10-Q 1 0001.txt JUNE 30, 2000 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 [_] TRANSITION REPORT UNDER 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 THE REGISTRANT AS SPECIFIED IN ITS CHARTER) VIRGINIA 54-1838100 (STATE OF INCORPORATION) (IRS EMP. ID NO.) 100 SOUTH MAIN STREET, KILMARNOCK, VA 22482 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE) (804)435-1171 (REGISTRANTS TELEPHONE NUMBER INCLUDING AREA CODE) Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during 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 X yes ____ no ---- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 1,158,562 shares of common stock at June 30, 2000. FORM 10-Q For the interim period ending June 30, 2000. INDEX PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999 CONSOLIDATED STATEMENTS OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED) CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY JUNE 30, 2000 (UNAUDITED), DECEMBER 31, 1999 AND 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PARENT ONLY BALANCE SHEETS AS OF JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999 PARENT ONLY STATEMENTS OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) AND 1999 PARENT ONLY STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 2000 AND 1999 (UNAUDITED) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FINANCIAL HIGHLIGHTS FOR THE SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO JUNE 30, 1999 (UNAUDITED) ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS ITEM 3. DEFAULTS UPON SENIOR SECURITIES ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ITEM 5. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K PART I - FINANCIAL INFORMATION Item 1. Financial Statements The accompanying notes are an integral part of these financial statements
Bay Banks of Virginia, Inc. Consolidated Balance Sheets (Unaudited) June 30, 2000 Dec 31, 1999 ASSETS Cash and due from banks 6,927,471 5,360,621 Federal funds sold 1,803,163 0 Investments Available for Sale 52,432,641 53,169,880 Gross Loans 144,471,130 131,961,820 Allowance for loan losses (1,256,329) (1,197,843) Premises and equipment 5,532,011 4,953,723 Accrued interest receivable 1,692,576 1,598,605 Other real estate owned 480,115 592,702 Other assets 3,523,170 3,333,168 Total assets 215,605,948 199,772,677 LIABILITIES Demand deposits 21,221,170 20,888,591 Savings and NOW deposits 96,389,565 96,848,391 Other time deposits 59,722,535 59,964,985 Total deposits 177,333,270 177,701,967 Fed Funds Purchased 0 0 Securities Sold for Repurchase 2,718,691 1,283,324 Other Short Term Borrowings 14,700,000 Other liabilities 1,106,390 1,081,526 Total liabilities 195,858,351 180,066,816 SHAREHOLDERS' EQUITY Common stock - $5 par value; Authorized - 5,000,000 shares 5,792,808 5,826,617 Additional paid-in capital 3,769,659 3,735,576 Retained Earnings 11,698,553 11,572,592 Accumulated other comprehensive income/(loss) (1,513,423) (1,428,924) Total shareholders' equity 19,747,597 19,705,861 Total liabilities and shareholders' equity 215,605,948 199,772,677
The accompanying notes are an integral part of these financial statements
Bay Banks of Virginia, Inc. Consolidated Statements of Earnings (Unaudited) Qtr Ended Qtr Ended Year-to-date Year-to-date Jun 30, 2000 Jun 30, 1999 Jun 30, 2000 Jun 30, 1999 INTEREST INCOME Loans receivable (incl fees) 3,042,440 2,473,030 5,881,783 4,909,615 Securities 781,690 943,422 1,592,353 1,809,156 Federal funds sold 22,646 54,557 35,815 162,162 Total interest income 3,846,776 3,471,009 7,509,951 6,880,933 INTEREST EXPENSE Deposits 1,852,919 1,589,433 3,630,824 3,209,624 Federal funds purchased 41,686 0 51,136 0 Securities Sold to Repurchase 32,380 0 52,407 0 Other Short Term Borrowings 100,871 0 100,871 0 Total interest expense 2,027,856 1,589,433 3,835,238 3,209,624 Net Interest Income 1,818,920 1,881,576 3,674,713 3,671,309 Provision for loan losses 60,000 130,000 130,000 200,000 Net interest income after provision 1,758,920 1,751,576 3,544,713 3,471,309 NONINTEREST INCOME Income from fiduciary activities 158,042 136,512 322,288 258,846 Service charges on deposit accounts 92,962 92,947 176,268 175,707 Other service charges and fees 118,598 139,280 192,490 197,420 Net securities gains -3,450 0 -4,400 0 Other income 89,509 78,571 112,507 122,095 Total noninterest income 455,661 447,310 799,153 754,068 NONINTEREST EXPENSES Salaries and employee benefits 829,734 733,474 1,629,403 1,443,998 Occupancy expense 175,731 83,804 345,572 153,633 Other expense 631,218 679,455 1,174,831 1,257,725 Total noninterest expenses 1,636,683 1,496,733 3,149,806 2,855,356 Net Income before income taxes 577,898 702,153 1,194,060 1,370,021 Income tax expense 161,500 174,000 334,000 338,000 Net Income after income taxes 416,398 528,153 860,060 1,032,021 Average shares outstanding 1,158,437 1,169,070 1,160,875 1,167,870 Earnings per share 0.36 0.45 0.74 0.88
