Bay Banks of Virginia, Inc. : Reports Second Quarter and First Half 2019 Results

RICHMOND, Va., July 30, 2019 /PRNewswire/ -- Bay Banks of Virginia, Inc. (OTCQB: BAYK), holding company of Virginia Commonwealth Bank and VCB Financial Group, Inc., announced financial results for the three and six months ended June 30, 2019.

The company reported net income of $1.7 million, or $0.13 per diluted share, for the second quarter of 2019 compared to $1.5 million, or $0.11 per diluted share, for the first quarter of 2019 and $946 thousand, or $0.07 per diluted share, for the second quarter of 2018. For the first half of 2019, the company reported net income of $3.2 million, or $0.25 per diluted share, compared to $2.1 million, or $0.16 per diluted share, for the first half of 2018. Net income in the first half of 2018 included $363 thousand ($287 thousand¹ after income tax) of merger-related expenses incurred in connection with the company's merger with Virginia BanCorp, Inc. on April 1, 2017 (the "Merger").

Randal R. Greene, President and Chief Executive Officer, commented: "I am again pleased to report improved quarterly results. As noted in our first quarter report, we have intentionally slowed loan growth preserving our liquidity for higher yielding opportunities.  In the second quarter, we experienced a higher than usual level of loan payoffs. However, loans to new relationships and advances under current lines were strong in the quarter and we are earning slightly higher yields on these loans. Deposit costs in our markets appear to be stabilizing, and as a result, we have taken actions to lower the cost of this funding source. We are experiencing some success in growing noninterest-bearing accounts, though this growth is not at the pace we would like. We are focused on growing these accounts."

Operating Results

Second Quarter 2019 compared to First Quarter 2019

• Income before income taxes for the second quarter of 2019 was $2.1 million compared to $1.8 million for the first quarter of 2019.
• Interest income for the three months ended June 30, 2019 was $12.3 million, on average interest-earning assets of $1.04 billion, compared to $12.3 million, on average interest-earning assets of $1.02 billion, for the three months ended March 31, 2019. Interest income in the second quarter of 2019 included accretion of acquired loan discounts of $197 thousand, while interest income in the first quarter of 2019 included $439 thousand of accretion of acquired loan discounts. Higher accretion in the first quarter of 2019 was primarily attributable to early payoffs of loans acquired in the Merger. Yields on average interest-earning assets were 4.77% and 4.90% for the linked quarter periods, including the effect of accretion. Of the decline in yield from the first quarter to the second quarter of 2019, 11 basis points were attributable to lower accretion of acquired loan discounts of $242 thousand.
• Interest expense was $3.8 million and $3.7 million for the three months ended June 30, 2019 and March 31, 2019, respectively, and cost of funds was 1.58% and 1.54% for the linked quarter periods. Average interest-bearing liabilities were $857.4 million and $853.6 million for the second and first quarters of 2019, respectively.
• Net interest margin ("NIM") was 3.29% for the second quarter of 2019 compared to 3.45% for the first quarter of 2019. Of the decline in NIM from the first quarter to the second quarter of 2019, 9 basis points were attributable to lower accretion of acquired loan discounts, while the remaining decline was primarily due to higher cost of funds.
• Provision for loan losses was $62 thousand in the second quarter of 2019, while provision for loan losses in the first quarter of 2019 was $314 thousand. Provision for loan losses in the second quarter of 2019 was primarily attributable to adjustments to certain qualitative loan loss factors to adjust for the change in the composition of the company's loan portfolio. Provision for loan losses in the first quarter of 2019 was primarily attributable to gross loan growth of $16.5 million.
• Noninterest income for the three months ended June 30, 2019 and March 31, 2019 was $1.3 million and $1.1 million, respectively. Greater noninterest income in the second quarter of 2019 compared to the first quarter of 2019 was primarily due to higher secondary market mortgage sales and servicing income, which increased $196 thousand, as the company sold a greater volume of originated loans and due to general seasonality in the mortgage banking business.
• Noninterest expenses for the three months ended June 30, 2019 and March 31, 2019 were $7.6 million and $7.6 million, respectively. Noninterest expenses for the second quarter of 2019 included a net loss on the sale and valuation of other real estate owned of $72 thousand, while the first quarter of 2019 included a $6 thousand net gain on the sale and valuation of other real estate owned. The company's efficiency ratio for the second quarter of 2019 was 77.7% compared to 78.1% for the first quarter of 2019.
• Income tax expense for the second quarter of 2019 was $395 thousand, reflective of an 18.6% effective income tax rate, while income tax expense for the first quarter of 2019 was $337 thousand, reflective of an 18.4% effective income tax rate.

