10-Q 1 d10q.txt FORM 10-Q DATED MARCH 31, 2001 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 MARCH 31, 2001 [_] 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: 1,163,419 shares of common stock at March 31, 2001. FORM 10-Q For the interim period ending MARCH 31, 2001. INDEX PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000................... CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)............. CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)................................ CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY MARCH 31, 2001 (UNAUDITED), DECEMBER 31, 2000 AND 1999............. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................... PARENT ONLY BALANCE SHEETS AS OF MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000................... PARENT ONLY STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 2001 (UNAUDITED) AND 2000............. PARENT ONLY STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (UNAUDITED)................................ ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION........................................... FINANCIAL HIGHLIGHTS FOR THE THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO MARCH 31, 2000 (UNAUDITED)............................. NET INTEREST INCOME ANALYSIS FOR THE THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO MARCH 31, 2000 (UNAUDITED)............. INTEREST RATE SENSITIVITIY GAP ANALYSIS AS OF MARCH 31, 2001 (UNAUDITED)........................................................ ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......... RATE SHOCK ANALYSIS OF INTEREST INCOME AND EXPENSE BASED ON MARCH 31, 2001 ANNUALIZED (UNAUDITED)........................... 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) March 31, 2001 Dec 31, 2000 ASSETS Cash and due from banks 4,882,675 6,638,567 Federal funds sold 7,975,000 4,757,000 Investments Available for Sale 47,869,975 52,582,952 Gross Loans 151,169,896 149,047,718 Allowance for loan losses (1,455,010) (1,369,842) Premises and equipment 7,023,501 6,778,080 Accrued interest receivable 1,557,409 1,778,791 Other real estate owned 779,313 804,507 Other assets 3,961,689 4,151,837 Total assets 223,764,448 225,169,610 LIABILITIES Demand deposits 22,992,664 23,657,690 Savings and NOW deposits 101,142,304 100,481,431 Other time deposits 73,134,493 75,878,971 Total deposits 197,269,461 200,018,092 Fed Funds Purchased 0 0 Securities Sold for Repurchase 3,244,210 2,805,091 Other liabilities 1,213,554 1,059,635 Total liabilities 201,727,225 203,882,818 SHAREHOLDERS' EQUITY Common stock - $5 par value; Authorized - 5,000,000 shares 5,817,097 5,809,841 Additional paid-in capital 3,930,073 3,887,823 Retained Earnings 11,954,144 11,848,640 Accumulated other comprehensive income/(loss) 335,909 (259,512) Total shareholders' equity 22,037,223 21,286,792 Total liabilities and shareholders' equity 223,764,448 225,169,610 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 Mar 31, 2001 Mar 31, 2000 INTEREST INCOME Loans receivable (incl fees) 3,232,993 2,839,343 Securities 728,202 810,663 Federal funds sold 65,753 16,915 Total interest income 4,026,948 3,666,921 INTEREST EXPENSE Deposits 2,055,166 1,777,905 Federal funds purchased 0 20,027 Securities Sold to Repurchase 33,572 9,450 Total interest expense 2,088,738 1,807,382 Net Interest Income 1,938,210 1,859,539 Provision for loan losses 100,000 70,000 Net interest income after provision 1,838,210 1,789,539 NONINTEREST INCOME Income from fiduciary activities 246,506 160,500 Service charges on deposit accounts 105,238 83,306 Other service charges and fees 147,642 73,892 Net securities gains 20,422 (950) Other income 40,057 22,998 Total noninterest income 559,865 339,746 NONINTEREST EXPENSES Salaries and employee benefits 984,772 799,669 Occupancy expense 239,809 169,841 Other expense 526,610 544,709 Total noninterest expenses 1,751,191 1,514,219 Net Income before income taxes 646,884 615,066 Income tax expense 187,260 172,500 Net Income after income taxes 459,624 442,566 Average shares outstanding 1,161,950 1,163,147 Earnings per share 0.40 0.38 The accompanying notes are an integral part of these financial statements. Bay Banks of Virginia, Inc. Consolidated Statements of Cash Flows (Unaudited)
