Bay Banks of Virginia, Inc. Reports Fourth Quarter and Full-Year 2018 Results

RICHMOND, Va., Feb. 6, 2019 /PRNewswire/ -- Bay Banks of Virginia, Inc. BAYK, holding company of Virginia Commonwealth Bank and VCB Financial Group, Inc., announced financial results for the quarter and year ended December 31, 2018.

The company reported net income of $782 thousand, or $0.06 per diluted share, for the fourth quarter of 2018 compared to $1.0 million, or $0.08 per diluted share, for the third quarter of 2018, and to a net loss of $2.4 million, or ($0.18) per diluted share, for the fourth quarter of 2017. Net income for the fourth quarter of 2018 included $483 thousand ($382 thousand¹ after income taxes) of expenses incurred in connection with the company's previously announced early retirement program. Net income in the fourth quarter of 2017 included $850 thousand ($561 thousand¹ after income taxes) of merger-related expenses in connection with the company's merger with Virginia BanCorp, Inc. on April 1, 2017 (the "Merger").

For the year of 2018, the company reported net income of $3.9 million, or $0.31 per diluted share, compared to a net loss of $1.2 million, or ($0.14) per diluted share, for the year of 2017. Expenses incurred in connection with the Merger were $363 thousand and $2.0 million for the years ended December 31, 2018 and 2017, respectively.

Randal R. Greene, President and Chief Executive Officer, commented: "Since our merger with Virginia BanCorp, Inc. at the beginning of the second quarter of 2017, we have grown our balance sheet by 30%. Our larger balance sheet coupled with the cost savings initiatives announced during the third quarter of 2018 are beginning to result in improved profitability. Income before income taxes for the fourth quarter of 2018 when excluding the provision for loan losses and the costs incurred in implementing our early retirement program was just over $2.0 million. Our challenge continues to be growing deposits at acceptable rates to keep pace with the loan growth opportunities we have in our very strong markets."

Operating Results

Fourth Quarter 2018 compared to Third Quarter 2018

• Income before income taxes for the fourth quarter of 2018 was $670 thousand compared to $1.2 million for the third quarter of 2018. Income before income taxes, excluding the costs incurred to implement the company's early retirement program, was $1.2 million¹ for the fourth quarter of 2018.
• Interest income for the three months ended December 31, 2018 was $11.7 million, on average interest-earning assets of $989.3 million, compared to $10.9 million for the three months ended September 30, 2018, on average interest-earning assets of $929.1 million. Interest income in the fourth quarter of 2018 included accretion of acquired loan discounts of $352 thousand, while interest income in the third quarter of 2018 included $357 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.72% and 4.66% for the linked quarter periods.
• Interest expense was $3.3 million and $2.6 million for the three months ended December 31, 2018 and September 30, 2018, respectively, and cost of funds was 1.40% and 1.19% for the linked quarter periods. Average interest-bearing liabilities were $817.3 million and $762.0 million for the fourth and third quarters of 2018, respectively. Higher funding cost in the fourth quarter period was primarily due to heightened competition for deposits in the company's markets and greater use of higher cost Federal Home Loan Bank of Atlanta ("FHLB") borrowings to fund loan growth, both affected by higher interest rates, in general.
• Net interest margin ("NIM") was 3.41% for the fourth quarter of 2018 compared to 3.57% for the third quarter of 2018. Net interest margin excluding accretion of acquired loan discounts and amortization of fair value marks on time deposits ("Core NIM") for the fourth quarter of 2018 was 3.25%¹ compared to 3.40%¹ for the third quarter of 2018. The decline in Core NIM for the linked quarter periods was primarily attributable to higher cost of funds, partially offset by higher yields on interest-earning assets.
• Provision for loan losses was $870 thousand in the fourth quarter of 2018, while provision for loan losses in the third quarter of 2018 was $509 thousand. Provision for loan losses in the fourth quarter of 2018 was primarily attributable to an increase of $48.0 million of gross loans in the quarter and higher reserves attributed to certain loan types as the company's loan portfolio mix shifts from residential and consumer loans to commercial loans.
• Noninterest income for the three months ended December 31, 2018 and September 30, 2018 was $1.0 million and $944 thousand, respectively. Increased income from the company's wealth management business was partially offset by lower income from fiduciary activities from the company's trust management and administration services business.
• Noninterest expenses for the three months ended December 31, 2018 and September 30, 2018 were $7.9 million and $7.5 million, respectively. Noninterest expenses for the fourth quarter of 2018 included $483 thousand incurred to implement the company's early retirement program. Efficiency ratio for the three months ended December 31, 2018 was 83.7% (78.6%¹ excluding expenses incurred to implement the early retirement program) compared to 81.3% for the three months ended September 30, 2018.
• Income taxes for the fourth quarter of 2018 were a benefit of $112 thousand. The income tax benefit was primarily attributable to higher than estimated tax deductions reported in the company's 2017 federal income tax return at the higher 2017 corporate tax rate and a lower effective income tax rate for the full year of 2018 than was recorded for the 2018 period through the third quarter of 2018.

