Bay Banks of Virginia, Inc. Reports Fourth Quarter and Full Year 2019 Results

RICHMOND, Va., Jan. 28, 2020 /PRNewswire/ -- Bay Banks of Virginia, Inc. (OTCQB: BAYK), holding company of Virginia Commonwealth Bank and VCB Financial Group, Inc., announced financial results for the quarter and year ended December 31, 2019.

The company reported net income of $2.0 million, or $0.15 per diluted share, for the fourth quarter of 2019 compared to $1.8 million, or $0.14 per diluted share, for the third quarter of 2019 and $782 thousand, or $0.06 per diluted share, for the fourth quarter of 2018. Net income for the fourth quarter of 2018 included $483 thousand ($382 thousand¹ after income taxes) of expenses incurred in connection with the company's previously announced early retirement program.

For the year of 2019, the company reported net income of $7.1 million, or $0.54 per diluted share, compared to $3.9 million, or $0.30 per diluted share, for the year of 2018. Net income in the year of 2018 included $363 thousand ($287 thousand¹ after income tax) of merger-related expenses incurred in connection with the company's merger with Virginia BanCorp, Inc. on April 1, 2017 (the "Merger").  

Randal R. Greene, President and Chief Executive Officer, commented: "2019 was a year of great improvement with increasing profitability in each sequential quarter. We began the year with a focus on balance sheet management and low-cost deposit growth. Our overall loan portfolio shows minimal growth in 2019; however, net growth in our markets was nearly $79 million in 2019. Our portfolio of loans acquired in the Merger and subsequent purchases of consumer portfolios have declined from $290 million since the Merger to approximately $123 million at year-end 2019. We have sold more originated residential mortgages into the secondary market, grown noninterest-bearing deposits and continue to emphasize these accounts, and we've aggressively lowered deposit costs since the second quarter of 2019."

Operating Results

Fourth Quarter 2019 compared to Third Quarter 2019

• Income before income taxes for the fourth quarter of 2019 was $2.5 million compared to $2.3 million for the third quarter of 2019.
• Interest income for the three months ended December 31, 2019 was $13.0 million, on average interest-earning assets of $1.06 billion, compared to $12.8 million, on average interest-earning assets of $1.04 billion, for the three months ended September 30, 2019. Interest income in the fourth quarter of 2019 included accretion of acquired loan discounts of $929 thousand, while interest income in the third quarter of 2019 included $357 thousand of accretion of acquired loan discounts. Higher accretion in the fourth quarter of 2019 was primarily attributable to significant paydowns and payoffs of loans acquired in the Merger. Yields on average interest-earning assets were 4.87% for each of the sequential quarter periods, including the effect of accretion. Yields on average interest-earning assets in the fourth quarter of 2019 were positively affected by higher accretion of acquired loan discounts, which had a positive 21 basis point effect compared to yields in the third quarter of 2019. Negatively affecting yields on average interest-earning assets in the fourth quarter of 2019 were higher average balances of lower earning investment securities purchased in the quarter and lower yields on new loans originated in the latter part of the fourth quarter of 2019.
• Interest expense was $3.9 million and $3.7 million for the three months ended December 31, 2019 and September 30, 2019, respectively, and cost of funds was 1.54% and 1.52% for the sequential quarter periods. Average interest-bearing liabilities were $860.4 million and $851.4 million for the fourth and third quarters of 2019, respectively. Interest expense on the company's $25 million of 5.625% subordinated notes issued on October 7, 2019 and maturing on October 15, 2029 (the "2029 Notes") contributed $354 thousand and 10 basis points to interest expense and cost of funds, respectively, in the fourth quarter of 2019. Cost of deposits was 1.34% for the fourth quarter of 2019, down six basis points from 1.40% for the third quarter of 2019.
• Net interest margin ("NIM") was 3.43% for the fourth quarter of 2019 compared to 3.45% for the third quarter of 2019. Higher accretion in the fourth quarter of 2019 had a positive 21 basis point effect on NIM, which was offset by higher balances of lower earning investment securities, lower yields on interest-earning deposits and federal funds sold, and higher cost of funds. The 2029 Notes had a negative 10 basis point effect on NIM in the fourth quarter of 2019.
• Provision for loan losses was $311 thousand in the fourth quarter of 2019 and was primarily attributable to net loan growth of approximately $17.2 million and net charge-offs from a select portfolio of purchased consumer loans. The majority of loans acquired in the Merger, which declined, carry no allowance for loan losses as they were recorded at fair value at the effective date of the Merger. Provision for loan losses of $495 thousand in the third quarter of 2019 was primarily attributable to net charge-offs from a select portfolio of purchased consumer loans, a specific reserve for a commercial and industrial loan, and net loan growth of $23.7 million.
• Noninterest income for the three months ended December 31, 2019 and September 30, 2019 was $1.4 million and $1.2 million, respectively. Higher noninterest income in the fourth quarter of 2019 compared to the third quarter of 2019 was primarily due to wealth management income, which increased $69 thousand on a sequential quarter basis.
• Noninterest expense for the three months ended December 31, 2019 and September 30, 2019 was $7.7 million and $7.4 million, respectively. Higher noninterest expense in the fourth quarter of 2019 was primarily due to higher salaries and employee benefits and higher Federal Deposit Insurance Corporation ("FDIC") assessments, partially offset by lower net losses from other real estate owned. Higher salaries and employee benefits for the fourth quarter of 2019 were primarily due to required contributions to the company's Employee Stock Ownership Plan (ESOP) and positive adjustments to the incentive accrual recorded in the third quarter of 2019. The company's FDIC assessment for the third quarter of 2019 included the benefit of a small bank assessment credit of $171 thousand compared to a $55 thousand benefit in the fourth quarter of 2019. The company's efficiency ratio for the fourth quarter of 2019 was 73.5% compared to 72.8% for the third quarter of 2019.
• Income tax expense for the fourth quarter of 2019 was $469 thousand, reflective of a 19.0% effective income tax rate, while income tax expense for the third quarter of 2019 was $448 thousand, reflective of a 19.6% effective income tax rate.

