Bay Banks of Virginia, Inc. Reports First Quarter 2019 Results

RICHMOND, Va., April 30, 2019 /PRNewswire/ -- Bay Banks of Virginia, Inc. (OTCQB: BAYK), holding company of Virginia Commonwealth Bank and VCB Financial Group, Inc., announced financial results for the first quarter ended March 31, 2019.

The company reported net income of $1.5 million, or $0.11 per diluted share, for the first quarter of 2019 compared to $782 thousand, or $0.06 per diluted share, for the fourth quarter of 2018 and $1.1 million, or $0.09 per diluted share, for the first quarter of 2018. Net income for the fourth quarter of 2018 included $483 thousand ($382 thousand¹ after income tax) of expenses incurred in connection with the company's previously announced early retirement program. Net income in the first quarter of 2018 included $363 thousand ($287 thousand¹ after income tax) of merger-related expenses in connection with the company's merger with Virginia BanCorp, Inc. on April 1, 2017 (the "Merger"). Costs associated with the succession of the company's CFO and costs related to fees incurred relating to the completion of the company's 2017 year-end financial reporting in the first quarter of 2018 totaled approximately $1.0 million.

Randal R. Greene, President and Chief Executive Officer, commented: "I am pleased to report improved first quarter 2019 results, which reflect the strongest quarterly earnings reported since the Merger. Our results reflect an intentional slowing of loan growth as we exercise a disciplined approach of investing our liquidity in higher yielding loans. Growing deposits, particularly noninterest-bearing accounts, continues to be challenging in a fiercely competitive environment and our deposit costs continue to increase due to both this competition and the natural repricing of our maturing time deposits. In the first quarter of 2019, higher loan yields contributed to some stability in our net interest margin, when excluding accretion of loan discounts. Also, in the first quarter of 2019, we completed the closure of our Hopewell, Virginia branch, as planned."

Operating Results

First Quarter 2019 compared to Fourth Quarter 2018

• Income before income taxes for the first quarter of 2019 was $1.8 million compared to $670 thousand for the fourth quarter of 2018. Income before income taxes, excluding the costs incurred to implement the company's early retirement program, was $1.2 million¹ for the fourth quarter of 2018.
• Interest income for the three months ended March 31, 2019 was $12.3 million, on average interest-earning assets of $1.0 billion, compared to $11.7 million on average interest-earning assets of $989.3 million for the three months ended December 31, 2018. Interest income in the first quarter of 2019 included accretion of acquired loan discounts of $439 thousand, while interest income in the fourth quarter of 2018 included $352 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.90% and 4.72% for the linked quarter periods.
• Interest expense was $3.7 million and $3.3 million for the three months ended March 31, 2019 and December 31, 2018, respectively, and cost of funds was 1.54% and 1.40% for the linked quarter periods. Average interest-bearing liabilities were $853.6 million and $817.3 million for the first and fourth quarters of 2019 and 2018, respectively. Higher funding costs in the first quarter of 2019 was primarily due to competition for deposits in the company's markets, higher interest rates in general, and the repricing of maturing time deposits.
• Net interest margin ("NIM") was 3.45% for the first quarter of 2019 compared to 3.41% for the fourth quarter of 2018. NIM excluding accretion of acquired loan discounts and amortization of fair value marks on acquired time deposits ("Core NIM") for the first quarter of 2019 was 3.26%¹ compared to 3.25%¹ for the fourth quarter of 2018.
• Provision for loan losses was $314 thousand in the first quarter of 2019, while provision for loan losses in the fourth quarter of 2018 was $870 thousand. Provision for loan losses in both periods was primarily attributable to loan growth of $16.5 million and $48.0 million for the first quarter of 2019 and the fourth quarter of 2018, respectively.
• Noninterest income for the three months ended March 31, 2019 and December 31, 2018 was $1.1 million and $1.0 million, respectively. Wealth management and secondary market sales and servicing income were higher in the fourth quarter of 2018 compared to the first quarter of 2019 by $78 thousand and $60 thousand, respectively, offset by a $138 thousand loss in the fourth quarter of 2018 on rabbi trust assets associated with the company's deferred compensation plan.
• Noninterest expenses for the three months ended March 31, 2019 and December 31, 2018 were $7.6 million and $7.9 million, respectively. Noninterest expenses for the fourth quarter of 2018 included $483 thousand incurred to implement the company's early retirement program. Additionally, fourth quarter of 2018 noninterest expenses included the reversal of approximately $300 thousand of costs related to certain management incentives, as the basis for these were not met. The company's efficiency ratio for the three months ended March 31, 2019 was 78.1% compared to 83.7% (78.6%¹ excluding expenses incurred to implement the early retirement program) for the three months ended December 31, 2018.
• Income tax expense in the first quarter of 2019 was $337 thousand, reflective of an 18.4% effective income tax rate, while income tax expense for the fourth quarter of 2018 was a benefit of $112 thousand. The income tax benefit was primarily attributable to higher than estimated tax deductions reported in the company's 2017 federal income tax return at the higher 2017 corporate tax rate and a lower effective income tax rate for the full year of 2018 than was recorded for the 2018 period through the third quarter of 2018.

