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, 2020

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.)

1801 BAYBERRY COURT, SUITE 101

RICHMOND, Virginia 23226

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(804) 325-3775

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A

(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

 

None

 

 

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, every Interactive Data File required to be submitted 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 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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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: 13,332,874 shares of common stock on May 1, 2020.

 

 

1


 

FORM 10-Q

For the interim period ending March 31, 2020

INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

3

 

 

 

CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2020 (UNAUDITED) AND DECEMBER 31, 2019

 

3

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)

 

4

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)

 

5

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)

 

6

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)

 

7

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

8

 

 

 

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

 

25

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

33

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

33

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

34

 

 

 

ITEM 1A. RISK FACTORS

 

34

 

 

 

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

 

34

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

35

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

35

 

 

 

ITEM 5. OTHER INFORMATION

 

35

 

 

 

ITEM 6. EXHIBITS

 

36

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

2020

 

 

December 31,

2019 (1)

 

(Dollars in thousands, except share data)

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

9,976

 

 

$

6,096

 

Interest-earning deposits

 

 

44,711

 

 

 

34,358

 

Federal funds sold

 

 

1,319

 

 

 

1,359

 

Certificates of deposit

 

 

2,754

 

 

 

2,754

 

Available-for-sale securities, at fair value

 

 

94,618

 

 

 

99,454

 

Restricted securities

 

 

5,752

 

 

 

5,706

 

Loans receivable, net of allowance for loan losses of $10,172 and

   $7,562, respectively

 

 

960,023

 

 

 

916,628

 

Loans held for sale

 

 

747

 

 

 

1,231

 

Premises and equipment, net

 

 

19,462

 

 

 

20,141

 

Accrued interest receivable

 

 

3,139

 

 

 

3,035

 

Other real estate owned, net

 

 

1,679

 

 

 

1,916

 

Bank owned life insurance

 

 

19,870

 

 

 

19,752

 

Goodwill

 

 

10,374

 

 

 

10,374

 

Mortgage servicing rights

 

 

774

 

 

 

935

 

Core deposit intangible

 

 

1,369

 

 

 

1,518

 

Other assets

 

 

6,986

 

 

 

6,666

 

Total assets

 

$

1,183,553

 

 

$

1,131,923

 

LIABILITIES

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

136,437

 

 

$

137,933

 

Savings and interest-bearing demand deposits

 

 

394,637

 

 

 

382,607

 

Time deposits

 

 

433,393

 

 

 

389,900

 

Total deposits

 

 

964,467

 

 

 

910,440

 

Securities sold under repurchase agreements

 

 

3,284

 

 

 

6,525

 

Federal Home Loan Bank advances

 

 

45,000

 

 

 

45,000

 

Subordinated notes, net of issuance costs

 

 

31,029

 

 

 

31,001

 

Other liabilities

 

 

12,371

 

 

 

12,772

 

Total liabilities

 

 

1,056,151

 

 

 

1,005,738

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock ($5 par value; authorized - 30,000,000 shares;

   outstanding - 13,346,789 and 13,261,801 shares, respectively) (2)

 

 

66,734

 

 

 

66,309

 

Additional paid-in capital

 

 

36,536

 

 

 

36,658

 

Unearned employee stock ownership plan shares

 

 

(1,463

)

 

 

(1,525

)

Retained earnings

 

 

24,646

 

 

 

24,660

 

Accumulated other comprehensive income, net

 

 

949

 

 

 

83

 

Total shareholders’ equity

 

 

127,402

 

 

 

126,185

 

Total liabilities and shareholders’ equity

 

$

1,183,553

 

 

$

1,131,923

 

 

(1)

Derived from audited December 31, 2019 Consolidated Financial Statements.

(2)

Preferred stock is authorized; however, none was outstanding as of March 31, 2020 and December 31, 2019.

See Notes to Consolidated Financial Statements.

3


BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the Three Months Ended

 

(Dollars in thousands, except per share data)

 

March 31, 2020

 

 

March 31, 2019

 

INTEREST INCOME

 

 

 

 

 

 

 

 

Loans, including fees

 

$

11,352

 

 

$

11,461

 

Securities:

 

 

 

 

 

 

 

 

Taxable

 

 

652

 

 

 

595

 

Tax-exempt

 

 

94

 

 

 

118

 

Federal funds sold

 

 

2

 

 

 

7

 

Interest-bearing deposit accounts

 

 

104

 

 

 

135

 

Certificates of deposit

 

 

14

 

 

 

20

 

Total interest income

 

 

12,218

 

 

 

12,336

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Deposits

 

 

2,848

 

 

 

2,809

 

Securities sold under repurchase agreements

 

 

2

 

 

 

3

 

Subordinated notes

 

 

512

 

 

 

137

 

Federal Home Loan Bank advances

 

 

234

 

 

 

704

 

Total interest expense

 

 

3,596

 

 

 

3,653

 

Net interest income

 

 

8,622

 

 

 

8,683

 

Provision for loan losses

 

 

2,777

 

 

 

314

 

Net interest income after provision for loan losses

 

 

5,845

 

 

 

8,369

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Trust management

 

 

193

 

 

 

214

 

Service charges and fees on deposit accounts

 

 

236

 

 

 

238

 

Wealth management

 

 

247

 

 

 

206

 

Interchange fees, net

 

 

98

 

 

 

101

 

Other service charges and fees

 

 

33

 

 

 

29

 

Secondary market sales and servicing

 

 

202

 

 

 

71

 

Increase in cash surrender value of bank owned life insurance

 

 

118

 

 

 

120

 

Net gains on sales and calls of available-for-sale securities

 

 

26

 

 

 

 

Net losses on disposition of other assets

 

 

(7

)

 

 

(1

)

Net (losses) gains on rabbi trust assets

 

 

(263

)

 

 

90

 

Referral fees

 

 

471

 

 

 

 

Other

 

 

37

 

 

 

22

 

Total noninterest income

 

 

1,391

 

 

 

1,090

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

3,628

 

 

 

4,001

 

Occupancy

 

 

751

 

 

 

868

 

Data processing

 

 

537

 

 

 

588

 

Bank franchise tax

 

 

256

 

 

 

216

 

Telecommunications and other technology

 

 

358

 

 

 

207

 

FDIC assessments

 

 

148

 

 

 

216

 

Foreclosed property

 

 

7

 

 

 

43

 

Consulting

 

 

71

 

 

 

115

 

Advertising and marketing

 

 

67

 

 

 

67

 

Directors’ fees

 

 

192

 

 

 

164

 

Audit and accounting

 

 

140

 

 

 

204

 

Legal

 

 

191

 

 

 

83

 

Core deposit intangible amortization

 

 

149

 

 

 

180

 

Net other real estate owned gains

 

 

 

 

 

(6

)

Other

 

 

813

 

 

 

684

 

Total noninterest expense

 

 

7,308

 

 

 

7,630

 

(Loss) income before income taxes

 

 

(72

)

 

 

1,829

 

Income tax (benefit) expense

 

 

(58

)

 

 

337

 

Net (loss) income

 

$

(14

)

 

$

1,492

 

Basic and diluted earnings per share

 

$

 

 

$

0.11

 

 

See Notes to Consolidated Financial Statements.

4


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

For the Three Months Ended

 

(Dollars in thousands)

 

March 31, 2020

 

 

March 31, 2019

 

Net (loss) income

 

$

(14

)

 

$

1,492

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized holding gain on available-for-sale securities arising during the

   period

 

 

1,070

 

 

 

1,020

 

Deferred income tax expense on unrealized gain on available-for-sale

   securities

 

 

(225

)

 

 

(214

)

Reclassification of net gains on sales and calls of available-for-sale

   securities recognized in net income

 

 

26

 

 

 

 

Deferred income tax expense on realized gain on available-for-sale

   securities

 

 

(5

)

 

 

 

Total other comprehensive income

 

 

866

 

 

 

806

 

Comprehensive income

 

$

852

 

 

$

2,298

 

 

See Notes to Consolidated Financial Statements.

5


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Income, net

 

 

Equity

 

Three months ended March 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

13,261,801

 

 

$

66,309

 

 

$

36,658

 

 

$

(1,525

)

 

$

24,660

 

 

$

83

 

 

$

126,185

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14

)

 

 

 

 

 

(14

)

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

866

 

 

 

866

 

Stock options exercised, net

 

 

15,514

 

 

 

77

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

81

 

Director and executive stock grant

 

 

11,734

 

 

 

59

 

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

105

 

Restricted stock awards

 

 

61,020

 

 

 

305

 

 

 

(305

)

 

 

 

 

 

 

 

 

 

 

 

 

Shares repurchased pursuant to ESOP

 

 

(3,280

)

 

 

(16

)

 

 

(9

)

 

 

 

 

 

 

 

 

 

 

 

(25

)

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

62

 

 

 

 

 

 

 

 

 

62

 

Share-based compensation expense

 

 

 

 

 

 

 

 

142

 

 

 

 

 

 

 

 

 

 

 

 

142

 

Balance at end of period

 

 

13,346,789

 

 

$

66,734

 

 

$

36,536

 

 

$

(1,463

)

 

$

24,646

 

 

$

949

 

 

$

127,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Loss, net

 

 

Equity

 

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

13,201,682

 

 

$

66,008

 

 

$

36,972

 

 

$

(1,734

)

 

$

17,557

 

 

$

(1,327

)

 

$

117,476

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,492

 

 

 

 

 

 

1,492

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

806

 

 

 

806

 

Stock options exercised, net

 

 

5,173

 

 

 

26

 

 

 

(17

)

 

 

 

 

 

 

 

 

 

 

 

9

 

Director stock grant

 

 

762

 

 

 

4

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

6

 

Restricted stock awards

 

 

105,920

 

 

 

530

 

 

 

(530

)

 

 

 

 

 

 

 

 

 

 

 

 

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Share-based compensation expense

 

 

 

 

 

 

 

 

66

 

 

 

 

 

 

 

 

 

 

 

 

66

 

Cumulative effect adjustment of adoption of accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

 

 

 

 

 

45

 

Balance at end of period

 

 

13,313,537

 

 

$

66,568

 

 

$

36,493

 

 

$

(1,697

)

 

$

19,094

 

 

$

(521

)

 

$

119,937

 

 

See Notes to Consolidated Financial Statements.

 

6


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

For the Three Months Ended

 

(Dollars in thousands)

 

March 31, 2020

 

 

March 31, 2019

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net (loss)  income

 

$

(14

)

 

$

1,492

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

375

 

 

 

446

 

Net premium amortization on available-for-sale securities

 

 

130

 

 

 

118

 

Amortization of subordinated notes issuance costs

 

 

28

 

 

 

4

 

Amortization of core deposit intangible

 

 

149

 

 

 

180

 

Accretion of fair value adjustment on acquired time deposits

 

 

(24

)

 

 

(34

)

Accretion of fair value adjustments (discounts) on acquired loans

 

 

(189

)

 

 

(439

)

Provision for loan losses

 

 

2,777

 

 

 

314

 

Share-based compensation expense

 

 

142

 

 

 

66

 

Increase in other real estate owned valuation allowance

 

 

10

 

 

 

16

 

Gain on sale of other real estate owned

 

 

(10

)

 

 

(22

)

Net loss on the disposition of fixed and other assets

 

 

7

 

 

 

1

 

Decrease in value of mortgage servicing rights

 

 

161

 

 

 

54

 

Increase in cash surrender value of bank owned life insurance

 

 

(118

)

 

 

(120

)

Net gains on sales and calls of available-for-sale securities

 

 

(26

)

 

 

 

Originations of loans held for sale (HFS)

 

 

(23,327

)

 

 

(2,344

)

Proceeds from HFS loan sales

 

 

24,068

 

 

 

2,773

 

Gain on HFS sold loans

 

 

(257

)

 

 

(61

)

Decrease (increase) in other assets and accrued interest receivable

 

 

103

 

 

 

(4,099

)

(Decrease) increase in other liabilities

 

 

(444

)

 

 

5,116

 

Net cash provided by operating activities

 

 

3,541

 

 

 

3,461

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

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

 

 

7,846

 

 

 

1,098

 

Purchases of available-for-sale securities

 

 

(2,018

)

 

 

 

Purchases of restricted securities, net

 

 

(46

)

 

 

(204

)

Decrease in federal funds sold

 

 

40

 

 

 

443

 

Net increase in loans

 

 

(46,113

)

 

 

(16,583

)

Proceeds from sale of other real estate owned

 

 

367

 

 

 

22

 

Net (purchases) disposals of premises and equipment

 

 

(230

)

 

 

27

 

Net cash used in investing activities

 

 

(40,154

)

 

 

(15,197

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Increase in demand, savings, and other interest-bearing demand deposits

 

 

10,534

 

 

 

10,380

 

Net increase in time deposits

 

 

43,517

 

 

 

4,115

 

Stock options exercised, net

 

 

81

 

 

 

9

 

Net (decrease) increase in securities sold under repurchase agreements and other borrowings

 

 

(3,261

)

 

 

1,061

 

Shares repurchased pursuant to ESOP

 

 

(25

)

 

 

 

Net cash provided by financing activities

 

 

50,846

 

 

 

15,565

 

Net increase in cash and due from banks

 

 

14,233

 

 

 

3,829

 

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

 

 

40,454

 

 

 

26,666

 

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

 

$

54,687

 

 

$

30,495

 

Supplemental Schedule of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

3,523

 

 

$

3,587

 

Income taxes

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unrealized gain on available-for-sale securities

 

 

1,096

 

 

 

1,020

 

Loans transferred to other real estate owned

 

 

130

 

 

 

137

 

Changes in deferred taxes resulting from other comprehensive income transactions

 

 

(230

)

 

 

(214

)

Cumulative effect adjustment of adoption of accounting principle

 

 

 

 

 

(45

)

Employee stock ownership plan transactions

 

 

(62

)

 

 

(37

)

Director and executive stock grant

 

 

105

 

 

 

6

 

 

See Notes to Consolidated Financial Statements.

