no significant concentrations of credit.
Commercial real estate loans are generally collateralized by the
related property. The residential real estate loan portfolio consists
principally of loans collateralized by 1-4 family residential property.
The loans to individuals portfolio consists of consumer loans primarily
for home improvements, automobiles, personal property and other
consumer purposes. These loans are generally collateralized by the
related property. Overall, the Bank's loan portfolio is not
concentrated within a single industry or group of industries, the loss
of any one or more of which would generate a materially adverse impact
on the business of the Bank.
The Bank has established operating policies relating to the credit
process and collateral in loan originations. Loans to purchase real and
personal property are generally collateralized by the related property.
Credit approval is principally a function of collateral and the
evaluation of the creditworthiness of the borrower based on available
financial information.
(13) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires the Corporation to
disclose estimated fair values of its financial instruments.
The following methods and assumptions were used to estimate the
approximate fair value of each class of financial instrument for which
it is practicable to estimate that value:
(a) Cash and Due from Banks and Money Market Investments
The carrying amounts are a reasonable estimate of fair value.
(b) Securities
The fair value of securities, except certain state and
municipal securities, is estimated based on bid prices
published in financial newspapers or bid quotations received
from securities dealers.
The fair value of certain state and municipal securities is
not readily available through market sources other than dealer
quotations, so fair value estimates are based on quoted market
prices of similar instruments, adjusted for differences
between the quoted instruments and the instruments being
valued.
(c) Loans
Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such
as
51
<PAGE>
commercial, commercial real estate, residential real estate
and loans to individuals. Each loan category is further
segmented into fixed and adjustable rate interest terms.
The fair value of loans is calculated by discounting scheduled
cash flows through the estimated maturity using estimated
market discount rates that reflect the credit and interest
rate risk inherent in the loan as well as estimates for
prepayments. The estimate of maturity is based on the Bank's
industry experience with repayments for each loan
classification, modified, as required, by an estimate of the
effect of current economic and lending conditions.
(d) Deposits
The fair value of noninterest-bearing deposits,
interest-bearing deposits and savings deposits is the amount
payable on demand. The fair value of fixed maturity time
deposits and certificates of deposit is estimated using the
rates currently offered for deposits with similar remaining
maturities.
(e) Commitments to Extend Credit and Standby Letters of Credit
The only amounts recorded for commitments to extend credit and
standby letters of credit are the deferred fees arising from
these unrecognized financial instruments. These deferred fees
are not deemed significant at December 31, 1999 and 1998, and
as such, the related fair values have not been estimated.
(f) Federal Home Loan Bank Advances
The fair value of fixed rate borrowings are estimated using
discounted cash flows based on current incremental borrowing
rates for similar types of borrowing arrangements.
(g) Securities Sold Under Agreements to Repurchase
These agreements generally mature within one to seven days.
The carrying amounts are a reasonable estimate of fair value.
The carrying amounts and approximate fair values of the Corporation's
financial instruments are as follows at December 31, 1999 and 1998:
52
<PAGE>
<TABLE>
<CAPTION>
1999 1998
----------------------------- -----------------------------
Approx- Approx-
imate imate
Carrying Fair Carrying Fair
Amounts Values Amounts Values
============== ============= ============= ==============
<S> <C> <C> <C> <C>
Financial assets:
Cash and due from banks $ 4,027 $ 4,027 $ 3,462 $ 3,462
Money market investments 6,105 6,105 1,743 1,743
Securities available-for-sale 31,964 31,964 26,118 26,118
Loans, net 90,448 90,118 70,875 71,333
-------------- ------------- ------------- --------------
Total financial assets $ 132,544 $ 132,214 $ 102,198 $ 102,656
============== ============= ============= ==============
Financial liabilities:
Deposits $ 115,477 $ 116,051 $ 90,026 $ 90,576
Federal Home Loan Bank advances 10,000 10,000 5,000 5,012
Securities sold under agreements
to repurchase 992 992 - -
-------------- ------------- ------------- --------------
Total financial
liabilities $ 126,469 $ 127,043 $ 95,026 $ 95,588
============== ============= ============= ==============
</TABLE>
Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument. Because no market exists
for a significant portion of the Corporation's financial instruments,
fair value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments and other factors. These estimates are
subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet
financial instruments without attempting to estimate the value of
anticipated future business and the value of assets and liabilities that
are not considered financial instruments. Significant assets that are
not considered financial assets include deferred tax assets and premises
and equipment. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the
estimates.
(14) Time Deposits
At December 31, 1999, the approximate scheduled maturities of time
deposits are as follows:
1999 $ 53,420
2000 4,156
2001 4,068
2002 3,631
2003 2,916
-------------
$ 68,191
=============
(15) Commitments
53
<PAGE>
On February 2, 2000 the Bank executed an agreement to purchase a branch
from a large regional bank holding company. The purchase price is
$485,000 and the branch is located in Roanoke, Virginia.
At December 31, 1998, the Corporation had outstanding contractual
commitments of approximately $400,000 related to construction of a new
branch.