First Half 2019 compared to First Half 2018

• Income before income taxes for the first half of 2019 was $3.9 million compared to $2.5 million for the first half of 2018.
• Interest income for the six months ended June 30, 2019 was $24.7 million, on average interest-earning assets of $1.03 billion, compared to $21.2 million for the six months ended June 30, 2018, on average interest-earning assets of $909.0 million. Interest income in the first half of 2019 included accretion of acquired loan discounts of $636 thousand, while interest income in the first half of 2018 included $1.1 million of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.83% and 4.68% for the first half of 2019 and 2018, respectively. The higher yield on average interest-earning assets in the 2019 period was primarily due to higher loan yields, partially offset by lower accretion of acquired loan discounts of $414 thousand, which had a negative 11 basis point effect.
• Interest expense was $7.5 million and $4.4 million for the six months ended June 30, 2019 and 2018, respectively, and cost of funds was of 1.56% and 0.98% for the respective periods. Higher cost of funds in the first half of 2019 was primarily due to competition for deposits in the company's markets, the repricing of maturing time deposits, and higher interest rates in general. Average interest-bearing liabilities were $855.5 million and $747.7 million for the first half of 2019 and 2018, respectively.
• NIM was 3.37% for the first half of 2019 compared to 3.75% for the first half of 2018. Lower NIM in the 2019 period was primarily due to higher cost of funds and lower accretion of acquired loan discounts, which had a negative 23 basis point effect, partially offset by higher loan yields.
• Provision for loan losses was $376 thousand for the first half of 2019, primarily attributable to gross loan growth of $15.3 million. Provision for loan losses in the first half of 2018 was a recovery of $28 thousand, which included a $580 thousand benefit to correct for an overstatement in the company's allowance for loan losses as of December 31, 2017, as previously reported, and the decline in reserve levels for a select portfolio of purchased consumer loans.
• Noninterest income for the six months ended June 30, 2019 and 2018 was $2.4 million and $2.3 million, respectively. The 2018 period included a gain of $352 thousand on the curtailment of the company's post-retirement benefit plan.
• Noninterest expenses for the six months ended June 30, 2019 and 2018 were $15.2 million and $16.7 million, respectively. Merger-related expenses were $0 and $363 thousand for the six months ended June 30, 2019 and 2018, respectively. Expenses associated with the succession of the company's CFO and in the completion of the company's 2017 year-end reporting incurred in the first half of 2018 were approximately $1.2 million.
• Income tax expense for the second half of 2019 was $732 thousand, reflective of an 18.6% effective income tax rate, while income tax expense for the second half of 2018 was $447 thousand, reflective of an 17.8% effective income tax rate.

Second Quarter 2019 compared to Second Quarter 2018

• Income before income taxes for the second quarter of 2019 was $2.1 million compared to $1.1 million for the second quarter of 2018.
• Interest income for the three months ended June 30, 2019 was $12.3 million, on average interest-earning assets of $1.04 billion, compared to $10.5 million, on average interest-earning assets of $913.5 million, for the three months ended June 30, 2018. Interest income in the second quarter of 2019 included accretion of acquired loan discounts of $197 thousand, while interest income in the second quarter of 2018 included $547 thousand of accretion of acquired loan discounts and negative adjustments totaling $145 thousand for amounts incorrectly reported in the first quarter of 2018, as previously reported. Yields on average interest-earning assets were 4.77% and 4.61% for the second quarters of 2019 and 2018, respectively. Higher loan yields in the 2019 period were partially offset by lower accretion of acquired loan discounts.
• Interest expense was $3.8 million and $2.3 million for the three months ended June 30, 2019 and 2018, respectively, and cost of funds was 1.58% and 1.08%, for the respective periods. Higher costs of funds in the 2019 period was primarily due to higher cost of deposits, as noted above, and greater use of FHLB borrowings. Average interest-bearing liabilities were $857.4 million and $747.2 million for the second quarters of 2019 and 2018, respectively.
• NIM was 3.29% for the second quarter of 2019 compared to 3.60% for the second quarter of 2018. The decline in NIM was primarily attributable to higher cost of funds and lower accretion of acquired loan discounts, partially offset by higher loan yields in the 2019 period.
• Provision for loan losses was $62 thousand for the three months ended June 30, 2019, primarily attributable to adjustments to certain qualitative loan loss factors, as noted above. Provision for loan losses for the three months ended June 30, 2018 was a recovery of $348 thousand, primarily attributable to a $580 thousand benefit to correct for an overstatement in the company's allowance for loan losses as of December 31, 2017, as noted above.
• Noninterest income for the three months ended June 30, 2019 and 2018 was $1.3 million and $1.2 million, respectively. The increase of $132 thousand was primarily attributable to higher service charges and fees on deposit accounts and a gain on rabbi trust assets of $40 thousand in the second quarter of 2019 compared to a loss of $25 thousand in the 2018 period.
• Noninterest expenses for the three months ended June 30, 2019 and 2018 were $7.6 million and $8.6 million, respectively. Noninterest expenses associated with the succession of the company's CFO was approximately $200 thousand in the second quarter of 2018. Higher consulting and audit and accounting fees in the 2018 period were primarily related to projects, such as the implementation of an enterprise risk management platform and a Sarbanes-Oxley readiness assessment. The company's efficiency ratio for the second quarter of 2019 was 77.7% compared to 91.5% for the same quarter of 2018.
• Income tax expense for the second quarter of 2019 and 2018 was $395 thousand and $197 thousand, respectively, reflective of an 18.6% and 17.2% effective income tax rate, respectively.

