Last10K.com

Bay Banks Of Virginia Inc (BAYK) SEC Filing 10-Q Quarterly report for the period ending Friday, March 31, 2017

Bay Banks Of Virginia Inc

CIK: 1034594 Ticker: BAYK

Bay Banks of Virginia Reports 1st Quarter 2017 Results

RICHMOND, Va., April 28, 2017 /PRNewswire/ -- Bay Banks of Virginia, Inc. (OTCQB: BAYK) (the "Company") reported a loss of $177,000 for the quarter ended March 31, 2017 compared to earnings of $524,000 for the same quarter in 2016.

"We are very proud to report that we met our goal of $500 million in total assets during the first quarter. We have also completed our merger with Virginia BanCorp as of April 1, 2017. Our combined banks are now operating as Virginia Commonwealth Bank, which has made us the fifth largest community bank headquartered in Richmond," said Randal R. Greene, President and Chief Executive Officer. He continued, "Customers will receive communications as we prepare for the systems integration. The net loss in the first quarter was anticipated as merger-related expenses were recognized as well as our investment associated with expansion of our Richmond market operations."

HIGHLIGHTS FOR THE QUARTER

  • The loss was $(0.04) per share for the first quarter of 2017 compared to earnings of $0.12 per share for the prior quarter and $0.11 per share for the first quarter of 2016.
  • Annualized loss on average assets was (0.14)% for the first quarter of 2017 compared to annualized earnings on average assets of 0.48% for the prior quarter and 0.47% for the first quarter of 2016.
  • Merger-related and severance costs were $471,000 during the first quarter, which is equivalent to approximately $0.07 per share after tax.
  • Total loans grew by $19.9 million, or 5.2%, during the first quarter of 2017.
  • Total deposits grew by $782,000, or 0.2%, during the first quarter of 2017.
  • Total assets grew by $17.5 million, or 3.6%, during the first quarter of 2017.
  • The first quarter's net interest margin was 3.45% compared to 3.45% for the prior quarter and 3.35% for the first quarter of 2016.

FIRST QUARTER NET INCOME

  • Net interest income increased by 3.0%, or $114,000, on a linked-quarter basis and increased by 12.1%, or $420,000, compared to the first quarter of 2016.
  • Provision for loan losses increased by $310,000 on a linked-quarter basis, and by $225,000 compared to the first quarter of 2016.
  • Noninterest income decreased by 35.6%, or $473,000 on a linked-quarter basis, and was unchanged compared to the first quarter of 2016.
  • Noninterest expense increased by 11.4%, or $497,000, on a linked-quarter basis, and by 31.8%, or $1.1 million, compared to the first quarter of 2016.

The increase in net interest income for the first quarter of 2017 compared to the first quarter of 2016 was driven by an increase in interest income of $444,000 while interest expense increased by $24,000. The improved interest income was driven by growth in loan balances and improved yields on investment securities, which offset reductions in loan yields.

Non-interest income for the first quarter of 2017 was unchanged as compared to the same period last year and amounted to $857,000. This amount is down as compared to $1.3 million for the fourth quarter of 2016, which was primarily due to reduced net gains from the sale of investment securities and loans combined with losses associated with other real estate owned.

Non-interest expense totaled $4.8 million and $3.7 million for the first quarter of 2017 and 2016, respectively. Merger related expenses during the first quarter totaled approximately $300,000, plus $171,000 in severance costs. Other changes in non-interest expense included a $605,000 increase in salaries and benefits due primarily to $250,000 in performance-related and hiring bonuses, the aforementioned $171,000 of severance expense associated with the merger, $102,000 primarily for new hires in the Richmond market, $69,000 in deferred compensation expense and $42,000 in residential lending commissions as the result of loan growth.

NET INTEREST MARGIN

  • Net interest margin was 3.45% this quarter compared to 3.45% on a linked-quarter basis and 3.35% for the first quarter of 2016.
  • Yield on earning assets increased to 4.26% this quarter compared to 4.23% on a linked-quarter basis and increased from 4.20% for the first quarter of 2016, primarily due to improved yields on investments.
  • Cost of funds increased to 0.82% this quarter compared to 0.80% on a linked-quarter basis and 0.88% for the first quarter of 2016.

The improvement in net interest margin is primarily due to increases in yields in the investment portfolio and higher loan fees. On a linked-quarter basis, the increased cost of funds was due to tactical use of FHLB advances to support loan growth, while improvements in yields on earning assets offset the increased cost of funds.

ASSET QUALITY

  • As a percentage of tier 1 capital plus the allowance for loan losses, total classified assets increased to 26.9% as of March 31, 2017, compared to 26.0% for the prior quarter-end but decreased from 30.4% as of March 31, 2016.
  • Total classified assets increased to $12.1 million, an increase of $393,000 on a linked-quarter basis and a decrease of $1.0 million compared to March 31, 2016.
  • Nonperforming assets increased to $8.3 million, an increase of $462,000 during the first quarter and an increase of $651,000 since March 31, 2016.
  • Nonperforming assets represented 1.64% of total assets as of March 31, 2017, compared to 1.60% for the prior quarter-end and 1.70% as of March 31, 2016.
  • Annualized net loan charge-offs (recoveries) as a percent of average loans were 0.06% during the first quarter, compared to (0.26)% during the prior quarter and 0.09% during the first quarter of 2016. 
  • Allowance for loan losses decreased to 0.99% of total loans as of March 31, 2017, from 1.00% for the prior quarter-end and from 1.17% at March 31, 2016. 
  • Coverage of loan loss reserves to non-performing loans was 68.6% as of March 31, 2017, compared to 72.9% at the prior quarter-end and 84.8% at March 31, 2016. 

During the first quarter of 2017, non-performing assets, excluding troubled debt restructures (TDRs), increased by $462,000 to $8.3 million, or 1.6% of total assets. Classified assets increased by $393,000 during the same period to $12.1 million, or 26.9% of tier 1 capital plus the allowance for loan losses. Net loan charge-offs totaled $60,000 during the first quarter of 2017, or 0.06% of average total loans, compared to 0.02% during the first quarter of 2016.

BALANCE SHEET AND CAPITAL

  • Total assets grew by 3.6% to $504.2 million as of March 31, 2017.
  • Tangible common equity as a percent of tangible assets decreased to 7.93% from 8.24% on a linked-quarter basis, and from 8.67% at March 31, 2016.
  • The tier 1 leverage ratio decreased to 8.41% this quarter compared to 8.67% last quarter and 8.80% at March 31, 2016.

During the first quarter of 2017, total assets increased by $17.5 million. This was due to an increase of $19.9 million in the loan portfolio which was funded mainly by an increase of $25.0 million in FHLB advances.

For additional details on the Company's financial results for the quarter ended March 31, 2017, please refer to the Selected Financial Data attached.

MERGER

On April 1, 2017, the Company and Virginia BanCorp, Inc. ("Virginia BanCorp"), a bank holding company conducting substantially all of its operations through its subsidiary Virginia Commonwealth Bank, completed a merger (the "Company Merger"). The Company is the surviving corporation and shareholders of Virginia BanCorp received 1.178 shares of the Company's common stock for each share of Virginia BanCorp common stock they owned immediately prior to the Company Merger, for a total of 4,586,397 shares of the Company's common stock valued at approximately $40.5 million. As of the closing of the Company Merger, the Company's legacy shareholders owned approximately 51% of the outstanding stock of the Company and former Virginia BanCorp shareholders owned approximately 49% of the outstanding stock of the Company.

Immediately after the Company Merger, Virginia Commonwealth Bank merged with and into the Bank of Lancaster (the "Bank Merger"). Immediately after the Bank Merger, Bank of Lancaster changed its name to Virginia Commonwealth Bank. Banking operations are being consolidated and are expected to be completed during the fourth quarter of 2017.

Combined merger-related costs during the first quarter of 2017 were $808,000, and accumulated combined merger-related costs including the fourth quarter of 2016 were $1.8 million. Annual non-interest cost savings of the combined companies are anticipated to be approximately 14% from 2016 levels.

About Bay Banks of Virginia, Inc.

Bay Banks of Virginia, Inc. is the bank holding company for Virginia Commonwealth Bank and Bay Trust Company. Founded in the 1930's, Virginia Commonwealth Bank and former Bank of Lancaster, are now combined and headquartered in Richmond, Virginia. With 19 banking offices located throughout the Richmond market area, the Northern Neck region, the Tri-Cities area of Petersburg, Hopewell and Colonial Heights, Middlesex County and Suffolk, the bank serves businesses, professionals and consumers with a wide variety of financial services, including retail and commercial banking, investment services, and mortgage banking. Bay Trust Company provides management services for personal and corporate trusts, including estate planning, estate settlement and trust administration.

For further information, contact Randal R. Greene, Chief Executive Officer, at 800-435-1140 or inquiries@baybanks.com.

This report contains statements concerning the Company's expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute "forward-looking statements" as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, the ability to successfully implement integration plans associated with the Virginia BanCorp merger, which integration may be more difficult, time-consuming or costly than expected, the ability to achieve the cost savings and synergies contemplated by the merger within the expected timeframe, disruptions to customer and employee relationships and business operations caused by the merger, changes in interest rates, general economic conditions, the legislative/regularity climate, monetary and fiscal policies of the U. S. Government, including policies of the U. S. Treasury and Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area, acquisitions and dispositions, and accounting principles, polices and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.

Selected Financial Data






Quarters ended:

3/31/2017

12/31/2016

9/30/2016

6/30/2016

3/31/2016

(in thousands except for per share and share amounts)





BALANCE SHEET






Assets

$   504,207

$   486,710

$   468,274

$   468,339

$   447,837

Loans receivable

405,261

385,400

368,563

351,302

349,742

Deposits

382,500

381,718

377,975

379,029

356,613

Loans to deposits

106.0%

101.0%

97.5%

92.7%

98.1%







CAPITAL






Common equity

$     41,617

$     41,705

$     41,948

$     41,212

$     40,440

Regulatory capital

51,826

51,726

51,069

50,017

49,983

Total common equity to assets

8.25%

8.57%

8.96%

8.80%

9.03%

Tangible common equity to tangible assets (non-GAAP)*

7.93%

8.24%

8.61%

8.45%

8.67%

Tier 1 Leverage Ratio

8.41%

8.67%

8.60%

8.74%

8.80%







PROFITABILITY MEASURES






Interest Income

$       4,798

$       4,635

$       4,555

$       4,392

$       4,354

Interest Expense

914

865

889

881

890

Net Interest Income

$       3,884

$       3,770

$       3,666

$       3,511

$       3,464

Provision for (recovery of) Loan Losses

190

(120)

259

183

(35)

Net Interest Income after Provision/Recovery

$       3,694

$       3,890

$       3,407

$       3,328

$       3,499

Noninterest Income

857

1,330

1,338

1,084

858

Noninterest Expense

4,849

4,352

3,565

3,636

3,680

Income (Loss) before Taxes

$       (298)

$          868

$       1,180

$          776

$          677

Income Taxes

(121)

297

326

190

153

Net Income (Loss)

$       (177)

$          571

$          854

$          586

$          524

Return on Average Assets

-0.14%

0.48%

0.72%

0.51%

0.47%

Return on Average Equity

-1.70%

5.46%

8.14%

5.74%

5.24%

Net interest margin

3.45%

3.45%

3.40%

3.37%

3.35%

Yield on earning assets

4.25%

4.23%

4.22%

4.21%

4.20%

Cost of funds

0.82%

0.80%

0.83%

0.86%

0.88%







PER SHARE DATA






Basic Earnings (Loss) per share (EPS)

($0.04)

$0.12

$0.18

$0.12

$0.11

  Average basic shares outstanding

4,776,800

4,774,856

4,774,856

4,774,856

4,774,856

Diluted Earnings (Loss) per share (EPS)

($0.04)

$0.12

$0.18

$0.12

$0.11

  Diluted average shares outstanding

4,776,800

4,816,071

4,797,521

4,794,783

4,791,139

Book value per share

$8.69

$8.73

$8.79

$8.63

$8.47

Tangible book value per share (non-GAAP)*

$8.21

$8.25

$8.32

$8.24

$8.08

  Period-end shares outstanding

4,787,356

4,774,856

4,774,856

4,774,856

4,774,856







ASSET QUALITY






Classified assets

$     12,076

$     11,683

$     12,090

$     12,666

$     13,109

Classified assets to Tier 1 capital + ALL

26.86%

25.99%

27.34%

29.34%

30.39%

Non-performing assets (excluding TDR's)

$       8,256

$       7,794

$       7,800

$       8,004

$       7,605

Non-performing assets to total assets

1.64%

1.60%

1.67%

1.71%

1.70%

Net charge-offs (recoveries)

$            60

$       (242)

$            38

$          743

$            81

Net charge-offs to average loans

0.06%

-0.26%

0.03%

0.85%

0.09%

Loan loss reserves to non-performing loans

68.61%

72.89%

74.29%

66.14%

84.77%

Loan Loss Reserve to Loans

0.99%

1.00%

1.02%

1.01%

1.17%







* Tangible equity and tangible assets are net of goodwill.









The following information was filed by Bay Banks Of Virginia Inc (BAYK) on Friday, April 28, 2017 as an 8K 2.02 statement, which is an earnings press release pertaining to results of operations and financial condition. It may be helpful to assess the quality of management by comparing the information in the press release to the information in the accompanying 10-Q Quarterly Report statement of earnings and operation as management may choose to highlight particular information in the press release.
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-22955

 

 

BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

VIRGINIA   54-1838100

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

 

(I.R.S. EMPLOYER

IDENTIFICATION NO.)