(16) Short-term Borrowing
Short-term debt consists of securities under agreements to repurchase
and federal funds purchased, which generally mature within one to seven
days from the transaction date. Additional is summarized below:
1999 1998
--------- ----------
Outstanding balance at December 31 $ 992 $ -
Year-end weighted average rate 5.56% -
Daily average outstanding during the period $ 658 $ 839
Average rate for the period 5.56% 5.60%
Maximum outstanding at any month-end during
the period $ 4,597 $ 4,531
(17) Other Comprehensive Income (Loss)
Other comprehensive income (loss) net of income taxes and net of
reclassification adjustments between net income and other comprehensive
income (loss) relating to securities available-for-sale are reported in
the Consolidated Statements of Income and Comprehensive Income (Loss).
The information that follows discloses the reclassification adjustments
and the income taxes related to securities available-for-sale that are
included in other comprehensive income (loss), net of income taxes.
<TABLE>
<CAPTION>
1999 1998
------------- --------------
<S> <C> <C>
Net unrealized gains (losses) on securities available-for-sale:
Net unrealized holding gains (losses) during
the year $ (1,739) $ 190
Less reclassification adjustments for gains
included in net income - (17)
Income tax (expense) benefit 591 (59)
------------- --------------
Other comprehensive income (loss), net
of income taxes $ (1,148) $ 114
============= ==============
</TABLE>
(18) Subsequent Event - Stock Split
On January 20, 2000, the Company declared a 1.05 for 1 stock split
effectd in the form of a dividend payable on February 15, 2000 to
shareholders of record on January 31, 2000. All prior period weighted
average shares outstanding, net income per share, and srock option data
has been adjusted to reflect the effects of the Company's stockk split.
54
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company dismissed its independent auditors, KPMG LLP, on April 27, 1999 and
engaged Larrowe & Company, PLC to audit the Company's financial statements for
the year ending December 31, 1999. For the years ended December 31, 1998 and
1997, the Company received unqualified opinions in its audit reports. The
decision to change independent accountants was approved by the Audit Committee
of the Board of Directors pursuant to specific delegation of authority from the
full Board of Directors, and was based on competitive factors. There were no
disagreements between the Company and KPMG LLP during the last two fiscal years
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure which, if not resolved, would have
caused KPMG LLP to make reference to the subject matter of such disagreement in
connection with its report with the former accountants. A copy of the
disclosures required by Item 304 of Regulation S-B was given to KPMG LLP for
review before it was filed on Form 8-K dated April 29, 1999 with the Commission
and KPMG LLP addressed a letter to the Commission, in which KPMG LLP expressed
its opinion on the statements made by the Company. The letter addressed to the
Commission was filed as an exhibit on Form 8-K/A dated April 29, 1999 and is
incorporated herein by reference.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by Item 401 of Regulation S-B is set forth under the
caption "Information Concerning Directors and Nominees" on pages 3-5 of the
Company's Proxy Statement dated March 22, 2000 and is incorporated herein by
reference.
The information required by Item 405 of Regulation S-B is set forth under the
caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 7 of
the Company's Proxy Statement dated March 22, 2000 and is incorporated herein by
reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by Item 402 of Regulation S-B is set forth under the
caption "Executive Compensation" on pages 8-10 of the Company's Proxy Statement
dated March 22, 2000 and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by item 403 of Regulation S-B is set forth under the
caption "Security Ownership of Certain Beneficial Owners" on page 3 of the
Company's Proxy Statement dated March 22, 2000 and under the caption
"Information Concerning Directors and Nominees" on pages 3-5 of the Company's
Proxy Statement dated March 22, 2000 and is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 404 of Regulation S-B is set forth under the
caption "Certain
55
<PAGE>
Relationships and Related Transactions" on page 6 of the
Company's Proxy Statement dated March 22, 2000 and is incorporated herein by
reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements:
Independent Auditors' Report on 1999 Consolidated Financial
Statements.
Independent Auditors' Report on 1998 Consolidated Financial
Statements.
Consolidated Balance Sheets as of December 31, 1999 and 1998.
Consolidated Statements of Income and Comprehensive Income
(Loss) for the Years Ended December 31, 1999 and 1998.
Consolidated Statements of Changes in Shareholders' Equity for
the Years Ended December 31, 1999 and 1998.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999 and 1998.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
All schedules are omitted as the required information is
inapplicable or the information is presented in the Financial
Statements or related notes.
3. Exhibits:
3.1 Articles of Incorporation (incorporated herein by
reference to Exhibit No. 3.1 of Registration
Statement No. 33-77568, on form S-1, as amended).
3.2 Bylaws (incorporated herein by reference to Exhibit
No. 3.2 of Registration Statement No. 33-77568, on
form S-1, as amended).
*10.2 Employment Agreement dated April 8, 1994, by and
between the Company and A. Wayne Lewis (incorporated
herein by reference to Exhibit No. 10.2 of
Registration Statement No. 33-77568, on Form S-1, as
amended).
*10.3 Severance Agreement dated December 19, 1996, by and
between the Company and Ellis L. Gutshall
(incorporated herein by reference to Exhibit No. 10.3
of Form 10-KSB filed March 27, 1997, File No.
33-77568).
56
<PAGE>
*10.4 Stock Option Agreement dated December 19, 1996, by
and between the Company and Ellis L. Gutshall
(incorporated herein by reference to Exhibit No. 10.4
of Form 10-KSB filed March 27, 1997, File No.
33-77568).