Quarter ended: 3/31/2001 3/31/2000 CASH FLOWS FROM OPERATING ACTIVITIES Net Income 459,624 442,566 Adjustments to reconcile Net Income to Cash: Depreciation 115,789 135,508 Provision for Loan Losses 100,000 70,000 Net (Gain) / Loss on Sale of Securities 20,422 (950) (Increase) / Decrease in Accrued Interest Receivable 221,382 109,662 (Increase) / Decrease in Other Assets (116,583) (196,539) Increase / (Decrease) in Other Liabilities 153,919 5,742,886 Net Cash Provided / (Used) by Operating Activities 954,553 6,303,133 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of AFS Securities 0 (2,134,440) Proceeds from sales of AFS Securities 3,978,389 498,750 Proceeds from maturities of AFS Securities 1,616,318 332,828 (Increase) / Decrease in Loans outstanding (2,186,616) (6,830,452) (Increase) / Decrease in Fed Sunds Sold (3,218,000) (398,631) Purchases of Premises and Equipment (361,210) (50,475) (Increase) / Decrease in Other Real Estate Owned 74,800 54,186 Net Cash Provided / (Used) in Investing Activities (96,319) (8,528,234) CASH FLOWS FROM FINANCING ACTIVITIES Increase / (Decrease) in Demand, Savings, & NOW deposits (4,153) (1,143,770) Increase / (Decrease) in Time Deposits (2,744,478) 1,628,998 Proceeds from issuance of Common Stock 77,495 98,530 Repurchase of Common Stock (114,500) (58,511) Dividends paid (267,652) (244,005) Other 439,162 (181,957) Net Cash Provided / (Used) in Financing Activities (2,614,126) 99,285 Net Increase / (Decrease) in Cash & Due from Banks (1,755,892) (2,125,816) Cash & Due From Banks at Beginning of quarter 6,638,567 5,360,621 Cash & Due From Banks at End of quarter 4,882,675 3,234,806
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 12/31/98 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 1,612,620 1,612,620 Net changes in unrealized appreciation of available- for-sale securities, net of taxes of $602,425 1,169,412 1,169,412 ------------------------------------------------------------------------------------------- Total Comprehensive Income - - 1,612,620 1,169,412 2,782,032 Dividends paid ($0.86/share) (996,885) (996,885) Stock repurchases (84,515) (177,340) (339,687) (601,542) Sale of common stock: Dividends Reinvested 47,739 291,562 - - 339,301 Stock Options exercised 20,000 38,025 - 58,025 =========================================================================================== Balance on 12/31/00 5,809,841 3,887,823 11,848,640 (259,512) 21,286,792 Comprehensive Income: Net Income 459,624 459,624 Net changes in unrealized appreciation of available- for-sale securities, net of taxes of $306,732 595,421 595,421 ------------------------------------------------------------------------------------------- Total Comprehensive Income - - 459,624 595,421 1,055,045 Dividends paid ($0.23/share) (267,652) (267,652) Stock repurchases (16,250) (34,097) (64,153) (114,500) Sale of common stock: Dividends Reinvested 11,071 66,424 - - 77,495 Stock Options exercised 12,435 9,923 (22,315) - 43 =========================================================================================== Balance on 3/31/01 5,817,097 3,930,073 11,954,144 335,909 22,037,223
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 2000 Annual Report to Shareholders. Bay Banks of Virginia, Inc. Parent Only Balance Sheets (Unaudited)
Mar 31, 2001 Dec 31, 2000 ASSETS Cash and due from banks 687,755 194,573 Due from Subsidiaries 187,260 569,844 Federal funds sold - - Investments (incl unreal G/L) - - Loans - - Allowance for loan losses - - Premises and equipment 192,895 183,446 Other real estate owned - - Other assets 316,542 316,542 Investment In Subsidiary Bank of Lancaster 19,121,026 18,363,686 Investment in Subsidiary Bay Trust Company 1,953,987 1,904,755 Investment In Subsidiary Chesapeake Holdings 701 701 Organizational Expenses 21,258 23,457 Total assets 22,481,424 21,557,004 LIABILITIES Total deposits - - Fed Funds Purchased - - Other liabilities 503,124 317,254 Total liabilities 503,124 317,254 SHAREHOLDERS' EQUITY Common stock - $5 par value; Authorized - 5,000,000 shares Outstanding - 1,163,419 and 1,161,968 5,817,097 5,809,841 Additional paid-in capital 12,526,900 12,484,650 Retained Earnings 3,298,394 3,204,770 Accumulated other comprehensive income/(loss) 335,909 (259,512) Total shareholders' equity 21,978,300 21,239,749 Total liabilities and shareholders' equity 22,481,424 21,557,004
