-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BhgGDHaH8br2OYQqgPkJkd48HgGRzNszgTC9e7SK7adt2W2+/ziNkm2GqmdsC762 eTbNcnprDm7QEOcqtlaJ7w== 0000916641-98-000384.txt : 19980401 0000916641-98-000384.hdr.sgml : 19980401 ACCESSION NUMBER: 0000916641-98-000384 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAY BANKS OF VIRGINIA INC CENTRAL INDEX KEY: 0001034594 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541838100 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-22955 FILM NUMBER: 98581906 BUSINESS ADDRESS: STREET 1: P O BOX 1869 CITY: KILMARNICK STATE: VA ZIP: 22482 BUSINESS PHONE: 8044351171 MAIL ADDRESS: STREET 1: P O BOX 1869 CITY: KILMARNOCK STATE: VA ZIP: 22482 10KSB 1 BAY BANKS OF VIRGINIA 10-KSB UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] BAY BANKS OF VIRGINIA, INC. (Name of small business issuer in its charter) VIRGINIA 54-1838100 (State of Incorporation) (I.R.S. Employer Identification no.) 100 SOUTH MAIN STREET, KILMARNOCK, VIRGINIA 22482 (Address of principal executive offices) (Zip Code) Issuers telephone number............................................804.435.1171 Securities registered under Section 12(b) of the Exchange Act...............NONE Securities registered under Section 12(g) of the Exchange Act: Common Stock ($5.00 Par Value) (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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.......Yes_X_NO___. Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form-10KSB. [ X ] State issuers revenues for its most recent fiscal year...............$13,410,466 Number of shares outstanding as of February 28, 1998...................1,150,826 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1997 Annual Report to Shareholders are incorporated by reference into Part II of this Form 10-KSB. Portions of the registrants definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 18, 1998 are incorporated by reference into Part III of this Form 10-KSB. Bank of Lancaster Form 10-KSB TABLE OF CONTENTS PART I ITEM NUMBER PAGE NUMBER - ----------- ----------- 1. DESCRIPTION OF BUSINESS 3 2. DESCRIPTION OF PROPERTIES 4 3. LEGAL PROCEEDINGS 4 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5 PART II 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 5 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6 7. FINANCIAL STATEMENTS AND RELATED DATA 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON FINANCIAL DISCLOSURE 6 PART III 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 6 10. EXECUTIVE COMPENSATION 6 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 7 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 7 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K 7 SUPPLEMENTAL DATA SIGNATURES OF OFFICERS AND DIRECTORS 9 CONSENT OF AUDITORS 10 PART 1 ITEM 1: DESCRIPTION OF BUSINESS Nature of Business. Bay Banks of Virginia, Inc. (the "Company") is a one-bank holding company that conducts substantially all of its operations through its subsidiary, Bank of Lancaster, (the "Bank"). Bay Banks of Virginia, Inc. was incorporated under the laws of the Commonwealth of Virginia on February 10, 1997, in connection with the reorganization of the Bank of Lancaster. The Bank is a state-chartered bank and a member of the Federal Reserve System. The Bank services individual and commercial customers, the majority of which are in the Northern Neck of Virginia. The Bank has two offices located in Kilmarnock and one office in White Stone, Virginia. A substantial amount of the Bank's deposits are interest bearing, and the majority of the Bank's loan portfolio is secured by real estate. Deposits of the Bank are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation. The Bank offers a full range of banking and related financial services, including checking, savings, and other depository services, commercial and industrial loans, residential and commercial mortgages, home equity loans, and consumer installment loans. The Bank's Trust Department also offers a broad range of trust and related fiduciary services. As of December 31, 1997, the Company and its subsidiaries had 60 full-time equivalent employees. Competition. The Bank's trade area includes Lancaster County and parts of Northumberland and Middlesex County. The Bank is subject to competition from a variety of commercial banks and financial service companies. For deposits, the Bank competes with statewide banking institutions, local community banks, major investment brokerage houses and issuers of money markets and mutual fund products. For loans, the Bank competes with other commercial banks, savings and loans, credit unions, and consumer finance companies. As the marketplace continues to develop, the Bank expects competition to increase. The counties composing the Bank's marketplace are situated on the Chesapeake Bay and its tributaries, and as such, many people find it a highly desirable vacation spot. Second and summer homes are also prevalent. The senior citizen market is substantial, as many are relocating to the area to reside near the Chesapeake Bay. Resorts and health care providers are the largest employers in the community, with agriculture, fishing, boat repair, general retail, financial, construction, and services directed toward the retirement community being other major economic sectors. The Bank had $168,725,484 in total assets and $149,604,806 in total deposits as of December 31, 1997. Net earnings for the year ended December 31, 1997, were $1,959,832. Bay Services Company, Inc. The Bank has one wholly owned subsidiary, Bay Service Company, Inc., a Virginia corporation organized