100 SOUTH MAIN STREET, KILMARNOCK, VA 22482

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(804) 435-1171

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  yes    ☐  no

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ☒  yes    ☐  no

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  yes    ☒  no

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

9,373,577 shares of common stock on April 30, 2017

 

 

 


Table of Contents

FORM 10-Q

For the interim period ending March 31, 2017

INDEX

 

PART I - FINANCIAL INFORMATION

  

ITEM 1.

 

FINANCIAL STATEMENTS

  

CONSOLIDATED BALANCE SHEETS MARCH  31, 2017 (UNAUDITED) AND DECEMBER 31, 2016

     3  

CONSOLIDATED STATEMENTS OF (LOSS) INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 (UNAUDITED)

     4  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 (UNAUDITED)

     5  

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2017 (UNAUDITED)

     6  

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016 (UNAUDITED)

     7  

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

     8  

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     26  

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     32  

ITEM 4.

 

CONTROLS AND PROCEDURES

     32  

PART II - OTHER INFORMATION

  

ITEM 1.

 

LEGAL PROCEEDINGS

     32  

ITEM 1A.

 

RISK FACTORS

     32  

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     32  

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     32  

ITEM 4.

 

MINE SAFETY DISCLOSURES

     32  

ITEM 5.

 

OTHER INFORMATION

     33  

ITEM 6.

 

EXHIBITS

     33  

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

 

     March 31, 2017     December 31, 2016 (1)  
(Dollars in thousands)    (unaudited)        

ASSETS

    

Cash and due from banks

   $ 5,087     $ 4,851  

Interest-bearing deposits

     6,826       7,501  

Certificates of deposit

     3,472       4,216  

Federal funds sold

     336       2,350  

Securities available-for-sale, at fair value

     49,826       51,173  

Restricted securities

     3,756       2,649  

Loans receivable, net of allowance for loan losses of $3,993 and $3,863

     401,268       381,537  

Loans held for sale

     —         276  

Premises and equipment, net

     10,859       10,844  

Accrued interest receivable

     1,321       1,372  

Other real estate owned, net

     2,436       2,494  

Bank owned life insurance

     9,944       9,869  

Goodwill

     2,808       2,808  

Mortgage servicing rights

     692       671  

Other assets

     5,576       4,099  
  

 

 

   

 

 

 

Total assets

   $ 504,207     $ 486,710  
  

 

 

   

 

 

 

LIABILITIES

    

Noninterest-bearing deposits

   $ 77,369     $ 74,799  

Savings and interest-bearing demand deposits

     169,027       178,869  

Time deposits

     136,104       128,050  
  

 

 

   

 

 

 

Total deposits

     382,500       381,718  

Securities sold under repurchase agreements

     8,489       18,310  

Federal Home Loan Bank advances

     60,000       35,000  

Subordinated debt, net of issuance costs

     6,864       6,860  

Other liabilities

     4,737       3,117  
  

 

 

   

 

 

 

Total liabilities

     462,590       445,005  
  

 

 

   

 

 

 

SHAREHOLDERS’ EQUITY

    

Common stock ($5 par value; authorized - 30,000,000 shares; outstanding - 4,787,356 and 4,774,856 shares, respectively)

     23,937       23,874  

Additional paid-in capital

     2,868       2,872  

Retained earnings

     16,017       16,194  

Accumulated other comprehensive loss, net

     (1,205     (1,235
  

 

 

   

 

 

 

Total shareholders’ equity

     41,617       41,705  
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 504,207     $ 486,710  
  

 

 

   

 

 

 

 

(1) Derived from the audited December 31, 2016 Consolidated Financial Statements

See Notes to Consolidated Financial Statements.

 

3


Table of Contents

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF (LOSS) INCOME

(unaudited)

 

     For the three months ended  
(Dollars in thousands except per share amounts)    March 31, 2017     March 31, 2016  

INTEREST INCOME

    

Loans, including fees

   $ 4,388     $ 3,974  

Securities:

    

Taxable

     269       207  

Tax-exempt

     114       136  

Federal funds sold

     1       —    

Interest-bearing deposit accounts

     7       15  

Certificates of deposit

     19       22  
  

 

 

   

 

 

 

Total interest income

     4,798       4,354  
  

 

 

   

 

 

 

INTEREST EXPENSE

    

Deposits

     630       645  

Federal funds purchased

     10       —    

Securities sold under repurchase agreements

     3       2  

Subordinated debt

     117       118  

FHLB advances

     154       125  
  

 

 

   

 

 

 

Total interest expense

     914       890  
  

 

 

   

 

 

 

Net interest income

     3,884       3,464  
  

 

 

   

 

 

 

Provision for (recovery of) loan losses

     190       (35
  

 

 

   

 

 

 

Net interest income after provision for loan losses

     3,694       3,499  
  

 

 

   

 

 

 

NON-INTEREST INCOME

    

Income from fiduciary activities

     245       207  

Service charges and fees on deposit accounts

     212       227  

VISA-related fees

     (1     46  

Non-deposit product income

     80       106  

Other service charges and fees

     171       148  

Secondary market lending income

     115       77  

Increase in cash surrender value of life insurance

     75       63  

Net (losses) gains on sale of securities available for sale

     (5     6  

Other real estate losses

     (96     (35

Other income

     61       13  
  

 

 

   

 

 

 

Total non-interest income

     857       858  
  

 

 

   

 

 

 

NON-INTEREST EXPENSES

    

Salaries and employee benefits

     2,824       2,055  

Occupancy expense

     439       448  

Software maintenance

     204       161  

Bank franchise tax

     76       60  

VISA expense

     20       39  

Telephone expense

     28       31  

FDIC assessments

     85       81  

Foreclosure property expense

     10       12  

Consulting expense

     54       55  

Merger expense

     300       —    

Other expense

     809       738  
  

 

 

   

 

 

 

Total non-interest expenses

     4,849       3,680  
  

 

 

   

 

 

 

Net (loss) income before income taxes

     (298     677  

Income tax (benefit) expense

     (121     153  
  

 

 

   

 

 

 

Net (loss) income

   $ (177   $ 524  
  

 

 

   

 

 

 

Basic (Loss) Earnings Per Share

    

Average basic shares outstanding

     4,776,800       4,774,856  

(Loss) earnings per share, basic

   $ (0.04   $ 0.11  

Diluted (Loss) Earnings Per Share

    

Average diluted shares outstanding

     4,776,800       4,791,139  

(Loss) earnings per share, diluted

   $ (0.04   $ 0.11  

See Notes to Consolidated Financial Statements.

 

4


Table of Contents

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(unaudited)

 

     For the three months ended  
     March 31,  
(Dollars in thousands)    2017     2016  

Net (loss) income

   $ (177   $ 524  

Other comprehensive income:

    

Unrealized gains (losses) on securities:

    

Unrealized holding gains arising during the period

     40       508  

Deferred tax expense

     (13     (173

Reclassification of net securities losses (gains) recognized in net (loss) income

     5       (6

Deferred tax (benefit) expense

     (2     2  
  

 

 

   

 

 

 

Unrealized gains adjustment, net of tax

     30       331  
  

 

 

   

 

 

 

Total other comprehensive income

     30       331  
  

 

 

   

 

 

 

Comprehensive (loss) income

   $ (147   $ 855  
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

5


Table of Contents

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

 

                               Accumulated        
     Shares of             Additional           Other     Total  
(Dollars in thousands, except    Common      Common      Paid-in     Retained     Comprehensive     Shareholders’  
share data or amounts)    Stock      Stock      Capital     Earnings     Loss     Equity  

Three Months ended March 31, 2017

              

Balance at beginning of period

     4,774,856      $ 23,874      $ 2,872     $ 16,194     $ (1,235   $ 41,705  

Net loss

     —          —          —         (177     —         (177

Other comprehensive income

     —          —          —         —         30       30  

Stock-based compensation expense

     12,500        63        (4     —         —         59  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

     4,787,356      $ 23,937      $ 2,868     $ 16,017     $ (1,205   $ 41,617  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

6


Table of Contents

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

     For the Three Months Ended  
     March 31,  
(Dollars in thousands)    2017     2016  

Cash Flows From Operating Activities

    

Net income

   $ (177   $ 524  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     274       265  

Net premium amortization and discount accretion of securities

     92       107  

Amortization of subordinated debt issuance costs

     4       4  

Provision for (recovery of) loan losses

     190       (35

Stock compensation expense

     59       16  

Deferred tax benefit

     (5     (6

Loss (gains) on securities available-for-sale

     5       (6

Increase in OREO valuation allowance

     97       —    

(Gain) loss on sale of other real estate

     (1     35  

(Increase) decrease in mortgage servicing rights

     (21     10  

Loan originations for sale

     (3,471     (2,727

Loan sales

     3,766       2,086  

Gain on sold loans

     (19     (34

Increase in cash surrender value of life insurance

     (75     (63

Decrease in accrued income and other assets

     38       112  

Increase in other liabilities

     146       60  
  

 

 

   

 

 

 

Net cash provided by operating activities

     902       348  
  

 

 

   

 

 

 

Cash Flows From Investing Activities

    

Proceeds from maturities and principal paydowns of available-for-sale securities

     993       842  

Proceeds from sales and calls of available-for-sale securities

     995       2,702  

Maturities of certificates of deposit

     744       248  

Purchases of available-for-sale securities and certificates of deposit

     (693     (1,175

(Purchases) sales of restricted securities

     (1,107     157  

Decrease (increase) in federal funds sold

     2,014       (59

Loan (originations) and principal collections, net

     (19,971     (3,429

Proceeds from sale of other real estate

     12       228  

Proceeds from sale of equipment

     6       —    

Purchases of premises and equipment

     (295     (99
  

 

 

   

 

 

 

Net cash used in investing activities

     (17,302     (585
  

 

 

   

 

 

 

Cash Flows From Financing Activities

    

Net decrease in demand, savings, and other interest-bearing deposits

     (7,272     (4,463

Net increase in time deposits

     8,054       1,218  

Net decrease in securities sold under repurchase agreements

     (9,821     (1,149

Increase (decrease) in Federal Home Loan Bank advances

     25,000       (5,000
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     15,961       (9,394
  

 

 

   

 

 

 

Net decrease in cash and due from banks

     (439     (9,631

Cash and cash equivalents (including interest-earning deposits) at beginning of period

     12,352       20,299  
  

 

 

   

 

 

 

Cash and cash equivalents (including interest-earning deposits) at end of period

   $ 11,913     $ 10,668  
  

 

 

   

 

 

 

Supplemental Schedule of Cash Flow Information

    

Cash paid for:

    

Interest

   $ 1,019     $ 987  
  

 

 

   

 

 

 

Income taxes

     —         —    
  

 

 

   

 

 

 

Non-cash investing and financing:

    

Unrealized gain on investment securities

     45       502  
  

 

 

   

 

 

 

Change in fair value of pension and post-retirement obligation

     —         —    
  

 

 

   

 

 

 

Loans transferred to other real estate owned

     50       1,352  
  

 

 

   

 

 

 

Loans originated to facilitate sale of OREO

     —         117  
  

 

 

   

 

 

 

Changes in deferred taxes resulting from OCI transactions

     15       171  
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements.

 

7


Table of Contents

Notes to Consolidated Financial Statements (Unaudited)

Note 1: General

Bay Banks of Virginia, Inc. (the “Company”) owns 100% of Virginia Commonwealth Bank, formerly named Bank of Lancaster (refer to Note 2) (the “Bank”), 100% of Bay Trust Company, Inc. (the “Trust Company”) and 100% of Steptoes Holdings, LLC (“Steptoes Holdings”). The consolidated financial statements include the accounts of the Bank, the Trust Company, Steptoes Holdings and Bay Banks of Virginia, Inc. Since the business combination was effective on April 1, 2017 these March 31, 2017 consolidated financial statements do not yet reflect combined operations.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to the general practices within the banking industry. In management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or for any other interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share or shareholders’ equity as previously reported.

Note 2: Business Combination

On April 1, 2017, the Company and Virginia BanCorp, Inc. (“Virginia BanCorp”), a bank holding company conducting substantially all of its operations through its subsidiary Virginia Commonwealth Bank, completed a merger pursuant to the Agreement and Plan of Merger, dated as of November 2, 2016, by and between the Company and Virginia BanCorp. The Company is the surviving corporation in the merger and the former shareholders of Virginia BanCorp received 1.178 shares of the Company’s common stock for each share of Virginia BanCorp common stock they owned immediately prior to the merger, for a total issuance of 4,586,221 shares of the Company’s common stock valued at approximately $40.5 million. As of the completion of the merger, the Company’s legacy shareholders owned approximately 51% of the outstanding common stock of the Company and Virginia BanCorp’s former shareholders owned approximately 49% of the outstanding common stock of the Company. After the merger of Virginia BanCorp with and into the Company, Virginia BanCorp’s subsidiary bank was merged with and into Bank of Lancaster, and immediately thereafter Bank of Lancaster changed its name to Virginia Commonwealth Bank. Bank operating systems are being consolidated and are expected to be completed during the fourth quarter of 2017.

Note 3: Significant Accounting Policies

Loans

The Company grants mortgage loans on real estate, commercial and industrial loans, and consumer and other loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans on real estate. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Company’s market areas.

Loans are reported at their recorded investment, which is the outstanding principal balance net of any unearned income, such as deferred fees and costs, and charge-offs. Interest on loans is recognized over the term of the loan and is calculated using the interest method on principal amounts outstanding. Loan origination fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield over the contractual term of the loan, adjusted for early pay-offs, where applicable.