The accompanying notes are an integral part of these financial statements. Bay Banks of Virginia, Inc. Parent Only Statements of Earnings (Unaudited) Quarter ending: Mar 31, 2001 Mar 31, 2000 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 - - Dividend Income from Subsidiary 250,000 225,000 Undistributed Earnings of Bank of Lancaster 161,919 211,729 Undistributed Earnings of Bay Trust 49,232 (655) Undistributed Earnings of Chesapeake Hldgs - - Total noninterest income 461,151 436,074 NONINTEREST EXPENSES Salaries and employee benefits - - Occupancy expense - - Deposit insurance premium - - Other expense 13,407 5,388 Total noninterest expenses 13,407 5,388 Income before income taxes 447,744 430,685 Income tax expense - - NET INCOME 447,744 430,685 The accompanying notes are an integral part of these financial statements. Bay Banks of Virginia, Inc. Parent Only Statements of Cash Flows (Unaudited)
Quarter ending Mar 31, 2001 Mar 31, 2000 CASH FLOWS FROM OPERATING ACTIVITIES Net Income $ 447,744 $ 430,686 Adjustments to reconcile Net Income to Net Cash Provided by Operating Activities: Equity in undistributed (earnings) losses of subsidiaries ($211,151) ($211,074) (Increase) / Decrease in other assets $ 375,334 ($86,805) Increase / (Decrease) in other liabilities $ 185,869 $ 174,602 Other $ 0 $ 0 Net Cash Provided / (Used) by Operating Activities $ 797,796 $ 307,409 CASH FLOWS FROM INVESTING ACTIVITIES Payments for investments in and advances to subsidiaries $ 0 ($500,000) Sale or repayment of investments in and advances to subsidiaries $ 0 $ 0 Other $ 0 $ 0 Net Cash Provided (used) by Investing Activities $ 0 ($500,000) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from advances from subsidiaries $ 0 $ 0 Repayment of advances from subsidiaries $ 0 $ 0 Proceeds from issuance of common stock $ 99,853 $ 98,530 Payments to repurchase common stock ($136,815) ($58,511) Dividends paid ($267,652) ($244,005) Other $ 0 ($181,957) Net Cash Provided (used) by Financing Activities ($304,614) ($385,943) Net increase (decrease) in Cash & Cash Equivalents $ 493,182 ($578,534) Cash & Cash Equivalents at beginning of quarter $ 194,573 $2,113,231 Cash & Cash Equivalents at end of quarter $ 687,755 $1,534,697 ================================================================================================================
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION (Unaudited) 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 (Unaudited)
Three months ended (Thousands) 3/31/01 3/31/00 Change FINANCIAL CONDITION Average Assets 223,846 203,033 10.3% Average Interest-earning Assets 206,303 191,786 7.6% Average Earning Assets to Total Average Assets 92.2% 94.5% -2.4% Period-end Interest-bearing Liabilities 174,277 165,265 5.5% Average Interest-bearing Liabilities 175,138 161,302 8.6% Average Equity, including FAS 115 adjustment 21,671 19,734 9.8% Tier 1 Capital 18,495 19,399 0.3% Net Risk-weighted Assets 147,499 137,968 1.6% Tier 2 Capital 1,455 1,231 4.5% RESULTS OF OPERATIONS Net Interest Income before Provision 1,938 1,860 4.2% Net Income 460 442 3.9% Annualized Yield on Average Interest-earning Assets 7.93% 7.76% 2.2% Annualized Cost on Average Interest-bearing Liabilities 4.69% 4.48% 4.7% Annualized Net Yield on Average Interest-earning Assets 3.88% 3.99% -2.8% Annualized Net Interest Rate Spread 3.24% 3.27% -0.9% RATIOS Total Capital to Risk-weighted Assets (10% min) 13.5% 15.0% -1.0% Tier 1 Capital to Risk-weighted Assets (6% min) 12.5% 14.1% -1.2% Leverage Ratio (5% min) 8.4% 9.6% -9.0% Annualized Return on Average Assets 0.8% 0.9% -5.7% Annualized Return on Average Equity 8.5% 9.0% -5.3% Period-end shares outstanding 1,163,419 1,164,463 -0.1% Average shares outstanding 1,161,950 1,163,147 -0.1% PER SHARE DATA Basic Earnings per average share (EPS) (three months) 0.40 0.38 5.3% Cash Dividends per average share (three months) 0.23 0.21 9.5% Book Value per share before Accumulated Comprehensive Income/Loss 18.65 18.29 2.0% after Accumulated Comprehensive Income/Loss 18.94 16.97 11.6%