10.5 Office Lease dated February 28, 1994, by and between
First Federal Building, L.C. and Valley Financial
Enterprises, L.C. (incorporated herein by reference
to Exhibit No. 10.5 of Registration Statement No.
33-77568, on Form S-1, as amended).
10.10 First amendment dated August 5, 1994, to the Office
Lease dated February 28, 1994, by and between First
Federal Building, L.C. and Valley Financial
Enterprises, L.C. (incorporated herein by reference
to Exhibit No. 10.10 of Form 10-K filed March 30,
1995, File No. 33-77568).
10.12 Second amendment dated December 14, 1994, to the
Office Lease dated February 28, 1994, by and between
First Federal Building, L.C. and Valley Financial
Enterprises, L.C. (incorporated herein by reference
to Exhibit No. 10.12 of Form 10-K filed March 30,
1995, File No. 33-77568).
10.13 Lease agreement for office space dated September 20,
1996, by and between Valley Bank, N.A. and Betty J.
Burrows (incorporated herein by reference to Exhibit
No. 10.13 of Form 10-KSB filed March 27, 1997, File
No. 33-77568).
*10.6 Severance agreement dated February 9, 1998, by and
between the Company and J. Randall Woodson.
21. Subsidiaries of the Registrant.
24. Power of Attorney.
27. Financial Data Schedule.
_________________
*Management contract or compensatory plan or agreement required to be filed as
an Exhibit to this Form 10-KSB pursuant to Item 13(a).
(b) Reports on Form 8-K filed during the last quarter of the period covered
by this report:
Form 8-K dated October 28, 1999 to report third quarter earnings and
the related press release.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized on March 29, 2000.
Valley Financial Corporation
By: /s/ Ellis L. Gutshall
-----------------------------
Ellis L. Gutshall
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
following persons in the capacities indicated as of March 29, 2000.
Signature Title
/s/ Ellis L. Gutshall President, Chief Executive Officer
- ------------------------------ and Director (Chief Executive Officer)
(Ellis L. Gutshall)
/s/ A. Wayne Lewis Executive Vice President, Chief
- --------------------------- Operating Officer and Director
(A. Wayne Lewis)
/s/ A. Wayne Lewis Chief Financial Officer
- ---------------------------- (Principal Financial Officer
(A. Wayne Lewis) and Principal Accounting Officer)
/s/ Abney S. Boxley, III * Director
- ----------------------------
(Abney S. Boxley, III)
/s/ William D. Elliot * Director
- -----------------------------
(William D. Elliot)
58
<PAGE>
Director
- -----------------------------
(Mason Haynesworth)
/s/ Eddie F. Hearp Director
- -----------------------------
(Eddie F. Hearp)
/s/ Anna L. Lawson * Director
- -----------------------------
(Anna L. Lawson)
/s/ Barbara B. Lemon * Director
- -----------------------------
(Barbara B. Lemon)
/s/ George W. Logan * Director
- ----------------------------
(George W. Logan)
/s/ John W. Starr * Director
- ----------------------------
(Dr. John W. Starr)
/s/ Ward W. Stevens * Director
- ----------------------------
(Dr. Ward W. Stevens)
Director
- ----------------------------
(Maury L. Strauss)
/s/ Michael E. Warner Director
- ----------------------------
(Michael E. Warner)
* By /s/ A. Wayne Lewis
--------------------------
A. Wayne Lewis
(Attorney in Fact)
59
<PAGE>
INDEX TO EXHIBITS
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
3.1 Articles of Incorporation (incorporated herein by
reference to Exhibit No. 3.1 of Registration Statement
No. 33-77568, on Form S-1, as amended).
3.2 Bylaws (incorporated herein by reference to Exhibit
No. 3.2 of Registration Statement No. 33-77568,
on Form S-1, as amended).
10.2 Employment Agreement dated April 8, 1994,
by and between the Company and A. Wayne Lewis
(incorporated herein by reference to Exhibit No. 10.2
of Registration Statement No. 33-77568, on Form S-1,
as amended).
10.3 Severance Agreement dated December 19, 1996,
by and between the Company and Ellis L. Gutshall
(incorporated herein by reference to Exhibit No.
10.3 of Form 10-KSB filed March 27, 1997, File
No. 33-77568).
10.4 Stock Option Agreement dated December 19, 1996,
by and between the Company and Ellis L. Gutshall
(incorporated herein by reference to Exhibit No. 10.4
of Form 10-KSB filed March 27, 1997, File No.
33-77568).
10.5 Office Lease dated February 28, 1994, by and between
First Federal Building, L.C. and Valley Financial
Enterprises, L.C. (incorporated herein by reference to
Exhibit No. 10.5 of Registration Statement No. 33-77568,
on Form S-1, as amended).
10.10 First amendment dated August 5, 1994, to the Office
Lease dated February 28, 1994, by and between First
Federal Building, L.C. and Valley Financial Enterprises,
L.C. (incorporated herein by reference to Exhibit No.
10.10 of Form 10-K filed March 30, 1995, File No. 33-77568).
10.12 Second amendment dated December 14, 1994, to the Office
Lease dated February 28, 1994, by and between First
60
<PAGE>
Federal Building, L.C. and Valley Financial Enterprises,
L.C. (incorporated herein by reference to Exhibit No. 10.12
of Form 10-K filed March 30, 1995, File No. 33-77568).