The accompanying notes are an integral part of these financial statements
Bay Banks of Virginia, Inc. Consolidated Statements of Cash Flows (Unaudited) Six months ended: June 30, 2000 June 30, 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net Income 860,060 1,032,021 Adjustments to reconcile Net Income to Cash: Depreciation 204,374 220,656 Provision for Loan Losses 130,000 200,000 Net (Gain) / Loss on Sale of Securities (4,400) 0 (Increase) / Decrease in Accrued Interest Receivable (93,971) (154,417) Increase / (Decrease) in Accrued Interest Payable 19,866 (30,619) Increase / (Decrease) in Short Term Borrowings 16,135,367 678,772 (Increase) / Decrease in Other Assets (566,970) (1,801,274) Increase / (Decrease) in Other Liabilities 24,864 (1,051,463) Net Cash Provided / (Used) by Operating Activities 16,709,190 (906,324) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of AFS Securities (2,134,440) (9,855,822) Proceeds from sales of AFS Securities 2,115,300 0 Principal returns & maturities of AFS Securities 1,038,471 4,587,395 (Increase) / Decrease in Loans outstanding (12,509,309) (3,480,503) (Increase) / Decrease in Fed Funds Sold (1,803,163) 9,445,405 Purchases of Premises and Equipment (754,694) 138,509 (Increase) / Decrease in Other Real Estate Owned 112,587 544,300 Net Cash Provided / (Used) in Investing Activities (13,935,248) 1,379,284 CASH FLOWS FROM FINANCING ACTIVITIES Increase / (Decrease) in Demand, Savings, & NOW deposits (126,247) 4,211,154 Increase / (Decrease) in Time Deposits (242,450) (4,395,443) Proceeds from issuance of Common Stock 189,735 33,433 Repurchase of Common Stock (189,756) 0 Dividends paid (487,238) (446,000) Other (351,136) 0 Net Cash Provided / (Used) in Financing Activities (1,207,092) (596,856) Net Increase / (Decrease) in Cash & Due from Banks 1,566,850 (123,896) Cash & Due From Banks on 12/31/99 5,360,621 5,268,229 Cash & Due From Banks on 6/30/00 6,927,471 5,144,333
The accompanying notes are an integral part of these financial statements Bay Banks of Virginia, Inc. Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
Accumulated Other Other Common Paid-in Retained Comprehensive Total Stock Capital Earnings Income/(Loss) Equity Balance on 12/31/97 5,754,130 3,164,510 9,502,341 271,137 18,692,118 Comprehensive Income: Net Income 1,930,900 1,930,900 Net changes in unrealized appreciation of available- for-sale securities, net of taxes of $176,746 355,363 355,363 ---------- ---------- ---------- ---------- ---------- Total Comprehensive Income - - 1,930,900 355,363 2,286,263 Dividends paid ($0.70/share) (809,825) (809,825) Sale of common stock: Dividends Reinvested 59,420 280,124 - - 339,544 Stock Options exercised 10,090 84,660 (94,710) - 40 ---------- ---------- ---------- ---------- ---------- Balance on 12/31/98 5,823,640 3,529,294 10,528,706 626,500 20,508,140 Comprehensive Income: Net Income 2,175,378 2,175,378 Net changes in unrealized appreciation of available- for-sale securities, net of taxes of $1,058,856 (2,055,424) (2,055,424) ---------- ---------- ---------- ---------- ---------- Total Comprehensive Income - - 2,175,378 (2,055,424) 119,954 Dividends paid ($0.78/share) (910,279) (910,279) Stock repurchases (58,385) (122,510) (214,349) (395,244) Sale of common stock: Dividends Reinvested 56,152 310,127 - - 366,279 Stock Options exercised 5,210 18,665 (6,864) - 17,011 ---------- ---------- ---------- ---------- ---------- Balance on 12/31/99 5,826,617 3,735,576 11,572,592 (1,428,924) 19,705,861 Comprehensive Income: Net Income 860,060 860,060 Net changes in unrealized appreciation of available- for-sale securities, net of taxes of $43,529 (84,499) (84,499) ---------- ---------- ---------- ---------- ---------- Total Comprehensive Income - - 860,060 (84,499) 775,561 Dividends paid ($0.39/share) (487,238) (487,238) Stock repurchases (61,245) (128,216) (246,861) (436,322) Sale of common stock: Dividends Reinvested 25,936 158,849 - - 184,785 Stock Options exercised 1,500 3,450 - 4,950 ---------- ---------- ---------- ---------- ---------- Balance on 6/30/00 5,792,808 3,769,659 11,698,553 (1,513,423) 19,747,597
Notes to Consolidated Financial Statements Bay Banks of Virginia, Inc. owns 100% of the Bank of Lancaster, `the Bank,' and 100% of Bay Trust Company of Virginia, Inc, `the Trust Company.' The consolidated financial statements include the accounts of the Bank, the Trust Company, and Bay Banks of Virginia. The accounting and reporting policies of the registrant conform to generally accepted accounting principals and to the general practices within the banking industry. This interim statement has not been audited. However, in management's opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial statements have been included. These consolidated financial statements should be read in conjunction with the financial statements and notes to financial statements included in the registrant's 1999 Annual Report to Shareholders. Bay Banks of Virginia, Inc. Parent Only Balance Sheets The accompanying notes are an integral part of these financial statements (Unaudited)