Balance Sheet

• Total assets were $1.1 billion at June 30, 2019 and at December 31, 2018.
• Loans, net of allowance for loan losses, were $909.9 million at June 30, 2019 compared to $894.2 million at December 31, 2018, an annualized growth rate of over 3%. Excluding the payoff of approximately $19.5 million in the first half of 2019 of purchased portfolio loans, including those acquired in the Merger, loan growth, annualized, was approximately 8% for the first half of 2019.
• Deposits were $875.6 million at June 30, 2019 compared to $842.2 million at December 31, 2018. Noninterest-bearing demand accounts comprised 13.3% of total deposits at June 30, 2019, down slightly from 13.6% at December 31, 2018.
• Shareholders' equity was $122.6 million and $117.5 million at June 30, 2019 and December 31, 2018, respectively, an increase of $5.1 million. The increase in shareholders' equity in the first half of 2019 was primarily attributable to net income of $3.2 million and $1.4 million of unrealized gains on the company's available-for-sale securities portfolio. Tangible book value, calculated as shareholders' equity less goodwill and core deposit intangible assets, net of the associated deferred tax liability, divided by common shares outstanding, was $8.31¹ and $7.98¹ at June 30, 2019 and December 31, 2018, respectively. Capital ratios for Virginia Commonwealth Bank were above regulatory minimum guidelines for well-capitalized banks as of June 30, 2019 and December 31, 2018.
• Annualized return on average assets for the quarters ended June 30, 2019, March 31, 2019, and June 30, 2018 was 0.62%, 0.55%, and 0.38%, respectively, while annualized return on average equity for the same periods was 5.72%, 5.05%, and 3.28%, respectively.

Asset Quality

• Nonperforming assets were $7.7 million, or 0.71% of total assets, as of June 30, 2019, compared to $8.8 million, or 0.81% of total assets, as of December 31, 2018, and $7.0 million, or 0.71% of total assets, as of June 30, 2018.
• The ratio of allowance for loan losses to total gross loans was 0.82%, 0.88%, and 0.89% at June 30, 2019, December 31, 2018, and June 30, 2018, respectively. The company's allowance for loan losses does not include discounts recorded on loans acquired in the Merger, which were $3.3 million, $3.9 million, and $4.7 million as of June 30, 2019, December 31, 2018, and June 30, 2018, respectively.

Outlook

Greene concluded: "Our loan pipeline continues to be strong and we expect to selectively grow loans in the second half of the year.  We will continue our strategy of emphasizing residential loan originations that can be sold in the secondary market and adding residential loans to our portfolio that have favorable yields. Deposit costs are being strategically lowered, which we expect will provide support to our net interest margin in the coming quarters."

About Bay Banks of Virginia, Inc.

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

Caution About Forward-Looking Statements

This press release contains statements concerning the company's expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute "forward-looking statements" as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the company include, but are not limited to: changes in interest rates and general economic conditions; the legislative/regulatory climate; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the company's market area; acquisitions and dispositions; implementation of new technologies and the ability to develop and maintain secure and reliable electronic systems; and tax and accounting rules, principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. Except to the extent required by applicable law or regulation, the company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

For further information, contact Randal R. Greene, President and Chief Executive Officer, at 844-404-9668 or Judy C. Gavant, Executive Vice President and Chief Financial Officer, at 804-518-2606 or inquiries@baybanks.com.

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