10.13 Lease agreement for office space dated September 20, 1996,
by and between Valley Bank, N.A. and Betty J. Burrows
(incorporated herein by reference to Exhibit No. 10.13 of
Form 10-KSB filed March 27, 1997, File No. 33-77568).
10.6 Severance agreement dated February 9, 1998, by and between 62
the Company and J. Randall Woodson.
21 Subsidiaries of the Registrant. 77
24 Power of attorney. 78
27 Financial Data Schedule. 80
61
EXHIBIT 10.6
SEVERANCE AGREEMENT BETWEEN
VALLEY FINANCIAL CORPORATION
AND J. RANDALL WOODSON
This Severance Agreement ("Agreement"), dated as of February 9, 1998,
is made and entered into between Valley Financial Corporation ("Employer"), a
Virginia corporation, and J. Randall Woodson ("Employee").
WHEREAS, Employee is employed as Senior Vice President; and
WHEREAS, Employer desires to provide Employee with certain benefits in
the event that Employee's employment with Employer is terminated under the
circumstances specified in this Agreement;
WHEREAS, Employee desires to continue employment with Employer and to
accept Employer's offer of the benefits specified in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
SECTION I. DEFINITIONS. As used in this Agreement, the following
capitalized terms have the indicated meanings unless the context clearly
requires otherwise:
A. "Applicable Federal Rate" has the meaning ascribed to that term in
Section 1274(b)(2)(B) of the Code.
B. "Bank Board" means the Board of Directors of any Subsidiary Bank.
C. "Bank Subsidiary" means Valley Bank, N.A. and any other bank or
subsidiary as to which Employer is now or hereafter deemed a bank
holding company under the applicable regulations of the Board of
Governors of the Federal Reserve System.
D. "Board" means the Board of Directors of the Employer.
E. "Cause" means (i) the willful and continued failure by Employee to
substantially
62
<PAGE>
perform his duties hereunder (other than any such failure resulting from his
incapacity due to physical or mental illness) after a written demand for
substantial performance is delivered to the Employee by the Board and which
failure has not been cured as hereinafter provided, which demand specifically
identifies the manner in which the Board believes that Employee has not
substantially performed his duties, except to the extent such conduct also
constitutes "Cause" under Clause E.(ii) (in which case clause E.(ii) shall
apply) or (ii) the willful engaging by the Employee in illegal conduct or any
conduct which is demonstrably and materially injurious to the Employer or any
Bank Subsidiary. Without limiting the generality of the foregoing, Cause shall
include the issuance of a removal order or similar order by a governmental
regulatory agency with appropriate jurisdiction prohibiting Employee from
participating in the affairs of the Employer or any Bank Subsidiary. Any act or
failure to act by Employee based upon authority given pursuant to a resolution
duly adopted by the Board or any Bank Board or based upon the advice of counsel
for the Employer or Bank Subsidiary shall be conclusively presumed to be done or
omitted to be done by the Employee in good faith and in the best interests of
the Employer and Bank Subsidiary. It is also expressly understood that the
Employee's attention to matters not directly related to the business of the
Employer or any Bank Subsidiary shall not provide a basis for termination for
Cause so long as the Board has approved Employee's engagement in such
activities. After the Effective Date, Employee's employment shall not be
terminated for Cause unless and until there shall have been delivered to
Employee a copy of a resolution duly adopted by the affirmative vote of not less
than 75% of the entire membership of the Board (excluding Employee if he is a
Board member) at a meeting of the Board called and held for such purpose (after
a reasonable notice to Employee and an opportunity for Employee, together with
his counsel, to be heard before the Board), finding that in the good faith
opinion of the Board the Employee was guilty of conduct set forth above and
63
<PAGE>
specifying the particulars thereof in detail. In such event, Employee shall have
a reasonable period of time in which to correct the alleged violation, provided,
however, that the alleged violation is neither dishonest nor criminal. For
purposes of the immediately preceding sentence as well as clause E(i), it is
agreed that thirty (30) days after written demand for performance is delivered
to the Employee by the Board (excluding Employee if Employee is a Board member)
shall be deemed a reasonable time to correct any such alleged violation but if
the Board (excluding Employee if Employee is a Board member) determines that
Employee is using his best efforts to make such correction and that the alleged
violation can be corrected, the Board shall extend the thirty (30) day period by
such time as is deemed by the Board reasonably necessary for the Employee to
effect such correction.
