Bay Banks of Virginia, Inc. Reports Second Quarter and First Half 2018 Results

RICHMOND, Va., Aug. 1, 2018 /PRNewswire/ — Bay Banks of Virginia, Inc. (OTCQB: BAYK), holding company of Virginia Commonwealth Bank and VCB Financial Group, Inc., reported financial results for the second quarter and first half of 2018.

The company reported net income of $946 thousand, or $0.07 per diluted share, for the second quarter of 2018 compared to $1.1 million, or $0.09 per diluted share, for the first quarter of 2018, and $557 thousand, or $0.06 per diluted share, for the second quarter of 2017. For the first half of 2018, the company reported net income of $2.1 million, or $0.16 per diluted share, compared to $380 thousand, or $0.05 per diluted share, for the first half of 2017.  

Randal R. Greene, President and Chief Executive Officer, commented: “Earnings for the second quarter were less than adequate; however, as I reflect on the first half of 2018, there were many highlights. Net new loan growth in the first half was strong considering the run-off of nearly $40 million of purchased portfolio loans including those acquired in the Virginia BanCorp merger. Comparing results for the first half of 2018 to the first half of 2017, we are realizing positive leverage from our larger balance sheet and our asset quality metrics continue to improve. In the first half of 2018, we transitioned several key management positions and the bank is stronger for it.” 

Operating Results

Second Quarter 2018 compared to First Quarter 2018

• Income before income taxes for the second quarter of 2018 was $1.1 million compared to $1.4 million for the first quarter of 2018.
• Interest income for the three months ended June 30, 2018 was $10.5 million, on average interest-earning assets of $913.5 million, compared to $10.7 million for the three months ended March 31, 2018, on average interest-earning assets of $905.0 million. Interest income in the second quarter of 2018 included accretion of acquired loan discounts of $547 thousand, while interest income in the first quarter of 2018 included $503 thousand of accretion of acquired loan discounts. Interest income in the second quarter of 2018 included negative adjustments totaling $145 thousand for amounts reported in the prior quarter.
• Interest expense was $2.3 million and $2.0 million for the second quarter of 2018 and the first quarter of 2018, respectively, and cost of funds was 1.08% and 0.95% for the consecutive quarter periods. Higher funding cost in the second quarter period was primarily due to higher costs of deposits.  
• Net interest margin was 3.60% for the three months ended June 30, 2018 compared to 3.83% for the three months ended March 31, 2018. Net interest margin excluding accretion of acquired loan discounts and amortization of fair value marks on time deposits for the three months ended June 30, 2018 was 3.34%¹ compared to 3.58%¹ for the three months ended March 31, 2018. Lower net interest margin in the second quarter period was primarily due to the interest income adjustment noted above and higher funding costs in the second quarter of 2018.
• Provision for loan losses was ($348) thousand for the second quarter of 2018, while provision for loan losses in the first quarter of 2018 was $320 thousand. The recovery of loan losses in the second quarter of 2018 is primarily due to the decline of reserve levels for a select portfolio of consumer loans as these loan balances continue to decline.
• Noninterest income for both the three months ended June 30, 2018 and March 31, 2018 was $1.2 million. Noninterest income in the first quarter of 2018 included a gain of $352 thousand on the curtailment of the company’s post-retirement benefit plan effective March 1, 2018.
• Noninterest expenses for the three months ended June 30, 2018 and March 31, 2018 were $8.6 million and $8.1 million, respectively. In the first quarter of 2018, merger-related expenses were $363 thousand and costs associated with the succession of the company’s CFO and in the completion of the company’s 2017 year-end reporting totaled $1.0 million, while costs related to these activities were approximately $200 thousand in the second quarter of 2018.

First Half 2018 compared to First Half 2017

• Income before income taxes for the first half of 2018 was $2.5 million compared to $513 thousand for the first half of 2017. Results for the first half of 2017 include the operations of Virginia BanCorp, Inc. since the effective date of the merger, April 1, 2017. 
• Interest income for the six months ended June 30, 2018 was $21.2 million, on average interest-earning assets of $909.0 million, compared to $13.7 million for the six months ended June 30, 2017, on average interest-earning assets of $621.5 million. Average interest-earning assets in the first half of 2017 included those acquired in the merger from the effective date of the merger. Interest income in the first half of 2018 included accretion of acquired loan discounts of $1.1 million, while interest income in the first half of 2017 included $451 thousand of accretion of acquired loan discounts.
• Interest expense was $4.4 million and $2.4 million for the six months ended June 30, 2018 and 2017, respectively, and cost of funds was of 1.05% and 0.82% for the respective periods. Average interest-bearing liabilities were $716.7 million and $518.6 million for the first half of 2018 and 2017, respectively. Average interest-bearing liabilities in 2017 included those assumed in the merger from the effective date of the merger.
• Net interest margin was 3.72% for the six months ended June 30, 2018 compared to 3.68% for the six months ended June 30, 2017. Net interest margin excluding accretion of acquired loan discounts and amortization of fair value marks on time deposits for the six months ended June 30, 2018 was 3.46%¹ compared to 3.50%¹ for the six months ended June 30, 2017.
• Provision for loan losses was ($28) thousand for the first half of 2018, while provision for loan losses in the first half of 2017 was $758 thousand.
• Noninterest income for the six months ended June 30, 2018 and 2017 was $2.3 million and $2.0 million, respectively.
• Noninterest expenses for the six months ended June 30, 2018 and 2017 were $16.7 million and $12.0 million, respectively. As noted, noninterest expenses for the first half of 2017 include the operations of Virginia BanCorp from the effective date of the merger. Merger-related expenses were $363 thousand and $985 thousand for the six months ended June 30, 2018 and 2017, respectively. Expenses associated with the succession of the company’s CFO and fees incurred in the first half of 2018 in the completion of the company’s 2017 year-end reporting totaled approximately $1.2 million.