Full-Year 2019 compared to Full-Year 2018

• Income before income taxes for the year of 2019 was $8.7 million compared to $4.4 million for the year of 2018.
• Interest income for the year ended December 31, 2019 was $50.4 million, on average interest-earning assets of $1.04 billion, compared to $43.8 million for the year ended December 31, 2018, on average interest-earning assets of $934.5 million. Interest income for the year ended December 31, 2019 included accretion of acquired loan discounts of $1.9 million, while interest income for the year ended December 31, 2018 included $1.8 million of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.85% and 4.70% for the year of 2019 and 2018, respectively. The higher yield on average interest-earning assets in the 2019 period was primarily due to higher loan yields and higher accretion of acquired loan discounts of $163 thousand, which had a positive 2 basis point effect.
• Interest expense was $15.1 million and $10.2 million for the years ended December 31, 2019 and 2018, respectively, and cost of funds was of 1.55% and 1.17% for the respective periods. Higher cost of funds in the year ended December 31, 2019 was primarily due to higher rates paid on deposits generated in the latter part of 2018, the repricing of maturing time deposits in a higher rate environment, the issuance of the 2029 Notes during the fourth quarter of 2019, greater use and cost of Federal Home Loan Bank of Atlanta advances, and higher interest rates in general. Average interest-bearing liabilities were $855.7 million and $768.8 million for the years ended December 31, 2019 and 2018, respectively.
• NIM was 3.40% for the year ended December 31, 2019 compared to 3.61% for the year ended December 31, 2018. Lower NIM in the 2019 period was primarily due to higher cost of funds, partially offset by higher loan yields and higher accretion of acquired loan discounts. Higher accretion of acquired loan discounts had a positive 2 basis point effect on NIM in the 2019 period compared to the 2018 period.
• Provision for loan losses was $1.2 million for the year ended December 31, 2019, primarily attributable to net loan growth of approximately $78.6 million and net charge-offs from a select portfolio of purchased consumer loans. The majority of loans acquired in the Merger, which declined, carry no allowance for loan losses as they were recorded at fair value at the effective date of the Merger. Provision for loan losses for the year ended December 31, 2018 was $1.4 million, which was primarily attributable net loan growth of $135.5 million during 2018. The 2018 period also included a $580 thousand benefit to correct for an overstatement in the company's allowance for loan losses as of December 31, 2017, as previously reported.
• Noninterest income for the years ended December 31, 2019 and 2018 was $5.0 million and $4.3 million, respectively. Noninterest income in the 2019 period reflects greater income from secondary market sales and servicing of $282 thousand, as the company sold a greater volume of mortgages originated in the 2019 period, while the 2018 period included a gain of $352 thousand on the curtailment of the company's post-retirement benefit plan effective March 1, 2018.
• Noninterest expense for the years ended December 31, 2019 and 2018 was $30.4 million and $32.1 million, respectively. Expenses associated with the succession of the company's CFO and in the completion of the company's 2017 year-end reporting incurred in the first half of 2018 were approximately $1.2 million. Merger-related expenses were $0 and $363 thousand for the years ended December 31, 2019 and 2018, respectively, and the 2018 period included $483 thousand of expenses incurred in connection with the company's early retirement program noted above.
• Income tax expense for the year ended December 31, 2019 was $1.6 million, reflective of an 18.9% effective income tax rate, while income tax expense for the year ended December 31, 2018 was $533 thousand, reflective of a 12.1% effective income tax rate. The 2018 effective income tax rate was positively affected by higher than estimated income tax deductions reported in the company's 2017 federal income tax return at the higher 2017 rate, as previously reported.