F. "Change in Control" or "Change in Control of the Employer" means a
change of control of a nature that would be required to be reported (assuming
such event has not been "previously reported") in response to Item 1(a) of the
current report on Form 8-K, as in effect on the date hereof, pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934, as amended ("Exchange Act");
provided that, notwithstanding the foregoing and without limitation, such a
change in control shall be deemed to have occurred at such time as (i) any
Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 or Rule
13d-5 under the Exchange Act as in effect on January 1, 1994), directly or
indirectly of 20% or more of the combined voting power of Employer's voting
securities; (ii) the Incumbent Board ceases for any reason to constitute at
least the majority of the Board, provided that any person becoming a director
subsequent to the Effective Date whose election, or nomination for election by
the Employer's shareholders, was approved by a vote of at least 75% of the
directors comprising the Incumbent Board (either by a specific vote or by
approval of the proxy statement of the Employer in which such person is named as
a nominee for director,
64
<PAGE>
without objection to such nomination) shall be, for purposes of this clause
F.(ii) considered as though such person were a member of the Incumbent Board;
(iii) all of substantially all of the assets of the Employer or the assets of
any Subsidiary Bank(s) which comprise substantially all of the assets of
Employer are sold, transferred or conveyed by any means, including but not
limited to direct purchase or merger, if the transferee is not controlled by the
Employer, control meaning the ownership of more than 50% of the combined voting
power of such entity's voting securities; or (iv) the Employer is merged or
consolidated with another corporation or entity and as a result of such merger
or consolidation less than 75% of the outstanding voting securities of the
surviving or resulting corporation or entity shall be owned in the aggregate by
the former shareholders of the Employer. Notwithstanding anything in the
foregoing to the contrary, no change in control shall be deemed to have occurred
for purposes of this Agreement by virtue of any transaction (x) which results in
the Employee or a group of Persons which includes the Employee, acquiring,
directly or indirectly, 20% or more of the combined voting power of the
Employer's voting securities; (y) arranged or caused by a federal bank
regulatory agency possessing appropriate jurisdiction on the grounds of failing
financial condition of the Employer or any Subsidiary Bank which results in the
acquisition, directly or indirectly, of 20% or more of the combined voting power
of the Employee's voting securities by any Person; or (z) which results in the
Employer, any subsidiary of the Employer or any profit-sharing plan, employee
stock ownership plan or employee benefit plan of the Employer or any of its
subsidiaries (or any trustee of or fiduciary with respect to any such plan
acting in such capacity) acquiring, directory or indirectly, 20% or more of the
combined voting power of Employer's voting securities.
G. "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
H. "Date of Termination" means (i) if Employee's employment is
terminated by
65
<PAGE>
Employee for other than Good Reason, ninety (90) days after Notice of
Termination is given; (ii) if Employee's employment is to be terminated for
Disability, thirty (30) days after Notice of Termination is given (provided that
the Employee shall not have returned to the performance of his duties on a
full-time basis during such thirty (30) day period), or (iii) except as
otherwise provided in this paragraph, if Employee's employment is to be
terminated by the Employer for Cause or by the Employee for Good Reason, the
date specified in the Notice of Termination, (iv) the date of Employee's death,
or (v) if Employee's employment is to be terminated by the Employer for any
reason other than Cause or Disability, the date specified in the Notice of
Termination, which in no event shall be a date earlier than ninety (90) days
after the date on which such Notice of Termination is given, unless an earlier
date has been expressly agreed to by the Employee in writing either in advance
of, or after, receiving such Notice of Termination. In the case of termination
of Employee's employment by Employer for Cause, if, after the Effective Date,
Employee has not previously expressly agreed in writing to the termination, then
within thirty (30) days after receipt by the Employee of the Notice of
Termination by Employer the Employee may notify the Employer that a dispute
exists concerning the termination, in which event the Date of Termination shall
be either the date set by mutual written consent of the parties or the date the
dispute is resolved. During the pendency of any such dispute, the Employer will
continue to be paid his full compensation in effect prior to the time the Notice
of Termination is given and until the dispute is resolved.
I. "Disability" means (i) as a result of Employee's inability due to
physical of mental illness, Employee shall have been absent from the full-time
performance of his duties with the Employer for six (6) consecutive months, and
(ii) within thirty (30) days after Notice of Termination is given Employee shall
not have returned to the full-time performance of his duties.
J. "Effective Date" means the date and time at which a Change of
Control occurs with
66
<PAGE>
respect to Employer.
K. "Employer" includes any corporation or other entity which is the
surviving or continuing entity in respect of any merger, consolidation or form
of business combination in which the Employer ceases to exist.
L. "Employment Year" means the 12-month period beginning with the
Effective Date and each 12-month period beginning on the annual anniversary of
such Effective Date thereafter.
M. "Good Reason" means:
(i) An adverse change in Employee's status or position(s) as
an officer or director of the Employer or any Bank Subsidiary after a Change of
Control including, without limitation, any adverse change in Employee's status
or position as a result of a material diminution of his duties or
responsibilities (other than, if applicable, any such change directly
attributable solely to the fact that the Employer is no longer publicly owned
except that Employer or Successor may not use the fact that Employer is no
longer publicly owned to justify taking any action mentioned in this Section
I.M. which is detrimental to the Employee or adverse to his best interests) or
the assignment to Employee after a Change of Control of any duties or
responsibilities which, in Employee's reasonable judgment, are inconsistent with
such status or position(s), or any removal of Employee from or any failure to
reappoint or reelect Employee after a Change of Control to such position(s)
(except in connection with the termination of Employee's employment for Cause,
Disability or Retirement or as a result of Employee's death or by Employee other
than for Good Reason);
(ii) When a Notice of Termination is required hereunder for
termination of Employee under this Agreement, any purported termination by the
Employer or Successor of the Employee's employment after a Change of Control
which is not effected pursuant to a Notice of
67
<PAGE>
Termination satisfying the applicable requirements of Section I.O. hereof (and,
if applicable, Section I.E. hereof);
(iii) The failure by Employer or Successor to continue in
effect after a Change of Control any Plans in which Employee participates at the
time of the Change in Control (or Plans providing Employee with at least
substantially similar benefits) other than as a result of the normal expiration
of any such Plan in accordance with its terms as in effect at the time of the
Change in Control, or the taking of any action, or the failure to act, by
Employer or Successor after a Change of Control which would adversely affect
Employee's continued participation in any of such Plans on at least as favorable
a basis as existing on the date of the Change in Control or which would
materially r educe Employee's benefits in the future under any such Plans or
deprive Employee of any material benefit enjoyed by the Employee at the time of
the Change in Control;
(iv) The failure by Employer or Successor after a Change of
Control to provide and credit Employee with number of paid vacation days to
which Employee would then be entitled in accordance with the Employer's normal
vacation policy as in effect at the time of the Change in Control, whichever is
greater;
(v) Employer or Successor requiring the Employee after a
Change in Control to be based anywhere other than where his office is located
immediately prior to the Change in Control except for required travel on
business for the Employer or Successor to an extent substantially consistent
with the business travel obligations which Employee undertook on behalf of
Employer prior to the Change in Control; or
(vi) Any refusal by Employer or Successor after a Change in
Control to continue to allow Employee to attend to matters or engage in
activities not directly related to the business of the Employer or Successor
which, prior to the Change in Control of the Employer, Employee was
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<PAGE>
permitted by Employer to attend to or engage in.