Jun 30, 2000 Dec 31, 1999 ASSETS Cash and due from banks 510,618 2,113,231 Due from Subsidiaries - - Federal funds sold - - Investments (incl unreal G/L) - - Loans - - Allowance for loan losses - - Premises and equipment 41,189 - Other real estate owned - - Other assets 369,991 - Investment In Subsidiary Bank of Lancaster 18,366,368 18,751,030 Investment in Subsidiary Bay Trust Company 1,921,314 238,479 Investment In Subsidiary Chesapeake Holdings 701 701 Organizational Expenses 27,855 32,254 Total assets 21,238,036 21,135,695 LIABILITIES Total deposits - - Fed Funds Purchased - - Other liabilities 1,397 432 Total liabilities 1,397 432 SHAREHOLDERS' EQUITY Common stock - $5 par value; Authorized - 5,000,000 shares Outstanding - 1,158,562 and 1,165,323 5,792,808 5,826,617 Additional paid-in capital 12,366,485 12,332,403 Retained Earnings 3,077,346 2,976,243 Total shareholders' equity 21,236,639 21,135,263 Total liabilities and shareholders' equity 21,238,036 21,135,695
The accompanying notes are an integral part of these financial statements Bay Banks of Virginia, Inc. Parent Only Statements of Earnings (Unaudited)
Qtr ended Qtr ended Year-to-date Year-to-date 6/30/00 6/30/99 6/30/00 6/30/99 INTEREST INCOME Loans receivable (incl fees) - - - - Securities - - - - Federal funds sold - - - - Total interest income - - - - INTEREST EXPENSE Deposits - - - - Total interest expense - - - - NET INTEREST INCOME - - - - Provision for loan losses - - - - Net interest income after provision - - - - NONINTEREST INCOME Income from fiduciary activities - - - - Other service charges and fees - - - - Net securities gains - - - - Other income 44,392 - 44,392 - Dividend Income from Subsidiary 230,000 200,000 455,000 425,000 Undistributed Earnings of Bank of Lancaster 163,609 338,128 376,435 616,996 Undistributed Earnings of Bay Trust 23,489 - 22,834 - Undistributed Earnings of Chesapeake Hldgs - - - (50) Total noninterest income 461,490 538,128 898,661 1,041,946 NONINTEREST EXPENSES Salaries and employee benefits - - - - Occupancy expense - - - - Deposit insurance premium - - - - Other expense 56,973 850 62,361 10,268 Total noninterest expenses 56,973 850 62,361 10,268 Income before income taxes 404,517 537,278 836,300 1,031,678 Income tax expense - - - - NET INCOME 404,517 537,278 836,300 1,031,678
The accompanying notes are an integral part of these financial statements Bay Banks of Virginia, Inc. Parent Only Statements of Cash Flows (Unaudited)
Year-to-date Year-to-date June 30, 2000 June 30, 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net Income 836,300 1,031,678 Adjustments to reconcile Net Income to Net Cash Provided by Operating Activities: Equity in undistributed (earnings) losses of subsidiaries (398,173) (616,946) (Increase) / Decrease in other assets (322,283) 733,284 Increase / (Decrease) in other liabilities 964 (409) Other - - Net Cash Provided (used) by Operating Activities 116,808 1,147,607 CASH FLOWS FROM INVESTING ACTIVITIES Payments for investments in and advances to subsidiaries (900,000) - Sale or repayment of investments in and advances to subsidiaries - - Other - - Net Cash Provided (used) by Investing Activities (900,000) - CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from advances from subsidiaries - - Repayment of advances from subsidiaries - - Proceeds from issuance of common stock 189,735 200,134 Payments to repurchase common stock (189,462) - Dividends paid (487,239) (447,040) Other (332,455) (728,942) Net Cash Provided (used) by Financing Activities (819,421) (975,848) Net increase (decrease) in Cash & Cash Equivalents (1,602,613) 171,759 Cash & Cash Equivalents on December 31, 1999 2,113,231 2,470,587 Cash & Cash Equivalents on June 30, 2000 510,618 2,642,346
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion is intended to assist in understanding the results of operations and the financial condition of Bay Banks of Virginia, Incorporated, "the Company," a two bank holding company. This discussion should be read in conjunction with the following Financial Highlights Table, the above consolidated financial statements and the notes thereto. Bay Banks of Virginia, Inc. Financial Highlights The accompanying notes are an integral part of these financial statements (Unaudited)