The accrual of interest is generally discontinued at the time a loan is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Payments received for loans no longer accruing interest are applied to the unpaid principal balance. Loans greater than 90 days past due may remain on accrual status if the credit is well-secured and in process of collection. Personal loans are typically charged off no later than 180 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are charged off at an earlier date if collection of principal or interest is considered doubtful. Nonaccrual and past due policies are materially the same for all types of loans.

All interest accrued but not collected for loans that are placed on non-accrual or charged off are reversed against interest income. Any subsequent interest received on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Generally, a loan is returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured, or it becomes well secured and in the process of collection.

Allowance for loan losses (“ALL”)

The ALL reflects management’s judgment of probable loan losses inherent in the portfolio at the balance sheet date. Management uses a disciplined process and methodology to establish the ALL each quarter. To determine the total ALL, the Company estimates the reserves needed for each homogenous segment and class of the portfolio, plus any loans analyzed individually for impairment. Depending on the nature of each segment and class, considerations include historical loss experience, adverse situations that may affect a borrower’s ability to repay, credit scores, past due history, estimated value of any underlying collateral, prevailing local and national economic conditions, and internal policies and procedures including credit risk management and underwriting. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as conditions change.

 

8


Table of Contents

Management employs a risk rating system to evaluate and consistently categorize loan portfolio credit risk. Loans assigned risk rating grades include all commercial loans not secured by real estate, commercial mortgages, residential mortgages greater than $1 million, smaller residential mortgages which are impaired, loans to real estate developers and contractors, consumer loans greater than $250 thousand with chronic delinquency, and troubled debt restructures (“TDRs”). The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Risk grades are evaluated as new information becomes available for each borrowing relationship or at least quarterly. All other loans not specifically assigned a risk rating grade are monitored as a discrete pool of loans generally based on delinquency status. Risk rating categories are as follows:

Pass – Borrower is strong or sound and collateral securing the loan, if any, is adequate.

Watch – Borrower exhibits some signs of financial stress but is generally believed to be a satisfactory customer and collateral, if any, may be in excess of 90% of the loan balance.

Special Mention – Adverse trends in the borrower’s financial position are evident and warrant management’s close attention. Any collateral may not be fully adequate to secure the loan balance.

Substandard – A loan in this category has a well-defined weakness in the primary repayment source that jeopardizes the timely collection of the debt. There is a distinct possibility that a loss may result if the weakness is not corrected.

Doubtful – Default has already occurred and it is likely that foreclosure or repossession procedures have begun or will begin in the near future. Weaknesses make collection or liquidation in full, based on currently existing information, highly questionable and improbable.

Loss – Uncollectible and of such little value that continuance as a bankable asset is not warranted.

The ALL consists of specific, general, and unallocated components. The specific component is determined by identifying impaired loans (as described below) then evaluating each one to calculate the amount of impairment. Impaired loans measured for impairment generally include: (1) non-accruing Special mention, Substandard and Doubtful loans in excess of $250,000; (2) Substandard and Doubtful loans in excess of $500,000; (3) Special Mention loans in excess of $500,000 if any of the loans in the relationship are more than 30 days past due or if the borrower has filed for bankruptcy; and (4) all TDRs. A specific allowance arises when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component collectively evaluates smaller commercial loans, residential mortgages and consumer loans, grouped into segments and classes. Historical loss experience is calculated and applied to each segment or class, then adjusted for qualitative factors. Qualitative factors include changes in local and national economic indicators, such as unemployment rates, interest rates, gross domestic product growth and real estate market trends; the level of past due and nonaccrual loans; risk ratings on individual loans; strength of credit policies and procedures; loan officer experience; borrower credit scores; and other intrinsic risks related to the types and geographic locations of loans. These qualitative adjustments reflect management’s judgment of risks inherent in the segments. An unallocated component is maintained if needed to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. Changes in the allowance for loan losses and the related provision expense can materially affect net income.

The specific component of the ALL calculation accounts for the loan loss reserve necessary on impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not considered impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Accrual of interest may or may not be discontinued for any given impaired loan. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Because large groups of smaller balance homogeneous loans are collectively evaluated for impairment, the Company does not generally separately identify smaller balance individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a troubled debt restructuring agreement.

The general component of the ALL calculation collectively evaluates groups of loans in segments and classes, as noted above. The segments are: (1) Mortgage loans on real estate; (2) Commercial and industrial loans; and (3) Consumer and other loans. The segment for Mortgage loans on real estate is disaggregated into the following classes: (1) Construction, land and land development; (2) Farmland; (3) Residential first mortgages; (4) Residential revolving and junior mortgages; (5) Commercial mortgages (non-owner-occupied); and (6) Commercial mortgages (owner-occupied). Loans in segment 1 are secured by real estate. Loans in segments 2 and 3 are secured by other types of collateral or are unsecured. A given segment or class may not reflect the purpose of a loan. For example, a business owner may provide his residence as collateral for a loan to his company, in which case the loan would be grouped in a residential mortgage class. Historical loss factors are calculated for the prior 20 quarters by segment and class, and then applied to the current balances in each segment and class. Finally, qualitative factors are applied to each segment and class.

 

9


Table of Contents

Construction and development loans carry risks that the project will not be finished according to schedule or according to budget and the value of the collateral, at any point in time, may be less than the principal amount of the loan. These loans also bear the risk that the general contractor may face financial pressure unrelated to the project. Loans secured by land, farmland and residential mortgages carry the risk of continued credit-worthiness of the borrower and changes in value of the underlying real estate collateral. Commercial mortgages and commercial and industrial loans carry risks associated with the profitable operation of a business and its related cash flows. Additionally, commercial and industrial loans carry risks associated with the value of collateral other than real estate which may depreciate over time. Consumer loans carry risks associated with the continuing credit-worthiness of the borrower and are more likely than real estate loans to be adversely affected by divorce, unemployment, personal illness or bankruptcy of an individual. Consumer loans secured by automobiles carry risks associated with rapidly depreciating collateral. Consumer loans have historically included credit cards, which are unsecured. The credit card portfolio was sold to an unaffiliated third party in the third quarter of 2016.

The summation of the specific, general and unallocated components results in the total estimated ALL. Management may also include an unallocated component to cover uncertainties in the level of probable losses. This estimate is inherently subjective and actual losses could be greater or less than the estimates.

Additions to the ALL are made by charges to earnings through the provision for loan losses. Charge-offs result from credit exposures deemed to be uncollectible and the ALL is reduced by these. Recoveries of previously charged off amounts are credited back to the ALL. Charge-off policies are materially the same for all types of loans.

Note 4: Amendments to the Accounting Standards Codification

In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Update Standard (“ASU”) 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. This ASU requires Securities and Exchange Commission (“SEC”) registrants to disclose the effect that recently issued accounting standards will have on their financial statements when adopted in a future period. In cases where a registrant cannot reasonably estimate the impact of the adoption, additional qualitative disclosures should be considered to assist the reader in assessing the significance of the standard’s impact on its financial statements. The Company adopted ASU 2017-03 in the first quarter of 2017. The adoption of the standard resulted in enhanced disclosures regarding the impact that recently issued accounting standards adopted in a future period will have on the Company’s financial statements and disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which is new guidance for the accounting for credit losses on instruments within its scope. It introduces a new model for current expected credit losses (“CECL”) which will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This will include loans, held-to-maturity debt securities, loan commitments, financial guarantees, net investments in leases, reinsurance and trade receivables. The CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information and reasonable and supportable forecasts, including estimates of prepayments. In addition, ASU 2016-13 replaces the current available-for-sale debt securities other-than-temporary impairment model with an estimate of expected credit losses only when the fair value falls below the amortized cost of the asset. Credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The available-for-sale debt security model will also require the use of an allowance to record estimated credit losses and subsequent recoveries. The ASU also addresses purchased financial assets with credit deterioration. Disclosure requirements are expanded regarding an entity’s assumptions, models and methods for estimating the ALL. The ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is evaluating the impact that ASU 2016-13 will have on its consolidated financial statements. Periodic historical loan data is being accumulated which will allow for migration analysis of risk ratings, past due and non-accrual status, plus other various individual loan characteristics.

In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Shares-Based Payment Accounting.” The amendments in this ASU simplify several aspects of the accounting for share-based payment award transactions including: (1) income tax consequences; (2) classification of awards as either equity or liabilities; (3) diluted earnings per share; and (4) classification on the statement of cash flows. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. ASU 2016-02 will be effective for the Company for the fiscal years beginning after December 15, 2018, with early adoption permitted. The Company expects to adopt ASU 2016-02 in the first quarter of 2019. The Company is evaluating the impact of the standard and expects a minimal increase in assets and liabilities; however, the Company does not expect the guidance to have a material effect on its financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) which requires equity investments, other than those accounted for using the equity method, to be measured at fair value through earnings. There will no longer be an available-for-sale classification measured (changes in fair value reported in other comprehensive income) for equity securities with readily determinable fair values. The cost method is also eliminated for equity instruments without a readily determinable fair value. For these

 

10


Table of Contents

investments, companies can elect to record the investment at cost, less impairment, plus or minus subsequent adjustments for observable price changes. This election only applies to equity investments that do not qualify for the net asset value practical expedient. Public companies will be required to use the exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. In addition, the ASU requires financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset. The classification and measurement guidance is effective for periods beginning after December 15, 2017. The Company’s primary available-for sale investments are debt securities and are therefore not included in the scope of ASU 2016-01. The Company is continuing to evaluate the impact that ASU 2016-01 will have on its consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this ASU modify the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The ASU requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and services. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the satisfaction of performance obligations. In August 2015, the FASB issued ASU 2014-09 changing the effective date for ASU 2014-09 to annual reporting periods beginning after December 15, 2017 from December 15, 2016. The Company’s primary source of revenue is interest income from loans and their fees and investments. As these items are outside the scope of the guidance, this income is not expected to be impacted by implementation of ASU 2014-09. The Company is still reviewing other sources of income such as fiduciary fees, secondary market lending fees and other deposit account fees to evaluate the impact of ASU 2014-09. The Company continues to evaluate the impact that ASU 2014-09 will have on its consolidated financial statements.

Note 5: Securities

The aggregate amortized costs and fair values of the available-for-sale securities portfolio are as follows:

 

(Dollars in thousands)                            

Available-for-sale securities

March 31, 2017

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
     Fair
Value
 

Corporate bonds

   $ 6,695      $ 20      $ —        $ 6,715  

U.S. Government agencies

     24,615        49        (429      24,235  

State and municipal obligations

     19,229        77        (430      18,876  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 50,539    $ 146    $ (859    $ 49,826  
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities

December 31, 2016

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
     Fair
Value
 

Corporate bonds

   $ 7,695      $ 14      $ (5    $ 7,704  

U.S. Government agencies

     25,668        53        (408      25,313  

State and municipal obligations

     18,566        49        (459      18,156  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 51,929      $ 116      $ (872    $ 51,173
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross realized gains and gross realized losses on sales and calls of securities were as follows:

 

     For the three months ended  
     March 31,  
(Dollars in thousands)    2017      2016  

Gross realized gains

   $ —        $ 15  

Gross realized losses

     (5      (9
  

 

 

    

 

 

 

Net realized (losses) gains

   $ (5    $ 6  
  

 

 

    

 

 

 

Aggregate proceeds

   $ 995      $ 2,702  
  

 

 

    

 

 

 

Average yields (taxable equivalent) on securities were 3.22% and 3.03% for the three months ended March 31, 2017 and 2016, respectively.

Securities with a market value of $10.7 million and $19.1 million were pledged as collateral for repurchase agreements and for other purposes as required by law as of March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017 and December 31, 2016, all the securities pledged to repurchase agreements were state and municipal obligations. All the repurchase agreements had remaining contractual maturities that were overnight and continuous. Securities sold under repurchase agreements were $8.5 million and $18.3 million as of March 31, 2017 and December 31, 2016, respectively, and included in liabilities on the consolidated balance sheets. The securities pledged to each agreement are reviewed daily and can be changed at the option of the Bank with minimal risk of loss due to fair value.

 

11


Table of Contents

Securities in an unrealized loss position at March 31, 2017 and December 31, 2016, by duration of the unrealized loss, are shown below. The unrealized loss positions were directly related to interest rate movements as there is minimal credit risk exposure in these investments. All agency securities, and states and municipal securities, are investment grade or better and their losses are considered temporary. Management does not intend to sell the securities and does not expect to be required to sell the securities. Furthermore, all amortized cost bases are expected to be recovered. Bonds with unrealized loss positions at March 31, 2017 included 39 federal agencies and 35 municipals. Bonds with unrealized loss positions at December 31, 2016 included 37 federal agencies, one corporate bond and 39 municipals. The tables are shown below.

