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


                                       2
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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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<PAGE>

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,

                                       4
<PAGE>

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.

                                       5
<PAGE>

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,

                                       6
<PAGE>

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

                                       7
<PAGE>

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

                                       8
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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

                                       10
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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.

                                       11
<PAGE>

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


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