Bay Banks of Virginia, Inc. Reports Third Quarter and Year-to-Date 2018 Results

RICHMOND, Va., Oct. 30, 2018 /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 ninth months ended September 30, 2018.

The company reported $1.03 billion of assets as of September 30, 2018 compared to $970.6 million as of December 31, 2017.

The company also reported net income of $1.0 million, or $0.08 per diluted share, for the third quarter of 2018 compared to $946 thousand, or $0.07 per diluted share, for the second quarter of 2018, and $742 thousand, or $0.07 per diluted share, for the third quarter of 2017. For the first nine months of 2018, the company reported net income of $3.1 million, or $0.24 per diluted share, compared to $1.1 million, or $0.14 per diluted share, for the first nine months of 2017. Costs incurred in connection with the company's merger with Virginia BanCorp, Inc. on April 1, 2017 (the "Merger") were $0 and $363 thousand for the three and nine months ended September 30, 2018, respectively, compared to $141 thousand and $1.1 million for the three and nine months ended September 30, 2017, respectively.

Randal R. Greene, President and Chief Executive Officer, commented: "Reaching $1 billion of assets is a major milestone for our company. Just a year and a half ago we merged with Virginia BanCorp creating an $830 million financial institution. We have experienced an asset growth rate of 23% over this period. In reviewing our results of the third quarter, we are beginning to realize the leverage of our larger balance sheet and the savings anticipated from our noninterest expense initiatives that we announced during the quarter. Earnings before both taxes and provision for loan losses improved to $1.7 million in the third quarter of 2018 from $795 thousand in the second quarter of 2018. Net loan growth of $88.3 million in the first nine months of the year was strong, particularly considering the run-off of nearly $50 million of purchased portfolio loans, including those acquired in the Merger." 

Operating Results

Third Quarter 2018 compared to Second Quarter 2018

• Income before income taxes for the third quarter of 2018 was $1.2 million compared to $1.1 million for the second quarter of 2018.
• Interest income for the three months ended September 30, 2018 was $10.9 million, on average interest-earning assets of $929.1 million, compared to $10.5 million for the three months ended June 30, 2018, on average interest-earning assets of $913.5 million. Interest income in the third quarter of 2018 included accretion of acquired loan discounts of $357 thousand, while interest income in the second quarter of 2018 included $547 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.66% and 4.61% for the linked quarter periods.
• Interest expense was $2.6 million and $2.3 million for the third quarter of 2018 and the second quarter of 2018, respectively, and cost of funds was 1.19% and 1.08% for the linked quarter periods. Average interest-bearing liabilities were $762.0 million and $747.2 million for the third quarter of 2018 and the second quarter of 2018, respectively. Higher funding cost in the third quarter period was primarily due to heightened competition for deposits in the company's markets and promotional deposit products offered as the company expands in the Hampton Roads market.
• Net interest margin was 3.57% for the three months ended September 30, 2018 compared to 3.60% for the three months ended June 30, 2018. Net interest margin excluding accretion of acquired loan discounts and amortization of fair value marks on time deposits for the three months ended September 30, 2018 was 3.40%¹ compared to 3.34%¹ for the three months ended June 30, 2018.
• Provision for loan losses was $509 thousand in the third quarter of 2018, while provision for (recovery of) loan losses in the second quarter of 2018 was ($348) thousand. Provision for loan losses in the third quarter of 2018 was primarily attributable to an increase of approximately $52.7 million of gross loans in the quarter. The recovery of loan losses in the second quarter of 2018 was primarily due to the correction of an overstatement recorded in the company's year-end 2017 allowance for loan losses for acquired loans, as reported in the company's second quarter Form 10-Q. Also contributing to the recovery of loan loss provision in the second quarter of 2018 was a decline in reserve levels for a select portfolio of consumer loans, as these loan balances continued to decline.
• Noninterest income for the three months ended September 30, 2018 and June 30, 2018 was $994 thousand and $1.2 million, respectively. The decline in noninterest income quarter to quarter was partially attributable to lower income from fiduciary activities and non-deposit product income recorded for the company's wealth management business as the company transitioned to an outsourced operating platform during the second quarter of 2018 and adjusted to the changes in fee structure. Additionally, secondary market lending fees decreased in the third quarter compared to the second quarter due to lower loan sales volume. These declines were partially offset by higher service charges and fees on deposit accounts.
• Noninterest expenses for the three months ended September 30, 2018 and June 30, 2018 were $7.5 million and $8.6 million, respectively. In the third quarter of 2018, the company announced initiatives and other anticipated reductions to reduce noninterest expenses. The benefits of these items resulted in reductions in data processing, consulting, and salaries and employee benefits expenses in the third quarter of 2018 compared to the second quarter of 2018. Efficiency ratio for the three months ended September 30, 2018 was 81.3% compared to 91.5% for the three months ended June 30, 2018.