 


7


Notes to Consolidated Financial Statements (Unaudited)

Note 1: Basis of Presentation

 

Bay Banks of Virginia, Inc. (the “Company”) is the holding company for Virginia Commonwealth Bank (the “Bank”), for VCB Financial Group, Inc. (the “Financial Group”), and for Steptoes Holdings, LLC (“Steptoes Holdings”). The consolidated financial statements of the Company include the accounts of Bay Banks of Virginia, Inc., the Bank, the Financial Group, and Steptoes Holdings. All significant intercompany accounts and transactions are eliminated upon consolidation.

The Bank is a state-chartered bank, headquartered in Richmond, Virginia, and a member of the Federal Reserve System. It serves businesses, professionals, and consumers through 18 banking offices, including one loan production office, located in the greater Richmond region, the Northern Neck region, Middlesex County, and the Hampton Roads region of Virginia. The Bank offers a wide range of deposit and loan products to its retail and commercial customers. A substantial amount of the Bank’s deposits are interest-bearing. The majority of the Bank’s loan portfolio is secured by real estate.

 

The Financial Group provides management services for personal and corporate trusts, including estate planning, estate settlement, trust administration, and investment and wealth management services from its Richmond and Kilmarnock, Virginia offices. Products and services include revocable and irrevocable living trusts, testamentary trusts, custodial accounts, investment planning, brokerage services, insurance investment managed accounts, and managed and self-directed individual retirement accounts.

 

On April 1, 2017, the Company completed a merger with Virginia BanCorp, Inc. (“Virginia BanCorp”), a bank holding company conducting substantially all of its operations through its subsidiary, Virginia Commonwealth Bank. Immediately following the Company’s merger with Virginia BanCorp, Virginia BanCorp’s subsidiary bank was merged with and into the Company’s banking subsidiary, Bank of Lancaster (collectively, the “Merger”). Bank of Lancaster then changed its name to Virginia Commonwealth Bank.

 

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 necessary for a fair presentation of the consolidated financial statements have been included.

 

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.

 

All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

Note 2: Amendments to the Accounting Standards Codification

In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740), which is guidance for the simplification of accounting for income taxes. This ASU removes certain exceptions to the general principals of Topic 740 and simplifies existing guidance to improve consistent application of GAAP. The exceptions removed by this ASU are the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This ASU simplifies the accounting by requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; requiring that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date; and making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. This ASU is effective for interim and annual reporting periods beginning after December 15, 2020. The Company is currently evaluating the effect that this ASU will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which is guidance for the modifications to fair value measurement disclosure requirements. This ASU removes, modifies, and adds disclosure requirements for Topic 820, Fair Value Measurement (“ASC 820”). The disclosure requirement for the valuation process of Level 3 fair value measurements was removed from ASC 820. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The disclosure requirements added to ASC 820 were the changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU was effective for interim and annual reporting periods beginning after December 15, 2019. The additional

8


disclosure requirements are to be applied prospectively and the other modifications will be applied retrospectively. The adoption of this ASU in the first quarter of 2020 did not have a material effect on the Company’s consolidated financial statements.

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. This ASU introduces a new model for current expected credit losses (“CECL”), which applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures, including 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, this standard will replace 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. This ASU also addresses purchased financial assets with credit deterioration. Disclosure requirements are expanded regarding an entity’s assumptions, models, and methods for estimating the allowance for loan losses. On October 16, 2019, the FASB voted to extend the effective date of ASU 2016-13 for smaller reporting companies (including the Company) and non-SEC registrants; therefore, this ASU is effective for interim and annual reporting periods beginning after December 15, 2022. The Company has a CECL cross-functional working group that implemented a third-party CECL software in 2019 and will continue to assess and implement the requirements of ASU 2016-13 by the adoption date.

Note 3: Securities

The aggregate amortized costs and fair values of available-for-sale securities as of the dates stated were as follows.

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

March 31, 2020

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies and mortgage backed securities

 

$

60,305

 

 

$

1,250

 

 

$

(14

)

 

$

61,541

 

State and municipal obligations

 

 

15,492

 

 

 

369

 

 

 

 

 

 

15,861

 

Corporate bonds

 

 

17,175

 

 

 

94

 

 

 

(53

)

 

 

17,216

 

Total available-for-sale securities

 

$

92,972

 

 

$

1,713

 

 

$

(67

)

 

$

94,618

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

December 31, 2019

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies and mortgage backed securities

 

$

67,491

 

 

$

284

 

 

$

(178

)

 

$

67,597

 

State and municipal obligations

 

 

16,238

 

 

 

341

 

 

 

(3

)

 

 

16,576

 

Corporate bonds

 

 

15,165

 

 

 

116

 

 

 

 

 

 

15,281

 

Total available-for-sale securities

 

$

98,894

 

 

$

741

 

 

$

(181

)

 

$

99,454

 

 

Securities with fair values of $11.2 million and $11.1 million were pledged as collateral for securities sold under repurchase agreements as of March 31, 2020 and December 31, 2019, respectively. As of March 31, 2020 and December 31, 2019, all of the securities pledged for repurchase agreements were state and municipal obligations. All of the repurchase agreements had remaining contractual maturities that were overnight and continuous. Securities sold under repurchase agreements were $3.3 million and $6.5 million as of March 31, 2020 and December 31, 2019, respectively, and are 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 changes.

9


The following tables present securities in an unrealized loss position as of March 31, 2020 and December 31, 2019, by period of the unrealized loss and number of securities. The unrealized loss positions were primarily related to interest rate movements and not the credit quality of the issuers. All agency securities and state and municipal securities are investment grade or better, and their losses are considered temporary. Management does not intend to sell nor expect to be required to sell these securities, and all amortized cost bases are expected to be recovered.

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

March 31, 2020

 

Number of Securities

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

U.S. Government agencies and mortgage backed securities

 

 

6

 

 

$

1,954

 

 

$

(9

)

 

$

449

 

 

$

(5

)

 

$

2,403

 

 

$

(14

)

Corporate bonds

 

 

6

 

 

 

6,976

 

 

 

(53

)

 

 

 

 

 

 

 

 

6,976

 

 

 

(53

)

Total temporarily impaired securities

 

 

12

 

 

$

8,930

 

 

$

(62

)

 

$

449

 

 

$

(5

)

 

$

9,379

 

 

$

(67

)

 

 

 

 

 

 

 

Less than 12 months

 

 

12 months or more

 

 

Total

 

December 31, 2019

 

Number of Securities

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

 

Fair

Value

 

 

Unrealized

Loss

 

U.S. Government agencies and mortgage backed securities

 

 

38

 

 

$

12,356

 

 

$

(53

)

 

$

16,930

 

 

$

(125

)

 

$

29,286

 

 

$

(178

)

State and municipal obligations

 

 

1

 

 

 

610

 

 

 

(3

)

 

 

 

 

 

 

 

 

610

 

 

 

(3

)

Total temporarily impaired securities

 

$

39

 

 

$

12,966

 

 

$

(56

)

 

$

16,930

 

 

$

(125

)

 

$

29,896

 

 

$

(181

)

 

The following table presents the amortized cost and fair value by contractual maturity of available-for-sale securities as of the dates stated. Expected maturities may differ from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Amortized Cost

 

 

Fair Value

 

 

Amortized Cost

 

 

Fair Value

 

Due in one year or less

 

$

10,913

 

 

$

10,962

 

 

$

10,528

 

 

$

10,563

 

Due after one year but less than five years

 

 

48,594

 

 

 

49,745

 

 

 

49,586

 

 

 

49,921

 

Due after five years but less than ten years

 

 

28,973

 

 

 

29,325

 

 

 

33,332

 

 

 

33,535

 

Due after ten years

 

 

4,492

 

 

 

4,586

 

 

 

5,448

 

 

 

5,435

 

Total available-for-sale securities

 

$

92,972

 

 

$

94,618

 

 

$

98,894

 

 

$

99,454

 

 

Restricted Securities

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $2.9 million as of March 31, 2020 and December 31, 2019. The Company also has an investment in the Federal Reserve Bank of Richmond (“FRB”) stock, which totaled $2.6 million as of March 31, 2020 and December 31, 2019 and a stock investment in the Bank’s primary correspondent bank totaling $220 thousand as of March 31, 2020 and December 31, 2019. 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, pursuant to 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.

Note 4: Loans

Loans are reported at their recorded investment, which is the outstanding principal balance net of any unearned income and costs, such as deferred fees and costs, charge-offs, and discounts or premiums on acquired or purchased loans. Interest on loans is recognized in earnings over the contractual term of the loan and is calculated using the effective interest method on principal amounts outstanding. Loan 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 or principal curtailments, as applicable.

10


All interest accrued but not collected for loans that are placed on nonaccrual or charged-off are reversed against interest income at the time the loans are placed on nonaccrual or charged-off. Any subsequent interest received on these loans is recognized as interest income under the cash basis method of accounting or applied as a reduction of the principal balance of the loan until the loan qualifies for return to accrual status. Generally, a loan is returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, or the loan becomes well-secured and in the process of collection.

The following table presents a summary of loans as of the dates stated.

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

Residential first mortgages

 

$

298,539

 

 

$

293,913

 

Commercial mortgages (non-owner occupied)

 

 

229,488

 

 

 

196,143

 

Construction, land and land development

 

 

127,417

 

 

 

126,010

 

Commercial mortgages (owner occupied)

 

 

75,455

 

 

 

82,829

 

Residential revolving and junior mortgages

 

 

31,505

 

 

 

31,893

 

Commercial and industrial

 

 

198,278

 

 

 

181,730

 

Consumer

 

 

9,846

 

 

 

11,985

 

Total loans

 

 

970,528

 

 

 

924,503

 

Net unamortized deferred loan fees

 

 

(333

)

 

 

(313

)

Allowance for loan losses

 

 

(10,172

)

 

 

(7,562

)

Loans receivable, net

 

$

960,023

 

 

$

916,628

 

 

As of March 31, 2020 and December 31, 2019, the Company had $371.6 million and $369.5 million, respectively, of loans pledged to the FHLB as collateral for borrowings. After adjustments by the FHLB, the total lendable collateral was $288.2 million and $288.8 million as of March 31, 2020 and December 31, 2019, respectively.  

 

The following tables present the recorded investment for past due, based upon contractual terms, and nonaccrual loans as of the dates stated. A loan past due 90 days or more is generally placed on nonaccrual unless it is both well-secured and in the process of collection. Loans presented below as 90 days or more past due and still accruing include purchased credit-impaired (“PCI”) loans.

 

March 31, 2020

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccrual

 

 

Total Past

Due and

Nonaccrual

 

 

Current

 

 

Total

Loans

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

$

3,079

 

 

$

103

 

 

$

3,139

 

 

$

6,321

 

 

$

292,218

 

 

$

298,539

 

Commercial mortgages (non-owner occupied)

 

 

201

 

 

 

 

 

 

433

 

 

 

634

 

 

 

228,854

 

 

 

229,488

 

Construction, land and land development

 

 

327

 

 

 

 

 

 

302

 

 

 

629

 

 

 

126,788

 

 

 

127,417

 

Commercial mortgages (owner occupied)

 

 

50

 

 

 

 

 

 

443

 

 

 

493

 

 

 

74,962

 

 

 

75,455

 

Residential revolving and junior mortgages

 

 

50

 

 

 

 

 

 

721

 

 

 

771

 

 

 

30,734

 

 

 

31,505

 

Commercial and industrial

 

 

548

 

 

 

 

 

 

217

 

 

 

765

 

 

 

197,513

 

 

 

198,278

 

Consumer

 

 

56

 

 

 

 

 

 

186

 

 

 

242

 

 

 

9,604

 

 

 

9,846

 

Total loans

 

$

4,311

 

 

$

103

 

 

$

5,441

 

 

$

9,855

 

 

$

960,673

 

 

$

970,528

 

 

December 31, 2019

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccrual

 

 

Total Past

Due and

Nonaccrual

 

 

Current

 

 

Total

Loans

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

$

3,904

 

 

$

16

 

 

$

1,403

 

 

$

5,323

 

 

$

288,590

 

 

$

293,913

 

Commercial mortgages (non-owner occupied)

 

 

126

 

 

 

 

 

 

433

 

 

 

559

 

 

 

195,584

 

 

 

196,143

 

Construction, land and land development

 

 

77

 

 

 

 

 

 

417

 

 

 

494

 

 

 

125,516

 

 

 

126,010

 

Commercial mortgages (owner occupied)

 

 

173

 

 

 

 

 

 

587

 

 

 

760

 

 

 

82,069

 

 

 

82,829

 

Residential revolving and junior mortgages

 

 

52

 

 

 

 

 

 

724

 

 

 

776

 

 

 

31,117

 

 

 

31,893

 

Commercial and industrial

 

 

570

 

 

 

 

 

 

670

 

 

 

1,240

 

 

 

180,490

 

 

 

181,730

 

Consumer

 

 

139

 

 

 

 

 

 

242

 

 

 

381

 

 

 

11,604

 

 

 

11,985

 

Total loans

 

$

5,041

 

 

$

16

 

 

$

4,476

 

 

$

9,533

 

 

$

914,970

 

 

$

924,503

 

 

11


The following tables include an aging analysis, based upon contractual terms, of the recorded investment of PCI loans included in the tables above as of the dates stated.