Six months ended 6/30/00 6/30/99 Change (Dollars in thousands) FINANCIAL CONDITION Average Assets 207,303 199,240 4.05% Average Interest-earning Assets 194,672 183,970 5.82% Average Earning Assets to Total Average Assets 93.9% 92.3% 1.70% Period-end Interest-bearing Liabilities 173,531 156,199 11.10% Average Interest-bearing Liabilities 165,053 157,848 4.56% Average Equity, after FAS 115 19,739 19,718 0.10% Tier 1 Capital 19,473 18,713 4.06% Net Risk-weighted Assets 144,568 124,915 15.73% Tier 2 Capital 1,256 1,146 9.62% RESULTS OF OPERATIONS Net Interest Income before Provision 3,675 3,671 0.09% Net Income 860 1,032 -16.67% Annualized Yield on Average Interest-earning Assets 7.95% 7.76% 2.45% Annualized Yield on Average Interest-bearing Liabilities 4.65% 4.07% 14.25% Annualized Net Yield on Average Interest-earning Assets 4.02% 4.27% -5.85% Annualized Net Interest Rate Spread 3.30% 3.69% -10.57% RATIOS Total Capital to Risk-weighted Assets (10% min) 14.3% 15.9% -9.82% Tier 1 Capital to Risk-weighted Assets (6% min) 13.5% 15.0% -10.09% Leverage Ratio (5% min) 9.5% 9.5% -0.16% Annualized Return on Average Assets 0.8% 1.0% -19.91% Annualized Return on Average Equity 8.7% 10.5% -16.75% Period-end shares outstanding 1,158,562 1,169,945 -0.97% Average shares outstanding 1,160,875 1,167,870 -0.60% PER SHARE DATA Basic Earnings per average share (EPS) (six months) 0.74 0.88 -16.16% Cash Dividends per average share (six months) 0.42 0.38 10.52% Book Value per share before FAS 115 18.35 17.66 3.89% after FAS 115 17.04 17.04 0.02%
EARNINGS SUMMATION For the six months ended June 30, 2000, net income was $860,060 as compared to $1,032,021 for the comparable period in 1999, a decrease of 16.67%. Earnings per average share for the first six months of 2000 were $.74 as compared to $.88 for the first six months of 1999, a decrease of 16.16%. Return on average equity was 8.7% for the first six months of 2000 as compared to 10.5% for the first six months of 1999, a decrease of 16.75%. Return on average assets was 0.8% for the first six months of 2000 as compared to 1.0% for the first six months of 1999, a decrease of 19.91%. Net interest income for the first six months of 2000 was $3,674,713 as compared to $3,671,309 for the first six months of 1999, an increase of 0.09%. Average interest-earning assets totaled $194.7 million for the first six months of 2000 as compared to $184.0 million for the comparable period of 1999, an increase of 5.82%. Average interest-bearing liabilities totaled $165.1 million for the first six months of 2000 as compared to $157.8 million for the comparable period of 1999, an increase of 4.56%. The annualized yield on average interest-earning assets for the first six months of 2000 was 7.95% as compared to 7.76% for the comparable period of 1999, an increase of 2.45%. The annualized yield (cost) on interest-bearing liabilities for the first six months of 2000 was 4.65% as compared to 4.07% for the comparable period of 1999, an increase of 14.25%. Average interest-earning assets as a percent of total average assets was 93.9% for the first six months of 2000 as compared to 92.3% for the comparable period of 1999, an increase of 1.7%. Average total assets for the first six months of 2000 was $207.3 million as compared to $199.2 million for the first six months of 1999, growth of 4.05%. For the six months ended June 30, 2000, yields on interest-earning assets have improved mainly due to increases in volume. Interest-earning assets are comprised mainly of the loan portfolio at $144.5 million, then the investment portfolio at $52.4 million, and then federal funds sold at $1.8 million. For the six month periods ended June 30, 2000, compared to June 30, 1999, on a fully tax equivalent basis, taxable investment yields improved from 6.25% to 6.28%, tax-exempt investment yields declined from 7.53% to 7.42%, and total investment yields declined from 6.60% to 6.55%. In the first six months of 2000, gross loans on average volumes yielded 8.53% as compared to 8.54% for the comparable period of 1999. Yield on total average earning assets improved from 7.76% to 7.95% for the first six months of 2000 compared to the first six months of 1999. Yields on average interest-bearing deposits comparing the months of June, 2000, to June, 1999, were as follows. Savings yields were 4.96% compared to 4.06%, NOW accounts were 2.99% compared to 2.77%, money market demand accounts were 3.69% compared 2.92%, and certificates of deposit were 5.66% compared to 4.97%. The resulting total yields on deposits in June, 2000, were 4.22% compared to 4.08% in June, 1999. Rising current interest rate trends have resulted in a narrowing spread in net interest margins within the Bank. As of June 30, 2000, the Bank had interest-earning assets that mature within 3 months totaling $17.2 million, in 3-12 months totaling $29.7 million, in 1-5 years totaling $92.7 million, and over 5 years totaling $66.9 million. In comparison, interest-bearing liabilities