First Quarter 2019 compared to First Quarter 2018

• Income before income taxes for the first quarter of 2019 was $1.8 million compared to $1.4 million for the first quarter of 2018.
• Interest income for the three months ended March 31, 2019 was $12.3 million, on average interest-earning assets of $1.0 billion, compared to $10.7 million on average interest-earning assets of $905.0 million for the three months ended March 31, 2018. Interest income in the first quarter of 2019 included accretion of acquired loan discounts of $439 thousand, while interest income in the first quarter of 2018 included $503 thousand of accretion of acquired loan discounts and approximately $330 thousand of additional fee income and other adjustments, a portion of which was reversed in the second quarter of 2018. Yields on average interest-earning assets were 4.90% and 4.74% for the first quarters of 2019 and 2018, respectively.
• Interest expense was $3.7 million and $2.0 million for the three months ended March 31, 2019 and 2018, respectively, and the cost of funds was 1.54% and 0.95% for the quarter-over-quarter periods. Higher funding costs in the 2019 period was primarily due to higher cost of deposits, as noted above, and greater use of FHLB borrowings. Average interest-bearing liabilities were $853.6 million and $747.8 million for the first quarters of 2019 and 2018, respectively.
• NIM was 3.45% for the first quarter of 2019 compared to 3.83% for the first quarter of 2018. Core NIM for the first quarter of 2019 was 3.26%¹ compared to 3.58%¹ for the same quarter of 2018. The decline in Core NIM was primarily attributable to higher cost of funds (59 basis points), partially offset by higher yields on interest-earning assets (16 basis points). The effect of the interest income adjustments, noted above, on NIM in the first quarter of 2018 was approximately 14 basis points.
• Provision for loan losses was $314 thousand for the first quarter of 2019, while provision for loan losses in the first quarter of 2018 was $320 thousand.
• Noninterest income for the first quarters of 2019 and 2018 was $1.1 million and $1.2 million, respectively. Contributing to higher noninterest income in the 2018 period was a gain on the curtailment of the company's post-retirement benefit plan of $352 thousand. Partially offsetting this gain in the first quarter of 2018 was higher service charges and fees on deposit accounts and interchange fee income, net, in the first quarter of 2019 of $103 thousand and $109 thousand, respectively.
• Noninterest expenses for the first quarters of 2019 and 2018 were $7.6 million and $8.1 million, respectively. Noninterest expenses in the first quarter of 2018 included $363 thousand of merger-related expenses, while there were no merger-related expenses in the first quarter of 2019. Costs associated with the succession of the company's CFO and costs related to fees incurred in the first quarter of 2018 in the completion of the company's 2017 year-end financial reporting totaled approximately $1.0 million. First quarter of 2019 noninterest expenses compared to the same period of 2018, excluding these items, were higher due to the company's expansion into the Virginia Beach market, expansion of VCB Financial Group in the Richmond, Virginia market, and costs for general infrastructure to support the company's growing operations. Additionally, the first quarter of 2018 included a net gain on the sale of other real estate owned of $141 thousand compared to a $6 thousand gain in the first quarter of 2019. The company's efficiency ratio for the first quarter of 2019 was 78.1% compared to 82.7% for the same quarter of 2018 (79.0%¹ excluding merger-related expenses).
• Income tax expense in the first quarter of 2019 and 2018 was $337 thousand and $250 thousand, respectively, reflective of an 18.4% and 18.2% effective income tax rate, respectively.