EARNINGS SUMMATION For the three months ended March 31, 2001, net income was $460 thousand as compared to $443 thousand for the comparable period in 2000, an increase of 3.9%. Earnings per average share for the first three months of 2001 were $.40 as compared to $.38 for the first three months of 2000. Return on average equity was 8.5% for the first three months of 2001 as compared to 9.0% for the first three months of 2000, a decrease of 5.3%. Return on average assets was 0.8% for the first three months of 2001 as compared to 0.9% for the first three months of 2000, a decrease of 5.7%. Net interest income before the provision for loan loss for the first three months of 2001 was $1,938 thousand as compared to $1,860 thousand for the first three months of 2000, an increase of 4.2%. Average interest-earning assets totaled $206.3 million for the first three months of 2001 as compared to $191.8 million for the first three months of 2000, an increase of 7.6%. Average interest-bearing liabilities totaled $175.1 million for the first three months of 2001 as compared to $161.3 million for the first three months of 2000, an increase of 8.6%. The annualized yield on average interest-earning assets for the first three months of 2001 was 7.9% as compared to 7.8% for the first three months of 2000. The annualized yield (cost) on interest-bearing liabilities for the first three months of 2001 was 4.7% as compared to 4.5% for the first three months of 2000, an increase of 4.7%. Average interest-earning assets as a percent of total average assets was 92.2% for the first three months of 2001 as compared to 94.5% for the comparable period of 2000, a decrease of 2.4%. Average total assets for the first three months of 2001 were $223.8 million as compared to $203.0 million for the first three months of 2000, growth of 10.3%. Bay Banks of Virginia, Inc. Net Interest Income Analysis (Unaudited)
----------------------------------------------------------------------------- (Fully taxable equivalent basis) Quarter Quarter ended ended 3/31/2001 3/31/2000 ----------------------------------------------------------------------------- (Thousands) Average Income/ Annualized Average Income/ Annualized Balance Expense Yield/Rate Balance Expense Yield/Rate ----------------------------------------------------------------------------- INTEREST EARNING ASSETS: ------------------------ Investments (Book Value): Taxable Investments 39,486 597 6.05% 42,821 669 6.25% Tax-Exempt Investments (1) 10,654 126 7.18% 12,815 157 7.43% --------------------------------------------------------------------------------------------------------------------------- Total Investments 50,140 723 6.29% 55,636 826 6.52% Gross Loans (2) 151,562 3,233 8.53% 134,772 2,796 8.30% Interest-bearing Deposits 202 2 3.22% 100 - 0.00% Fed Funds Sold 4,400 66 5.98% 1,278 17 5.32% =========================================================================================================================== TOTAL INTEREST EARNING ASSETS 206,304 4,024 7.93% 191,786 3,639 7.76% INTEREST-BEARING LIABILITIES: Deposits: Savings Deposits 58,764 663 4.51% 60,634 681 4.49% NOW Deposits 29,061 193 2.65% 25,550 182 2.85% CD's greater than or equal to $100,000 18,041 277 6.14% 14,341 213 5.94% CD's less than $100,000 56,499 821 5.81% 47,967 614 5.12% Money Market Deposit Accounts 12,773 102 3.19% 10,607 89 3.36% --------------------------------------------------------------------------------------------------------------------------- Total Deposits 175,138 2,056 4.69% 159,099 1,779 4.47% Fed Funds Purchased - - 0.00% 298 9 5.45% Securities Sold to Repurchase 2,907 34 4.62% 1,906 20 4.20% Other Short Term Borrowings - - 0.00% - - 0.00% =========================================================================================================================== TOTAL INTEREST-BEARING LIABILITIES 178,045 2,090 4.69% 161,303 1,808 4.48% Net Interest Income/Yield on Earning Assets 1,934 3.88% 1,831 3.99% Net Interest Rate Spread 3.24% 3.27%