maturing within 3 months totaled $74.1 million, in 3-12 months totaled $51.9 million, in 1-5 years totaled $47.5 million, and over 5 years totaled nil. The resulting short-term liability sensitivity has resulted in deposit rates increasing more rapidly than loan rates. Management is currently reviewing loan and deposit products to develop offerings that will be less subject to interest rate risk. LIQUIDITY Bay Banks maintains adequate short-term assets to meet the company's liquidity needs as anticipated by management. Federal funds sold and investments that mature in one year or less provide the major sources of funding for liquidity needs. On June 30, 2000, federal funds sold totaled $1.8 million and securities maturing in one year or less totaled $2.9 million, for a total pool of $4.7 million. The liquidity ratio as of June 30, 2000 was 29.77% as compared to 30.40% as of December 31, 1999. Bay Banks of Virginia determines this ratio by dividing net liabilities into the sum of cash and cash equivalents, unpledged investment securities and Federal Funds Sold. Management, through historical analysis, has deemed 15% an adequate liquidity ratio. Steady loan demand and nominal deposit growth have resulted in the utilization of Federal Home Loan Bank lines during the first quarter of 2000. The Bank has a total available line with the Federal Home Loan Bank of $20.0 million. As of June 30, 2000, $14.7 million was borrowed against that line. In addition, the Bank maintained additional available credit of $11.1 million. In the short term, The Bank will continue to be liability-sensitive. Simply stated, deposit rates are increasing faster than loan rates. This trend is evidenced by the following analysis. For the six months ended June 30, 2000, compared to the six months ended June 30, 1999, the annualized yield paid on interest-bearing liabilities is greater by 14.25%, but the annualized yield on average earning assets is greater by only 2.45%. Although, comparing those same periods, average interest-earning assets are greater by 5.82%, and average interest-bearing liabilities are greater by 4.56%, net interest income before provision for loan losses is greater by only 0.09%. Another factor causing the liability sensitivity is the Bank's recent draws on its Federal Home Loan Bank (FHLB) line of credit. This can be seen in Other Short Term Borrowings. This source of funds demands a higher rate than traditional deposits. Traditional average interest-bearing deposits have grown only 1.1% for the six months ended June 30, 2000, compared to the same period in 1999. CAPITAL RESOURCES From December 31, 1999, to June 30, 2000, total shareholder's equity has grown by 0.22%. It is impacted by unrealized losses on securities in the amount of $1,513,422 as of June 30, 2000. These unrealized losses at year-end were $1,428,923. Unrealized gains or losses, net of taxes, are recognized as accumulated comprehensive income or loss on the balance sheet and statement of changes in shareholder's equity. Shareholder's equity before unrealized losses was $21.3 million on June 30, 2000, and $21.1 million on December 31, 1999. This represents an increase of $126 thousand or 0.6% during the six-month period. Book value per average share for the first six months of 2000, compared to the same period in 1999, remained the same at $17.04. Book value per average share before accumulated comprehensive income for the first six months of 2000, compared to the same period in 1999, grew from $17.66 to $18.35, an increase of 3.89%. Cash dividends paid for the six months ended June 30, 2000, were $487 thousand, or $0.42 per average share, compared to $444 thousand, or $0.38 per average share, for the comparable period ended June 30, 1999, an increase of 10.52%. Total shares outstanding on June 30, 2000, were 1,158,562, compared to 1,169,945 on June 30, 1999. Average shares outstanding for the six months ended June 30, 2000 were 1,160,875, compared to 1,167,870 for the comparable period ended June 30, 1999. The Company began a share repurchase program in August of 1999 and has continued the program into 2000. The company has implemented a share repurchase plan not to exceed 40,000 shares. Through June 30, 2000, the company has repurchased 23,926 shares since inception, for a total reduction in shareholders' equity of $831,566. The average number of shares repurchased since inception has been 2175 per month. During 2000, management does not expect the program to significantly exceed this level of monthly share repurchases. During the second quarter of 2000, the Trust Company completed renovations of its office space at 1 North Main Street, Kilmarnock, and took occupancy. As a result, the value of the Trust Company's total fixed assets grew to $890 thousand on June 30, 2000. This compares to