When Valley Financial Corporation (NASDAQ:VYFC) announced its second-quarter earnings last Friday, it became one of the few banks I've seen show earnings increase from both the sequential and prior-year quarters. When I initiated coverage on the bank in early May, I was expecting earnings to increase due to the redemption of preferred shares, and this alone has been responsible for saving $228 thousand YTD ($0.05).
The redemption of the preferred shares has also resulted in increasing the leverage of the bank's equity account. A return on assets of 0.81% is typically nothing to jump up and down about, but shareholders command an increasingly uncommon amount of assets for each dollar of equity, and that helped the bank turn in an ROE of 12.43%. Looking back at last year's results, a higher ROA of 0.97% brought in a lower ROE of 12.13%. Because of this capital structure, I continue to believe the bank will grow at a faster rate than most of its peers.
Although there were a lot of positives in the earnings report, they did include a mixed bag of non-recurring items (gain from security sales of $714 thousand, and a larger-than-normal provision expense of $1 million). Nonaccrual loans also increased due to one singled out borrower, but a lot of foreclosed real estate was offloaded to bring NPAs down to 3.1%. If you subtract out foreclosed assets, allowances have nonaccrual loans completely covered (120.03%). With that in mind, Valley's portfolio is clean and shares still look cheap at 1.06Xs tangible book value.
I did initiate a small tracking position, as indicated in my prior article. At this time, I have no plans to add to this position.
Disclosure: The author is long VYFC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
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