Notes: (1)-Yield assumes a federal tax rate of 34% (2)-Includes Visa Program & nonaccrual loans. This table shows net interest yield declining to 3.88% from 3.99% for the first quarter of 2001 compared to the first quarter of 2000. However, when comparing the first quarter of 2001 with year-end 2000, the company is experiencing an increase in net interest yield. This is due mainly to the reduction in interest rates by the Federal Reserve Bank. Interest-earning assets are comprised mainly of the loan portfolio at $151.2 million and the investment portfolio at $47.9 million. For the three month period ended March 30, 2001, compared to year-end 2000, on a fully tax equivalent basis, tax-exempt investment yields declined to 7.18% from 7.30%, taxable investment yields declined to 6.05% from 6.13%, and total investment yields declined slightly to 6.29% from 6.40 at year-end 2000. In the first three months of 2001, gross loans on average volumes yielded 8.53% as compared to 8.56% for year-end 2000. Yields on average interest-bearing deposits comparing the first three months of 2001 to year-end 2000, were as follows. Savings yields were down to 4.51% compared to 4.81%, NOW accounts were down to 2.65% compared to 2.92%, money market demand accounts were down to 3.19% compared 3.56%, certificates of deposit greater than $100 thousand were down to 6.14% compared to 6.20%, and certificates of deposit less than $100 thousand were 5.81% as compared to 5.60% for year-end 2000. The resulting total yields on deposits in March 2001 was down to 4.69% compared to 4.88% at year-end 2000. INTEREST RATE SENSITIVITY Bay Banks of Virginia, Inc. Interest Rate Sensitivity Gap Analysis (Unaudited)
as of 3/31/2001 (Thousands) Within 3 3-12 1-5 Years Over 5 Total months Months Years INTEREST EARNING ASSETS: Interest-Bearing Due From Banks 144 - - - 144 Fed Funds Sold 7,975 - - - 7,975 Debt Securities (Market Value) 1,024 3,239 25,445 16,908 46,616 Loans 18,032 27,204 62,682 43,252 151,170 TOTAL EARNING ASSETS 27,175 30,443 88,127 60,160 205,905 INTEREST-BEARING LIABILITIES: NOW Accounts 6,798 - 22,759 - 29,557 MMDA's & Savings 26,486 - 45,099 - 71,585 CD's less than $100,000 14,217 33,215 8,960 - 56,392 CD's greater than or equal to $100,000 4,274 9,727 2,742 - 16,743 Total Interest-bearing Deposits 51,775 42,942 79,560 - 174,277 Fed Funds Purchased - - - - - Securities Sold to Repurchase 3,244 - - - 3,244 Other Short Term Borrowings - - - - - TOTAL INTEREST-BEARING LIABILITIES 55,019 42,942 79,560 - 177,521 Rate Sensitive Gap (27,844) (12,499) 8,567 60,160 28,384 Cumulative Gap (27,844) (40,343) (31,776) 28,384
Note: Visa Receivables are classified as 'Within 3 Month' Loans. Rising interest rate trends throughout 2000 resulted in a narrowing spread in net interest margins within the Bank during the prior year and into the first quarter of 2001. As of March 31, 2001, the Bank had interest-earning assets that mature within 3 months totaling $27.2 million, in 3-12 months totaling $30.4 million, in 1-5 years totaling $88.2 million, and over 5 years totaling $60.2 million. In comparison, interest-bearing liabilities maturing within 3 months totaled $55.0 million, in 3-12 months totaled $42.9 million, in 1-5 years totaled $79.6 million, and over 5 years totaled $0. The resulting short-term liability sensitivity resulted in deposit rates changing more rapidly than loan rates throughout 2000 and into the first quarter 2001. Rate reductions in the first quarter of 2001 will positively impact net interest spreads as prime-sensitive savings and short-term certificates of deposit reprice downward. Management is continually reviewing loan and deposit products to modify or develop offerings that are less subject to interest rate risk. In the short term, the Bank will continue to be somewhat liability-sensitive. Subsequently, in the current falling rate environment, deposit rates are decreasing faster than loan rates which will continue to positively impact the net interest margin. LIQUIDITY The company 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 March 31, 2001, federal funds sold totaled $8.0 million and securities maturing in one year or less totaled $1.0 million, for a total pool of $9.0 million. The liquidity ratio as of March 31, 2001 was 27.88% as compared to 28.96% as of December 31, 2000. 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. CAPITAL RESOURCES From December 31, 2000, to March 31, 2001, total shareholder's equity has grown by 3.5%. It is impacted by unrealized gains on securities in the amount of $335,909, as of March 31, 2001. There were unrealized losses on December 31, 2000 of $259,912. 