March 31, 2020

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccrual

 

 

Total Past

Due and

Nonaccrual

 

 

Current

 

 

Total

PCI

Loans

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

$

274

 

 

$

103

 

 

$

 

 

$

377

 

 

$

2,486

 

 

$

2,863

 

Commercial mortgages (non-owner occupied)

 

 

127

 

 

 

 

 

 

 

 

 

127

 

 

 

 

 

 

127

 

Construction, land and land development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,346

 

 

 

1,346

 

Commercial mortgages (owner occupied)

 

 

50

 

 

 

 

 

 

 

 

 

50

 

 

 

197

 

 

 

247

 

Residential revolving and junior mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

 

 

 

40

 

Total purchased credit-impaired loans

 

$

451

 

 

$

103

 

 

$

 

 

$

554

 

 

$

4,069

 

 

$

4,623

 

 

December 31, 2019

 

30-89

Days

Past Due

 

 

90 Days or

More Past

Due and

Still Accruing

 

 

Nonaccrual

 

 

Total Past

Due and

Nonaccrual

 

 

Current

 

 

Total

PCI

Loans

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

$

239

 

 

$

16

 

 

$

 

 

$

255

 

 

$

2,836

 

 

$

3,091

 

Commercial mortgages (non-owner occupied)

 

 

126

 

 

 

 

 

 

 

 

 

126

 

 

 

 

 

 

126

 

Construction, land and land development

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,357

 

 

 

1,357

 

Commercial mortgages (owner occupied)

 

 

25

 

 

 

 

 

 

 

 

 

25

 

 

 

229

 

 

 

254

 

Residential revolving and junior mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42

 

 

 

42

 

Total purchased credit-impaired loans

 

$

390

 

 

$

16

 

 

$

 

 

$

406

 

 

$

4,464

 

 

$

4,870

 

 

The following table presents the changes in accretable yield for PCI loans for the periods stated.

 

 

 

For the Three Months Ended

 

 

 

March 31, 2020

 

March 31, 2019

 

Balance at beginning of period

 

$

973

 

$

1,083

 

Accretion of acquisition accounting adjustment

 

 

(72

)

 

(86

)

Reclassifications from nonaccretable balance, net

 

 

3

 

 

45

 

Other changes, net

 

 

(150

)

 

65

 

Balance at end of period

 

$

754

 

$

1,107

 

 

Internal Risk Ratings

Loans in the Company’s loan portfolio are risk rated on a periodic basis by experienced credit personnel.

Risk rating categories are as follows:

Pass – Several pass credit risk ratings apply to loans in this category. These ratings are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities to management attention credits that have all characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special Mention – Adverse trends in the borrower’s financial position are evident and warrant management’s close attention for loans risk rated special mention. Any collateral securing loans in this category 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 loan. 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 an asset is not warranted.

12


The following tables present the Company’s risk rating of loans by loan type as of the dates stated.

 

March 31, 2020

 

Residential

First

Mortgages

 

 

Commercial

Mortgages

(Non-Owner Occupied)

 

 

Construction,

Land and

Land

Development

 

 

Commercial

Mortgages

(Owner

Occupied)

 

 

Residential

Revolving

and Junior

Mortgages

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

Loans

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

292,427

 

 

$

187,794

 

 

$

109,739

 

 

$

62,192

 

 

$

30,198

 

 

$

177,247

 

 

$

9,647

 

 

$

869,244

 

Special mention

 

 

1,886

 

 

 

41,134

 

 

 

15,711

 

 

 

12,669

 

 

 

586

 

 

 

19,111

 

 

 

 

 

 

91,097

 

Substandard

 

 

4,226

 

 

 

560

 

 

 

1,967

 

 

 

594

 

 

 

721

 

 

 

1,920

 

 

 

199

 

 

 

10,187

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

298,539

 

 

$

229,488

 

 

$

127,417

 

 

$

75,455

 

 

$

31,505

 

 

$

198,278

 

 

$

9,846

 

 

$

970,528

 

 

December 31, 2019

 

Residential

First

Mortgages

 

 

Commercial

Mortgages

(Non-Owner

Occupied)

 

 

Construction,

Land and

Land

Development

 

 

Commercial

Mortgages

(Owner

Occupied)

 

 

Residential

Revolving

and Junior

Mortgages

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

Loans

 

Grade:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

290,322

 

 

$

195,584

 

 

$

123,916

 

 

$

81,936

 

 

$

31,084

 

 

$

177,608

 

 

$

11,729

 

 

$

912,179

 

Special mention

 

 

1,091

 

 

 

 

 

 

 

 

 

149

 

 

 

86

 

 

 

2,289

 

 

 

 

 

 

3,615

 

Substandard

 

 

2,500

 

 

 

559

 

 

 

2,094

 

 

 

744

 

 

 

723

 

 

 

1,833

 

 

 

256

 

 

 

8,709

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans

 

$

293,913

 

 

$

196,143

 

 

$

126,010

 

 

$

82,829

 

 

$

31,893

 

 

$

181,730

 

 

$

11,985

 

 

$

924,503

 

 

In March of 2020, the Company downgraded approximately $88.5 million of loans to borrowers in industries highly affected by the COVID-19 pandemic, such as hotels, restaurants, churches, and assisted-living facilities. The majority of the risk rating downgrades due to COVID-19 were from pass grades to special mention, and the majority were in commercial and construction loan types.

 

Note 5: Allowance for Loan Losses

 

The allowance for loan losses (“ALL”) reflects management’s estimate of probable loan losses inherent in the loan portfolio as of the balance sheet date. Management uses a disciplined process and methodology to establish the ALL each quarter-end. To determine the total ALL, the Company estimates the reserves needed for each homogenous type of the loan category and for any loans analyzed individually for impairment. Depending on the nature of each loan type, 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.

 

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 individually to calculate the amount of impairment. Impaired loans measured individually for impairment generally include (1) any loan risk rated substandard or worse with balances of $400 thousand or more, and (2) all loans designated as a troubled debt restructuring (“TDR”). For the general component of the ALL, the Company collectively evaluates loans not evaluated individually for a specific reserve, plus impaired loans risk rated substandard or worse with balances less than $400 thousand. All loans evaluated collectively are grouped into types, and historical loss experience is calculated and applied to each loan type and the resultant reserve is 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 types. An unallocated component is maintained, if needed, to cover uncertainties that could affect management’s estimate of probable losses.

13


Loans Evaluated for Impairment

The following table presents the ALL by loans evaluated for impairment individually and collectively by loan type as of the dates stated.

 

March 31, 2020

 

Mortgage

Loans

on Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

Allowance for loan losses applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

1,113

 

 

$

336

 

 

$

110

 

 

$

1,559

 

Loans collectively evaluated for impairment

 

 

6,142

 

 

 

2,064

 

 

 

407

 

 

 

8,613

 

Purchased credit-impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

 

$

7,255

 

 

$

2,400

 

 

$

517

 

 

$

10,172

 

Loan balances applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

7,011

 

 

$

489

 

 

$

110

 

 

$

7,610

 

Loans collectively evaluated for impairment

 

 

750,810

 

 

 

197,789

 

 

 

9,696

 

 

 

958,295

 

Purchased credit-impaired loans

 

 

4,583

 

 

 

 

 

 

40

 

 

 

4,623

 

Total loans

 

$

762,404

 

 

$

198,278

 

 

$

9,846

 

 

$

970,528

 

December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

878

 

 

$

49

 

 

$

112

 

 

$

1,039

 

Loans collectively evaluated for impairment

 

 

4,494

 

 

 

1,522

 

 

 

507

 

 

 

6,523

 

Purchased credit-impaired loans

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for loan losses

 

$

5,372

 

 

$

1,571

 

 

$

619

 

 

$

7,562

 

Loan balances applicable to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans individually evaluated for impairment

 

$

5,502

 

 

$

455

 

 

$

112

 

 

$

6,069

 

Loans collectively evaluated for impairment

 

 

720,458

 

 

 

181,275

 

 

 

11,831

 

 

 

913,564

 

Purchased credit-impaired loans

 

 

4,828

 

 

 

 

 

 

42

 

 

 

4,870

 

Total loans

 

$

730,788

 

 

$

181,730

 

 

$

11,985

 

 

$

924,503

 

 

The following tables present an analysis of the change in the ALL by loan type for the periods presented.

 

For the Three Months Ended March 31, 2020

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

Beginning of period

 

$

5,372

 

 

$

1,571

 

 

$

619

 

 

$

7,562

 

Charge-offs

 

 

(63

)

 

 

 

 

 

(183

)

 

 

(246

)

Recoveries

 

 

5

 

 

 

 

 

 

74

 

 

 

79

 

Provision

 

 

1,941

 

 

 

829

 

 

 

7

 

 

 

2,777

 

Ending of period

 

$

7,255

 

 

$

2,400

 

 

$

517

 

 

$

10,172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2019

 

Mortgage

Loans on

Real Estate

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

 

Beginning of period

 

$

4,967

 

 

$

1,374

 

 

$

1,561

 

 

$

7,902

 

Charge-offs

 

 

(54

)

 

 

 

 

 

(407

)

 

 

(461

)

Recoveries

 

 

24

 

 

 

1

 

 

 

78

 

 

 

103

 

Provision (recovery of)

 

 

322

 

 

 

31

 

 

 

(39

)

 

 

314

 

Ending of period

 

$

5,259

 

 

$

1,406

 

 

$

1,193

 

 

$

7,858

 

 

Approximately $1.5 million of the $2.8 million of provision for loan losses reported in the first quarter of 2020 was attributable to estimated reserve needs due to the negative economic impact of the COVID-19 pandemic occurring in the quarter. Of this $1.5 million, approximately $200 thousand was due to risk rating downgrades of loans in highly-affected industry segments. The remaining $1.3 million relates to a qualitative loss factor applied to the majority of the Company’s loan portfolio for management’s estimate of losses for negative economic implications, such as the rising unemployment in the Bank’s markets. The remaining $1.3 million of the total provision for loan losses was unrelated to COVID-19 and primarily due to gross loan growth of $46.0 million and higher specific reserves recorded in the first quarter of 2020.

14


Impaired Loans

The following table presents the Company’s recorded investment and the borrowers’ unpaid principal balances for impaired loans, excluding PCI loans, with the associated ALL amount, if applicable, by loan type as of the dates stated.

 

 

 

As of March 31, 2020

 

 

As of December 31, 2019

 

 

 

Recorded

Investment

 

 

Borrowers’ Unpaid

Principal Balance

 

 

Related

Allowance

 

 

Recorded

Investment

 

 

Borrowers’ Unpaid

Principal Balance

 

 

Related

Allowance

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

$

509

 

 

$

509

 

 

$

 

 

$

510

 

 

$

510

 

 

$

 

Commercial mortgages (non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

16

 

 

 

16

 

 

 

 

 

 

17

 

 

 

17

 

 

 

 

Commercial mortgages (owner occupied)

 

 

341

 

 

 

341

 

 

 

 

 

 

419

 

 

 

419

 

 

 

 

Residential revolving and junior mortgages

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans with no related allowance

 

 

866

 

 

 

866

 

 

 

 

 

 

946

 

 

 

946

 

 

 

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

 

4,062

 

 

 

4,062

 

 

 

794

 

 

 

2,857

 

 

 

2,857

 

 

 

676

 

Commercial mortgages (non-owner occupied)

 

 

433

 

 

 

433

 

 

 

65

 

 

 

433

 

 

 

433

 

 

 

58

 

Construction, land and land development

 

 

167

 

 

 

167

 

 

 

42

 

 

 

171

 

 

 

171

 

 

 

44

 

Commercial mortgages (owner occupied)

 

 

1,116

 

 

 

1,116

 

 

 

53

 

 

 

1,048

 

 

 

1,048

 

 

 

53

 

Residential revolving and junior mortgages

 

 

367

 

 

 

367

 

 

 

159

 

 

 

47

 

 

 

47

 

 

 

47

 

Commercial and industrial

 

 

489

 

 

 

489

 

 

 

336

 

 

 

455

 

 

 

455

 

 

 

49

 

Consumer

 

 

110

 

 

 

110

 

 

 

110

 

 

 

112

 

 

 

112

 

 

 

112

 

Total impaired loans with allowance recorded

 

 

6,744

 

 

 

6,744

 

 

 

1,559

 

 

 

5,123

 

 

 

5,123

 

 

 

1,039

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

 

4,571

 

 

 

4,571

 

 

 

794

 

 

 

3,367

 

 

 

3,367

 

 

 

676

 

Commercial mortgages (non-owner occupied)

 

 

433

 

 

 

433

 

 

 

65

 

 

 

433

 

 

 

433

 

 

 

58

 

Construction, land and land development

 

 

183

 

 

 

183

 

 

 

42

 

 

 

188

 

 

 

188

 

 

 

44

 

Commercial mortgages (owner occupied)

 

 

1,457

 

 

 

1,457

 

 

 

53

 

 

 

1,467

 

 

 

1,467

 

 

 

53

 

Residential revolving and junior mortgages

 

 

367

 

 

 

367

 

 

 

159

 

 

 

47

 

 

 

47

 

 

 

47

 

Commercial and industrial

 

 

489

 

 

 

489

 

 

 

336

 

 

 

455

 

 

 

455

 

 

 

49

 

Consumer

 

 

110

 

 

 

110

 

 

 

110

 

 

 

112

 

 

 

112

 

 

 

112

 

Total impaired loans

 

$

7,610

 

 

$

7,610

 

 

$

1,559

 

 

$

6,069

 

 

$

6,069

 

 

$

1,039

 

 

15


The following table presents the average recorded investment and interest income recognized for impaired loans, excluding PCI loans, by loan type for the periods presented.