Full-Year 2018 compared to Full-Year 2017

• Income before income taxes for the year of 2018 was $4.4 million compared to a loss before income taxes of $475 thousand for 2017. Results for the year of 2017 include the operations of Virginia BanCorp, Inc. since the effective date of the Merger, April 1, 2017.
• Interest income for the year ended December 31, 2018 was $43.8 million, on average interest-earning assets of $934.5 million, compared to $33.7 million for the year ended December 31, 2017, on average interest-earning assets of $702.1 million. Average interest-earning assets for the year of 2017 included those acquired in the Merger from the effective date of the Merger. Interest income for the year of 2018 included accretion of acquired loan discounts of $1.8 million, while interest income for the year of 2017 included $1.9 million of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.70% and 4.83% for the years ended December 31, 2018 and 2017, respectively. Yields on average interest-earning assets in 2017 were favorably affected by higher accretion, higher average balances of higher yielding consumer loans, and higher fee income, some of which was to align policies for recording certain fees as a result of the Merger.
• Interest expense was $10.2 million and $6.0 million for the years ended December 31, 2018 and 2017, respectively, and cost of funds was 1.17% and 0.91% for the respective periods. Average interest-bearing liabilities were $768.8 million and $569.0 million for the years 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 cost of deposits and greater use of higher cost FHLB borrowings to fund loan growth.
• Net interest margin was 3.61% for the year ended December 31, 2018 compared to 3.98% for the year ended December 31, 2017. Core NIM for the years ended December 31, 2018 and 2017 was 3.40%¹ and 3.66%¹, respectively.
• Provision for loan losses was $1.4 million for the year of 2018, while provision for loan losses for the year of 2017 was $4.9 million. Provision for loan losses in the 2018 period included the correction in the second quarter of 2018 of the overstatement recorded in the company's 2017 allowance for loan losses, as previously reported, while provision for loan losses in the 2017 period was primarily due to higher reserves for a certain portfolio of consumer loans.
• Noninterest income for the years ended December 31, 2018 and 2017 was $4.3 million and $3.5 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, while noninterest income in the 2017 period included an additional $213 thousand of losses recorded on the disposition of assets.
• Noninterest expenses for the years ended December 31, 2018 and 2017 were $32.1 million and $26.7 million, respectively. Merger-related expenses were $363 thousand and $2.0 million for the years ended December 31, 2018 and 2017, respectively. Expenses in 2018 associated with the succession of the company's CFO and fees incurred in the completion of the company's 2017 year-end reporting totaled approximately $1.2 million, all of which were recorded in the first six months of 2018. Efficiency ratio for the year ended December 31, 2018 was 84.8% compared to 85.7% for the year ended December 31, 2017.
• Income tax expense for the year ended December 31, 2018 was $533 thousand, representing an effective rate of 12.1%. The effective rate was positively affected by higher than estimated income tax deductions reported in the company's 2017 federal income tax return at the higher 2017 rate, as noted above. Income tax expense for 2017 of $797 thousand reflected the effect of the revaluation of the company's net deferred tax asset upon the enactment of the Tax Cuts and Jobs Act of 2017 ("TCJA") at the end of 2017.