Balance Sheet

• Loans, net of allowance for loan losses, were $910.8 million at March 31, 2019 compared to $894.2 million at December 31, 2018, an annualized growth rate of over 7%. Excluding the pay-down of approximately $16.4 million in the first quarter of 2019 of purchased portfolio loans, including those acquired in the Merger, loan growth, annualized, was approximately 14.5% for the first quarter ended March 31, 2019.
• Total assets were $1.1 billion at March 31, 2019 and at December 31, 2018.
• Deposits were $856.7 million at March 31, 2019 compared to $842.2 million at December 31, 2018. Noninterest-bearing accounts comprised 13.1% of total deposits at March 31, 2019, down slightly from 13.6% at December 31, 2018.
• Shareholders' equity was $119.9 million and $117.5 million at March 31, 2019 and December 31, 2018, respectively, an increase of $2.5 million. The increase in shareholders' equity in the first quarter of 2019 was primarily attributable to net income of $1.5 million and $806 thousand of unrealized gains on the company's available-for-sale securities portfolio due to declining long-term interest rates. 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 $8.11¹ and $7.98¹ at March 31, 2019 and December 31, 2018, respectively. Capital ratios for Virginia Commonwealth Bank were above regulatory minimum guidelines for well-capitalized banks as of March 31, 2019 and December 31, 2018.
• Annualized return on average assets for the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018 was 0.55%, 0.30%, and 0.46%, respectively, while annualized return on average equity for the same periods was 5.05%, 2.69%, and 3.92%, respectively. Annualized operating return on average assets, which excludes expenses incurred implementing the early retirement program and merger-related expenses, for the quarters ended March 31, 2019, December 31, 2018, and March 31, 2018 was 0.55%¹, 0.44%¹, and 0.57%¹, respectively.

Asset Quality

• Nonperforming assets were $9.1 million, or 0.82% of total assets, as of March 31, 2019, compared to $8.8 million, or 0.81% of total assets, as of December 31, 2018, and $9.5 million, or 0.95% of total assets, as of March 31, 2018.
• The ratio of allowance for loan losses to total gross loans was 0.86%, 0.88%, and 1.00% at March 31, 2019, December 31, 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 1.23%¹, 1.31%¹, and 1.65%¹, as of the same three period ends, respectively.

Outlook

Greene concluded: "As noted, we expect to slow 2019 loan growth when compared to 2018 to preserve liquidity for higher yielding loans. In particular, we will place a greater emphasis on residential loan originations that can be sold in the secondary market. Secondary market sales are an important source of fee income and allow us to avoid higher incremental funding costs. We've also restructured our residential lending group to align with this shift. We are addressing deposit growth on a number of fronts; we have dedicated deposit managers and have in place 2019 incentive plans for our lenders that are heavily weighted on noninterest-bearing account generation.

"Additionally, we continue to evaluate the transaction activity in our branches. To align staffing with the needs of our customers, we recently moved to staffing certain of our branches with part-time personnel. We believe this model will allow us to operate more efficiently, while continuing to provide our customers with the quality service they expect. The changes in our retail staffing and residential lending group should result in annualized savings of approximately $400,000, which we expect to begin to realize in the second quarter of 2019."

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 1930s, 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, Middlesex County, the Tri-Cities area of Petersburg, Hopewell and Colonial Heights, 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, and 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: changes in interest rates and general economic conditions; the legislative/regulatory 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; implementation of new technologies and the ability to develop and maintain secure and reliable electronic systems; and tax and accounting rules, principles, policies 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 Judy C. Gavant, Executive Vice President and Chief Financial Officer, at 804-518-2606 or inquiries@baybanks.com.

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