 

(Dollars in thousands)    Less than 12 months     12 months or more     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

March 31, 2017

   Value      Loss     Value      Loss     Value      Loss  

U.S. Government agencies

   $ 21,463      $ (418   $ 1,248      $ (11   $ 22,711      $ (429

States and municipal obligations

     12,409        (430     —          —         12,409        (430
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 33,872      $ (848   $ 1,248      $ (11   $ 35,120      $ (859
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 
     Less than 12 months     12 months or more     Total  
     Fair      Unrealized     Fair      Unrealized     Fair      Unrealized  

December 31, 2016

   Value      Loss     Value      Loss     Value      Loss  

Corporate bonds

   $ 995      $ (5   $ —        $ —       $ 995      $ (5

U.S. Government agencies

     20,933        (396     1,308        (12     22,241        (408

States and municipal obligations

     12,888        (459     —          —         12,888        (459
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total temporarily impaired securities

   $ 34,816      $ (860   $ 1,308      $ (12   $ 36,124      $ (872
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $3.0 million and $1.9 million at March 31, 2017 and December 31, 2016, respectively. The Company also had an investment in Federal Reserve Bank of Richmond (“FRB”) stock which totaled $595 thousand and $580 thousand at March 31, 2017 and December 31, 2016, respectively. The investments in both FHLB and FRB stock are required investments related to the Bank’s membership with the FHLB and FRB. These securities do not have a readily determinable fair value as their ownership is restricted, and they lack an active market for trading. Additionally, per charter provisions related to the FHLB and FRB stock, all repurchase transactions of such stock must occur at par. Accordingly, these securities are carried at cost, and are periodically evaluated for impairment. The Company’s determination as to whether its investment in FHLB and FRB stock is impaired is based on management’s assessment of the ultimate recoverability of its par value rather than recognizing temporary declines in its value. The determination of whether the decline affects the ultimate recoverability of the investments is influenced by available information regarding various factors. These factors include, among others, the significance of the decline in net assets of the issuing banks as compared to the capital stock amount reported by these banks, and the length of time a decline has persisted; commitments by such banks to make payments required by law or regulation and the level of such payments in relation to the operating performance of the issuing bank; and the overall liquidity position of the issuing bank. Based on its most recent analysis of publicly available information regarding the financial condition of the issuing banks, management concluded that no impairment existed in the carrying value of FHLB and FRB stock.

Note 6: Low Income Housing Tax Credits

The Company had investments in three separate housing equity funds at March 31, 2017. The general purpose of these funds is to encourage and assist participants in investing in low-income residential rental properties located in the Commonwealth of Virginia, develop and implement strategies to maintain projects as low-income housing, deliver federal low income housing tax credits to investors, allocate tax losses and other possible tax benefits to investors, and to preserve and protect project assets. The investments in these funds were recorded as other assets on the consolidated balance sheets and were $1.5 million as of March 31, 2017. These investments and related tax benefits have expected terms through 2029. Tax credits and other tax benefits recognized related to these investments during the three months ended March 31, 2017 was $17 thousand. Total projected tax credits to be received for 2017 are $68 thousand, which is based on the most recent quarterly estimates received from the funds. Additional capital calls expected for the funds totaled $1.5 million at March 31, 2017 and are included in other liabilities on the consolidated balance sheets.

 

12


Table of Contents

Note 7: Loans

The following is a summary of the balances of loans:

 

(Dollars in thousands)    March 31, 2017      December 31, 2016  

Mortgage loans on real estate:

     

Construction, Land and Land Development

   $ 44,119      $ 39,818  

Farmland

     994        1,023  

Commercial Mortgages (Non-Owner Occupied)

     35,464        35,343  

Commercial Mortgages (Owner Occupied)

     42,550        41,825  

Residential First Mortgages

     205,106        194,007  

Residential Revolving and Junior Mortgages

     27,090        26,425  

Commercial and Industrial loans

     46,205        43,024  

Consumer Loans

     3,324        3,544  
  

 

 

    

 

 

 

Total loans

     404,852        385,009  

Net unamortized deferred loan costs

     409        391  

Allowance for loan losses

     (3,993      (3,863
  

 

 

    

 

 

 

Loans, net

   $ 401,268      $ 381,537  
  

 

 

    

 

 

 

The recorded investment in past due and non-accruing loans is shown in the following table. A loan past due by more than 90 days is generally placed on nonaccrual unless it is both well secured and in the process of collection.

 

            90 Days or                              
     30-89      More Past             Total Past                
(Dollars in thousands)    Days      Due and             Due and             Total  

March 31, 2017

   Past Due      Still Accruing      Nonaccruals      Nonaccruals      Current      Loans  

Mortgage Loans on Real Estate:

                 

Construction, Land and Land Development

   $ —        $ —        $ 547      $ 547      $ 43,572      $ 44,119  

Farmland

     —          —          —          —          994        994  

Commercial Mortgages (Non-Owner Occupied)

     —          —          —          —          35,464        35,464  

Commercial Mortgages (Owner Occupied)

     —          —          2,148        2,148        40,402        42,550  

Residential First Mortgages

     402        —          1,975        2,377        202,729        205,106  

Residential Revolving and Junior Mortgages

     —          —          1,039        1,039        26,051        27,090  

Commercial and Industrial

     603        —          111        714        45,491        46,205  

Consumer Loans

     —          —          —          —          3,324        3,324  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,005      $ —        $ 5,820      $ 6,825      $ 398,027      $ 404,852  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
            90 Days or                              
     30-89      More Past             Total Past                
     Days      Due and             Due and             Total  

December 31, 2016

   Past Due      Still Accruing      Nonaccruals      Nonaccruals      Current      Loans  

Mortgage Loans on Real Estate:

                 

Construction, Land and Land Development

   $ —        $ —        $ 623      $ 623      $ 39,195      $ 39,818  

Farmland

     57        —          —          57        966        1,023  

Commercial Mortgages (Non-Owner Occupied)

     —          —          —          —          35,343        35,343  

Commercial Mortgages (Owner Occupied)

     188        —          2,270        2,458        39,367        41,825  

Residential First Mortgages

     1,546        —          2,155        3,701        190,306        194,007  

Residential Revolving and Junior Mortgages

     480        —          160        640        25,785        26,425  

Commercial and Industrial

     408        —          92        500        42,524        43,024  

Consumer Loans

     —          —          —          —          3,544        3,544  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,679      $ —        $ 5,300      $ 7,979      $ 377,030      $ 385,009  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents

Note 8: Allowance for Loan Losses

Loans Evaluated for Impairment

Loan receivables evaluated for impairment individually and collectively by segment as of March 31, 2017 and December 31, 2016 are as follows:

 

(Dollars in thousands)    Mortgage
Loans
     Commercial
and
     Consumer
and Other
        

As of March 31, 2017

   on Real Estate      Industrial      Loans      Total  

Individually evaluated for impairment

   $ 9,940      $ 92      $ —        $ 10,032  

Collectively evaluated for impairment

     345,383        46,113        3,324        394,820  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 355,323      $ 46,205      $ 3,324      $ 404,852  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2016

                           

Individually evaluated for impairment

   $ 10,323      $ 92      $ —        $ 10,415  

Collectively evaluated for impairment

     328,118        42,932        3,544        374,594  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Gross Loans

   $ 338,441      $ 43,024      $ 3,544      $ 385,009  
  

 

 

    

 

 

    

 

 

    

 

 

 

Allowance for Loan Losses

The allowance for loan losses disaggregated based on loan receivables evaluated for impairment individually and collectively by segment as of March 31, 2017 and December 31, 2016 are as follows:

 

(Dollars in thousands)   

Mortgage

Loans

    

Commercial

and

     Consumer         

As of March 31, 2017

   on Real Estate      Industrial      Loans      Total  

Individually evaluated for impairment

   $ 694      $ 92      $ —        $ 786  

Collectively evaluated for impairment

     2,727        436        44        3,207  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 3,421      $ 528      $ 44      $ 3,993  
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2016

   Mortgage
Loans
on Real Estate
     Commercial
and
Industrial
     Consumer
Loans
     Total  

Individually evaluated for impairment

   $ 803      $ 92      $ —        $ 895  

Collectively evaluated for impairment

     2,515        401        52        2,968  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 3,318      $ 493      $ 52      $ 3,863  
  

 

 

    

 

 

    

 

 

    

 

 

 

A disaggregation and an analysis of the change in the allowance for loan losses by segment is shown below.

 

(Dollars in thousands)

For the Three Months Ended

March 31, 2017

   Mortgage
Loans on
Real Estate
     Commercial
and
Industrial
     Consumer
Loans
     Total  

ALLOWANCE FOR LOAN LOSSES:

           

Beginning Balance

   $ 3,318      $ 493      $ 52      $ 3,863  

(Charge-offs)

     (132      —          (8      (140

Recoveries

     78        —          2        80  

Provision

     157        35        (2      190  
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 3,421      $ 528      $ 44      $ 3,993  
  

 

 

    

 

 

    

 

 

    

 

 

 

For the Three Months Ended

March 31, 2016

   Mortgage
Loans on
Real Estate
     Commercial
and
Industrial
     Consumer
Loans
     Total  

ALLOWANCE FOR LOAN LOSSES:

           

Beginning Balance

   $ 3,502      $ 599      $ 122      $ 4,223  

(Charge-offs)

     (83      —          (11      (94

Recoveries

     6        5        2        13  

(Recovery) provision

     (15      (25      5        (35
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending Balance

   $ 3,410      $ 579      $ 118      $ 4,107  
  

 

 

    

 

 

    

 

 

    

 

 

 

Internal Risk Rating Grades

Internal risk rating grades are generally assigned to commercial loans not secured by real estate, commercial mortgages, residential mortgages greater than $1 million, smaller residential mortgages which are impaired, loans to real estate developers and contractors, consumer loans greater than $250,000 with chronic delinquency, and TDRs, as shown in the following table. The grading analysis estimates the capability of the borrower to repay the contractual obligations of the loan agreements as scheduled. Risk grades (refer to Note 3) are evaluated as new information becomes available for each borrowing relationship or at least quarterly.

 

14


Table of Contents
     Construction,             Commercial      Commercial                
     Land and             Mortgages      Mortgages      Commercial         
(Dollars in thousands)    Land             (Non-Owner      (Owner      and         
As of March 31, 2017    Development      Farmland      Occupied)      Occupied)      Industrial      Total  

Grade:

                 

Pass

   $ 36,423      $ 994      $ 30,571      $ 32,412      $ 44,441      $ 144,841  

Watch

     5,762        —          4,375        7,732        1,538        19,407  

Special mention

     179        —          270        —          40        489  

Substandard

     1,755        —          248        2,406        186        4,595  

Doubtful

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 44,119      $ 994      $ 35,464      $ 42,550      $ 46,205      $ 169,332  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Construction,             Commercial      Commercial                
     Land and             Mortgages      Mortgages      Commercial         
     Land             (Non-Owner      (Owner      and         
As of December 31, 2016    Development      Farmland      Occupied)      Occupied)      Industrial      Total  

Grade:

                 

Pass

   $ 32,009      $ 1,023      $ 30,639      $ 31,191      $ 40,841      $ 135,703  

Watch

     5,795        —          4,184        6,652        1,891        18,522  

Special mention

     180        —          272        1,453        125        2,030  

Substandard

     1,834        —          248        2,529        167        4,778  

Doubtful

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 39,818      $ 1,023      $ 35,343      $ 41,825      $ 43,024      $ 161,033  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans not assigned internal risk rating grades are comprised of smaller residential mortgages and smaller consumer loans. Payment activity of these loans is reviewed monthly by management. However, some of these loans are graded when the borrower’s total exposure to the Bank exceeds the limits noted above. Loans are considered to be nonperforming when they are delinquent by 90 days or more or non-accruing and credit risk is primarily evaluated by delinquency status, as shown in the table below.

 

            Residential                
(Dollars in thousands)    Residential      Revolving                
As of March 31, 2017    First      and Junior      Consumer         

PAYMENT ACTIVITY STATUS

   Mortgages (1)      Mortgages (2)      Loans (3)      Total  

Performing

   $ 203,131      $ 26,051      $ 3,324      $ 232,506  

Nonperforming

     1,975        1,039        —          3,014  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 205,106      $ 27,090      $ 3,324      $ 235,520  
  

 

 

    

 

 

    

 

 

    

 

 

 
            Residential                
     Residential      Revolving                
As of December 31, 2016    First      and Junior      Consumer         

PAYMENT ACTIVITY STATUS

   Mortgages (4)      Mortgages (5)      Loans (6)      Total  

Performing

   $ 191,852      $ 26,265      $ 3,544      $ 221,661  

Nonperforming

     2,155        160        —          2,315  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 194,007      $ 26,425      $ 3,544      $ 223,976  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Residential First Mortgages which have been assigned a risk rating grade of Substandard totaled $3.1million as of March 31, 2017.
(2) Residential Revolving and Junior Mortgages which have been assigned a risk rating grade of Substandard totaled $1.9 million as of March 31, 2017.
(3) No Consumer Loans had been assigned a risk rating grade of Substandard as of March 31, 2017.
(4) Residential First Mortgages which have been assigned a risk rating grade of Substandard totaled $3.3 million as of December 31, 2016.
(5) Residential Revolving and Junior Mortgages which have been assigned a risk rating grade of Substandard totaled $1.1 million as of December 31, 2016.
(6) No Consumer Loans had been assigned a risk rating grade of Substandard as of December 31, 2016.

Impaired Loans

The following tables show the Company’s recorded investment and the customers’ unpaid principal balances for impaired loans, with the associated allowance amount, if applicable, as of March 31, 2017 and December 31, 2016, along with the average recorded investment and interest income recognized for the three months ended March 31, 2017 and 2016, respectively.