First Nine Months 2018 compared to First Nine Months 2017

• Income before income taxes for the first nine months of 2018 was $3.7 million compared to $1.5 million for the first nine months of 2017. Results for the first nine months of 2017 include the operations of Virginia BanCorp, Inc. since the effective date of the Merger, April 1, 2017.
• Interest income for the nine months ended September 30, 2018 was $32.1 million, on average interest-earning assets of $916.2 million, compared to $23.2 million for the nine months ended September 30, 2017, on average interest-earning assets of $692.4 million. Average interest-earning assets in the first nine months of 2017 included those acquired in the Merger from the effective date of the Merger. Interest income in the first nine months of 2018 included accretion of acquired loan discounts of $1.4 million, while interest income in the first nine months of 2017 included $860 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.69% and 4.50% for the nine months ended September 30, 2018 and 2017, respectively.
• Interest expense was $7.0 million and $4.1 million for the nine months ended September 30, 2018 and 2017, respectively, and cost of funds was of 1.08% and 0.81% for the respective periods. Average interest-bearing liabilities were $752.5 million and $582.7 million for the first nine months of 2018 and 2017, respectively. Average interest-bearing liabilities in 2017 included those assumed in the Merger from the effective date of the Merger. Higher funding cost in the 2018 period was primarily due to higher costs of deposits, as noted above.
• Net interest margin was 3.67% for the nine months ended September 30, 2018 compared to 3.72% for the nine months ended September 30, 2017. Net interest margin excluding accretion of acquired loan discounts and amortization of fair value marks on time deposits for the nine months ended September 30, 2018 was 3.44%¹ compared to 3.51%¹ for the nine months ended September 30, 2017. The decline in net interest margin was primarily attributable to increasing cost of funds, partially offset by higher yields on interest-earning assets.
• Provision for loan losses was $481 thousand for the first nine months of 2018, while provision for loan losses for the first nine months of 2017 was $1.8 million. Provision for loan losses in the 2018 period included the correction of the overstatement, while provision for loan losses in the 2017 period was primarily due to higher reserves for a select portfolio of consumer pools.
• Noninterest income for the nine months ended September 30, 2018 and 2017 was $3.3 million and $2.9 million, respectively. Noninterest income in the 2018 period included a $352 thousand gain on the discontinuance of the company's post-retirement benefit plan effective March 1, 2018.
• Noninterest expenses for the nine months ended September 30, 2018 and 2017 were $24.2 million and $18.7 million, respectively. Merger-related expenses were $363 thousand and $1.1 million for the nine months ended September 30, 2018 and 2017, respectively. Expenses associated with the succession of the company's CFO and fees incurred in the completion of the company's 2017 year-end reporting in the first nine months of 2018 totaled approximately $1.2 million, all of which were recorded in the first six months of 2018. Efficiency ratio for the nine months ended September 30, 2018 was 85.2% compared to 84.8% for the nine months ended September 30, 2017.

Third Quarter 2018 compared to Third Quarter 2017

• Income before income taxes for the third quarter of 2018 was $1.2 million compared to $1.0 million for the third quarter of 2017.
• Interest income for the three months ended September 30, 2018 was $10.9 million, on average interest-earning assets of $929.1 million, compared to $9.5 million for the three months ended September 30, 2017, on average interest-earning assets of $867.9 million. Interest income in the third quarter of 2018 included accretion of acquired loan discounts of $357 thousand, while interest income in the third quarter of 2017 included $409 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.69% and 4.40% for the three months ended September 30, 2018 and 2017, respectively.
• Interest expense was $2.6 million and $1.7 million for the third quarter of 2018 and the third quarter of 2017, respectively, and the cost of funds was 1.19% and 0.83% for the quarter-over-quarter periods. Average interest-bearing liabilities were $762.0 million and $715.9 million for the third quarter of 2018 and 2017, respectively.
• Net interest margin was 3.57% for the three months ended September 30, 2018 compared to 3.62% for the three months ended September 30, 2017. Net interest margin excluding accretion of acquired loan discounts and amortization of fair value marks on time deposits for the three months ended September 30, 2018 was 3.40%¹ compared to 3.39%¹ for the three months ended September 30, 2017.
• Provision for loan losses was $509 thousand for the third quarter of 2018, while provision for loan losses in the third quarter of 2017 was $1.1 million. Provision for loan losses in the third quarter of 2018 was primarily attributable to an increase of approximately $52.7 million of gross loans in the quarter, while provision in the 2017 period included reserves for a select portfolio of consumer loans, as noted above.
• Noninterest income for the three months ended September 30, 2018 and 2017 was $994 thousand and $1.0 million, respectively.
• Noninterest expenses for the three months ended September 30, 2018 and 2017 were $7.5 million and $6.7 million, respectively. Merger-related expenses were $141 thousand in the third quarter of 2017, while no merger-related expenses were reported in the third quarter of 2018. Higher noninterest expenses in the 2018 period were primarily due to higher personnel costs (greater number of full-time equivalents) and higher consulting, audit and accounting, and legal fees, due to various regulatory and corporate activities in the 2018 period. Efficiency ratio for the three months ended September 30, 2018 was 81.3% compared to 76.3% for the three months ended September 30, 2017.