 

 

 

For the Three Months Ended

 

 

For the Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest

Income

Recognized

 

With no related allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

$

510

 

 

$

8

 

 

$

1,431

 

 

$

19

 

Commercial mortgages (non-owner occupied)

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

16

 

 

 

 

 

 

334

 

 

 

2

 

Commercial mortgages (owner occupied)

 

 

342

 

 

 

6

 

 

 

384

 

 

 

6

 

Residential revolving and junior mortgages

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired loans with no allowance

 

 

868

 

 

 

14

 

 

 

2,149

 

 

 

27

 

With an allowance recorded:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

 

3,298

 

 

 

21

 

 

 

3,034

 

 

 

33

 

Commercial mortgages (non-owner occupied)

 

 

433

 

 

 

5

 

 

 

439

 

 

 

23

 

Construction, land and land development

 

 

169

 

 

 

3

 

 

 

274

 

 

 

4

 

Commercial mortgages (owner occupied)

 

 

1,120

 

 

 

15

 

 

 

1,066

 

 

 

14

 

Residential revolving and junior mortgages

 

 

368

 

 

 

1

 

 

 

502

 

 

 

3

 

Commercial and industrial

 

 

700

 

 

 

7

 

 

 

 

 

 

 

Consumer

 

 

111

 

 

 

 

 

 

121

 

 

 

2

 

Total impaired loans with allowance recorded

 

 

6,199

 

 

 

52

 

 

 

5,436

 

 

 

79

 

Total impaired loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

 

3,808

 

 

 

29

 

 

 

4,465

 

 

 

52

 

Commercial mortgages (non-owner occupied)

 

 

433

 

 

 

5

 

 

 

439

 

 

 

23

 

Construction, land and land development

 

 

185

 

 

 

3

 

 

 

608

 

 

 

6

 

Commercial mortgages (owner occupied)

 

 

1,462

 

 

 

21

 

 

 

1,450

 

 

 

20

 

Residential revolving and junior mortgages

 

 

368

 

 

 

1

 

 

 

502

 

 

 

3

 

Commercial and industrial

 

 

700

 

 

 

7

 

 

 

 

 

 

 

Consumer

 

 

111

 

 

 

 

 

 

121

 

 

 

2

 

Total impaired loans

 

$

7,067

 

 

$

66

 

 

$

7,585

 

 

$

106

 

 

The following table presents a reconciliation of nonaccrual loans to impaired loans as of the dates stated.

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Nonaccrual loans

 

$

5,441

 

 

$

4,476

 

Nonaccrual loans collectively evaluated for impairment

 

 

(1,569

)

 

 

(1,895

)

Nonaccrual impaired loans

 

 

3,872

 

 

 

2,581

 

TDRs on accrual

 

 

3,249

 

 

 

3,270

 

Other impaired loans on accrual

 

 

489

 

 

 

218

 

Total impaired loans

 

$

7,610

 

 

$

6,069

 

 

Troubled Debt Restructurings

In some situations, for economic or legal reasons related to a borrower’s financial condition, the Company may grant a concession to a borrower that it would not otherwise consider. Concessions include new terms that provide for a reduction of the face amount or maturity amount of the debt as stated in the original agreement, a reduction (absolute or contingent) of the stated interest rate for the remaining original life of the loan, and/or an extension of the maturity date or dates at a stated interest rate lower than the current market rate for new debt with similar risk. Concessions granted to a borrower experiencing financial difficulties results in a loan that is subsequently classified as a troubled debt restructuring or TDR. Management strives to identify borrowers in financial difficulty early and work with them to modify their loan to more affordable terms before their loan reaches nonaccrual status to minimize the economic loss and to avoid foreclosure or repossession of underlying collateral, if any. TDRs are considered impaired loans and are individually evaluated for impairment for the ALL.

16


No new loans were designated TDRs in the three months ended March 31, 2020 or 2019. No loans designated as TDRs subsequently defaulted in the twelve months following the restructuring.

 

The following table presents a roll-forward of accruing and nonaccrual TDRs for the period presented.

 

 

 

Accruing

 

 

Nonaccrual

 

 

Total

 

Balance as of December 31, 2019

 

$

3,270

 

 

$

1,352

 

 

$

4,622

 

Charge-offs

 

 

 

 

 

 

 

 

 

Payments and other adjustments

 

 

(21

)

 

 

(16

)

 

 

(37

)

New TDR designation

 

 

 

 

 

 

 

 

 

Release TDR designation

 

 

 

 

 

 

 

 

 

Transfer

 

 

 

 

 

 

 

 

 

Balance as of March 31, 2020

 

$

3,249

 

 

$

1,336

 

 

$

4,585

 

 

COVID-19 Loan Modifications

The Company modified approximately 180 loans totaling $86.5 million of principal balances in March 2020 in response to the COVID-19 pandemic’s impact on certain of its borrowers (“COVID-19 Loan Modifications”). The COVID-19 Loan Modifications allow for the short-term deferral of principal payments or of principal and interest payments and were made on a good faith basis to borrowers who were current in their payments prior to the modifications. As a result of regulatory guidance regarding such modifications, the COVID-19 Loan Modifications are not considered TDRs as of March 31, 2020 and are not included in the disclosures in “Troubled Debt Restructurings” above.

 

 

Note 6: Other Real Estate Owned, net

The following table presents the number and carrying values of properties included in other real estate owned (“OREO”) as of the dates stated.

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Number of

 

 

Carrying

 

 

Number of

 

 

Carrying

 

 

 

Properties

 

 

Value

 

 

Properties

 

 

Value

 

Residential

 

 

3

 

 

$

164

 

 

 

4

 

 

$

302

 

Land

 

 

11

 

 

 

1,255

 

 

 

13

 

 

 

1,354

 

Commercial properties

 

 

1

 

 

 

260

 

 

 

1

 

 

 

260

 

Total other real estate owned, net

 

 

15

 

 

$

1,679

 

 

 

18

 

 

$

1,916

 

 

No residential mortgage loans were in the process of foreclosure as of March 31, 2020.

Note 7: Leases

 

For the three months ended March 31, 2020 and 2019, operating lease expense totaled $226 thousand and $227 thousand, respectively.  

 

The following table presents the right-of-use (“ROU”) assets and lease liabilities as of the date stated. ROU assets and lease liabilities are included in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets.  

 

 

March 31, 2020

 

Operating lease right-of-use assets

$

4,094

 

 

 

 

 

Current operating lease liabilities

 

841

 

Noncurrent lease liabilities

 

3,545

 

Total operating lease liabilities

$

4,386

 

 

17


The following table presents the weighted average remaining lease term and discount rate associated with the Company’s operating leases as of the date stated.

 

 

March 31, 2020

 

Weighted average remaining lease term - operating leases

9 years

 

Weighted average discount rate - operating leases

 

3.11%

 

 

The following table presents a maturity analysis of the Company’s operating lease liabilities for the five years ending subsequent to March 31, 2020 and in total thereafter.

 

2020

 

$

714

 

2021

 

 

995

 

2022

 

 

619

 

2023

 

 

370

 

2024

 

 

380

 

Thereafter

 

 

1,908

 

Total

 

 

4,986

 

Less interest

 

 

(600

)

Lease liability

 

$

4,386

 

 

The following table presents supplemental cash flow information related to the Company’s operating leases for the period stated.

 

 

For the Three Months Ended

 

 

March 31, 2020

 

March 31, 2019

 

Cash paid for amount included in the measurement of lease liabilities:

 

 

 

 

 

 

Operating cash flows from operating leases

$

247

 

$

246

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

 

 

826

 

 

Note 8: Earnings per Share

The following table shows the calculation of basic and diluted earnings per share and the weighted average number of shares outstanding used in computing earnings per share and the effect on the weighted average number of shares outstanding of dilutive potential common stock. Basic earnings per share amounts are computed by dividing net income (the numerator) by the weighted average number of common shares outstanding (the denominator). Diluted earnings per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments, unless the effect is to reduce the loss or increase earnings per common share. Potential dilutive common stock instruments include exercisable stock options and restricted shares. For both computations, the weighted average number of the Company’s employee stock ownership plan (“ESOP”) shares not committed to be released to participant accounts are not assumed to be outstanding. The weighted average ESOP shares excluded from the computation were 180,190 and 210,005 for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2020, 176,488 of options and 30,020 restricted shares were not included in the computation of diluted earnings per share because their effects would have been anti-dilutive. For the three months ended March 31, 2019, 88,784 options were not included in the computation of diluted earnings per share because their effects would have been anti-dilutive.

 

 

 

 

For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Net (loss) income

 

$

(14

)

 

$

1,492

 

Weighted average shares outstanding, basic

 

 

13,056,576

 

 

 

13,001,182

 

Dilutive shares:

 

 

 

 

 

 

 

 

Stock options

 

 

 

 

 

33,944

 

Restricted shares

 

 

 

 

 

2,023

 

Weighted average shares outstanding, dilutive

 

 

13,056,576

 

 

 

13,037,149

 

Basic and diluted earnings per share

 

$

 

 

$

0.11

 

 

18


Note 9. Share Repurchase Program

 

In October 2019, the Company’s board of directors authorized the repurchase of up to 400,000 shares of the Company’s common stock (approximately 3% of the Company’s currently outstanding common stock) (the “Repurchase Program”). The Repurchase Program is effective through December 31, 2020, and the Company may repurchase shares through open market transactions or privately negotiated transactions, including pursuant to a trading plan in accordance with rules issued under the Securities Exchange Act of 1934. The actual timing, quantities, prices, and manner of any share repurchases under the Repurchase Program is determined by the Company in its discretion and depends on a number of factors, including the market price of the Company’s common stock, share repurchases required under the Company’s employee benefit plans, general market and economic conditions, and applicable legal and regulatory requirements. The Repurchase Program may be modified, amended, or terminated by the Company’s board of directors at any time. There is no guarantee as to the number of shares that the Company will repurchase under the Repurchase Program. The Company did not purchase any of its common shares in the first quarter of 2020.

 

 

Note 10: Borrowings

 

FHLB Borrowings

As of March 31, 2020 and December 31, 2019, the Bank had $45.0 million of outstanding FHLB borrowings, consisting of four advances. Advances on the FHLB line are secured by a blanket lien on qualified one-to-four family real estate, commercial real estate, and multifamily residential loans. Immediately available credit, as of March 31, 2020, was $205.9 million against a total line of credit of $281.9 million. As of March 31, 2020, the Bank had $31.0 million of letters of credit issued by the FHLB for the benefit of the Virginia Department of the Treasury as collateral for public deposits held by the Bank to comply with the Security of Public Deposits Act. The $31.0 million is not an outstanding borrowing as of March 31, 2020, but does reduce the available credit under the FHLB credit line.

 

The following table presents information regarding the four advances outstanding as of March 31, 2020.

 

 

 

 

 

 

 

 

 

Stated

 

 

Maturity

 

 

Balance

 

 

Originated

 

Interest Rate

 

 

Date

Adjustable rate hybrid

 

$

10,000

 

 

4/12/2013

 

 

4.23

%

 

4/13/2020

Fixed rate credit

 

 

15,000

 

 

3/20/2020

 

 

0.29

%

 

4/20/2020

Fixed rate hybrid

 

 

10,000

 

 

8/7/2019

 

 

1.79

%

 

8/7/2020

Convertible

 

 

10,000

 

 

2/28/2020

 

 

0.56

%

 

2/28/2030

Total FHLB borrowings

 

$

45,000

 

 

 

 

 

 

 

 

 

 

Subordinated Notes

On May 28, 2015, the Company issued an aggregate of $7.0 million of subordinated notes (the “2025 Notes”) with a maturity date of May 28, 2025 and that bear interest, payable on the first of March and September of each year, at a fixed interest rate of 6.50% per year. The Company has the right to redeem the 2025 Notes, in whole or in part, without premium or penalty, at any interest payment date on or after May 28, 2020, but in all cases in a principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. The 2025 Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s existing and future senior indebtedness. The 2025 Notes qualify as Tier 2 capital for regulatory reporting. The aggregate carrying value of the 2025 Notes, including capitalized, unamortized debt issuance costs, was $6.9 million at both March 31, 2020 and December 31, 2019. For the three months ended March 31, 2020 and 2019, the effective interest rate on the 2025 Notes was 6.83% and 6.84%, respectively.