total fixed assets valued at $194 thousand on December 31, 1999. The Company is subject to minimum regulatory capital ratios as defined by FFIEC guidelines. As of June 30, 2000, the Company maintained Tier 1 capital of $19.5 million, net risk weighted assets of $144.6 million, and Tier 2 capital of $1.3 million. The Tier 1 capital to risk weighted assets ratio was 13.5%, the total capital ratio was 14.3%, and the tier 1 leverage ratio was 9.5%. These ratios continue to be well in excess of regulatory minimums. Please refer to the Financial Highlights Table. FINANCIAL CONDITION Total assets on June 30, 2000, compared to December 31, 1999, have grown by 7.93% in the first six months of 2000. Cash and cash equivalents totaled $6.9 million on June 30, 2000, compared to $5.4 million at year-end 1999. Total loans, during the six months ended June 30, 2000, increased by 9.3%. During the same six-month period, real estate mortgage loans increased 10.61% to $106.1 million, real estate construction loans increased 17.6% to $6.4 million, commercial loans decreased 6.16% to $10.4 million, and installment loans increased 8.8% to $20.3 million. Real estate lending continues to be the main area of growth in the loan portfolio. Current local market conditions are favorable for a continued trend through 2000. The Bank of Lancaster currently maintains $6.0 million in first mortgage construction loans committed but not yet fully funded. In addition, home equity lines committed and but not fully funded total $5.8 million. For the six months ended June 30, 2000, the Company charged off loans totaling $74.0 thousand. For the comparable period in 1999, total loans charged off were $73.9 thousand. The Company maintained $480 thousand of other real estate owned, or "OREO," as of June 30, 2000. As of year-end 1999, the balance was $593 thousand. The Company is aggressively marketing all OREO properties, and management expects no loss on any of these properties. All properties maintained as other real estate owned are carried at the lesser of book or market value. Increases in the provision for loan losses amounted to $130,000 through the first six months, and the allowance for loan losses as of June 30, 2000, was $1,256,329. The allowance for loan losses, as a percentage of average total loans through the first six months of 2000 was .91%. As of June 30, 2000, there were $36,551 worth of loans on non-accrual status. Loans on non-accrual status as of June 30, 1999 were $44,028. Loans still accruing interest but delinquent for 90 days or more were $750,117 on June 30, 2000, as compared to $447,379 on June 30, 1999. The allowance for loan losses is analyzed for adequacy on a quarterly basis to determine the necessary provision. A loan by loan review is conducted of all loan classes and inherent losses on these individual loans are determined. This valuation is then compared to historical data in an effort to determine the prevailing trends. A third component of the process is the analysis of a tabular presentation of loss allocation percentages by loan type. Through this process the Company assesses the appropriate provision for the coming quarter. As of June 30, 2000, management deemed the loan loss reserve reasonable for the loss risk identified in the loan portfolio. As of June 30, 2000, investment securities totaled $54.7 million at book value. This compares with December 1999 book value of $55.3 million. This represents an increase of 1.1% of the total portfolio during the six months ended June 30, 2000. The investment portfolio is comprised of the following, at book value. U.S. Treasury securities are 1% of the portfolio at $0.5 million, U.S. Government agencies represent 16% at $8.6 million, state and municipal securities represent 42% at $22.7 million, mortgage-backed securities represent 7% at $3.9 million, and other securities represent 34% at $18.9 million. The investment portfolio is maintained entirely at market value under Financial Accounting Standard rule 115, "FAS-115." FAS-115 requires that the Company classify its investment portfolio in any combination of held-for-trading, held- to-maturity, or available-for-sale. Investments classified as held-for-trading must recognize gains or losses at market value in the current period's statement of earnings. Investments held-for-trading are considered short-term investments and are not intended to be held to call or maturity. Investments classified as held-to-maturity require no recognition of change in market value, however, the investments must be held to call or maturity, and therefore cannot be sold prior to such time. Investments that are classified as available-for-sale, as are the Company's, are valued each accounting period. This valuation is known as `marking to market' the investment portfolio. The