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 gains or losses was $21.7 million on March 31, 2001, and $21.5 million on December 31, 2000. This represents an increase of $155 thousand or .72% during the three- month period. Book value per average share for the first three months of 2001, compared to the same period in 2000, grew to $18.94 from $16.97, an increase of 11.6%. Book value per average share before accumulated comprehensive income for the first three months of 2001 compared to the same period in 2000 grew to $18.65 from $18.29, an increase of 2.0%. Cash dividends paid for the three months ended March 31, 2001, were $268 thousand, or $0.23 per average share, compared to $244 thousand, or $0.21 per average share, for the comparable period ended March 31, 2000, an increase of 9.5%. Total shares outstanding on March 31, 2001, were 1,163,419, compared to 1,164,463 on March 31, 2000. Average shares outstanding for the three months ended March 31, 2001 were 1,161,950, compared to 1,163,147, for the comparable period ended March 31, 2000. The Company began a share repurchase program in August of 2000 and has continued the program into 2001. The company has implemented a share repurchase plan not to exceed 40,000 shares. The Company is subject to minimum regulatory capital ratios as defined by FFIEC guidelines. As of March 31, 2001 the Company maintained Tier 1 capital of $18.5 million, net risk weighted assets of $147.5 million, and Tier 2 capital of $1.5 million. The Tier 1 capital to risk weighted assets ratio was 12.5%, the total capital ratio was 13.5%, and the tier 1 leverage ratio was 8.4%. These ratios continue to be well in excess of regulatory minimums. Please refer to the Financial Highlights Table. FINANCIAL CONDITION Total assets on March 31, 2001 compared to December 31, 2000, have decreased 0.6% during the first three months of 2001. Cash and cash equivalents totaled $4.9 million on March 31, 2001 compared to $6.6 million at year-end 2000. During the three months ended March 31, 2001, total loans increased by 1.4%. During the same three-month period, real estate mortgage loans increased 1.8% to $119.0 million, commercial loans increased 5.6% to $11.9 million, and installment loans decreased .9% to $11.6 million. Real estate lending continues to be the main area of growth in the loan portfolio, although commercial lending has begun to improve. Current local market conditions are favorable for a continued trend through 2001. For the three months ended March 31, 2001, the Company charged off loans totaling $16.0 thousand. For the comparable period in 2000, total loans charged off were $38.1 thousand. The Company maintained $779 thousand of other real estate owned, or "OREO," as of March 31, 2001. As of year-end 2000, the balance was $805 thousand. The Company actively markets all OREO properties, and 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 $100,000 through the first three months, and the allowance for loan losses as of March 31, 2001, was $1,455,010. The allowance for loan losses, as a percentage of average total loans through the first three months of 2001 was .96%. As of March 31, 2001, there were $19.8 thousand of loans on non-accrual status. There were no loans on non-accrual status as of March 31, 2000. Loans still accruing interest but delinquent for 90 days or more were $611.2 thousand on March 31, 2001, as compared to $485.0 thousand on March 31, 2000. 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 March 31, 2001, management deemed the loan loss reserve reasonable for the loss risk identified in the loan portfolio. As of March 31, 2001, investment securities totaled $47.9 million at book value. This compares with December 2000 book value of $52.6 million. This represents a decrease of 8.9% during the three months ended March 31, 2001. The investment portfolio represents 21.4% of total assets and 23.1% of earning assets. 