(vii) Termination of employment hereunder by the Employee for
any reason other than death or Disability pursuant to a Notice of Termination
given during the thirty (30) day period immediately following the first annual
anniversary of such Change of Control.
N. "Incumbent Board" means the Board as constituted on the date hereof.
O. "Notice of Termination" means a written notice that indicates the
specific termination provision of this Agreement relied upon and sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Employee's employment under the provision so indicated.
P. "Person" has the meaning ascribed to that term in Sections 3(a)(9)
and 13(d)(3) of the Securities Exchange Act of 1934, as amended.
Q. "Plan" means any compensation plan such as an incentive, bonus,
stock option or restricted stock plan, any pension or profit sharing plan or any
welfare benefit plan (including, but not limited to health, life or disability
insurance).
R. "Retirement" means Employee's voluntary termination of all
employment hereunder after the attainment of age sixty-five (65) or the
attainment of age fifty-five (55) having worked full time for the Employer for a
period ten (10) consecutive years.
S. "Successor" means any Person that succeeds to, or has the practical
ability to control (either immediately or with the passage of time) the
Employer's business directly, by merger or consolidation, or indirectly by
purchase of the Employer's voting securities, all or substantially all of its
assets or otherwise.
SECTION II. TERMINATION OF EMPLOYMENT AND SEVERANCE.
A. Termination for Death, Disability or Retirement or by
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<PAGE>
Employer For Cause or by Employee for Other Than Good Reason. Upon the
Employee's termination of his employment for Retirement or for other than Good
Reason after the Effective Date, upon the termination of Employee's employment
by the Employer for Cause after the Effective Date, upon termination for
Disability after the Effective Date, or upon Employee's death after the
Effective Date, the Employer shall pay the Employee his full base salary through
the Date of Termination at the rate in effect at the time Notice of Termination
is given (if required) and all other unpaid amounts, if any, to which Employee
is entitled as of the Date of Termination under any Plan or arrangement of
Employer or Bank at the time such payments are due. No Notice of Termination is
required hereunder in the event of Employee's death and the foregoing amounts
shall be determined on the date of death, if applicable.
B. Termination Under Certain Other Circumstances. Upon termination of
Employee's employment within thirty-six (36) months after the Effective Date,
unless such termination is (i) because of Employee's death or Retirement, (ii)
by Employer for Cause or Disability; or (iii) by Employee other than for Good
Reason, Employer shall pay to Employee an amount equal to 2.99 multiplied by the
Employee's annualized includable compensation for the base period, within the
meaning of Section 280G(d)(1) of the Code, provided, however, that if any of
such payment is or will be subject to the excise tax imposed by Section 4999 of
the Code or any similar tax that may hereafter be imposed ("Excise Tax") such
payment shall be reduced to a smaller amount, even to zero, which smaller amount
shall be the largest amount payable under this paragraph that would not be
subject in whole or in part to the Excise Tax after considering all other
payments to Employee required to be considered under Section 4999 or 280G of the
Code. Such payment shall be referred to as the "Severance Payment."
In the event that the Severance Payment is subsequently determined to
be less than the
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amount actually paid hereunder, the Employee shall repay the excess to the
Employer at the time that the proper amount is finally determined, plus interest
on the amount of such repayment at the Applicable Federal Rate. In the event
that the Severance Payment is determined to exceed the amount actually paid
hereunder, the Employer shall pay Employee such difference plus interest on the
amount of such additional payment at the Applicable Federal Rate at the time
that the amount of such difference is finally determined.
In the event that the amount of the Severance Payment exceeds or is
less than the amount initially paid, such difference shall constitute a loan by
the Employer to the Employee, or by the Employee to the Employer, as the case
may be, payable on the fifth (5th) day after demand (together with interest at
the Applicable Federal Rate).
C. Offset. The amount of any payment provided for in this Section II
shall not be reduced, offset or subject to recovery by the Employer or Successor
by reason of any compensation earned by Employee as the result of employment by
another employer after the Date of Termination, or otherwise.