Balance Sheet

• Loans, net of allowance for loan losses, were $847.0 million at September 30, 2018 compared to $758.7 million at December 31, 2017, an annualized growth rate of over 15%. Excluding the pay-down of approximately $50 million in the first nine months of 2018 of purchased portfolio loans, including those acquired in the Merger, gross loan growth on an annualized basis was approximately 24%.
• Total assets were $1.03 billion at September 30, 2018 compared to $970.6 million at December 31, 2017.
• Deposits were $809.1 million at September 30, 2018 compared to $761.8 million at December 31, 2017. Noninterest-bearing accounts comprised 13.4% of total deposits at September 30, 2018, slightly down from 13.5% at December 31, 2017.
• Shareholders' equity was $116.5 million and $114.6 million at September 30, 2018 and December 31, 2017, respectively. Tangible book value, calculated as shareholders' equity less goodwill and core deposit intangible assets, net of the associated deferred tax liability, divided by common shares outstanding, was $7.88¹ and $7.71¹ at September 30, 2018 and December 31, 2017, respectively. Capital ratios for Virginia Commonwealth Bank were above regulatory minimum guidelines for well-capitalized banks as of September 30, 2018 and December 31, 2017.
• Return on average assets for the nine months ended September 30, 2018 and 2017, annualized, was 0.42% and 0.20%, respectively, while return on average equity for the same periods, annualized, was 3.61% and 2.03%, respectively.

Asset Quality

• Nonperforming assets were $7.9 million, or 0.77% of total assets, as of September 30, 2018, compared to $7.0 million, or 0.71% of total assets, as of June 30, 2018, and $10.8 million, or 1.12% of total assets, as of December 31, 2017. Net charge-offs, annualized, to average loans were 0.12% and 0.17% for the nine months ended September 30, 2018 and 2017, respectively.
• The ratio of allowance for loan losses to total gross loans was 0.85%, 0.89%, and 1.00% at September 30, 2018, June 30, 2018, and December 31, 2017, respectively. The company's allowance for loan losses does not include discounts recorded on acquired loans. The ratio of allowance for loan losses plus remaining discounts on acquired loans to total gross loans (adding the remaining discounts on acquired loans) was 1.35%¹, 1.46%¹, and 1.76%¹, for the same three periods, respectively.

Outlook

Greene concluded: "I believe at our size, $1 billion of assets, we are able to offer all the products needed by our customers and we are agile enough to respond quickly to and customize solutions for them. Our lending opportunities in the greater Richmond area continue to be strong, and we have a pipeline of opportunities in Hampton Roads as we have built a first-class team in that market. Core deposit generation is a significant focus area for us as it is an imperative to support our future growth. Another focus area is expense management. We are beginning to realize the benefits of our previously-announced noninterest expense initiatives, but we have more work to do in this area. I believe the results of closely managing expenses and our growing balance sheet will continue to deliver improving financial results."

About Bay Banks of Virginia, Inc.

Bay Banks of Virginia, Inc. is the bank holding company for Virginia Commonwealth Bank and VCB Financial Group, Inc. Founded in the 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/regularity climate; monetary and fiscal policies of the U. S. Government, including policies of the U.S. Treasury and Federal Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the company's market area; acquisitions and dispositions; and tax and accounting rules, principles, polices and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. Except to the extent required by applicable law or regulation, the company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

For further information, contact Randal R. Greene, President and Chief Executive Officer, at 844-404-9668 or [email protected].

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

SOURCE Bay Banks of Virginia, Inc.

Related Links

http://www.baybanks.com

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