 

15


Table of Contents
     As of March 31, 2017      As of December 31, 2016  

(Dollars in thousands)

IMPAIRED LOANS

   Recorded
Investment
     Customers’ Unpaid
Principal Balance
     Related
Allowance
     Recorded
Investment
     Customers’ Unpaid
Principal Balance
     Related
Allowance
 

With no related allowance:

                 

Construction, Land and Land Development

   $ 1,455      $ 1,535      $ —        $ 1,531      $ 1,539      $ —    

Residential First Mortgages

     2,104        2,171        —          2,112        2,176        —    

Residential Revolving and Junior Mortgages (1)

     995        999        —          995        999        —    

Commercial Mortgages (Non-owner occupied)

     248        248        —          248        248        —    

Commercial Mortgages (Owner occupied)

     2,030        2,351        —          1,860        2,178        —    

Commercial and Industrial

     —          —          —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     6,832        7,304        —          6,746        7,140        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

                 

Construction, Land and Land Development

     239        285        140        243        286        145  

Residential First Mortgages

     1,942        1,942        338        1,951        1,951        367  

Residential Revolving and Junior Mortgages (1)

     526        528        175        544        546        199  

Commercial Mortgages (Non-owner occupied)

     —          —          —          —          —          —    

Commercial Mortgages (Owner occupied)

     401        421        41        839        854        92  

Commercial and Industrial

     92        101        92        92        101        92  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     3,200        3,277        786        3,669        3,738        895  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Impaired Loans:

                 

Construction, Land and Land Development

     1,694        1,820        140        1,774        1,825        145  

Residential First Mortgages

     4,046        4,113        338        4,063        4,127        367  

Residential Revolving and Junior Mortgages (1)

     1,521        1,527        175        1,539        1,545        199  

Commercial Mortgages (Non-owner occupied)

     248        248        —          248        248        —    

Commercial Mortgages (Owner occupied)

     2,431        2,772        41        2,699        3,032        92  

Commercial and Industrial

     92        101        92        92        101        92  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,032      $ 10,581      $ 786      $ 10,415      $ 10,878      $ 895  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Notes:

 

(1) Junior mortgages include equity lines.

 

     For the three months ended  
     March 31, 2017      March 31, 2016  
(Dollars in thousands)    Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With no related allowance:

           

Construction, land and land development

   $ 1,493      $ 13      $ 991      $ 14  

Residential First Mortgages

     2,108        5        2,783        26  

Residential Revolving and Junior Mortgages (1)

     995        10        468        9  

Commercial Mortgages (Non-owner occupied)

     248        4        256        4  

Commercial Mortgages (Owner occupied)

     2,159        5        1,090        17  

Commercial and Industrial

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     7,003        37        5,588        70  
  

 

 

    

 

 

    

 

 

    

 

 

 

With an allowance recorded:

           

Construction, land and land development

     241        1        260        1  

Residential First Mortgages

     1,946        24        2,905        21  

Residential Revolving and Junior Mortgages (1)

     527        5        309        4  

Commercial Mortgages (Non-owner occupied)

     —          —          —          —    

Commercial Mortgages (Owner occupied)

     406        —          2,208        14  

Commercial and Industrial

     92        —          280        1  
  

 

 

    

 

 

    

 

 

    

 

 

 
     3,212        30        5,962        41  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

           

Construction, land and land development

     1,734        14        1,251        15  

Residential First Mortgages

     4,054        29        5,688        47  

Residential Revolving and Junior Mortgages (1)

     1,522        15        777        13  

Commercial Mortgages (Non-owner occupied)

     248        4        256        4  

Commercial Mortgages (Owner occupied)

     2,565        5        3,298        31  

Commercial and Industrial

     92        —          280        1  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,215      $ 67      $ 11,550      $ 111  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Junior mortgages include equity lines.

Smaller non-accruing loans and non-accruing loans that are not graded because they are included in homogenous pools generally do not meet the criteria for impairment testing, and are therefore excluded from impaired loan disclosures. At March 31, 2017 and December 31, 2016, non-accruing loans excluded from impaired loan disclosure totaled $671 thousand and $465 thousand, respectively. If interest on these non-accruing loans had been accrued, such income would have totaled $6 thousand and $2 thousand during the three months ended March 31, 2017 and 2016, respectively.

 

16


Table of Contents

Loan Modifications

Loans modified as TDRs are considered impaired and are individually evaluated for the amount of impairment in the ALL. There were no new loans modified as TDRs in the first quarter of 2017 or the first quarter of 2016. In addition, no TDRs subsequently defaulted in the first quarter of 2017 or the first quarter of 2016.

Other Real Estate Owned

The table below details the properties included in other real estate owned (“OREO”) as of March 31, 2017 and December 31, 2016. There were no collateralized consumer residential mortgage loans in the process of foreclosure as of March 31, 2017.

 

     As of March 31, 2017      As of December 31, 2016  
     No. of      Carrying      No. of      Carrying  
(Dollars in thousands)    Properties      Value      Properties      Value  

Residential

     2      $ 831        2      $ 891  

Land lots

     7        586        7        547  

Convenience store

     1        60        1        59  

Restaurant

     1        55        1        55  

Commerical properties

     3        904        3        942  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     14      $ 2,436        14      $ 2,494  
  

 

 

    

 

 

    

 

 

    

 

 

 

Included in other assets as of March 31, 2017 and December 31, 2016, is one residential property purchased in 2013 from a related party with a value of $708 thousand and a former branch, which was closed April 30, 2015, with a value of $403 thousand.

Note 9: Earnings per share

The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock.

 

     For the three months ended  
     March 31, 2017      March 31, 2016  
     Average      Per share      Average      Per share  
     Shares      Amount      Shares      Amount  

Basic earnings per share

     4,776,800      $ (0.04      4,774,856      $ 0.11  

Effect of dilutive securities:

           

Stock options

     —             16,283     
  

 

 

       

 

 

    

Diluted earnings per share

     4,776,800      $ (0.04      4,791,139      $ 0.11  
  

 

 

       

 

 

    

For the three months ended March 31, 2017 and 2016, options on 91,368 and 68,473 shares, respectively, were not included in computing diluted earnings per share because their effects were anti-dilutive.

Note 10: Stock-Based Compensation

On June 28, 2013, the Company registered with the SEC a stock-based compensation plan, which superseded all other plans. There are 317,209 shares available for grant under this plan at March 31, 2017.

Stock-based compensation expense related to stock awards for the three month periods ended March 31, 2017 and 2016 was $59 thousand and $16 thousand, respectively. Compensation expense for stock options is the estimated fair value of options on the date granted using the Black-Scholes Model amortized on a straight-line basis over the vesting period of the award. There was no unrecognized compensation expense related to stock options as of March 31, 2017.

Options for a total of 8,500 shares were granted and vested during the three months ended March 31, 2017. The aggregate fair value of options granted during the three months ended March 31, 2017 was $16 thousand. Options for a total of 7,500 shares were granted and vested during the three months ended March 31, 2016. The aggregate fair value of options granted during the three months ended March 31, 2016 was $16 thousand.

 

17


Table of Contents

The variables used in these calculations of the fair value of the options are as follows:

 

     For the three months ended March 31,  
     2017     2016  

Risk free interest rate (5 year Treasury)

     1.93     1.49

Expected dividend yield

     0     0

Expected term (years)

     5       5  

Expected volatility

     21.7     40.1

Stock option activity for the three months ended March 31, 2017 is summarized below:

 

                   Weighted         
                   Average         
            Weighted Average      Remaining      Aggregate  
            Exercise      Contractual      Intrinsic  
     Shares      Price      Life (in years)      Value (1)  

Options outstanding, January 1, 2017

     218,300      $ 6.35        5.9     

Granted

     8,500        8.30        

Forfeited

     (1,195      8.43        

Exercised

     —          —          

Expired

     —          —          
  

 

 

          

Options outstanding and exercisable, March 31, 2017

     225,605      $ 6.41        5.9      $ 737,512  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on March 31, 2017. This amount changes based on changes in the market value of the Company’s common stock.

In the first quarter of 2017, 12,500 shares of restricted stock were granted to two executives. Of these shares, 5,000 shares vested immediately and $43 thousand of compensation expense was recorded. Another 2,500 shares of restricted stock will vest over two years and $20 thousand of compensation expense is expected to be recorded over that period. The final 5,000 shares of restricted stock will vest over three years and $40 thousand of compensation expense is expected to be recorded over that period.

Note 11: Employee Benefit Plans

The Company has a non-contributory, defined benefit pension plan for full-time employees who were over 21 years of age and vested in the plan as of December 31, 2012, when the plan was frozen. Each participant’s account balance grows based on monthly interest credits. The Company funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act.

The Company sponsors a post-retirement benefit plan covering current and future retirees who acquire age 55 and 10 years of service or age 65 and 5 years of service. The post-retirement benefit plan provides coverage toward a retiree’s eligible medical and life insurance benefits expenses. The plan is unfunded and funded as benefits are due.

Components of Net Periodic (Benefit) Cost

 

(Dollars in thousands)    Pension Benefits      Post-Retirement Benefits  

Three months ended March 31,

   2017      2016      2017      2016  

Service cost

   $ —        $ —        $ 5      $ 6  

Interest cost

     31        35        5        7  

Expected return on plan assets

     (45      (48      —          —    

Settlement loss

     13        —          —          —    

Amortization of net gain

     —          —          (2      —    

Recognized net actuarial loss

     19        19        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic cost

   $ 18      $ 6      $ 8      $ 13  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company expects to make no contribution to its pension plan and $5 thousand to its post-retirement benefit plan during the remainder of 2017. The Company has contributed $1 thousand towards the post-retirement plan during the first three months of 2017.

 

18


Table of Contents

Note 12: Long Term Debt

FHLB Debt

As of March 31, 2017, the Bank had $60.0 million of outstanding FHLB debt, consisting of nine advances. As of December 31, 2016, five advances totaling $35.0 million were outstanding. The Company drew four new advances totaling $25.0 million during the first quarter of 2017.

The nine advances are shown in the following table.

 

Description

   Balance      Originated      Current
Interest Rate
    Maturity
Date
 

Adjustable Rate Hybrid

   $ 10,000,000        4/12/2013        3.40178     4/13/2020  

Fixed Rate Credit

     5,000,000        12/21/2015        0.99000     6/15/2017  

Fixed Rate Credit

     5,000,000        12/22/2015        1.08000     9/15/2017  

Fixed Rate Credit

     5,000,000        1/17/2017        0.91000     10/1/2017  

Fixed Rate Credit

     5,000,000        1/20/2017        0.99500     12/20/2017  

Fixed Rate Credit

     10,000,000        3/1/2017        0.79000     5/29/2017  

Fixed Rate Credit

     5,000,000        3/6/2017        0.71000     4/5/2017  

Fixed Rate Credit

     10,000,000        3/30/2017        0.90000     4/28/2017  

Fixed Rate Credit

     5,000,000        3/31/2017        0.89000     5/1/2017  
  

 

 

         
   $ 60,000,000          
  

 

 

         

Advances on the FHLB lines are secured by a blanket lien on qualified 1 to 4 family residential real estate loans. Immediate available credit, as of March 31, 2017, was $54.8 million against a total line of credit of $120.8 million.

As of March 31, 2017 and December 31, 2016, the Company had $60.0 million and $35.0 million, respectively, in FHLB debt outstanding with a weighted average interest rate of 1.31% and 1.49%, respectively.

Subordinated Debt

On May 28, 2015, the Company issued an aggregate of $7,000,000 of subordinated notes (the “Notes”). The Notes have a maturity date of May 28, 2025. The Notes bear interest, payable on the 1st of March and September of each year, commencing September 1, 2015, at a fixed interest rate of 6.50% per year. The Notes are not convertible into common stock or preferred stock, and are not callable by the holders. The Company has the right to redeem the Notes, in whole or in part, without premium or penalty, at any interest payment date on or after May 28, 2020 and prior to the maturity date, but in all cases in a principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. If an event of default occurs, such as the bankruptcy of the Company, the holder of a Note may declare the principal amount of the Note to be due and immediately payable. The Notes are unsecured, subordinated obligations of the Company and will rank junior in right of payment to the Company’s existing and future senior indebtedness. The Notes qualify as Tier 2 capital for regulatory reporting.

 

(Dollars in thousands)    Balance as of  
   March 31, 2017  

6.5% Subordinated Debt

   $ 7,000  

Less: Issuance costs

     (136
  

 

 

 
   $ 6,864  
  

 

 

 

Note 13: Fair Value Measurements

The Company uses fair value to record certain assets and liabilities and to determine fair value disclosures. Authoritative accounting guidance clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

Authoritative accounting guidance specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

 

Level 1 –    Valuation is based on quoted prices in active markets for identical assets and liabilities.
Level 2 –    Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.
Level 3 –    Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

 

19


Table of Contents

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities available-for-sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Defined benefit plan assets: Defined benefit plan assets are recorded at fair value on an annual basis at year end.

Mortgage servicing rights: MSRs are recorded at fair value on a recurring basis, with changes in fair value recorded in the results of operations. A model is used to determine fair value, which establishes pools of performing loans, calculates cash flows for each pool and applies a discount rate to each pool. Loans are segregated into 14 pools based on each loan’s term and seasoning (age). All loans have fixed interest rates. Cash flows are then estimated by utilizing assumed service costs and prepayment speeds. Service costs were assumed to be $6.00 per loan as of both March 31, 2017 and December 31, 2016. Prepayment speeds are determined primarily based on the average interest rate of the loans in each pool. The prepayment scale used is the Public Securities Association (“PSA”) model, where “100% PSA” means prepayments are zero in the first month, then increase by 0.2% of the loan balance each month until reaching 6.0% in month 30. Thereafter, the 100% PSA model assumes an annual prepayment of 6.0% of the remaining loan balance. The average PSA speed assumption in the fair value model is 139% and 150% as of March 31, 2017 and December 31, 2016, respectively. A discount rate of 14% was then applied to each pool as of March 31, 2017 and 14.0% as of December 31, 2016. This discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSRs are classified as Level 3.