market value adjustment is then applied to the individual investment types, and the tax-effected adjustment is applied to shareholder's equity. This tax-effected adjustment to shareholder's equity is classified as Comprehensive Income on the Statement of Changes in Shareholder's Equity. Management has elected to mark the entire investment portfolio to market. The resulting accumulated adjustment to book value as of June 30, 2000, was an unrealized loss of $2.3 million. The corresponding accumulated adjustment to shareholders' equity was $1.5 million, as mentioned earlier. These losses are booked monthly as an adjustment to book value based upon market conditions, and are not realized as an adjustment to earnings until the securities are actually sold. Management does not anticipate the realization of losses on investments during 2000. As of June 30, 2000, total deposits were $177.3 million. Compared to $177.7 at year-end 1999, growth is essentially flat. Comparing types of deposit balances on June 30, 2000, to year-end 1999, results in the following. Non- Interest-bearing demand deposits increased by 1.6% to $21.2 million, NOW accounts increased by 6.6% to $26.5 million, money market demand accounts increased by 2.3% to $10.7 million, savings accounts decreased by 3.8% to $59.1 million, and time deposits decreased by 0.4% to $59.7 million. RESULTS OF OPERATIONS NON INTEREST INCOME Non-interest income for the first six months of 2000 totaled $799,153 compared to $754,068 for the same period in 1999. This is an increase of 6.0%. Non-interest income includes income from fiduciary activities, service charges on deposit accounts, other income, and gains on the sale of securities. Of these categories, fiduciary activities and service charges on deposit accounts contribute the majority. For the six months ended June 30, 2000, income from fiduciary activities totaled $322,288 and service charges on deposit accounts amounted to $176,268. Other service charges and fee income was $192,490 for the first six months of 2000. For the first six months of 1999, these totals were $258,876, $175,707, and $197,490, respectively. As of January 1, 2000, the trust and fiduciary activities of the Company and the Bank are being conducted through a newly organized subsidiary, Bay Trust Company of Virginia, Incorporated, `the Trust Company.' The Trust Company acquired the assets of the former trust department of the Bank of Lancaster, and formally began operations on January 1, 2000. The restructuring of the Trust Company into a separate holding company, organized as a state member bank, is expected to result in an expanded market area and expanded services within the market area. Over time, management expects the income from fiduciary activities to improve at a rate greater than historically realized. Management continues to explore methods of improving fee based services to its' customers. Continued expansion of fiduciary services, diversification of business lines, and expansion of fee based services provided to bank customers are among the areas under regular review. NON INTEREST EXPENSE Non-interest expenses totaled $3.1 million during the first six months of 2000 as compared to $2.9 million for the same period in 1999, an increase of 10.3%. Non-interest expenses include salaries and benefits, occupancy expense, and other operating expense. Of these categories, salaries and benefits are the major expense. Through the six months ended June 30, 2000, salary and benefit expense was $1,629,403, occupancy was $345,572, and other operating expense was $1,174,830. For 1999, the totals were $1,443,998, $153,633, and $1,257,725, respectively. Organizational costs for the Trust Company were partially recognized during 1999. Non-interest expenses related to the subsidiary are expected to increase during 2000 as the Trust Company has completed renovation and is now occupying office space in Kilmarnock, Virginia. In addition, the Trust Company is expected to hire additional staff throughout 2000. Management continues to review and analyze non-interest expenses for greater efficiency. During the first quarter of 2000, non-interest expenses were impacted by the formation of Bay Trust Company, as mentioned earlier. Further, during the twelve months from March 1999 to March 2000, the Bank of Lancaster committed significant resources to employee training, continuing computer systems upgrades, facilities renovation and management, and management and consulting services. During the third quarter, management expects non-interest expenses to be effected by the acquisition of three First Virginia Bank branch offices and their related deposit accounts. FORWARD LOOKING STATEMENT In addition to the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, the operations of the Bank, and the Company's actual results could differ significantly from those discussed in the forward looking statements. Some of the factors that could cause or contribute to such differences are discussed herein, but also include changes in economic conditions in the Company's or Bank's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Banks' market area, and competition. Any of these factors could cause actual results to differ materially from historical earnings and those presently anticipated or projected. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The accompanying notes are an integral part of these financial statements Bay Banks of Virginia, Inc. Net Interest Income Analysis (Unaudited)