SECTION III. EFFECTIVE DATE.
No provision of this Agreement other than the applicable definitions in
Section I, this Section III, Section IV, Section V, Section VII.B. through D.,
Section IX, Section X, and Section XI shall take effect and no Person shall have
any rights or duties under or in connection with this Agreement until the
Effective Date occurs. At the Effective Date, the rights and duties of the
parties hereunder shall automatically vest and become fully enforceable in
accordance with the terms of this Severance Agreement so long as Employee is,
immediately preceding the Effective Date, employed by Employer.
SECTION IV. BINDING AGREEMENT.
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<PAGE>
This Agreement shall inure to the benefit of and be enforceable by
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If Employee should die
while any amount would still be payable to Employee hereunder if the Employee
had continued to live, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to Employee's beneficiary
designated in writing and delivered to Employer, if any, and if none to
Employee's estate.
SECTION V. FEES AND EXPENSES.
Each party shall pay its own legal fees and related or other expenses
incurred in connection with this Agreement, whether or not such party prevails,
including, without limitation all such fees and expenses, if any, incurred in
contesting or disputing any termination or seeking to obtain or enforce any
right or benefit provided by this Agreement; provided, however, that, after the
Effective Date, the Employer shall pay all legal fees and related expenses
incurred by Employee in connection with this Agreement, whether or not Employee
prevails, including without limitation all such fees and expenses incurred by
Employee in contesting or disputing any termination of Employee or in seeking to
obtain or enforce any right or benefit provided by this Agreement.
SECTION VI. TAXES.
All payments to be made to Employee under this Agreement will be
subject to required withholding of federal, state and local and employment and
other taxes.
SECTION VII. MISCELLANEOUS.
A. Survival. The respective obligations of, and benefits afforded to,
Employer and Employee in Sections II., IV., V., VI., VII., VIII., and IX of this
Agreement shall survive termination of this Agreement.
B. Notice. For the purposes of this Agreement, notices and all other
communications
72
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provided for in the Agreement shall be in writing and shall be deemed to have
been duly given when delivered to Employee or the Chairman of the Board of
Employer or mailed by United States registered mail, return receipt requested,
postage prepaid and addressed, in the case of Employer, to the attention of the
Chairman of the Board at the following address:
Valley Financial Corporation
36 W. Church Avenue
Roanoke, Virginia 24011
or, in the case of Employee, to the address set forth below the Employee's
signature, provided that all notices may be sent to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
73
<PAGE>
C. Modification; Waiver. No provision of this Agreement may be
modified, waived or discharged unless such modification, waiver or discharge is
agreed to in writing signed by Employee and the Chairman of the Board of
Employer. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of a
similar or dissimilar provisions or conditions at the same or at any prior to
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the Commonwealth of Virginia.
D. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
SECTION VIII. CONFIDENTIALITY; COVENANT NOT TO COMPETE.
A. Confidentiality. Employee agrees that subsequent to his period of
employment with Employer and/or any Bank Subsidiary, he will not at any time
communicate or disclose to any unauthorized person, without the written consent
of the Employer, any proprietary or other confidential information concerning
the Employer or any subsidiary of the Employer, it being understood, however,
that the obligations of this Section shall not apply to the extent that the
aforesaid matters (I) are disclosed in circumstances where Employee is legally
required to do so or (ii) become generally known to and available for use by the
public otherwise than by the Employee?s wrongful act or omission.
B. Covenant Not to Compete. If the Employee's employment with the
Employer is terminated after the Effective Date by Employee other than for Good
Reason or by Employer other than for Cause, the Employee agrees that for a
period of 3 years from the date his employment is
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terminated, he will not, without the consent in writing of the Chairman of the
Board of the Employer, become an officer, employee, agent, partner, director or
substantial stockholder of any entity engaged in the commercial or retail
banking, lending, leasing or trust business within a 100 mile radius of the City
of Roanoke, Virginia, or become associated in any substantial manner with any
entity in the process of formation to engage in the retail or commercial
banking, lending, leasing or trust business, or any group that intends to form
any such entity in the geographical area described above.
C. Relief. In the event of Employee's actual or threatened breach of
this Section, the Employer shall be entitled to a preliminary restraining order
and an injunction restraining the Employee from violating its provisions. In the
event the Employee terminates his employment after the Effective Date for other
than Good Reason and his actual date of terminating his employment is less than
ninety (90) days after his Notice of Termination, the Employee will pay to the
Employer, as liquidated damages and not as a penalty, an amount equal to the
Employee's base salary then in effect, computed on a per diem basis, multiplied
by ninety (90).
D. Other Remedies. Nothing in this Agreement shall be construed to
prohibit the Employer from pursuing any other available remedies for such breach
or threatened breach, including the recovery of damages from the Employee. If at
the time of enforcement of this Section a court holds that the duration, scope
or area restrictions stated herein are unreasonable under the circumstances then
existing and, thus, unenforceable, the Employer and Employee agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area.
SECTION IX. RELATED AGREEMENTS.
To the extent that any provision of any other agreement between
Employer or any of its subsidiaries and Employee shall limit, qualify or be
inconsistent with any provision of this Agreement, then for purposes of this
Agreement, while the same shall remain in force, the provision
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<PAGE>
of this Agreement shall control and such provision of such other agreement shall
be deemed to have been superseded, and to be of no force or effect, as if such
other agreement had been formally amended to the extent necessary to accomplish
such purpose.