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 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. The Company's investment portfolio is classified as available-for-sale, and therefore management has elected to mark the entire investment portfolio to market. The resulting accumulated adjustment to book value as of March 31, 2001 was an unrealized gain of $595 thousand. The corresponding accumulated adjustment to shareholders' equity was $336 thousand. These gains or 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 net losses on investments during 2001. As of March 31, 2001 total deposits were $197.3 million. Compared to $200.0 at year-end 2000, balances have declined 1.4%. Comparing types of deposit balances on March 31, 2001 to year-end 2000 results in the following, non-interest-bearing demand deposits increased by 2.8% to $23.0 million, savings and NOW accounts increased by 0.6% to $101.1 million, and other time deposits decreased by 3.6% to $73.1 million. RESULTS OF OPERATIONS NON INTEREST INCOME Non-interest income for the first three months of 2001 totaled $559,865 compared to $339,746 for the same period in 2000. This is an increase of 64.8%. Non-interest income includes income from fiduciary activities, service charges on deposit accounts, other service charges and fees, gains on the sale of securities, and other income. Of these categories, fiduciary activities contributed the majority at $246,506. Service charges on deposit accounts contributed $105,238. Other service charges and fees contributed $187,699. For the first three months of 2000, these totals were $160,500, $83,306, and $96,890, respectively. As of January 1, 2000, the trust and fiduciary activities of the Company 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 non-deposit gathering 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 $1.8 million during the first three months of 2001 as compared to $1.5 million for the same period in 2000, an increase of 15.6%. 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 three months ended March 31, 2001, salary and benefit expense was $984.8 thousand, occupancy expense was $239.8 thousand, and other operating expense was $526.6 thousand. For 2000, the totals were $799.7 thousand, $169.8 thousand, and $544.7 thousand, respectively. Much of this increase is due to the Bank's acquisition of two new branches in the fourth quarter of 2000. Bank of Lancaster began the renovation of its existing operations center at 23 West Church Street in Kilmarnock in August of 2000. The renovation will result in the addition of approximately 4000 square feet of office space for operations and administration. This renovation will be complete in the second quarter of 2001, and will result in additional occupancy expense. 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. Rate Shock Analysis of Interest Income and Expense as of March 31, 2001 (Unauditied) (in thousands)
Rate Change -300 bp -200 bp -100 bp 0 bp +100 bp +200 bp +300 bp Interest Income: Fed Funds Sold 349 392 435 478 522 565 608 Loans 12,179 12,450 12,719 12,951 13,165 13,375 13,587 Securities 2,877 2,899 2,921 2,941 2,960 2,961 2,970 Total Interest Income 15,405 15,741 16,075 16,370 16,647 16,901 17,165 Interest Expense: Deposits 6,987 7,377 7,766 8,156 8,540 8,924 9,303 Fed Funds & Borrowing 95 112 130 147 165 182 200 Total Interest Expense 7,082 7,489 7,896 8,303 8,705 9,106 9,508 Net Interest Income 8,323 8,252 8,179 8,067 7,942 7,795 7,657 Difference from 0 bp 256 185 112 - (125) (272) (410)
Rate shock is a method for stress testing the Bank's Net Interest Margin over the next four quarters under several rate change levels. These levels span three 100 bp (basis point, or 1.00%) increments up and down from the current prime rate of interest. In order to simulate activity, maturing balances are replaced with new balances at the new rate level and repricing balances are adjusted to the new rate shock level. The interest is recalculated for each level along with the new average yield. Net Interest Margin is then calculated and a margin risk profile is developed. The results of these calculations are summarized in the table above. As shown, the company estimates that a 100 bp reduction in the current prime rate would result in $112 thousand of incremental net interest income to the Bank over twelve months. Similarly, an increase in the current prime rate by 100 bp results in an estimated $125 thousand of incremental loss. 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 (99) Additional Exhibits N/A (b) Reports on Form 8-K: None to report 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) 5/14/2001 /s/ Austin L. Roberts, III -------------------------- President and Chief Executive Officer 5/14/2001 /s/ Richard C. Abbott --------------------- Treasurer