(Fully taxable equivalent basis) Six months Six months ended ended 6/30/2000 6/30/1999 (Thousands) Average Income/ Annualized Average Income/ Annualized Balance Expense Yield/Rate Balance Expense Yield/Rate INTEREST EARNING ASSETS: Investments (Book Value): Taxable Investments 42,668 1,339 6.28% 44,766 1,398 6.25% Tax-Exempt Investments (1) 13,055 320 7.42% 17,050 424 7.53% Total Investments 55,723 1,659 6.55% 61,815 1,822 6.60% Gross Loans (2) 137,947 5,882 8.53% 115,552 4,936 8.54% Interest-bearing Deposits 100 - 0.00% - - 0.00% Fed Funds Sold 569 36 6.29% 6,602 162 4.91% TOTAL INTEREST EARNING ASSETS 194,339 7,577 7.95% 183,970 6,920 7.76% INTEREST-BEARING LIABILITIES: Deposits: Savings Deposits 60,225 1,394 4.63% 69,123 1,414 4.09% NOW Deposits 25,844 374 2.89% 25,611 357 2.79% CD's (greater than or equal to) $100,000 14,671 429 5.85% 11,575 295 5.09% CD's (less than) $100,000 47,335 1,247 5.27% 40,024 973 4.86% Money Market Deposit Accounts 10,742 187 3.48% 10,741 158 2.94% Total Deposits 158,816 3,631 4.57% 157,075 3,196 4.07% Fed Funds Purchased 757 51 6.75% - - 0.00% Securities Sold to Repurchase 2,311 52 4.53% 774 14 3.55% Other Short Term Borrowings 3,051 101 6.61% - - 0.00% TOTAL INTEREST-BEARING LIABILITIES 164,936 3,835 4.65% 157,848 3,210 4.07% Net Interest Income/Yield on Earning Assets 3,741 4.02% 3,711 4.27% Net Interest Rate Spread 3.30% 3.69%
Notes: ------ (1)-Yield assumes a federal tax rate of 34% (2)-Includes Visa Program & nonaccrual loans. The accompanying notes are an integral part of these financial statements Bay Banks of Virginia, Inc. Interest Rate Sensitivity Gap Analysis (Unaudited)
As of 6/30/2000 (Thousands) Within 3 3-12 1-5 Years Over 5 Total months Months Years INTEREST EARNING ASSETS: Interest-Bearing Due From Banks - 100 - - 100 Fed Funds Sold 1,803 - - - 1,803 Investments (Market Value) 578 2,333 22,855 26,667 52,433 Loans 14,865 18,284 69,842 40,209 143,200 TOTAL EARNING ASSETS 17,246 20,717 92,697 66,876 197,536 INTEREST-BEARING LIABILITIES: NOW Accounts 8,757 - 17,780 - 26,537 MMDA's 7,070 - 3,642 - 10,712 Savings 40,807 - 18,334 - 59,141 CD's greater than or equal to $100,000 10,066 28,195 6,041 24 44,326 CD's less than or equal to $100,000 4,687 9,015 1,694 - 15,396 Total Deposits 71,387 37,210 47,491 24 156,112 Fed Funds Purchased - - - - - Securities Sold to Repurchase 2,719 - - - 2,719 Other Short Term Borrowings - 14,700 - - 14,700 TOTAL INTEREST-BEARING LIABILITIES 74,106 51,910 47,491 24 173,531 Rate Sensitive Gap (56,860) (31,193) 45,206 66,852 24,005 Cumulative Gap (56,860) (88,053) (42,847) 24,005
Note: Visa Receivables are classified as "Within 3 Month" Loans. Management is currently developing plans to improve the Company's liability- sensitive position. PART II. ITEM 1. LEGAL PROCEEDINGS None to report. ITEM 2. CHANGES IN SECURITIES None to report ITEM 3. DEFAULT UPON SENIOR SECURITIES None to report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None to report. ITEM 5. OTHER INFORMATION None to report. ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit Index: ( 3)(i)(ii) Articles of Incorporation and Bylaws. N/A ( 4)(i) Rights of Holders. N/A (10)(ii)(A) Material Contracts. N/A (11) Statement: Computation of Earnings per Share N/A (15) Letter: Unaudited financial information N/A (18) Letter: Change in accounting principals N/A (19) Report furnished to security holders N/A Published report regarding matters submitted to a vote of security holders N/A (23) Consent of council N/A (24) Power of Attorney N/A (27) Financial Data Schedule Attached (99) Additional Exhibits N/A (b) Reports on Form 8-K: One report on form 8-K was filed with the Securities and Exchange Commission on 6/30/2000 announcing an agreement with First Virginia Bank and First Virginia Bank Hampton Roads regarding the divestiture of three First Virginia Bank branches. SIGNATURES BAY BANKS OF VIRGINIA 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) 8/11/2000 /s/ Austin L. Roberts, III -------------------------- President and Chief Executive Officer 8/11/2000 /s/ Richard C. Abbott --------------------- Assistant Treasurer