Fourth Quarter 2019 compared to Fourth Quarter 2018

• Income before income taxes for the fourth quarter of 2019 was $2.5 million compared to $670 thousand for the fourth quarter of 2018. Income before income taxes, excluding the costs incurred in connection with the company's early retirement program ($483 thousand), was $1.2 million¹ for the fourth quarter of 2018.
• Interest income for the three months ended December 31, 2019 was $13.0 million, on average interest-earning assets of $1.06 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 fourth quarters of 2019 and 2018 included accretion of acquired loan discounts of $929 thousand and $352 thousand, respectively. Yields on average interest-earning assets were 4.87% and 4.72% for the fourth quarters of 2019 and 2018, respectively. The increase in yield on average interest-earning assets was primarily attributable to higher accretion of loan discounts, which had a positive 22 basis point effect compared to the fourth quarter of 2018.  
• Interest expense was $3.9 million and $3.3 million for the three months ended December 31, 2019 and 2018, respectively, and cost of funds was 1.54% and 1.40%, for the respective periods. Higher costs of funds in the 2019 period was primarily due to higher cost of deposits of 1.34% in the 2019 period compared to 1.22% in the 2018 period, due to the reasons noted above. Average interest-bearing liabilities were $860.4 million and $817.2 million for the fourth quarters of 2019 and 2018, respectively.
• NIM was 3.43% for the fourth quarter of 2019 compared to 3.41% for the fourth quarter of 2018. The increase in NIM was primarily attributable to higher accretion of loan discounts, partially offset by higher cost of funds.
• Provision for loan losses was $311 thousand in the fourth quarter of 2019 and was primarily attributable to net loan growth of approximately $17.2 million and net charge-offs from a select portfolio of purchased consumer loans. The majority of loans acquired in the Merger, which declined, carry no allowance for loan losses as they were recorded at fair value at the effective date of the Merger. Provision for loan losses in the fourth quarter of 2018 was primarily attributable to an increase of $47.2 million of net loans in the quarter and higher reserves attributed to certain loan types, as the company's loan portfolio mix continues to shift from residential and consumer loans to commercial loans.
• Noninterest income for the three months ended December 31, 2019 and 2018 was $1.4 million and $1.0 million, respectively. The increase quarter-over-quarter was primarily attributable to a gain on rabbi trust assets of $62 thousand in the 2019 period compared to a loss of $179 thousand in the 2018 period and higher secondary market sales and servicing income of $178 thousand.
• Noninterest expense for the three months ended December 31, 2019 and 2018 was $7.7 million and $7.9 million, respectively. The fourth quarter of 2018 included $483 thousand of expenses incurred in connection with the company's early retirement program. The company's efficiency ratio for the fourth quarter of 2019 was 73.5% compared to 83.7% (78.6%¹ excluding early retirement program expenses) for the same quarter of 2018.
• Income tax expense for the fourth quarter of 2019 was $469 thousand, reflective of a 19.0% effective income tax rate. Income tax expense for the fourth quarter of 2018 was a benefit of $112 thousand, primarily attributable to higher than estimated tax deductions reported in the company's 2017 federal income tax return and lower effective income tax rate for the full year of 2018, as previously reported.