On October 7, 2019, the Company issued $25.0 million in fixed-to-floating rate subordinated notes due 2029 (the “2029 Notes”). The 2029 Notes qualify as Tier 2 capital for regulatory reporting. The 2029 Notes bear interest at 5.625% per annum, beginning October 7, 2019 through October 14, 2024, payable semi-annually in arrears. From October 15, 2024 through October 14, 2029, or up to an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month Secured Overnight Funding Rate (“SOFR”) (as defined in the 2029 Notes) plus 433.5 basis points, payable quarterly in arrears. The 2029 Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s existing and future senior indebtedness and rank in parity with the 2025 Notes. Beginning on October 15, 2024 through maturity, the 2029 Notes may be redeemed, at the Company's option, on any scheduled interest payment date. The 2029 Notes will mature on October 15, 2029. The aggregate carrying value of the 2029 Notes, including capitalized, unamortized debt issuance costs was $24.1 million at March 31, 2020 and December 31, 2019. For the three months ended March 31, 2020, the effective interest rate on the 2029 Notes was 6.08%.

19


ESOP Debt

The aggregate carrying value of debt secured by shares of Company stock, issued and outstanding, in the Company’s ESOP was $1.5 million as of March 31, 2020 and December 31, 2019, and is included in other liabilities on the consolidated balance sheets. As of March 31, 2020, the debt is comprised of three fixed rate amortizing notes, which carry an interest rate of 3.25% with maturity dates ranging from March 1, 2025 to November 1, 2026, and two variable rate amortizing notes (5.50% as of March 31, 2020) with maturity dates ranging from June 14, 2024 to December 31, 2027. Shares that collateralize these loans are not allocated to ESOP participants’ accounts.

Note 11: Fair Value Measurements

 

The Company uses fair value to record certain assets and liabilities and to determine fair value disclosures. Authoritative accounting guidance (ASC 820, Fair Value Measurements (“ASC 820”)) 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 at the measurement date. Fair value also assumes that the reporting entity would sell the asset or transfer the liability in the principal or most advantageous market.

 

ASC 820 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.

 

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:

 

Available-for-sale securities: Available-for-sale securities 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. The Company engages a third-party to determine the fair value of its available-for-sale securities.

 

Rabbi trust assets: The Company established a rabbi trust for the benefit of participants in the Company’s deferred

compensation benefit plan. The assets held by the rabbi trust are invested at the direction of the individual participants and are generally invested in marketable investment securities, such as common stocks and mutual funds or short-term investments (e.g., cash) (Level 1). Rabbi trust assets are included in other assets on the consolidated balance sheets.

 

Mortgage servicing right (“MSR”) assets: The Company currently owns MSR assets from two residential loan portfolios, one serviced for Fannie Mae and one serviced for Freddie Mac. The MSR assets are recorded at fair value on a recurring basis, with changes in fair value recorded in the consolidated statements of operations.

 

A third-party 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 12 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. Monthly service costs were assumed to be $6.50 per loan as of both March 31, 2020 and December 31, 2019. 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 292% and 187% as of March 31, 2020 and December 31, 2019, respectively. A discount rate of 12.5% was then applied to each pool as of March 31, 2020 and as of December 31, 2019. The

20


discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSR assets are classified as Level 3.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of the dates stated.

 

 

 

 

 

 

 

Fair Value Measurements as of March 31, 2020 Using

 

 

 

Balance as of March 31, 2020

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Government agencies and mortgage backed securities

 

$

61,541

 

 

$

 

 

$

61,541

 

 

$

 

State and municipal obligations

 

 

15,861

 

 

 

 

 

 

15,861

 

 

 

 

Corporate bonds

 

 

17,216

 

 

 

2,017

 

 

 

12,549

 

 

 

2,650

 

Total available-for-sale securities

 

$

94,618

 

 

$

2,017

 

 

$

89,951

 

 

$

2,650

 

MSR assets

 

$

774

 

 

$

 

 

$

 

 

$

774

 

Rabbi trust assets

 

$

849

 

 

$

849

 

 

$

 

 

$

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2019 Using

 

 

 

Balance as of December 31, 2019

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Available-for-sale securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U. S. Government agencies and mortgage backed securities

 

$

67,597

 

 

$

7,024

 

 

$

60,573

 

 

$

 

State and municipal obligations

 

 

16,576

 

 

 

 

 

 

16,576

 

 

 

 

Corporate bonds

 

 

15,281

 

 

 

2,000

 

 

 

10,631

 

 

 

2,650

 

Total available-for-sale securities

 

$

99,454

 

 

$

9,024

 

 

$

87,780

 

 

$

2,650

 

MSR assets

 

$

935

 

 

$

 

 

$

 

 

$

935

 

Rabbi trust assets

 

$

1,082

 

 

$

1,082

 

 

$

 

 

$

 

 

The following table presents the change in financial assets valued using Level 3 inputs for the periods stated.

 

 

 

MSR Assets

 

 

Corporate

Bonds

 

Balance as of January 1, 2020

 

$

935

 

 

$

2,650

 

Purchases

 

 

 

 

 

 

Impairments

 

 

 

 

 

 

Fair value adjustments

 

 

(161

)

 

 

 

Sales

 

 

 

 

 

 

Balance as of March 31, 2020

 

$

774

 

 

$

2,650

 

 

As of March 31, 2020, five corporate bonds totaling $2.7 million were reported at their respective purchase prices and as Level 3 assets in the fair value hierarchy as there were no observable market prices for similar investments.

 

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 will not be collected according to the contractual terms of the loan agreement. The measurement of loss associated with impaired loans can be based on either the discounted cash flows of the loan or the fair value of the collateral, if any, less estimated costs to sell, if the loan is collateral-dependent. 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; however, the majority of the Company’s loan collateral is real estate. The value of real estate collateral is generally 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 lack 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 significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging

21


reports (Level 3). Fair value adjustments are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

Other Real Estate Owned, net: OREO is measured at fair value less estimated costs to sell, generally based on an appraisal conducted by an independent, licensed appraiser, or using other methods such as a brokered price opinion of a third-party real estate agent. If the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of lack of marketability, then the fair value is considered Level 3. Fair value adjustments, if any, are recorded in the period incurred and included in other noninterest expense on the consolidated statements of operations.

The following tables summarize assets that were measured at fair value on a nonrecurring basis as of the dates stated.

 

 

 

 

 

 

 

Fair Value Measurements as of March 31, 2020 Using

 

 

 

Balance as of March 31, 2020

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans, net

 

$

5,185

 

 

$

 

 

$

 

 

$

5,185

 

Other real estate owned, net

 

 

1,679

 

 

 

 

 

 

 

 

 

1,679

 

 

 

 

 

 

 

 

Fair Value Measurements as of December 31, 2019 Using

 

 

 

Balance as of December 31, 2019

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Impaired loans, net

 

$

4,084

 

 

$

 

 

$

 

 

$

4,084

 

Other real estate owned, net

 

 

1,916

 

 

 

 

 

 

 

 

 

1,916

 

 

The following tables present quantitative information about Level 3 fair value measurements as of the dates stated.

 

 

 

Balance as of March 31, 2020

 

 

Valuation

Technique

 

Unobservable

Input

 

Range

(Weighted

Average)

Impaired loans, net

 

$

5,185

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

7%

13%-93% (29%)

 

 

 

 

 

 

Discounted cash flows

 

Discount rate

 

5%-7% (6%)

Other real estate owned, net

 

 

1,679

 

 

Discounted appraised value

 

Selling Cost

Lack of Marketability

 

6%-41% (11%)

25%-65% (31%)

 

 

 

Balance as of December 31, 2019

 

 

Valuation

Technique

 

Unobservable

Input

 

Range

(Weighted

Average)

 

Impaired loans, net

 

$

4,084

 

 

Discounted appraised value

 

Selling Cost

 

 

7%

 

 

 

 

 

 

 

 

 

Lack of Marketability

 

13%-100% (24%)

 

 

 

 

 

 

 

Discounted cash flows

 

Discount rate

 

6%-7% (6%)

 

Other real estate owned, net

 

 

1,916

 

 

Discounted appraised value

 

Selling Cost

 

6%-10% (8%)

 

 

 

 

 

 

 

 

 

Lack of Marketability

 

18%-100% (47%)

 

 

The carrying values of cash and due from banks, interest-earning deposits, federal funds sold or purchased, noninterest-bearing deposits, savings and interest-bearing deposits, and securities sold under repurchase agreements are payable on demand, or are of such short duration, that carrying value approximates market value (Level 1).

 

The carrying values of certificates of deposit, loans held for sale, and accrued interest receivable are payable on demand, or are of such short duration, that carrying value approximates market value (Level 2).

 

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

 

22


The fair value of performing loans is estimated by discounting the future cash flows using two sets of data sources. First, recent originations, occurring over the prior twelve months, were evaluated, and second, market data showing originations over the prior three months were evaluated. The selected rate was the greater of the two sources. For all loans other than a selective consumer loan portfolio, credit loss severity rates were calculated using the probability of default and the loss given default percentages derived from market data. For the selective consumer loan portfolio, historical delinquency data were obtained by the servicer of the portfolio. The fair value of impaired loans is measured as described within the Impaired Loans section of this note. The fair value of loans does consider the lack of liquidity and uncertainty in the market that might affect the valuation.

 

Time deposits are presented at estimated fair value by discounting the future cash flows using recent issuance rates over the prior three months and a market rate analysis of recent offering rates.

 

The fair value of the Company’s subordinated notes is estimated by utilizing recent issuance rates for subordinated debt offerings of similar issuer size.

 

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

 

Commitments to extend and standby letters of credit are generally not sold or traded. The estimated fair values of off-balance sheet credit commitments, including standby letters of credit and guarantees written, are not readily available due to the lack of cost-effective and reliable measurement methods for these instruments.

 

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 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.

 

The following tables summarize financial assets and liabilities at carrying values and estimated fair values on a nonrecurring basis as of the dates stated.

 

 

 

Carrying Value as of

 

 

Fair Value as of

 

 

Fair Value Measurements as of March 31, 2020 Using

 

 

 

March 31, 2020

 

 

March 31, 2020

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

9,976

 

 

$

9,976

 

 

$

9,976

 

 

$

 

 

$

 

Interest-earning deposits

 

 

44,711

 

 

 

44,711

 

 

 

44,711

 

 

 

 

 

 

 

Federal funds sold

 

 

1,319

 

 

 

1,319

 

 

 

1,319

 

 

 

 

 

 

 

Certificates of deposit

 

 

2,754

 

 

 

2,754

 

 

 

 

 

 

2,754

 

 

 

 

Restricted securities

 

 

5,752

 

 

 

5,752

 

 

 

 

 

 

 

 

 

5,752

 

Loans receivable, net

 

 

960,023

 

 

 

936,774

 

 

 

 

 

 

 

 

 

936,774

 

Loans held for sale

 

 

747

 

 

 

747

 

 

 

 

 

 

747

 

 

 

 

Accrued interest receivable

 

 

3,139

 

 

 

3,139

 

 

 

 

 

 

3,139

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

136,437

 

 

$

136,437

 

 

$

136,437

 

 

$

 

 

$

 

Savings and interest-bearing demand deposits

 

 

394,637

 

 

 

394,637

 

 

 

394,637

 

 

 

 

 

 

 

Time deposits

 

 

433,393

 

 

 

436,486

 

 

 

 

 

 

 

 

 

436,486

 

Securities sold under repurchase agreements

 

 

3,284

 

 

 

3,284

 

 

 

3,284

 

 

 

 

 

 

 

FHLB advances

 

 

45,000

 

 

 

44,762

 

 

 

 

 

 

44,762

 

 

 

 

Subordinated notes, net

 

 

31,029

 

 

 

31,756

 

 

 

 

 

 

 

 

 

31,756

 

23


 

 

 

Carrying Value as of

 

 

Fair Value as of

 

 

Fair Value Measurements as of December 31, 2019 Using

 

 

 

December 31, 2019

 

 

December 31, 2019

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Financial Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

6,096

 

 

$

6,096

 

 

$

6,096

 

 

$

 

 

$

 

Interest-earning deposits

 

 

34,358

 

 

 

34,358

 

 

 

34,358

 

 

 

 

 

 

 

Federal funds sold

 

 

1,359

 

 

 

1,359

 

 

 

1,359

 

 

 

 

 

 

 

Certificates of deposit

 

 

2,754

 

 

 

2,754

 

 

 

 

 

 

2,754

 

 

 

 

Restricted securities

 

 

5,706

 

 

 

5,706

 

 

 

 

 

 

 

 

 

5,706

 

Loans receivable, net

 

 

916,628

 

 

 

910,678

 

 

 

 

 

 

 

 

 

910,678

 

Loans held for sale

 

 

1,231

 

 

 

1,231

 

 

 

 

 

 

1,231

 

 

 

 

Accrued interest receivable

 

 

3,035

 

 

 

3,035

 

 

 

 

 

 

3,035

 

 

 

 

Financial Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing demand deposits

 

$

137,933

 

 

$

137,933

 

 

$

137,933

 

 

$

 

 

$

 

Savings and interest-bearing demand deposits

 

 

382,607

 

 

 

382,607

 

 

 

382,607

 

 

 

 

 

 

 

Time deposits

 

 

389,900

 

 

 

392,562

 

 

 

 

 

 

 

 

 

392,562

 

Securities sold under repurchase agreements

 

 

6,525

 

 

 

6,525

 

 

 

6,525

 

 

 

 

 

 

 

FHLB advances

 

 

45,000

 

 

 

44,936

 

 

 

 

 

 

44,936

 

 

 

 

Subordinated notes, net

 

 

31,001

 

 

 

32,552

 

 

 

 

 

 

 

 

 

32,552

 

 

Note 12: Changes in Accumulated Other Comprehensive Income (Loss), net

The components of accumulated other comprehensive income (loss), net of deferred income taxes, are presented in the following tables for the periods presented.