SECTION X. COUNTERPARTS.
This Agreement may be executed in several counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
SECTION XI. INITIAL TERM.
This Agreement shall expire and automatically terminate five years from
the date hereof, unless extended by written agreement of Employer and Employee.
Notwithstanding the foregoing sentence, no obligations hereunder resulting from
a Change in Control of the Employer during this initial term or any extension
thereof shall be affected by the expiration of the initial term or extension
thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
February 9, 1998.
VALLEY FINANCIAL CORPORATION
By:
/s/ Ellis L. Gutshall
---------------------
Its President and Chief
Executive Officer
Employee:
/s/ J. Randall Woodson
----------------------
Address:
-------------------------------
-------------------------------
76
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Valley Bank, N.A. was on December 31, 1999 the 100%-owned subsidiary of
the registrant, Valley Financial Corporation. Effective March 1, 2000 the Bank
became known as Valley Bank as part of a conversion to a state charter.
77
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned officers
and/or directors of Valley Financial Corporation, a Virginia corporation
("Valley"), does hereby constitute and appoint Ellis L. Gutshall and A. Wayne
Lewis, and each of them (with full power to each of them to act alone), his true
and lawful Attorneys in Fact and Agents for him and on his behalf and in his
name, place and stead in any and all capacities and particularly as an officer
and/or director of Valley, to sign, execute and affix his seal thereto and file
any of the documents referred to below:
Annual Report for the calendar year ended December 31, 1999 on
Form 10-KSB, and any amendments thereto, together with all
exhibits and any and all documents required to be filed with
respect thereto, with the Securities and Exchange Commission
and all other appropriate regulatory authorities; granting unto said
Attorneys and each of them full power and authority to do and perform
every act and thing requisite and necessary to be done in and about
the premises in order to effectuate the same as fully, to all intents
and purposes, as he himself might or could do if personally present,
hereby ratifying and affirming all that said Attorneys in Fact and
Agents or each of them may lawfully do or cause to be done by virtue
hereof.
WITNESS the signatures and seals of the undersigned this 20th day of
January, 2000.
<TABLE>
<CAPTION>
<S> <C>
/s/ Anna L. Lawson (SEAL) /s/ Eddie F. Hearp (SEAL)
- --------------------------------------- ----------------------------------
/s/ Abney S. Boxley, III (SEAL) /s/ Michael E. Warner (SEAL)
- -------------------------------------- ----------------------------------
/s/ William D. Elliot (SEAL) /s/ A. Wayne Lewis (SEAL)
- --------------------------------------- ----------------------------------
/s/ Barbara B. Lemon (SEAL) /s/ Ellis L. Gutshall (SEAL)
- -------------------------------------- ----------------------------------
/s/ George W. Logan (SEAL)
- --------------------------------------
/s/ Ward W. Stevens (SEAL)
- --------------------------------------
/s/ John W. Starr (SEAL)
- --------------------------------------
</TABLE>
78
<PAGE>
COMMONWEALTH OF VIRGINIA )
) to wit:
CITY OF ROANOKE )
I, Mary P. Hundley, a Notary Public in and for the jurisdiction
aforesaid, do hereby certify that Abney S. Boxley, III, William D. Elliot, Ellis
L Gutshall, Eddie F. Hearp, Anna L. Lawson, Barbara B. Lemon, A. Wayne Lewis,
George W. Logan, John W. Starr, Ward W. Stevens and Michael E. Warner, whose
names are signed to the foregoing writing bearing date the 20th day of January,
2000, this day personally appeared before me and acknowledged the same in my
City and State aforesaid.
GIVEN under my hand and seal this 20th day of January, 2000.
/s/ Mary P. Hundley
------------------------
Notary Public
My commission expires October 31, 2002
(SEAL)
79
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000921590
<NAME> VALLEY FINANCIAL CORP /VA/
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,027
<INT-BEARING-DEPOSITS> 71
<FED-FUNDS-SOLD> 6,034
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 31,964
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 91,390
<ALLOWANCE> 910
<TOTAL-ASSETS> 137,156
<DEPOSITS> 115,477
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,624
<LONG-TERM> 10,000
0
0
<COMMON> 9,099
<OTHER-SE> (44)
<TOTAL-LIABILITIES-AND-EQUITY> 137,156
<INTEREST-LOAN> 6,823
<INTEREST-INVEST> 1,801
<INTEREST-OTHER> 135
<INTEREST-TOTAL> 8,759
<INTEREST-DEPOSIT> 3,994
<INTEREST-EXPENSE> 4,432
<INTEREST-INCOME-NET> 4,327
<LOAN-LOSSES> 216
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,029
<INCOME-PRETAX> 1,436
<INCOME-PRE-EXTRAORDINARY> 1,042
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,042
<EPS-BASIC> 1.03
<EPS-DILUTED> .99
<YIELD-ACTUAL> 3.92
<LOANS-NON> 87
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 16
<ALLOWANCE-OPEN> 708
<CHARGE-OFFS> 14
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 910
<ALLOWANCE-DOMESTIC> 910
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 900
</TABLE>