 

20


Table of Contents

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of

March 31, 2017 and December 31, 2016:

 

(Dollars in thousands)   Fair Value Measurements at March 31, 2017 Using  

Description

  Balance     Level 1     Level 2     Level 3  

Securities available-for-sale:

       

Corporate bonds

  $ 6,715     $ —       $ —       $ 6,715  

U. S. Government agencies

    24,235       —         24,235       —    

State and municipal obligations

    18,876       —         18,876       —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available-for-sale:

  $ 49,826     $ —       $ 43,111     $ 6,715  
 

 

 

   

 

 

   

 

 

   

 

 

 

Mortgage servicing rights

  $ 692     $ —       $ —       $ 692  

Defined benefit plan assets:

       

Cash and cash equivalents

  $ 3     $ 3     $ —       $ —    

Mutual funds - fixed income

    1,043       1,043     $ —       $ —    

Mutual funds - equity

    1,577       1,577       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total defined benefit plan assets

  $ 2,623     $ 2,623     $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

 
    Fair Value Measurements at December 31, 2016 Using  

Description

  Balance     Level 1     Level 2     Level 3  

Securities available-for-sale:

       

Corporate bonds

  $ 7,704     $ —       $ —       $ 7,704  

U. S. Government agencies

    25,313       —         25,313       —    

State and municipal obligations

    18,156       —         18,156       —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total securities available-for-sale:

  $ 51,173     $ —       $ 43,469     $ 7,704  
 

 

 

   

 

 

   

 

 

   

 

 

 

Mortgage servicing rights

  $ 671     $ —       $ —       $ 671  

Defined benefit plan assets:

       

Mutual funds - fixed income

  $ 1,041     $ 1,041     $ —       $ —    

Mutual funds - equity

    1,649       1,649       —         —    
 

 

 

   

 

 

   

 

 

   

 

 

 

Total defined benefit plan assets

  $ 2,690     $ 2,690     $ —       $ —    
 

 

 

   

 

 

   

 

 

   

 

 

 

The reconciliation of items using Level 3 inputs is as follows:

 

            Corporate  
(Dollars in thousands)    MSRs      Bonds  

Balance, January 1, 2017

   $ 671      $ 7,704  

Purchases

     —          —    

Impairments

     —          —    

Fair value adjustments

     21        11  

Sales

     —          (1,000
  

 

 

    

 

 

 

Balance, March 31, 2017

   $ 692      $ 6,715  
  

 

 

    

 

 

 

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Any given loan may have multiple types of collateral. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered

 

21


Table of Contents

significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the ALL are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned: OREO is measured at fair value less estimated costs to sell, based on an appraisal conducted by an independent, licensed appraiser outside of the Company. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of marketability, then the fair value is considered Level 3. OREO is measured at fair value on a nonrecurring basis. The initial fair value of OREO is based on an appraisal done at the time of foreclosure. Subsequent fair value adjustments are recorded in the period incurred and included in other noninterest income on the Consolidated Statements of Income.

The following table summarizes the Company’s assets that were measured at fair value on a nonrecurring basis at the end of the respective period.

 

            Fair Value Measurements at March 31, 2017 Using  

(Dollars in thousands)

Description

   Balance as of
March 31, 2017
     Level 1      Level 2      Level 3  

Impaired Loans, net

   $ 2,414      $ —        $ —        $ 2,414  

Other real estate owned, net

     2,436        —          —          2,436  
            Fair Value Measurements at December 31, 2016 Using  

Description

   Balance as of
December 31, 2016
     Level 1      Level 2      Level 3  

Impaired loans, net

     2,774        —          —          2,774  

Other real estate owned, net

   $ 2,494      $ —        $ —        $ 2,494  

The following table displays quantitative information about Level 3 Fair Value Measurements as of March 31, 2017:

 

                      Range  
    Balance as of     Valuation     Unobservable     (Weighted  
(Dollars in thousands)   March 31, 2017     Technique     Input     Average)  

Impaired Loans, net

  $ 2,414       Discounted appraised value       Selling Cost       0% - 20% (15%
        Lack of Marketability       50% - 100% (96%

Other real estate owned, net

    2,436       Discounted appraised value       Selling Cost       3% - 13% (5%
        Lack of Marketability       10% -20% (11%

The following table displays quantitative information about Level 3 Fair Value Measurements as of December 31, 2016:

 

                      Range  
    Balance as of     Valuation     Unobservable     (Weighted  
(Dollars in thousands)   December 31, 2016     Technique     Input     Average)  

Impaired Loans, net

  $ 2,774       Discounted appraised value       Selling Cost       10% - 20% (16% )
        Lack of Marketability       50% (50%

Other real estate owned, net

  $ 2,494       Discounted appraised value       Selling Cost       3% - 13% (5%
        Lack of Marketability       10% - 20% (11%

 

22


Table of Contents

The estimated fair values of financial instruments are shown in the following table. The carrying amounts in the table are included in the balance sheet under the applicable captions.

 

                Fair Value Measurements at March 31, 2017 Using  

(Dollars in thousands)

Description

  Balance as of
March 31, 2017
    Fair Value as of
March 31, 2017
    Level 1     Level 2     Level 3  

Financial Assets:

         

Cash and due from banks

  $ 5,087     $ 5,087     $ 5,087     $ —       $ —    

Interest-bearing deposits

    6,826       6,826       6,826       —         —    

Certificates of deposit

    3,472       3,472       —         3,472       —    

Federal funds sold

    336       336       336       —         —    

Securities available-for-sale

    49,826       49,826       —         43,111       6,715  

Restricted securities

    3,756       3,756       —         —         3,756  

Loans, net

    401,268       400,988       —         —         400,988  

Accrued interest receivable

    1,321       1,321       —         1,321       —    

Bank owned life insurance

    9,944       9,944       9,944       —         —    

Mortgage servicing rights

    692       692       —         —         692  

Financial Liabilities:

         

Non-interest-bearing liabilities

  $ 77,369     $ 77,369     $ 77,369     $ —       $ —    

Savings and other interest-bearing deposits

    169,027       167,027       —         167,027       —    

Time deposits

    136,104       135,662       —         —         135,662  

Securities sold under repurchase agreements

    8,489       8,489       —         8,489       —    

FHLB advances

    60,000       59,352       —         59,352       —    

Subordinated debt

    6,864       7,000       —         —         7,000  

Accrued interest payable

    225       225       —         225       —    
                Fair Value Measurements at December 31, 2016 Using  

(Dollars in thousands)

Description

  Balance as of
December 31, 2016
    Fair Value as of
December 31, 2016
    Level 1     Level 2     Level 3  

Financial Assets:

         

Cash and due from banks

  $ 4,851     $ 4,851     $ 4,851     $ —       $ —    

Interest-bearing deposits

    7,501       7,501       7,501       —         —    

Certificates of deposit

    4,216       4,216       —         4,216       —    

Federal funds sold

    2,350       2,350       2,350       —         —    

Securities available-for-sale

    51,173       51,173       —         43,469       7,704  

Restricted securities

    2,649       2,649       —         —         2,649  

Loans, net

    381,537       384,468       —         —         384,468  

Loans held for sale

    276       276       —         —         276  

Accrued interest receivable

    1,372       1,372       —         1,372       —    

Bank owned life insurance

    9,869       9,869       9,869       —         —    

Mortgage servicing rights

    671       671       —         —         671  

Financial Liabilities:

         

Non-interest-bearing liabilities

  $ 74,799     $ 74,799     $ 74,799     $ —       $ —    

Savings and other interest-bearing deposits

    178,869       178,869       —         178,869       —    

Time deposits

    128,050       127,497       —         —         127,497  

Securities sold under repurchase agreements

    18,310       18,310       —         18,310       —    

FHLB advances

    35,000       35,668       —         35,668       —    

Subordinated debt

    6,860       7,000       —         —         7,000  

Accrued interest payable

    331       331       —         331       —    

The carrying amounts of cash and due from banks, interest-bearing deposits, federal funds sold or purchased, accrued interest receivable, loans held for sale and non-interest-bearing deposits, are payable on demand, or are of such short duration that carrying value approximates market value.

Securities available-for-sale are carried at quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

The carrying value of restricted securities approximates fair value based on the redemption provisions of the issuer.

 

23


Table of Contents

Bank owned life insurance is carried at its cash surrender value.

MSRs are carried at fair value. As described above, a valuation model is used to determine fair value. This model utilizes a discounted cash flow analysis with servicing costs and prepayment assumptions based on comparable instruments and a discount rate.

The fair value of performing loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar remaining maturities. This calculation ignores loan fees and certain factors affecting the interest rates charged on various loans such as the borrower’s creditworthiness and compensating balances and dissimilar types of real estate held as collateral. The fair value of impaired loans is measured as described within the Impaired Loans section of this note. The fair value of loans does not consider the lack of liquidity and uncertainty in the market that would affect the valuation.

Time deposits are presented at estimated fair value by discounting the future cash flows using interest rates offered for deposits of similar remaining maturities.

The fair value of the Company’s subordinated debt is estimated by utilizing observable market prices for comparable securities. Qualitative factors like asset quality, market factors and liquidity are also considered.

The fair value of the FHLB advances is estimated by discounting the future cash flows using the current interest rates offered for similar advances.

The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date. At March 31, 2017 and December 31, 2016, the fair value of loan commitments and standby letters of credit was immaterial and therefore, they are not included in the table above.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair value of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Note 14: Changes in Accumulated Other Comprehensive Income (Loss)

The balances in accumulated other comprehensive income (loss) are shown in the following tables:

 

     For the Three Months Ended March 31, 2017  
     Net Unrealized      Pension and      Accumulated Other  
     Gains (Losses)      Post-retirement      Comprehensive  
(Dollars in thousands)    on Securities      Benefit Plans      Income (Loss)  

Balance January 1, 2017

   $ (520    $ (715    $ (1,235

Change in net unrealized holding gains on securities, before reclassification, net of tax expense of $13

     27        —          27  

Reclassification for previously unrealized net losses recognized in income, net of tax benefit of $2

     3        —          3  
  

 

 

    

 

 

    

 

 

 

Balance March 31, 2017

   $ (490    $ (715    $ (1,205
  

 

 

    

 

 

    

 

 

 
     For the Three Months Ended March 31, 2016  
     Net Unrealized      Pension and      Accumulated Other  
     Gains (Losses)      Post-retirement      Comprehensive  
(Dollars in thousands)    on Securities      Benefit Plans      Income (Loss)  

Balance January 1, 2016

   $ 107      $ (883    $ (776

Change in net unrealized holding gains on securities, before reclassification, net of tax expense of $173

     335        —          335  

Reclassification for previously unrealized net gains recognized in income, net of tax expense of $2

     (4      —          (4
  

 

 

    

 

 

    

 

 

 

Balance March 31, 2016

   $ 438      $ (883    $ (445
  

 

 

    

 

 

    

 

 

 

 

24


Table of Contents

Reclassification for previously unrealized gains (losses) and impairments on securities are reported in the Consolidated Statements of (Loss) Income as follows. No unrealized gains (losses) on pension and post-employment related costs were reclassified to the Consolidated Statements of (Loss) Income in the three months ended March 31, 2017 and 2016.

Accumulated Other Comprehensive Income (Loss)

Reclassification for the Three Months Ended

Holding (Losses) Gains on Securities

 

(Dollars in thousands)    March 31, 2017      March 31, 2016  

Net (losses) gains on sale of securities available-for-securities

   $ (5    $ 6  

Tax benefit (expense)

     2        (2
  

 

 

    

 

 

 

Impact on net (loss) income

   $ (3    $ 4  
  

 

 

    

 

 

 

 

25


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding the results of operations and the financial condition of Bay Banks of Virginia, Inc. This discussion should be read in conjunction with the above consolidated financial statements and the notes thereto.

STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This report contains statements concerning the Company’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. These forward-looking statements include statements about the benefits of the merger between the Company and Virginia BanCorp, the Company’s and Virginia BanCorp’s plans, obligations, expectations and intentions and other statements that are not historical facts. Words such as “anticipates,” “believes,” “intends,” “should,” “expects,” “will,” and variations of similar expressions are intended to identify forward-looking statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, disruptions to customer and employee relationships and business operations caused by the merger; the ability to implement integration plans associated with the transaction in which integration may be more difficult, time-consuming or costly than expected; the ability to achieve the cost savings and synergies contemplated by the merger within the expected timeframe, or at all; changes in interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; expansion activities; demand for financial services in the Company’s market area, accounting principles, policies and guidelines and the other factors detailed in Bay Banks’s publicly filed documents, including its Annual Report on Form 10-K for the year ended December 31, 2016. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.

EXECUTIVE SUMMARY

MERGER WITH VIRGINIA BANCORP

On April 1, 2017, the Company and Virginia BanCorp, a bank holding company conducting substantially all of its operations through its subsidiary Virginia Commonwealth Bank (“VCB”), completed a merger pursuant to the Agreement and Plan of Merger, dated as of November 2, 2016, by and between the Company and Virginia BanCorp. The Company is the surviving corporation in the merger and the former shareholders of Virginia BanCorp received 1.178 shares of the Company’s common stock for each share of Virginia BanCorp common stock they owned immediately prior to the merger, for a total issuance of 4,586,221 shares of the Company’s common stock valued at approximately $40.5 million. As of the completion of the merger, the Company’s legacy shareholders owned approximately 51% of the outstanding common stock of the Company and Virginia BanCorp’s former shareholders owned approximately 49% of the outstanding common stock of the Company.