 

 

 

For the Three Months Ended March 31, 2020

 

 

 

Net Unrealized Gains on Available-for-Sale Securities

 

 

Pension and

Post-retirement

Benefit Plans

 

 

Accumulated

Other

Comprehensive

Income, net

 

Balance as of January 1, 2020

 

$

437

 

 

$

(354

)

 

$

83

 

Change in net unrealized holding gain on available-for-sale

   securities, net of deferred tax expense of $225

 

 

845

 

 

 

 

 

 

845

 

Reclassification for previously unrealized net gains recognized

   in net income, net of tax expense of $5

 

 

21

 

 

 

 

 

 

21

 

Balance as of March 31, 2020

 

$

1,303

 

 

$

(354

)

 

$

949

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended March 31, 2019

 

 

 

Net Unrealized Gains (Losses)

on Available-for-Sale Securities

 

 

Pension and

Post-retirement

Benefit Plans

 

 

Accumulated

Other

Comprehensive

Loss, net

 

Balance as of January 1, 2019

 

$

(1,252

)

 

$

(75

)

 

$

(1,327

)

Change in net unrealized holding gain on available-for-sale

   securities, net of deferred tax expense of $214

 

 

806

 

 

 

 

 

 

806

 

Balance as of March 31, 2019

 

$

(446

)

 

$

(75

)

 

$

(521

)

 

 

24


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. (the “Company”), the holding company for Virginia Commonwealth Bank (the “Bank”) and VCB Financial Group, Inc. (the “Financial Group”). This discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Form 10-K”).

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 Company’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: the effect of the COVID-19 pandemic, including its potential adverse effect on economic conditions, and the Company’s employees, customers, loan losses, and financial performance; 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 “Federal Reserve”); the quality or composition of the loan and 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; changes in banking, tax, and other laws and regulations and interpretations or guidance thereunder; and other factors detailed in the Company’s publicly filed documents, including the factors described in Item 1A., “Risk Factors,” in the 2019 Form 10-K. 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.

GENERAL

All dollar amounts included in the tables of this discussion are in thousands, except per share data, unless otherwise stated. There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2019 Form 10-K.

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. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Changes in the volume and/or mix of interest-earning assets and interest-bearing liabilities, the associated yields and rates, the level of noninterest-bearing deposits, and the volume of nonperforming assets have an effect on net interest income, net interest margin, and net income.

OVERVIEW OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Net (loss) income for the three months ended March 31, 2020 and 2019 was ($14) thousand and $1.5 million, respectively. Diluted earnings per share was $0.00 for the three months ended March 31, 2020 compared to $0.11 for the three months ended March 31, 2019. The net loss for the first quarter of 2020 includes loan loss provision expense of $2.8 million (pre-tax), a significant portion of which related to management’s estimate of incurred losses as a result of the COVID-19 pandemic.

 

(Loss) income before income taxes was ($72) thousand and $1.8 million for the three months ended March 31, 2020 and 2019, respectively.

 

Return on average assets (annualized) decreased to 0.00% for the three months ended March 31, 2020 from 0.55% for the comparable 2019 period.

 

Return on average equity (annualized) decreased to (0.04)% for the three months ended March 31, 2020 from 5.05% for the comparable 2019 period.

 

Total assets increased $51.6 million to $1.18 billion as of March 31, 2020 from $1.13 billion as of December 31, 2019.

 

Loans, net of allowance for loan losses were $960.0 million as of March 31, 2020 compared to $916.6 million as of December 31, 2019, an increase of $43.4 million and an annualized growth rate of 19%.

 

Allowance for loan losses increased $2.6 million to $10.2 million, or 1.05% of gross loans, as of March 31, 2020 from $7.6 million, or 0.82% of gross loans, as of December 31, 2019.

25


 

Total deposits increased by $54.0 million, or 5.9%, to $964.5 million as of March 31, 2020 from $910.4 million as of December 31, 2019. Of the $54.0 million increase in deposits in the first quarter of 2020, $43.5 million was attributable to time deposits.

 

The ratio of nonperforming assets to total assets increased to 0.60% as of March 31, 2020 from 0.56% as of December 31, 2019.

 

Capital levels and regulatory capital ratios for the Bank were above regulatory minimums for well-capitalized banks as of March 31, 2020, with a total capital ratio and tier 1 leverage ratio of 13.29% and 10.69%, respectively.

 

Beginning in April 2020, the Company actively participated in the Paycheck Protection Program (“PPP”) under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, processing 512 loans totaling $50.8 million in the month of April. Through the PPP, the federal government partnered with banks to provide over $650 billion to small businesses to support payrolls and other operating expenses.

RESULTS OF OPERATIONS

NET INTEREST INCOME AND NET INTEREST MARGIN

 

The following table presents average interest-earning assets and interest-bearing liabilities, taxable-equivalent yields on such assets, and rates (costs) paid on such liabilities, net interest margin (“NIM”), and net interest spread, as of and for the periods stated. Yields and costs are annualized.

 

 

 

Average Balances, Income and Expense, Yields and Rates

 

 

 

As of and for the For the Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

2020 Compared to 2019

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Income/ Expense

 

 

Variance Attributable to (8)

 

 

 

Balance

 

 

Expense

 

 

Cost

 

 

Balance

 

 

Expense

 

 

Cost

 

 

Variance

 

 

Rate

 

 

Volume

 

INTEREST-EARNING ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable securities

 

$

87,997

 

 

$

652

 

 

 

2.98

%

 

$

70,263

 

 

$

595

 

 

 

3.43

%

 

$

57

 

 

$

(94

)

 

$

151

 

Tax-exempt securities (1)

 

 

15,280

 

 

 

119

 

 

 

3.13

%

 

 

19,257

 

 

 

149

 

 

 

3.15

%

 

 

(30

)

 

 

1

 

 

 

(31

)

Total securities

 

 

103,277

 

 

 

771

 

 

 

3.00

%

 

 

89,520

 

 

 

744

 

 

 

3.37

%

 

 

27

 

 

 

(93

)

 

 

120

 

Gross loans (2) (3)

 

 

938,625

 

 

 

11,352

 

 

 

4.86

%

 

 

907,606

 

 

 

11,461

 

 

 

5.12

%

 

 

(109

)

 

 

(504

)

 

 

395

 

Interest-earning deposits and federal funds sold

 

 

34,695

 

 

 

106

 

 

 

1.23

%

 

 

23,186

 

 

 

142

 

 

 

2.48

%

 

 

(36

)

 

 

(107

)

 

 

71

 

Certificates of deposits

 

 

2,754

 

 

 

14

 

 

 

2.04

%

 

 

3,746

 

 

 

20

 

 

 

2.17

%

 

 

(6

)

 

 

(1

)

 

 

(5

)

Total interest-earning assets

 

 

1,079,351

 

 

 

12,243

 

 

 

4.56

%

 

 

1,024,058

 

 

 

12,367

 

 

 

4.90

%

 

$

(124

)

 

$

(705

)

 

$

581

 

Noninterest-earning assets

 

 

64,528

 

 

 

 

 

 

 

 

 

 

 

64,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average assets

 

$

1,143,879

 

 

 

 

 

 

 

 

 

 

$

1,088,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INTEREST-BEARING LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings deposits

 

$

57,160

 

 

$

35

 

 

 

0.25

%

 

$

57,502

 

 

$

42

 

 

 

0.30

%

 

$

(7

)

 

$

(7

)

 

$

 

Demand deposits

 

 

72,455

 

 

 

24

 

 

 

0.13

%

 

 

75,266

 

 

 

35

 

 

 

0.19

%

 

 

(11

)

 

 

(10

)

 

 

(1

)

Time deposits (4)

 

 

406,839

 

 

 

2,065

 

 

 

2.04

%

 

 

369,629

 

 

 

1,826

 

 

 

2.00

%

 

 

239

 

 

 

54

 

 

 

185

 

Money market deposits

 

 

257,128

 

 

 

724

 

 

 

1.13

%

 

 

236,399

 

 

 

906

 

 

 

1.55

%

 

 

(182

)

 

 

(262

)

 

 

80

 

Total deposits

 

 

793,582

 

 

 

2,848

 

 

 

1.44

%

 

 

738,796

 

 

 

2,809

 

 

 

1.54

%

 

 

39

 

 

 

(225

)

 

 

264

 

Securities sold under repurchase agreements

 

 

4,240

 

 

 

2

 

 

 

0.19

%

 

 

6,217

 

 

 

3

 

 

 

0.20

%

 

 

(1

)

 

 

 

 

 

(1

)

Subordinated notes and ESOP debt

 

 

32,511

 

 

 

513

 

 

 

6.35

%

 

 

8,598

 

 

 

137

 

 

 

6.46

%

 

 

376

 

 

 

(8

)

 

 

384

 

FHLB advances

 

 

41,264

 

 

 

233

 

 

 

2.27

%

 

 

100,000

 

 

 

704

 

 

 

2.86

%

 

 

(471

)

 

 

(54

)

 

 

(417

)

Total interest-bearing liabilities

 

 

871,597

 

 

 

3,596

 

 

 

1.66

%

 

 

853,611

 

 

 

3,653

 

 

 

1.74

%

 

$

(57

)

 

$

(287

)

 

$

230

 

Noninterest-bearing deposits

 

 

133,053

 

 

 

 

 

 

 

 

 

 

 

108,916

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other noninterest-bearing liabilities

 

 

12,274

 

 

 

 

 

 

 

 

 

 

 

7,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities

 

 

1,016,924

 

 

 

 

 

 

 

 

 

 

 

970,081

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shareholders' equity

 

 

126,955

 

 

 

 

 

 

 

 

 

 

 

118,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average liabilities and shareholders' equity

 

$

1,143,879

 

 

 

 

 

 

 

 

 

 

$

1,088,180

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income and NIM (5)

 

 

 

 

 

$

8,647

 

 

 

3.22

%

 

 

 

 

 

$

8,714

 

 

 

3.45

%

 

$

(67

)

 

$

(418

)

 

$

351

 

Total cost of funds (6)

 

 

 

 

 

 

 

 

 

 

1.44

%

 

 

 

 

 

 

 

 

 

 

1.54

%

 

 

 

 

 

 

 

 

 

 

 

 

Net interest spread (7)

 

 

 

 

 

 

 

 

 

 

2.90

%

 

 

 

 

 

 

 

 

 

 

3.16

%

 

 

 

 

 

 

 

 

 

 

 

 

26


 

 

(1)

Income and yield on tax-exempt securities assumes a federal income tax rate of 21%.

(2)

Includes loan fees and nonaccrual loans.

(3)

Includes accretion of fair value discounts on loans acquired in the Merger of $189 thousand and $439 thousand for the three months ended March 31, 2020 and 2019, respectively.

(4)

Includes amortization of fair value adjustments on time deposits assumed in the Merger of $24 thousand and $34 thousand for the three months ended March 31, 2020 and 2019, respectively.

(5)

Net interest margin is net interest income divided by average interest-earning assets.

(6)

Cost of funds is total interest expense divided by total interest-bearing liabilities and noninterest-bearing deposits.

(7)

Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities.

(8)

Change in income/expense due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.

Interest income, on a taxable-equivalent basis, for the three months ended March 31, 2020 was $12.2 million, a decrease of $124 thousand from the first quarter of 2019, primarily attributable to lower yields on loans in the 2020 period and higher accretion of acquired loan discounts in the 2019 period. The decline in yields and accretion income was partially offset by higher average interest-earning assets of $1.08 billion in the 2020 period compared to $1.02 billion in the 2019 period, an increase of $55.3 million ($31.0 million attributable to gross loans). Yields on average interest-earning assets were 4.56% and 4.90% for the first quarters of 2020 and 2019, respectively. The decline in yield on average interest-earning assets was primarily attributable to lower loan yields in the 2020 period and higher accretion of acquired loan discounts in the 2019 period of $250 thousand, which had a positive 11 basis point effect compared to the first quarter of 2020.

Loans acquired in the Merger were discounted to estimated fair value (for credit losses and interest rates) as of the effective date of the Merger. A portion of the acquisition accounting adjustments (discounts) to record the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans for those loans that were deemed to be, as of the Merger date, purchased performing and over the period of expected cash flows from the loans that were deemed to be purchased credit-impaired (“PCI”), as of the Merger date. The amount of accretion income recognized within a period is based on many factors, including among other factors, loan prepayments and curtailments; therefore, amounts recognized are subject to volatility. Accretion of discounts on acquired loans was $189 and $439 thousand in the first quarters of 2020 and 2019, respectively.