Second Quarter 2018 compared to Second Quarter 2017

• Income before income taxes for the second quarter of 2018 was $1.1 million compared to $811 thousand for the second quarter of 2017.
• Interest income for the three months ended June 30, 2018 was $10.5 million, on average interest-earning assets of $913.5 million, compared to $8.9 million for the three months ended June 30, 2017, on average interest-earning assets of $790.1 million. Interest income in the second quarter of 2018 included accretion of acquired loan discounts of $547 thousand, while interest income in the second quarter of 2017 included $451 thousand of accretion of acquired loan discounts.
• Interest expense was $2.3 million and $1.4 million for the second quarter of 2018 and the second quarter of 2017, respectively, and the cost of funds was 1.08% and 0.76% for the quarter over quarter periods.    
• Net interest margin was 3.60% for the three months ended June 30, 2018 compared to 3.80% for the three months ended June 30, 2017. Net interest margin excluding accretion of acquired loan discounts and amortization of fair value marks on time deposits for the three months ended June 30, 2018 was 3.34%¹ compared to 3.51%¹ for the three months ended June 30, 2017.
• Provision for loan losses was ($348) thousand for the second quarter of 2018, while provision for loan losses in the second quarter of 2017 was $568 thousand.
• Noninterest income for the three months ended June 30, 2018 and 2017 was $1.2 million and $1.1 million, respectively.
• Noninterest expenses for the three months ended June 30, 2018 and 2017 were $8.6 million and $7.2 million, respectively. Merger-related expenses were $685 thousand in the second quarter of 2017, while no merger-related expenses were reported in the second quarter of 2018. Expenses associated with the completion of the company’s 2017 year-end reporting and succession of the company’s CFO totaled approximately $200 thousand in the second quarter of 2018.

Balance Sheet

• Loans, net of allowance for loan losses, were $794.4 million at June 30, 2018 compared to $758.7 million at December 31, 2017, an annualized growth rate of over 9%. Excluding the pay-down of approximately $38 million in the first six months of 2018 of purchased portfolio loans, including those acquired in the Virginia BanCorp merger, gross loan growth on an annualized basis was approximately 19%. 
• Total assets were $983.2 million at June 30, 2018 compared to $970.6 million at December 31, 2017.
• Deposits were $775.1 million at June 30, 2018 compared to $761.8 million at December 31, 2017. Noninterest-bearing accounts comprised 14.1% of total deposits, an increase from 13.5% at December 31, 2017. 
• Shareholders’ equity was $115.7 million and $114.6 million at June 30, 2018 and December 31, 2017, respectively. Tangible book value, calculated as shareholders’ equity less goodwill and core deposit intangible assets, net of the associated deferred tax liability, divided by common shares outstanding, was $7.81¹ and $7.71¹ at June 30, 2018 and December 31, 2017, respectively. Capital ratios for Virginia Commonwealth Bank were above regulatory minimum guidelines for well-capitalized banks as of June 30, 2018 and December 31, 2017.
• Return on average assets for the six months ended June 30, 2018 and 2017, annualized, was 0.43% and 0.12%, respectively, while return on average equity for the same periods, annualized, was 3.63% and 2.65%, respectively.

Asset Quality

• Nonperforming assets were $6.9 million, or 0.71% of total assets, as of June 30, 2018, compared to $9.5 million, or 0.95% of total assets, as of March 31, 2018. Net charge-offs, annualized, to average loans was 0.16% and 0.09% for the six and three months ended June 30, 2018 and March 31, 2018, respectively.
• The ratio of allowance for loan losses to total gross loans was 0.89% and 1.00% at June 30, 2018 and March 31, 2018, respectively. The company’s allowance for loan losses does not include discounts recorded on acquired loans. The ratio of allowance for loan losses plus remaining discounts on acquired loans to total gross loans (adding the remaining discounts on acquired loans) was 1.46%¹ and 1.65%¹ at June 30, 2018 and March 31, 2018, respectively.

Outlook

Greene concluded: “I continue to believe we are well-positioned to capture an under-served segment in our target markets. Our pipeline of opportunities in the greater Richmond area is strong, though we are pursuing cautiously due to the recent increase in deposit costs. Our branch and loan production office in Virginia Beach are open for business and we are actively pursuing both loan and deposit opportunities. As previously noted, we are addressing infrastructure needs to support and mitigate the risks that come with our larger organization. At the same time, we are keenly focused on deposit generation and expense management, two areas that are lagging. We’ve launched several initiatives to address both and I believe the results of these initiatives will deliver improving financial results.”

About Bay Banks of Virginia, Inc.

Bay Banks of Virginia, Inc. is the bank holding company for Virginia Commonwealth Bank and VCB Financial Group, Inc. Founded in the 1930’s, Virginia Commonwealth Bank is headquartered in Richmond, Virginia. With 19 banking offices, including one production office, located throughout the greater Richmond area, the Northern Neck region, the Tri-Cities area of Petersburg, Hopewell and Colonial Heights, Middlesex County, Suffolk, and Virginia Beach, the bank serves businesses, professionals, and consumers with a wide variety of financial services, including retail and commercial banking, and mortgage banking. VCB Financial Group provides management services for personal and corporate trusts, including estate planning, estate settlement and trust administration, along with investment and wealth management services.

Caution About Forward-Looking Statements

This press release 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 (the “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 and 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 tax and accounting rules, 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. Except to the extent required by applicable law or regulation, the company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

For further information, contact Randal R. Greene, President and Chief Executive Officer, at 844-404-9668 or inquiries@baybanks.com.

¹ See discussion of non-GAAP financial measures at the end of the Supplemental Financial Data tables that follow.