Balance Sheet

• Total assets were $1.13 billion and $1.08 billion at December 31, 2019 and 2018, respectively.
• Loans, net of allowance for loan losses, were $916.6 million at December 31, 2019 compared to $894.2 million at December 31, 2018, a growth rate of approximately 2%. Excluding the payoff and amortization of approximately $56.5 million in the year of 2019 of purchased portfolio loans, including those acquired in the Merger, loan growth was approximately $78.6 million, or nearly 9%, for the year of 2019.
• Deposits were $910.4 million at December 31, 2019 compared to $842.2 million at December 31, 2018. Noninterest-bearing demand accounts comprised 15.2% of total deposits at December 31, 2019, up from 13.6% at December 31, 2018.
• Shareholders' equity was $126.2 million and $117.5 million at December 31, 2019 and 2018, respectively, an increase of $8.7 million. The increase in shareholders' equity in the year of 2019 was primarily attributable to net income of $7.1 million and $1.7 million of net unrealized gains on the company's available-for-sale securities portfolio. 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 $8.64¹ and $7.98¹ at December 31, 2019 and 2018, respectively. Pursuant to the company's previously announced share repurchase program and shares purchased by operation of the ESOP, the company purchased 72,705 common shares at a weighted average price per share of $7.98 in the fourth quarter of 2019. Capital ratios for Virginia Commonwealth Bank were above regulatory minimum guidelines for well-capitalized banks as of December 31, 2019 and 2018.
• Annualized return on average assets for the quarters ended December 31, 2019, September 30, 2019, and December 31, 2018 was 0.71%, 0.66%, and 0.30%, respectively, while annualized return on average shareholders' equity for the same periods was 6.39%, 5.97%, and 2.69%, respectively.  

Asset Quality

• Nonperforming assets were $6.4 million, or 0.56% of total assets, as of December 31, 2019, compared to $9.4 million, or 0.84% of total assets, as of September 30, 2019, and $8.8 million, or 0.81% of total assets, as of December 31, 2018. The decrease in nonperforming assets as of December 31, 2019 was primarily attributable to an approximately $2.2 million balance decline of a commercial and industrial loan participation to a professional service firm, which announced plans to liquidate and subsequently filed for Chapter 7 bankruptcy in the third quarter of 2019, as previously reported. The loan balance as of December 31, 2019 was approximately $450 thousand compared to $2.7 million as of September 30, 2019. During the 2019 year, the company reduced its other real estate owned, net from $3.6 million at December 31, 2018 to $1.9 million at December 31, 2019.
• The ratio of allowance for loan losses to total gross loans was 0.82%, 0.80%, and 0.88% at December 31, 2019, September 30, 2019, and December 31, 2018, respectively. The company's allowance for loan losses does not include discounts recorded on loans acquired in the Merger, which were $1.9 million, $2.9 million, and $3.9 million as of December 31, 2019, September 30, 2019, and December 31, 2018, respectively.

Outlook

Greene concluded: "As I look to 2020, we have set a goal to reach greater profitability and have charted the course to achieve this. We have a strong customer base on which to build and the management team who can deliver. I often receive unsolicited customer feedback stating that our employees have gone above and beyond to be responsive to our customers' banking needs, expeditiously, and with a personal touch. It is our competitive advantage. We have the team, the customers, the capital, the support of our board of directors, and operate in the best Virginia markets."

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 loan production office, located throughout the greater Richmond region, the Northern Neck region, Middlesex County, and the Hampton Roads region, 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.