Average interest-earning assets comprised 94.4% and 94.1% of the Company’s average assets for the three months ended March 31, 2020 and 2019, respectively.

Interest expense for the three months ended March 31, 2020 was $3.6 million, a decrease of $57 thousand from the first quarter of 2019, primarily attributable to lower costs of funds of 1.44% in the 2020 period compared to 1.54% in the 2019 period. Average interest-bearing liabilities increased by $18.0 million to $871.6 million in the 2020 period compared to $853.6 million in the 2019 period. 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 $375 thousand and 12 basis points to interest expense and cost of funds, respectively, in the first quarter of 2020. Offsetting the higher funding cost contributed by the 2029 Notes was lower deposit costs, which declined 10 basis points to 1.24% in the first quarter of 2020 from 1.34% in the first quarter of 2019. Higher average balances of noninterest-bearing deposits also contributed to the decline in deposit cost.

Net interest income, on a taxable-equivalent basis, for the three months ended March 31, 2020 was $8.6 million, a decrease of $67 thousand from the three months ended March 31, 2019.

 

Net interest margin was 3.22% for the first quarter of 2020 compared to 3.45% for the first quarter of 2019. The decrease in NIM was primarily attributable to lower accretion of acquired loan discounts and lower yields on interest-earning assets, partially offset by lower cost of funds.

 

The Company expects NIM to be negatively affected in the periods subsequent to March 31, 2020 as a result in a significant decline in interest rates in March 2020, most notably the federal funds rate.

PROVISION FOR LOAN LOSSES

Provision for loan losses was $2.8 million for the three months ended March 31, 2020, while provision for loan losses was $314 thousand for the same period of 2019. Of the first quarter of 2020 amount, approximately $1.5 million was attributable to estimated reserve needs due to the negative economic impact related to the COVID-19 pandemic. Of this $1.5 million, approximately $200 thousand was due to rating downgrades on loans to borrowers in highly-impacted industry segments; the remaining $1.3 million relates to a qualitative loss factor applied to the majority of the Company’s loan portfolio for negative economic implications, such as rising unemployment in the Bank’s markets. The remaining $1.3 million of the total provision for loan losses was unrelated to COVID-19 and primarily due to gross loan growth of $46.0 million and higher specific reserves recorded in the quarter.

27


NONINTEREST INCOME

The following table presents a summary of noninterest income and the dollar and percentage change for the periods presented.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

March 31, 2019

 

 

$ Change

 

 

% Change

 

Trust management

 

$

193

 

 

$

214

 

 

$

(21

)

 

 

(9.8

%)

Service charges and fees on deposit accounts

 

 

236

 

 

 

238

 

 

 

(2

)

 

 

(0.8

%)

Wealth management

 

 

247

 

 

 

206

 

 

 

41

 

 

 

19.9

%

Interchange fees, net

 

 

98

 

 

 

101

 

 

 

(3

)

 

 

(3.0

%)

Other service charges and fees

 

 

33

 

 

 

29

 

 

 

4

 

 

 

13.8

%

Secondary market sales and servicing

 

 

202

 

 

 

71

 

 

 

131

 

 

 

184.5

%

Increase in cash surrender value of bank owned life insurance

 

 

118

 

 

 

120

 

 

 

(2

)

 

 

(1.7

%)

Net gains on sales and calls of available-for-sale securities

 

 

26

 

 

 

 

 

 

26

 

 

 

100.0

%

Net losses on disposition of other assets

 

 

(7

)

 

 

(1

)

 

 

(6

)

 

 

600.0

%

Net (loss) gains on rabbi trust assets

 

 

(263

)

 

 

90

 

 

 

(353

)

 

 

(392.2

%)

Referral fees

 

 

471

 

 

 

 

 

 

471

 

 

 

100.0

%

Other

 

 

37

 

 

 

22

 

 

 

15

 

 

 

68.2

%

Total noninterest income

 

$

1,391

 

 

$

1,090

 

 

$

301

 

 

 

27.6

%

 

Higher noninterest income in the 2020 period was primarily due to referral fees earned for referring loan customers to a third-party financial institution to execute interest rate swaps and higher income from secondary market sales and servicing activity, partially offset by a net unrealized loss on rabbi trust assets of $263 thousand in the 2020 period compared to a $90 thousand net unrealized gain in the 2019 period. Greater secondary market sales and servicing activity was primarily due to increased refinancing of residential mortgage loans (due to low interest rates) and the Company’s strategy to sell more mortgages into this market.

NONINTEREST EXPENSE

 

The following table presents a summary of noninterest expense and the dollar and percentage change for the periods presented.

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

March 31, 2019

 

 

$ Change

 

 

% Change

 

Salaries and employee benefits

 

$

3,628

 

 

$

4,001

 

 

$

(373

)

 

 

(9.3

%)

Occupancy

 

 

751

 

 

 

868

 

 

 

(117

)

 

 

(13.5

%)

Data processing

 

 

537

 

 

 

588

 

 

 

(51

)

 

 

(8.7

%)

Bank franchise tax

 

 

256

 

 

 

216

 

 

 

40

 

 

 

18.5

%

Telecommunications and other technology

 

 

358

 

 

 

207

 

 

 

151

 

 

 

72.9

%

FDIC assessments

 

 

148

 

 

 

216

 

 

 

(68

)

 

 

(31.5

%)

Foreclosed property

 

 

7

 

 

 

43

 

 

 

(36

)

 

 

(83.7

%)

Consulting

 

 

71

 

 

 

115

 

 

 

(44

)

 

 

(38.3

%)

Advertising and marketing

 

 

67

 

 

 

67

 

 

 

 

 

 

(—

%)

Directors’ fees

 

 

192

 

 

 

164

 

 

 

28

 

 

 

17.1

%

Audit and accounting

 

 

140

 

 

 

204

 

 

 

(64

)

 

 

(31.4

%)

Legal

 

 

191

 

 

 

83

 

 

 

108

 

 

 

130.1

%

Core deposit intangible amortization

 

 

149

 

 

 

180

 

 

 

(31

)

 

 

(17.2

%)

Net other real estate owned gains

 

 

 

 

 

(6

)

 

 

6

 

 

 

(100.0

%)

Other

 

 

813

 

 

 

684

 

 

 

129

 

 

 

18.9

%

Total noninterest expense

 

$

7,308

 

 

$

7,630

 

 

$

(322

)

 

 

(4.2

%)

 

28


Lower noninterest expense in the 2020 period was primarily due to lower salaries and employee benefits, primarily due to a lower management incentive accrual being recorded and the unrealized loss on rabbi trust assets. The Company’s efficiency ratio was 73.0% and 78.1% for the first quarters of 2020 and 2019, respectively.

 

The following table presents income tax (benefit) expense and effective income tax rates for the periods presented.

 

 

 

Three Months Ended

 

 

 

March 31, 2020

 

 

March 31, 2019

 

Income tax (benefit) expense

 

$

(58

)

 

$

337

 

Effective income tax rate

 

 

80.6

%

 

 

18.4

%

 

The effective income tax rate of 80.6% in the 2020 period was primarily due to the amount of tax-exempt income relative to the Company’s pre-tax net loss for the period.

ASSET QUALITY

Loans charged-off during the first quarter of 2020, net of recoveries, totaled $166 thousand compared to $358 thousand for the first quarter of 2019. This resulted in a decrease in the annualized net charge-off ratio to 0.07% for the first quarter of 2020 compared to 0.16% for the first quarter of 2019.

The ratio of allowance for loan losses to gross loans was 1.05% as of March 31, 2020 compared to 0.82% as of December 31, 2019, an increase of 23 basis points. Of the increase, 15 basis points was attributable to a qualitative loss factor applied to the majority of the Company’s loan portfolio for management’s estimate of losses due to negative economic implications, such as rising unemployment, as a result of the COVID-19 pandemic. The remaining increase in the first quarter of 2020 was attributable to risk rating downgrades, also in response to COVID-19, $46.0 million of gross loan growth, and higher specific reserves on impaired loans.

As noted, the Company downgraded risk ratings on $88.5 million of loans to businesses in industries highly affected by the COVID-19 pandemic in the first quarter of 2020. Management expects that these loans may require further downgrades and/or other loans to borrowers affected by the COVID-19 pandemic will require risk rating downgrades. Additionally, loan modifications made during the first quarter of 2020, on loan balances of $86.5 million, do not necessarily represent that these borrowers will be able to pay amounts deferred or any amounts owed to the Company. The length of the economic slow-down, including the pace at which the economy recovers once governmental mandates are lifted, could have a material adverse effect on the Company’s asset quality and the amount of ALL required.

The following table presents certain asset quality measures as of the dates stated.

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Loans past due 90 days or more and still accruing (1)

 

$

 

 

$

 

Nonaccrual loans (1)

 

 

5,441

 

 

 

4,476

 

Total nonperforming loans

 

 

5,441

 

 

 

4,476

 

Other real estate owned, net

 

 

1,679

 

 

 

1,916

 

Total nonperforming assets

 

$

7,120

 

 

$

6,392

 

Allowance for loan losses

 

$

10,172

 

 

$

7,562

 

Gross loans

 

 

970,195

 

 

 

924,190

 

Total assets

 

 

1,183,553

 

 

 

1,131,923

 

Allowance for loan losses to gross loans

 

 

1.05

%

 

 

0.82

%

Allowance for loan losses to nonperforming loans

 

 

187.0

%

 

 

168.9

%

Nonperforming assets to total assets

 

 

0.60

%

 

 

0.56

%

Nonperforming loans to gross loans

 

 

0.56

%

 

 

0.48

%

 

(1)

Excludes PCI loans.

FINANCIAL CONDITION

Total assets increased by $51.6 million to $1.18 billion as of March 31, 2020 from $1.13 billion as of December 31, 2019, primarily due to net loan growth in the first three months of 2020 of $43.4 million.

29


The following tables present information about the securities portfolio on a taxable-equivalent basis as of the dates stated. As of March 31, 2020 and December 31, 2019, available-for-sale securities represented 8.0% and 8.8% of total assets, respectively.

 

 

 

March 31, 2020

 

 

 

Amortized Cost

 

 

Fair Value

 

 

Weighted Average Life in Years

 

 

Weighted Average Yield

 

U.S. Government agencies and mortgage backed securities

 

$

60,305

 

 

$

61,541

 

 

 

5.8

 

 

 

2.18

%

State and municipal obligations

 

 

15,492

 

 

 

15,861

 

 

 

4.3

 

 

 

3.16

%

Corporate bonds

 

 

17,175

 

 

 

17,216

 

 

 

4.8

 

 

 

5.39

%

Total available-for-sale securities

 

 

92,972

 

 

 

94,618

 

 

 

5.0

 

 

 

2.87

%

Restricted securities

 

 

5,752

 

 

 

5,752

 

 

n/a

 

 

 

5.83

%

Total securities

 

$

98,724

 

 

$

100,370

 

 

 

 

 

 

 

3.03

%

 

 

 

December 31, 2019

 

 

 

Amortized Cost

 

 

Fair Value

 

 

Weighted Average Life in Years

 

 

Weighted Average Yield

 

U.S. Government agencies and mortgage backed securities

 

$

67,491

 

 

$

67,597

 

 

 

6.1

 

 

 

2.18

%

State and municipal obligations

 

 

16,238

 

 

 

16,576

 

 

 

5.4

 

 

 

3.16

%

Corporate bonds

 

 

15,165

 

 

 

15,281

 

 

 

3.8

 

 

 

5.61

%

Total available-for-sale securities

 

 

98,894

 

 

 

99,454

 

 

 

5.1

 

 

 

2.92

%

Restricted securities

 

 

5,706

 

 

 

5,706

 

 

n/a

 

 

 

6.30

%

Total securities

 

$

104,600

 

 

$

105,160

 

 

 

 

 

 

 

3.18

%

 

The following table presents the composition of loans in dollar amounts and as a percentage of total loans as of the dates stated.

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Amount

 

 

Percent of Total

 

 

Amount

 

 

Percent of Total

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential first mortgages

 

$

298,539

 

 

 

30.9

%

 

$

293,913

 

 

 

31.8

%

Commercial mortgages (non-owner occupied)

 

 

229,488

 

 

 

23.6

%

 

 

196,143

 

 

 

21.2

%

Construction, land and land development

 

 

127,417

 

 

 

13.1

%

 

 

126,010

 

 

 

13.6

%

Commercial mortgages (owner occupied)

 

 

75,455

 

 

 

7.8

%

 

 

82,829

 

 

 

9.0

%

Residential revolving and junior mortgages

 

 

31,505

 

 

 

3.2

%

 

 

31,893

 

 

 

3.4

%

Commercial and industrial

 

 

198,278

 

 

 

20.4

%

 

 

181,730

 

 

 

19.7

%

Consumer

 

 

9,846

 

 

 

1.0

%

 

 

11,985

 

 

 

1.3

%

Total loans

 

 

970,528

 

 

 

100.0

%

 

 

924,503

 

 

 

100.0

%

Net unamortized deferred loan fees

 

 

(333

)

 

 

 

 

 

 

(313

)

 

 

 

 

Allowance for loan losses

 

 

(10,172

)

 

 

 

 

 

 

(7,562

)

 

 

 

 

Loans receivable, net

 

$

960,023

 

 

 

 

 

 

$

916,628

 

 

 

 

 

 

During the three months ended March 31, 2020, gross loans increased by $46.0 million, or 5%, from December 31, 2019. The largest components of this increase were a $26.0 million increase in commercial mortgages and a $16.5 million increase in commercial and industrial loans.