After the merger of Virginia BanCorp with and into the Company, Virginia BanCorp’s subsidiary bank was merged with and into Bank of Lancaster, and immediately thereafter Bank of Lancaster changed its name to Virginia Commonwealth Bank. Immediately prior to the merger, VCB had total loans of $274.8 million, total deposits of $266.1 million, and total assets of $326.7 million. Bank operating systems are currently being consolidated, which is expected to be completed during the fourth quarter of 2017.

Merger-related costs during the first quarter of 2017 were $471 thousand, and accumulated merger-related costs including the fourth quarter of 2016 were $1.0 million. Annual cost savings of the combined companies are anticipated to be approximately 14% of non-interest expense from 2016 levels.

GENERAL

Net (loss) earnings for the three months ended March 31, 2017 and 2016 were $(177) thousand and $524 thousand, respectively. This is a decline of $701 thousand, or 133.8 %, year over year. Net interest income grew by $420 thousand, non-interest income was unchanged and provision for loan losses increased by $225 thousand. Non-interest expenses increased by $1.2 million or 32%, mainly due to merger-related costs and non-recurring items. Refer to the Earnings Summation section later in this Item 2 for explanations. (Loss) return on average assets declined to (0.14)% from 0.46% for the comparable prior-year period, and (loss) return on average equity declined to (1.70)% from 5.24%.

The in-house loan portfolio grew by $19.7 million, or 5.2%, during the first three months of 2017. The portfolio of loans serviced for Fannie Mae totaled $82.9 million as of March 31, 2017 compared to $82.3 million as of December 31, 2016 and $72.4 million as of March 31, 2016.

The net interest margin improved to 3.45% for the first three months of 2017 compared to 3.35% for the same period in 2016 as costs of money market and time deposit accounts declined. Loan growth was primarily funded by Federal home loan bank advances.

Loans past due or non-accruing have declined by $1.2 million to $6.8 million in the three months ended March 31, 2017. Asset quality remains stable with non-performing assets at 1.6% of total assets at March 31, 2017 compared to 1.6% at December 31, 2016.

Finally, the Company’s core capital levels and regulatory ratios remain well above what is considered “well capitalized” by the Company’s regulators.

 

26


Table of Contents

For more information, visit the Company’s website at www.baybanks.com. Information contained on the Company’s website is not a part of or incorporated into this report.

EARNINGS SUMMATION

For the three months ended March 31, 2017 and 2016, net (loss) income was $(177) thousand and $524 thousand, respectively, a decrease of $701 thousand or 133.8%. Diluted (loss) earnings per average share for the three months ended March 31, 2017 and 2016 were $(0.04) and $0.11, respectively. The primary factors in the decrease were as follows:

 

    $769 thousand increase in salaries and employee benefits related to bonuses, one-time severance related to the merger, a change in payroll processes, and new hires;

 

    $300 thousand in other one-time merger related expenses;

 

    $225 thousand increase in provision for loan losses; partially offset by

 

    $420 thousand in additional net interest income related to loan growth.

Annualized (loss) return on average assets was (0.14)% for the first quarter of 2017 compared to 0.46% for the first quarter of 2016. Annualized (loss) return on average equity was (1.70)% and 5.24% for the three months ended March 31, 2017 and 2016, respectively.

RESULTS OF OPERATIONS

The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of assets which earn interest. Changes in the volume and mix of assets which earn interest and liabilities that bear interest, the associated yields and rates, and the volume of non-performing assets have an effect on net interest income, the net interest margin, and net income.

FOR THE THREE MONTHS ENDED MARCH 31, 2017 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2016

NET INTEREST INCOME

 

     Average Balances, Income and Expense, Yields and Rates  
Net Interest Income Analysis    Three months ended 3/31/2017     Three months ended 3/31/2016  

Fully taxable equivalent basis)

(Dollars in Thousands)

   Average
Balance
     Income/
Expense
     Yield/ Cost     Average
Balance
     Income/
Expense
     Yield/ Cost  

INTEREST EARNING ASSETS:

                

Taxable investments

   $ 35,705      $ 269        3.01   $ 30,152      $ 207        2.72

Tax-exempt investments (1)

     19,157        173        3.61     24,358        206        3.35
  

 

 

    

 

 

      

 

 

    

 

 

    

Total investments

     54,862        442        3.22     54,510        413        3.03

Gross loans (2)

     393,051        4,388        4.47     347,894        3,974        4.57

Interest-bearing deposits

     4,451        7        0.63     15,727        15        0.51

Certificates of deposits

     4,051        19        1.88     3,059        22        2.13

Federal funds sold

     542        1        0.74     516        —          0.31
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest Earning Assets

   $ 456,957      $ 4,857        4.25   $ 421,706      $ 4,424        4.20
  

 

 

    

 

 

      

 

 

    

 

 

    

INTEREST-BEARING LIABILITIES:

                

Savings deposits

   $ 44,430      $ 25        0.23   $ 41,961      $ 20        0.19

NOW deposits

     44,771        23        0.21     39,234        15        0.15

Time deposits => $100,000

     65,126        221        1.36     62,701        229        1.42

Time deposits < $100,000

     66,104        217        1.31     62,130        215        1.39

Time deposits - Wholesale

     —          —          —         5,504        7        0.49

Money market deposit accounts

     89,493        144        0.64     83,203        159        0.77
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Deposits

     309,924        630        0.81     294,733        645        0.89

Federal funds purchased

     2,677        10        1.49     —          —          —    

Securities sold under repurchase agreements

     8,234        3        0.15     5,829        2        0.17

Subordinated debt

     6,862        117        6.82     6,846        118        6.93

FHLB advances

     42,500        154        1.45     37,874        125        1.32
  

 

 

    

 

 

      

 

 

    

 

 

    

Total Interest-Bearing Liabilities

   $ 370,197      $ 914        0.99   $ 345,282      $ 890        1.05
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income and net interest margin

      $ 3,943        3.45      $ 3,534        3.35
     

 

 

         

 

 

    

Non-interest-bearing deposits

   $ 73,485        —          0.00   $ 63,525        —          0.00

Total Cost of funds

           0.82           0.88

Net interest rate spread

           3.43           3.32

Notes:

 

(1) Income and yield assumes a federal tax rate of 34%.
(2) Includes loan fees and nonaccrual loans.

 

27


Table of Contents

Interest income for the three months ended March 31, 2017, on a tax-equivalent basis, was $4.9 million, an increase of $433 thousand from the first quarter of 2016, due mainly to increases in loan balances and higher yields on investments. Interest expense for the three months ended March 31, 2017 was $914 thousand, an increase of $24 thousand from the first quarter of 2016, due primarily to an increase in FHLB advances which supported loan growth. Net interest income for the three months ended March 31, 2017, on a tax-equivalent basis, was $3.9 million, an increase of $409 thousand from the first quarter of 2016.

The annualized net interest margin was 3.45% and 3.35% for the three months ended March 31, 2017 and 2016, respectively. This increase is due primarily to higher investment yields of 3.22% in the first quarter of 2017 compared to 3.03% in the first quarter of 2016, plus reduced costs of money market accounts and time deposits. The net interest margin increase was partially offset by reductions in loan yields, to 4.47% for the first quarter of 2017 from 4.57% for the first quarter of 2016. The cost of funds declined to 0.82% for the first quarter of 2017 from 0.88% for the first quarter of 2016, a result of higher non-interest bearing deposit balances and lower costs of time and money market deposits.

The net interest spread, which is the difference between the annualized yield on earning assets and the total cost of funds, increased to 3.43% for the three months ended March 31, 2017, compared to 3.32% for the three months ended March 31, 2016.

NON-INTEREST INCOME

Non-interest income for the first quarter of 2017 was $857 thousand compared to $858 thousand for the first quarter of 2016. Primary changes in non-interest income were as follows:

 

    $61 thousand increase in other real estate losses due to an increase in the valuation allowance;

 

    $49 thousand increase in gains on deferred compensation plan assets;

 

    $38 thousand increase in fiduciary fees;

 

    $38 thousand increase in secondary market lending fees; and

 

    $47 thousand decrease in VISA related fees due to the sale of that portfolio in June 2016.

NON-INTEREST EXPENSE

For the three months ended March 31, 2017 and 2016, non-interest expenses totaled $4.8 million and $3.7 million, respectively. Contributing to the increase in non-interest expense was:

 

    $769 thousand increase in salaries and benefits due primarily to $250 thousand in bonuses consisting of performance related and hiring bonuses, $171 thousand related to one-time severance associated with the merger, $164 thousand related to payroll processing changes, $102 thousand primarily for new hires in the Richmond market, $69 thousand in deferred compensation expense and $42 thousand in residential lending commissions as the result of loan growth;

 

    $300 thousand in other one-time merger related expenses.

AVERAGE INTEREST-EARNING ASSETS AND AVERAGE INTEREST-BEARING LIABILITIES

Average interest-earning assets increased 8.4% to $457.0 million for the three months ended March 31, 2017, as compared to $421.7 million for the three months ended March 31, 2016, due mainly to higher loan balances. Average interest-earning assets as a percent of total average assets were 93.4% for the three months ended March 31, 2017 as compared to 93.3% for the same period in 2016. The loan portfolio, with $393.1 million in average balances as of March 31, 2017, is the largest category of interest-earning assets.

Average interest-bearing liabilities increased 7.2% to $370.2 million for the three months ended March 31, 2017, as compared to $345.3 million for the three months ended March 31, 2017. The largest category of interest-bearing liabilities is time deposits, with combined average balances of $131.2 million for the three months ended March 31, 2017, up from $124.8 million for the similar period in 2016. Average balances of money market deposit accounts increased by $6.3 million to $89.5 million for the first three months of 2017 compared to the same period in 2016.

ASSET QUALITY

Asset quality remains stable. Loans charged off during the first three months of 2017, net of recoveries, totaled $60 thousand compared to $81 thousand for the first three months of 2016. This represents a decrease in the annualized net charge-off ratio to 0.06% for the first three months of 2017 compared to 0.09% for the first three months of 2016. The majority of those charge-offs were anticipated and specific reserves had been provided for them in the ALL. Management believes it is maintaining an adequate level of the ALL at 0.99% of total loans at March 31, 2017 and 1.00% at December 31, 2016.

 

28


Table of Contents

Non-performing assets, which include OREO and non-performing loans, increased by $462 thousand to $8.3 million, or 1.6% of total assets as of March 31, 2017 compared to $7.8 million as of December 31, 2016. This increase is primarily related to an increase of $520 thousand in non-accruing loans partially offset by a decrease of $58 thousand in OREO.

Non-Performing Assets

 

(Dollars in Thousands)    March 31, 2017     December 31, 2016  

Loans past due 90 days or more and still accruing

   $ —       $ —    

Non-accruing loans

     5,820       5,300  
  

 

 

   

 

 

 

Total non-performing loans

     5,820       5,300  
  

 

 

   

 

 

 

Other real estate owned

     2,436       2,494  
  

 

 

   

 

 

 

Total non-performing assets

   $ 8,256     $ 7,794  
  

 

 

   

 

 

 

Allowance for loan losses

   $ 3,993     $ 3,863  
  

 

 

   

 

 

 

Allowance to non-performing loans

     68.6     72.9

Non-performing assets to total assets

     1.6     1.6

Classified assets, which include loans with risk rating grades of substandard, doubtful and loss, plus OREO, increased by $393 thousand during the first three months of 2017 to $12.1 million, or 26.86% of Tier 1 capital plus the allowance for loan losses. Risk rating grades are assigned conservatively, causing some homogenous loans, such as residential mortgages, to fall into the pool of adversely risk rated loans and thereby evaluated for impairment, even though they may be performing as agreed and therefore not impaired.

As of March 31, 2017, loans valued at $10.2 million were considered impaired, whereas $10.4 million were considered impaired as of December 31, 2016. Between December 31, 2016 and March 31, 2017, no new loans were identified as impaired and none were dispensed through foreclosure and charged-off. Management has reviewed the impaired credits and the underlying collateral and the current losses have been specifically reserved.

FINANCIAL CONDITION

Total assets increased to $504.2 million as of March 31, 2017 compared to $486.7 million as of December 31, 2017. Cash and due from banks, which produces no income was $5.1 million and $4.9 million as of March 31, 2017 and December 31, 2016, respectively. Interest-bearing deposits at other banks, which is mainly the Bank’s cash on deposit at the Federal Reserve Bank of Richmond, has decreased by $675 thousand to $6.8 million since year end 2016.

During the three months ended March 31, 2017, gross loans increased by $19.9 million or 5.2%, to $404.9 million from $385.0 million at year-end 2016. The largest components of this increase were $4.3 million related to construction and land, $11.1 million related to residential mortgages and $3.2 million related to commercial and industrial loans.

The Bank had $2.4 million and $2.5 million of OREO at March 31, 2017 and December 31, 2016, respectively. As of March 31, 2017, OREO consists of two residences, seven lots, one former convenience store, one former restaurant and three commercial business properties. During the first three months of 2017, one property with a book value of $50 thousand from one borrower was added through foreclosure, and one property with a total book value of $11 thousand was sold. There was $97 thousand in write-downs of OREO properties during the first three months of 2017, compared to none to the same period in 2016. All properties maintained as OREO are valued at the lesser of cost or fair value less estimated costs to sell and are actively marketed.

As of March 31, 2017, securities available-for-sale at fair value totaled $49.8 million as compared to $51.2 million on December 31, 2016. This represents a net decrease of $1.3 million or 2.6% for the three months ended March 31, 2017. As of March 31, 2017, available-for-sale securities represented 9.9% of total assets and 10.58% of earning assets. All securities in the Company’s investment portfolio are classified as available-for-sale and marked to market on a monthly basis. Unrealized gains or losses, net of tax, are booked as an adjustment to shareholders’ equity, and are not realized as an adjustment to earnings until the securities are actually sold or an other than temporary impairment occurs.