Fourth Quarter 2018 compared to Fourth Quarter 2017

• Income before income taxes for the fourth quarter of 2018 was $670 thousand compared to a loss of $2.0 million for the fourth quarter of 2017. Income before income taxes, excluding the costs incurred to implement the company's early retirement program ($483 thousand) was $1.2 million¹ for the fourth quarter of 2018.
• Interest income for the three months ended December 31, 2018 was $11.7 million, on average interest-earning assets of $989.3 million, compared to $10.5 million for the three months ended December 31, 2017, on average interest-earning assets of $900.6 million. Interest income in the fourth quarter of 2018 included accretion of acquired loan discounts of $352 thousand, while interest income in the fourth quarter of 2017 included $1.0 million of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.72% and 4.69% for the three months ended December 31, 2018 and 2017, respectively.
• Interest expense was $3.3 million and $1.9 million for the three months ended December 31, 2018 and 2017, respectively, and the cost of funds was 1.40% and 0.92% for the quarter-over-quarter periods. Higher funding cost in the 2018 period was primarily due to higher cost of deposits and greater use of FHLB borrowings, as noted above. Average interest-bearing liabilities were $817.2 million and $742.0 million for the fourth quarters of 2018 and 2017, respectively.
• Net interest margin was 3.41% for the fourth quarter of 2018 compared to 3.82% for the fourth quarter of 2017. Core NIM for the fourth quarter of 2018 was 3.25%¹ compared to 3.31%¹ for the same quarter of 2017. The decline in Core NIM was primarily attributable to higher cost of funds.
• Provision for loan losses was $870 thousand for the fourth quarter of 2018, while provision for loan losses in the fourth quarter of 2017 was $3.1 million. Provision for loan losses in the fourth quarter of 2018 was primarily attributable to an increase of $48.0 million of gross loans in the quarter and higher reserves attributed to certain loan types as the company's loan portfolio mix shifts from residential and consumer loans to commercial loans. Provision for loan losses in the 2017 period included higher reserves for a certain portfolio of consumer loans.
• Noninterest income for the fourth quarters of 2018 and 2017 was $1.0 million and $562 thousand, respectively. Contributing to higher noninterest income in the 2018 period was higher income from the company's wealth management business and losses recorded on the disposition of assets in the 2017 period.
• Noninterest expenses for the fourth quarters of 2018 and 2017 were $7.9 million and $8.0 million, respectively. Noninterest expenses in the fourth quarter of 2018 included $483 thousand of expenses incurred to implement the company's early retirement program, while merger-related expenses were $850 thousand in the fourth quarter of 2017. Higher noninterest expenses in the 2018 period compared to the 2017 period were primarily due to higher occupancy and data processing costs due to growth, partially offset by lower advertising and marketing and consulting costs incurred in the 2017 period. Efficiency ratio for the fourth quarter of 2018 was 83.7% (78.6%¹ excluding expenses incurred to implement the early retirement program) compared to 88.2% for the same quarter of 2017 (78.7%¹ excluding merger-related expenses).
• Income taxes for the fourth quarter of 2018 were a benefit of $112 thousand. The benefit was primarily attributable to greater than estimated income tax deductions reported in the company's 2017 federal income tax return and the adjustment to the year-to-date 2018 effective rate recorded in the fourth quarter of 2018, noted above. Income tax expense for the fourth quarter of 2017 of $391 thousand reflected the effect of the revaluation of the company's net deferred tax asset upon the enactment of the TCJA at the end of 2017.

Balance Sheet

• Loans, net of allowance for loan losses, were $894.2 million at December 31, 2018 compared to $758.7 million at December 31, 2017, a growth rate of over 17%. Excluding the pay-down of approximately $67 million in the year of 2018 of purchased portfolio loans, including those acquired in the Merger, gross loan growth was approximately 27% for 2018.
• Total assets were $1.1 billion at December 31, 2018 compared to $970.6 million at December 31, 2017.
• Deposits were $842.2 million at December 31, 2018 compared to $761.8 million at December 31, 2017. Noninterest-bearing accounts comprised 13.6% of total deposits at December 31, 2018, slightly up from 13.5% at December 31, 2017.
• Shareholders' equity was $117.5 million and $114.6 million at December 31, 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 $7.98¹ and $7.71¹ at December 31, 2018 and December 31, 2017, respectively. Capital ratios for Virginia Commonwealth Bank and Bay Banks of Virginia, Inc. were above regulatory minimum guidelines for well-capitalized banks and bank holding companies, respectively, as of December 31, 2018 and December 31, 2017.
• Return on average assets for the years ended December 31, 2018 and 2017 was 0.39% and (0.17)%, respectively, while return on average equity for the same periods was 3.36% and (1.58)%, respectively. Return on average assets for the fourth quarter of 2018, annualized, was 0.30% (0.44%¹ excluding expenses incurred implementing the early retirement program) compared to 0.41% for the third quarter of 2018.

Asset Quality

• Nonperforming assets were $8.8 million, or 0.81% of total assets, as of December 31, 2018, compared to $7.9 million, or 0.77% of total assets, as of September 30, 2018, and $10.8 million, or 1.12% of total assets, as of December 31, 2017. Net charge-offs to average gross loans were 0.15% and 0.17% for the years ended December 31, 2018 and 2017, respectively.
• The ratio of allowance for loan losses to total gross loans was 0.88%, 0.85%, and 1.00% at December 31, 2018, September 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 1.31%¹, 1.35%¹, and 1.76%¹, as of the same three period ends, respectively.

Outlook

Greene concluded: "I am optimistic moving into 2019, in spite of mixed economic headwinds. Our team is aligned. We have a three-year plan guiding us to our goals, but we are nimble and will adjust as our markets and economic conditions require. Deposit growth could slow attainment of our goals and we are sharply focused on growing them, primarily noninterest-bearing deposits.

As I reflect on 2018, I am pleased with the accomplishments of our team. This has been a building year, building of both infrastructure and talent. I believe we now have both to take our over $1 billion company to the next level. I express my thanks to our employees for what they have accomplished in 2018, to our board for their advice and counsel, to our shareholders for their continuing support, and to our customers who trust us to meet many of their financial needs every day."

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 20 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; 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, 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.