The following table presents the Company’s ALL by loan type and the percent of loans in each category to total loans as of the dates stated.

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

 

Amount

 

 

Percent of loans in each category to total loans

 

 

Amount

 

 

Percent of loans in each category to total loans

 

Mortgage loans on real estate

 

$

7,255

 

 

 

78.6

%

 

$

5,372

 

 

 

79.0

%

Commercial and industrial

 

 

2,400

 

 

 

20.4

%

 

 

1,571

 

 

 

19.7

%

Consumer

 

 

517

 

 

 

1.0

%

 

 

619

 

 

 

1.3

%

Total allowance for loan losses

 

$

10,172

 

 

 

100.0

%

 

$

7,562

 

 

 

100.0

%

 

30


As of March 31, 2020, OREO was $1.7 million, consisting of 15 properties (11 of which were land lots), compared to $1.9 million of OREO (18 properties) as of December 31, 2019, or a $237 thousand decrease.

 

As of March 31, 2020, total deposits were $964.5 million compared to $910.4 million at December 31, 2019, a $54.0 million increase. Time deposits comprised $43.5 million of this increase, a substantial portion of which was attributable to short-term time deposits sourced from the Promontory Interfinancial Network’s Certificate of Deposit Account Registry Service (“CDARS”). As of March 31, 2020 and December 31, 2019, CDARS time deposits were $47.0 million and $10.5 million, respectively. The growth in these deposits was primarily in anticipation of liquidity for PPP loans and other depositor requirements as a result of the COVID-19 pandemic.

 

Maturities of large denomination time deposits (equal to or greater than $100 thousand) as of March 31, 2020 are presented in the following table.

 

 

 

Within 3 Months

 

 

3-6 Months

 

 

6-12 Months

 

 

Over 12 Months

 

 

Total

 

 

Percent of Total Deposits

 

Time deposits

 

$

92,797

 

 

$

26,239

 

 

$

39,176

 

 

$

124,526

 

 

$

282,738

 

 

 

29.3

%

 

As of March 31, 2020, the Company had two fixed rate FHLB advances totaling of $25.0 million and two variable rate FHLB advances totaling $20.0 million outstanding. As of December 31, 2019, the Company had three fixed rate FHLB advances totaling $35.0 million and one variable rate FHLB advance of $10.0 million outstanding. The following table presents various information regarding FHLB advances as of and for the periods presented.

 

 

 

Three Months Ended March 31, 2020

 

 

Twelve Months Ended December 31, 2019

 

 

 

Period-End Balance

 

 

Highest Month-End Balance

 

 

Average Balance

 

 

Weighted Average Rate

 

 

Period-End Balance

 

 

Highest Month-End Balance

 

 

Average Balance

 

 

Weighted Average Rate

 

FHLB advances

 

$

45,000

 

 

$

50,000

 

 

$

41,264

 

 

 

2.27

%

 

$

45,000

 

 

$

100,000

 

 

$

76,181

 

 

 

2.74

%

 

LIQUIDITY

Liquidity represents an institution’s ability to meet present and future financial obligations (such as commitments to fund loans or meet depositors’ requirements) through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-earning 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 its customers’ credit needs.

As of March 31, 2020, cash and cash equivalents totaled $54.7 million; investment securities maturing in one year or less totaled $11.0 million; and loans maturing in one year or less totaled $108.5 million. This resulted in a liquidity ratio as of March 31, 2020 of 14.7% compared to 13.0% as of December 31, 2019. The Company determines this ratio by dividing the sum of cash and cash equivalents, and investment securities and loans maturing in one year or less, by total assets.

As of March 31, 2020, the Company had a secured borrowing line with the FHLB of $281.9 million, with $205.9 million available, and unsecured federal funds lines of credit with various correspondent banks totaling $41.0 million. Federal funds lines of credit are uncommitted and can be cancelled at any time by the lending bank.

As of March 31, 2020, other than the potential effect on liquidity of the COVID-19 pandemic, the Company was not aware of any other known trends, events, or uncertainties that have or are reasonably likely to have a material effect on liquidity. Management has and continues to monitor the effects of the COVID-19 pandemic on the Company’s liquidity. For example, management monitors for unusual changes in deposit balances, access to funding sources, amortization of loan balances, and the various liquidity programs offered by the FRB (in response to COVID-19). The Company is participating in the FRB’s PPP Liquidity Facility (“PPPLF”), which allows banks to pledge PPP loans as collateral in exchange for advances. The PPPLF advances are at 100% of the PPP loan value and term, have a fixed cost of 35 basis points, and receive favorable regulatory capital treatment. As of March 31, 2020, management believes the COVID-19 pandemic has not had an adverse effect on the Company’s 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

31


shareholders. The Company’s capital, also known as shareholders’ equity, is comprised primarily of outstanding common stock, additional paid-in capital, and retained earnings.

Shareholders’ equity is primarily affected by net income and net unrealized gains or losses on available-for-sale securities, net of taxes. The available-for-sale securities portfolio is reported at fair value with unrealized gains or losses, net of taxes, recognized as accumulated other comprehensive income on the Company’s consolidated balance sheets. Another factor affecting accumulated other comprehensive income is changes in the fair value of the Company’s pension and post-retirement benefit plans and changes in said plan obligations. Shareholders’ equity before accumulated other comprehensive income, net of taxes, was $126.5 million as of March 31, 2020 compared to $126.1 million as of December 31, 2019. The increase of $351 thousand was primarily attributable to share-based compensation expense of $142 thousand, director and executive stock grants of $105 thousand, and stock options exercised, net, of $81 thousand in the three months ended March 31, 2020. Accumulated other comprehensive income, net of taxes, increased by $866 thousand from December 31, 2019 to March 31, 2020, due to an increase in unrealized net gains, net of taxes, in the Company’s available-for-sale securities portfolio.

Book value per share of the Company’s common stock, including accumulated other comprehensive income, net of tax, increased to $9.55 as of March 31, 2020 from $9.51 as of December 31, 2019.

The Company and the Bank are subject to minimum regulatory capital ratios as defined by the Federal Reserve. As of March 31, 2020, the Company and the Bank’s capital ratios continue to be in excess of regulatory minimums and the Bank was “well capitalized” by these guidelines.

The Bank is subject to capital rules adopted by federal bank regulators implementing the Basel III regulatory capital reforms adopted by the Basel Committee, and certain changes required by the Dodd-Frank Act. These rules require the Bank to comply with the following minimum capital ratios: (i) a 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; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of average adjusted assets. The following additional capital requirements related to the capital conservation buffer (promulgated by the Basel III regulatory capital rules) 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, effectively resulting in a minimum ratio of Common Equity Tier 1 to risk-weighted assets of at least 7.0%), (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, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (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, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. 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 be subject to constraints on dividends, equity repurchases, and discretionary compensation paid to certain officers, based on the amount of the shortfall. As of March 31, 2020 and December 31, 2019, capital ratios of the Bank were in excess of the regulatory conservation buffer levels.

The following tables present capital ratios for the Bank, minimum capital ratios required with conservation buffer, and ratios defined as “well capitalized” by the Bank’s regulators as of the dates stated.

 

As of March 31, 2020

 

Actual

Ratio

 

 

Minimum Capital

Requirement Ratio

with Conservation Buffer

 

 

Minimum

to be Well

Capitalized

 

Total risk-based capital

 

 

13.29

%

 

 

10.50

%

 

 

10.00

%

Tier 1 capital

 

 

12.24

%

 

 

8.50

%

 

 

8.00

%

Common equity tier 1

 

 

12.24

%

 

 

7.00

%

 

 

6.50

%

Tier 1 leverage ratio

 

 

10.69

%

 

 

4.00

%

 

 

5.00

%

 

As of December 31, 2019

 

Actual

Ratio

 

 

Minimum Capital

Requirement Ratio

with Conservation Buffer

 

 

Minimum

to be Well

Capitalized

 

Total risk-based capital

 

 

13.07

%

 

 

10.50

%

 

 

10.00

%

Tier 1 capital

 

 

12.26

%

 

 

8.50

%

 

 

8.00

%

Common equity tier 1

 

 

12.26

%

 

 

7.00

%

 

 

6.50

%

Tier 1 leverage ratio

 

 

10.42

%

 

 

4.00

%

 

 

5.00

%

32


OFF BALANCE SHEET COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company offers various financial products to our 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 Company’s 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 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 loans to customers.

The following table presents off balance sheet commitments as of the dates stated.

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Total loan commitments outstanding

 

$

153,667

 

 

$

164,751

 

Stand-by letters of credit

 

 

6,584

 

 

 

6,118

 

CONTRACTUAL OBLIGATIONS

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s 2019 Form 10-K.

RECENT ACCOUNTING PRONOUNCEMENTS

Refer to Note 2, 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 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 (the “Exchange Act”). 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 control and procedure 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 the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s reports and forms, and that such information is accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure, as of March 31, 2020.

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, 2020 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

33


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

Other than as set forth below, there have been no material changes to the risk factors disclosed in the 2019 Form 10-K.

 

The ongoing COVID-19 pandemic and measures intended to prevent its spread may adversely affect the Company’s business, financial condition, and operations; the extent of such impacts are highly uncertain and difficult to predict.

 

Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which the Company operates, implementing numerous measures to try to contain the virus. These measures, including shelter-in-place orders and business limitations and shutdowns, have significantly contributed to rising unemployment and negatively affected consumer and business spending.

 

The COVID-19 outbreak has adversely affected and is likely to continue to adversely affect the Company’s employees and operations and the operations of its customers and business partners. In particular, the Company may experience adverse effects due to a number of operational factors impacting the Company or the Company’s customers or business partners, including but not limited to:

 

 

credit losses resulting from financial stress experienced by the Bank’s borrowers, especially those operating in industries most impacted by government measures to contain the spread of the virus;

 

operational failures, disruptions, or inefficiencies due to changes in Company’s normal business practices necessitated by the Company’s internal measures to protect the Company’s employees and government-mandated measures intended to slow the spread of the virus;

 

possible business disruptions experienced by the Company’s vendors and business partners in carrying out work that supports the Company’s operations;

 

decreased demand for the Company’s products and services due to economic uncertainty, volatile market conditions, and temporary business closures;

 

any financial liability, credit losses, litigation costs, or reputational damage resulting from the Bank’s origination of PPP loans; and

 

heightened levels of cyber and payment fraud, as cyber criminals try to take advantage of the disruption and increased online activity brought about by the pandemic.

 

The extent to which the pandemic affects the Company’s business, liquidity, financial condition, and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. In addition, the rapidly changing and unprecedented nature of COVID-19 heightens the inherent uncertainty of forecasting future economic conditions and their impact on the Bank’s loan portfolio, thereby increasing the risk that the assumptions, judgments, and estimates used to determine the allowance for loan losses and other estimates are incorrect. Further, the Bank’s loan modification program could delay or make it difficult to identify the extent of asset quality deterioration during the short-term deferral period. As a result of these and other conditions, the ultimate impact of the pandemic is highly uncertain and subject to change, and the Company cannot predict the full extent of the effects on the Company’s business, the Company’s operations, or the global economy as a whole. To the extent any of the foregoing risks or other factors that develop as a result of COVID-19 materialize, it could exacerbate the risk factors discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, or otherwise materially and adversely affect the Company’s business, liquidity, financial condition, and results of operations.  

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

None to report.

34


ITEM 3.DEFAULTS UPON SENIOR SECURITIES

None to report.

ITEM 4.MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.OTHER INFORMATION

None to report.

 

35


ITEM 6.EXHIBITS

 

 

 

 

 31.1

  

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 31.2

  

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) 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, 2020, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, (ii) Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2020 and 2019, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three months ended March 31, 2020 and 2019, (v) Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019, and (vi) Notes to Consolidated Financial Statements.

 

36


 

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 11, 2020

 

By:

 

/s/ Randal R. Greene

 

 

 

 

Randal R. Greene

 

 

 

 

President and Chief Executive Officer

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

By:

 

/s/ Judy C. Gavant

 

 

 

 

Judy C. Gavant

 

 

 

 

Executive Vice President and Chief Financial Officer

 

 

 

 

(Principal Financial Officer)

 

37

Exhibit 31.1

CERTIFICATIONS

I, Randal R. Greene, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Bay Banks of Virginia, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2020

 

 

/s/ Randal R. Greene

Randal R. Greene

President and Chief Executive Officer

 

Exhibit 31.2

CERTIFICATIONS

I, Judy C. Gavant, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Bay Banks of Virginia, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 11, 2020

 

 

/s/ Judy C. Gavant

Judy C. Gavant

Executive Vice President and Chief Financial Officer

 

 

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q for the period ended March 31, 2020 of Bay Banks of Virginia, Inc. (the “Company”), as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that based on their knowledge and belief: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report.

 

 

/s/ Randal R. Greene

Randal R. Greene, President and Chief Executive Officer

 

/s/ Judy C. Gavant

Judy C. Gavant, Executive Vice President and Chief Financial Officer

May 11, 2020