The bank owned life insurance’s cash surrender value as of March 31, 2017 was $9.9 million. The insurance’s purpose is to offset the cost of employee benefits.

As of March 31, 2017, total deposits were $382.5 million compared to $381.7 million at year-end 2016. This represents an increase in balances of $782 thousand or 0.2% during the first three months of 2017. The increase was driven by increases of $8.1 million in time deposits and $2.5 million in noninterest-bearing deposits offset by a decrease of $9.8 million in savings and interest-bearing deposits.

 

29


Table of Contents

FHLB advances have increased by $25.0 million since December 31, 2016, to $60.0 million as of March 31, 2017 in order to fund loan growth.

On May 28, 2015, the Company entered into a Purchase Agreement with 29 accredited investors under which the Company issued an aggregate of $7,000,000 of subordinated notes to the accredited investors. The Notes have a maturity date of May 28, 2025. The Notes bear interest, payable on the 1st of March and September of each year, commencing September 1, 2015, at a fixed interest rate of 6.50% per year. The Notes are not convertible into common stock or preferred stock, and are not callable by the holders. The Company has the right to redeem the Notes, in whole or in part, without premium or penalty, on any interest payment date on or after May 28, 2020 and prior to the maturity date, but in all cases in a principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. If an event of default occurs, such as the bankruptcy of the Company, the holder of a Note may declare the principal amount of the Note to be due and immediately payable. The Notes are unsecured, subordinated obligations of the Company and will rank junior in right of payment to the Company’s existing and future senior indebtedness. The Notes qualify as Tier 2 capital for regulatory reporting.

As of March 31, 2017, securities sold under repurchase agreements decreased by $9.8 million to $8.5 million from $18.3 million at December 31, 2016. This decrease was the result of normal seasonality for these customers.

LIQUIDITY

Liquidity represents an institution’s ability to meet present and future financial obligations (such as commitments to fund loans) through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with other banks, federal funds sold and investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates are major factors for liquidity. Management believes that the Company maintains overall liquidity that is sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.

At March 31, 2017, cash totaled $5.1 million, federal funds sold totaled $336 thousand, interest-bearing deposits totaled $6.8 million, securities and certificates of deposit maturing in one year or less totaled $620 thousand and loans maturing in one year or less totaled $29.0 million. This results in a liquidity ratio as of March 31, 2017 of 8.3% as compared to 7.8% as of December 31, 2016. The Company determines this ratio by dividing the sum of cash and cash equivalents, investment securities maturing in one year or less, loans maturing in one year or less and federal funds sold, by total assets. The Bank has a formal liquidity management policy and contingency plan, which includes periodic evaluation of cash flow projections.

In addition, the Company has a line of credit with the FHLB of $120.8 million, with $54.8 million available, plus federal funds lines of credit with correspondent banks totaling $21.5 million.

As of March 31, 2017, the Company was not aware of any other known trends, events or uncertainties that have or are reasonably likely to have a material impact on liquidity.

CAPITAL RESOURCES

Capital resources represent funds, earned or obtained, over which a financial institution can exercise greater long-term control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition and quality of the Company’s resources, and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allows management to effectively leverage its capital to maximize return to shareholders. The Company’s capital, also known as shareholders’ equity, is comprised mainly of outstanding common stock and retained earnings. Capital can be increased with securities offerings or through earnings.

Several factors impact shareholders’ equity, including net income and regulatory capital requirements. The Company’s capital resources are also impacted by net unrealized gains or losses on securities. The available-for-sale securities portfolio is marked to market monthly and unrealized gains or losses, net of taxes, are recognized as accumulated other comprehensive income (loss) on the balance sheets and statement of changes in shareholders’ equity. Another factor affecting accumulated other comprehensive income (loss) is changes in the market value of the Company’s pension and post-retirement benefit plans and changes in the plan obligations. The Company’s shareholders’ equity before accumulated other comprehensive loss was $42.8 million as of March 31, 2017 compared to $42.9 million as of December 31, 2016. Accumulated other comprehensive loss decreased by $30 thousand between December 31, 2016 and March 31, 2017, primarily as a result of decreases in unrealized net losses in the investment portfolio.

Book value per share, before accumulated other comprehensive loss, as of March 31, 2017, compared to December 31, 2016, decreased to $8.94 from $8.99. Book value per share, including accumulated other comprehensive loss, decreased to $8.69 as of March 31, 2017 from $8.73 as of December 31, 2016. No cash dividends were paid for the three month period ended March 31, 2017, nor for the comparable period ended March 31, 2016.

 

30


Table of Contents

The parent company has no substantial operations of its own, so its primary sources of liquidity are fees received from the Bank, interest on investments and borrowings. The parent company’s liquid assets consisted of cash and investment securities totaling $1.9 million as of March 31, 2017. The parent company has sufficient liquidity to meet its obligations and provide a source of capital for the Bank.

The Bank is subject to minimum regulatory capital ratios as defined by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). As of March 31, 2017, the Bank’s capital ratios continue to be well in excess of regulatory minimums.

In July 2013, the Federal Reserve issued final rules that made changes to its capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. Effective January 1, 2015, the final rules require the Bank to comply with the following minimum capital ratios: (i) a new Common Equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets (increased from the prior requirement of 4.0%); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.0% of total assets (unchanged from the prior requirement). The following additional capital requirements related to the capital conservation buffer are being phased in over a four year period, which began on January 1, 2016. When fully phased in on January 1, 2019, the rules will require the Bank to maintain (i) a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% Common Equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer requirement is being phased in as of January 1, 2016, at 0.625% of risk-weighted assets, increasing by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall. As of March 31, 2017, the Bank maintained Common Equity Tier 1 capital of $43.5 million, Tier 1 capital of $43.5 million, risk weighted assets of $361.0 million, and total capital of $47.5 million. As of March 31, 2017, all ratios were in excess of the fully phased-in requirements, with the Common Equity Tier 1 ratio at 12.04% of risk-weighted assets, the Tier 1 capital ratio at 12.04% of risk-weighted assets, the total capital ratio at 13.15% of risk-weighted assets, and the Tier 1 leverage ratio at 8.99% of total assets.

OFF BALANCE SHEET COMMITMENTS

In the normal course of business, the Company offers various financial products to its customers to meet their credit and liquidity needs. These instruments may involve elements of liquidity, credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby-letters of credit is represented by the contractual amount of these instruments. Subject to its normal credit standards and risk monitoring procedures, the Company makes contractual commitments to extend credit. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Conditional commitments are issued by the Company in the form of performance stand-by letters of credit, which guarantee the performance of a customer to a third-party. The credit risk of issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.

Off Balance Sheet Arrangements

 

(In thousands)    March 31, 2017      December 31, 2016  

Total Loan Commitments Outstanding

   $ 39,933      $ 38,152  

Standby-by Letters of Credit

     462        452  

The Company maintains liquidity and credit facilities with non-affiliated banks in excess of the total loan commitments and stand-by letters of credit. As these commitments are earning assets only upon takedown of the instrument by the customer, thereby increasing loan balances, management expects the revenue of the Company to be enhanced as these credit facilities are utilized.

There have been no material changes to the off balance sheet items disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

CONTRACTUAL OBLIGATIONS

On February 28, 2017, the Company entered into a 63 month lease related to office space in Richmond, Virginia. The total lease payments are expected to be $1.3 million over the term of the lease. There have been no other material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

31


Table of Contents

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 4, Amendments to the Accounting Standards Codification, in the Notes to the Consolidated Financial Statements contained in Item 1 of this report, for information related to the adoption of new amendments to the Accounting Standards Codification.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

 

ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions. Based upon their evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic Securities and Exchange Commission filings as of March 31, 2017.

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

There was no change to the Company’s internal control over financial reporting during the three months ended March 31, 2017 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of its operations, the Company is a party to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

 

ITEM 1A. RISK FACTORS

Not required.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None to report.

 

ITEM 3. DEFAULT UPON SENIOR SECURITIES

None to report.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

32


Table of Contents
ITEM 5. OTHER INFORMATION

None to report.

 

ITEM 6. EXHIBITS

 

    2.1    Agreement and Plan of Merger, dated November 2, 2016, by and between Bay Banks of Virginia, Inc. and Virginia BanCorp, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on November 8, 2016).
    3.1    Articles of Incorporation of Bay Banks of Virginia, Inc., as amended effective April 1, 2017 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 6, 2017).
    3.2    Bylaws of Bay Banks of Virginia, Inc., as amended effective April 1, 2017 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on April 6, 2017).
  10.1    Employment Agreement, dated November 2, 2016 and effective upon the merger of Bay Banks of Virginia, Inc. and Virginia BanCorp, Inc., between Bay Banks of Virginia, Inc. and C. Frank Scott, III (incorporated by reference to Exhibit 10.9 to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed on January 30, 2017).
  10.2    Employment Agreement, dated November 2, 2016 and effective upon the merger of Bay Banks of Virginia, Inc. and Virginia BanCorp, Inc., between Bay Banks of Virginia, Inc. and James A. Wilson, Jr. (incorporated by reference to Exhibit 10.10 to Pre-Effective Amendment No. 1 to the Registration Statement on Form S-4 filed on January 30, 2017).
  31.1    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, (ii) Consolidated Statements of Income for the three months ended March 31, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2017, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016, and (vi) Notes to Consolidated Financial Statements.

 

33


Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Bay Banks of Virginia, Inc.
  (Registrant)
May 15, 2017     By:  

/s/ Randal R. Greene

      Randal R. Greene
      Chief Executive Officer
      (Principal Executive Officer)
    By:  

/s/ James A. Wilson, Jr.

      James A. Wilson, Jr.
      Executive Vice President and Chief Financial Officer
      (Principal Financial and Accounting Officer)

 

34

View differences made from one quarter to another to evaluate Bay Banks Of Virginia Inc's financial trajectory

Compare SEC Filings Year-over-Year (YoY) and Quarter-over-Quarter (QoQ)
Sample 10-K Year-over-Year (YoY) Comparison

Compare this 10-Q Quarterly Report to its predecessor by reading our highlights to see what text and tables were  removed  ,   added    and   changed   by Bay Banks Of Virginia Inc.

Continue

Assess how Bay Banks Of Virginia Inc's management team is paid from their Annual Proxy

Definitive Proxy Statement (Form DEF 14A)
Screenshot example of actual Proxy Statement

Bay Banks Of Virginia Inc's Definitive Proxy Statement (Form DEF 14A) filed after their 2017 10-K Annual Report includes:

  • Voting Procedures
  • Board Members
  • Executive Team
  • Salaries, Bonuses, Perks
  • Peers / Competitors

Continue

Tools

Financial Statements, Disclosures and Schedules

Inside this 10-Q Quarterly Report

Document And Entity Information
Consolidated Balance Sheets
Consolidated Balance Sheets (parenthetical)
Consolidated Statements Of (loss) Income
Consolidated Statements Of Cash Flows
Consolidated Statements Of Changes In Shareholders' Equity
Consolidated Statements Of Comprehensive (loss) Income
Allowance For Loan Losses
Allowance For Loan Losses (tables)
Allowance For Loan Losses - Additional Information (detail)
Allowance For Loan Losses - Allowance For Loan Losses By Portfolio Segment (detail)
Allowance For Loan Losses - Allowance For Loan Losses Disaggregated Based On Loan Receivables Evaluated For Impairment Individually And Collectively By Segment (detail)
Allowance For Loan Losses - Company's Recorded Investment And Customers' Unpaid Principal Balances For Impaired Loans, With Associated Allowance Amount (detail)
Allowance For Loan Losses - Internal Risk Rating Grades (detail)
Allowance For Loan Losses - Loan Receivables Evaluated For Impairment Individually And Collectively By Segment (detail)
Allowance For Loan Losses - Performing And Non Performing Loans (detail)
Allowance For Loan Losses - Performing And Non Performing Loans (parenthetical) (detail)
Amendments To The Accounting Standards Codification
Business Combination
Business Combination - Additional Information (detail)
Changes In Accumulated Other Comprehensive Income (loss)
Changes In Accumulated Other Comprehensive Income (loss) (tables)
Changes In Accumulated Other Comprehensive Income (loss) - Balances In Accumulated Other Comprehensive Income (loss) (detail)
Changes In Accumulated Other Comprehensive Income (loss) - Balances In Accumulated Other Comprehensive Income (loss) (parenthetical) (detail)
Changes In Accumulated Other Comprehensive Income (loss) - Reclassification Of Unrealized Gains (losses) And Impairments On Securities (detail)
Earnings Per Share
Earnings Per Share (tables)
Earnings Per Share - Additional Information (detail)
Earnings Per Share - Weighted Average Number Of Shares Used In Computing Earnings Per Share (detail)
Employee Benefit Plans
Employee Benefit Plans (tables)
Employee Benefit Plans - Additional Information (detail)
Employee Benefit Plans - Components Of Net Periodic Benefit Cost (gain) (detail)
Fair Value Measurements
Fair Value Measurements (tables)
Fair Value Measurements - Additional Information (detail)
Fair Value Measurements - Estimated Fair Values Of Financial Instruments (detail)
Fair Value Measurements - Reconciliation Of Items Using Level Three Inputs (detail)
Fair Value Measurements - Schedule Of Balances Of Financial Assets And Liabilities Measured At Fair Value On Recurring Basis (detail)
Fair Value Measurements - Summary Of Assets Measured At Fair Value On Nonrecurring Basis (detail)