in 1994. Bay Services owns an equity interest in a land title insurance agency. Clients may include customers of the Bank and the other financial institutions that have an equity interest in the agency. Supervision and Regulation. Bank holding companies and banks are regulated under both federal and state law. The Company is subject to regulation by the Board of Governors of the Federal Reserve. Under the Bank Holding Company Act of 1956, the Federal Reserve exercises supervisory responsibility for any non-bank acquisition, merger or consolidation. In addition, the Bank Holding Company Act limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is closely related to banking. In addition, the Company is registered under the Bank Holding Laws of Virginia, and as such is subject to regulation and supervision by the State Corporation Commission Bureau of Financial Institutions, (the SCC). The Bank is supervised and subject to regular examination by the Federal Reserve Board, the State Corporation Commission, and the Federal Deposit Insurance Corporation. These on site examinations verify compliance with regulations governing corporate practices, capitalization, and safety and soundness. Further, the Bank is subject to the requirements of the Community Reinvestment Act, (the "CRA"). CRA requires financial institutions to meet the credit needs of the local community, including low to moderate income needs. Compliance with the CRA is monitored through regular examination by the Federal Reserve. ITEM 2: DESCRIPTION OF PROPERTY The Company owns no property, however its subsidiary, the Bank of Lancaster as of December 31, 1997 owned the following properties: Main Office Northside Branch WhiteStone Branch The Bank of Lancaster Lancaster Square Center Route 3 100 South Main Street Kilmarnock, Virginia White Stone, Virginia Kilmarnock, Virginia The Bank leases space for its' Operations Center on 23 West Church Street in Kilmarnock. The lease is an annual lease with four renewal options. The current rate is $11,400 annually with $600 annual increases. The Bank is in the fifth renewal period. Through the normal course of business, the Bank maintains an inventory of foreclosed properties known as Other Real Estate Owned, or OREO. This inventory is held at fair value, therefore, the Bank expects no losses on these properties. Balances in OREO as of December 31, 1997, were $1,378,795. Further information regarding property of the Bank is incorporated herein by reference from page 21, Note 5 of the Company's 1997 Annual Report to Shareholders. ITEM 3: LEGAL PROCEEDINGS The Company is not a party to any material pending legal proceedings before any court, administrative agency, or other tribunal. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Matters submitted to a vote of security holders include the adoption of an Agreement providing for the establishment of a holding company structure for the Bank. This matter was presented to the shareholders of the Bank at its annual meeting held April 28, 1997. The matter was approved by the shareholders and the holding company assumed control of the Bank as of July 1, 1997. PART II ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS No established public trading market currently exists for the Company's common stock. No brokerage firm regularly makes a market for the stock, and trades in the Company's stock occur infrequently on a local basis. Accordingly, the quotations set forth below do not necessarily reflect the price that would be paid in an active and liquid market. The Company, from time-to-time, on an informal basis, attempts to match or pair persons who desire to buy and sell the Company's stock. As of December 31, 1997, there were 654 stockholders of record. Management understands that several transfers have occurred since year-end in which the price per share was $27. To the best knowledge of management, the most recent trade in Company stock was on March 2, 1998, in the amount of 800 shares at a sales price of $27 per share. Further market information is as follows: COMMON EQUITY MARKET DATA Bank of Lancaster up to June 30, 1997 and Bay Banks of Virginia as of July 1, 1997 There was no change in number of shares outstanding as of the date of conversion. SALES PRICE SALES PRICE 1997 HI LOW DIVIDEND 1996 HI LOW DIVIDEND QTR 1 $23.50 $22.00 0.155 QTR 1 $17.00 $ 17.00 0.140 QTR 2 $23.75 $23.75 0.155 QTR 2 $20.00 $ 19.00 0.140 QTR 3 $26.50 $23.75 0.155 QTR 3 $21.00 $ 21.00 0.140 QTR 4 $26.50 $26.50 0.170 QTR 4 $22.00 $ 21.50 0.155 Bay Banks of Virginia, Inc. a one-bank holding company owns 100% of the stock of the Bank of Lancaster. The Bank is prohibited by The Federal Reserve from holding or purchasing its own shares except in limited circumstances. The Bank is subject to certain requirements as imposed by state banking statutes and regulations. The Bank is limited by the Board of Governors of the Federal Reserve System in what dividends it can pay to the Company. Any dividend in excess of the total of the Bank's net profit for that year plus retained earnings from the prior two years must be approved by the proper regulatory agencies. Further, under the Federal Deposit Insurance Corporation Improvement Act of 1991, insured depository institutions are prohibited from making capital distributions, if after making such distributions, the institution would become "undercapitalized" as defined by regulation. Based upon the Bank's current financial position, it is not anticipated that this statute will impact the continued operation of the Bank. Please see Notes 10 and 17 of the 1997 Annual Report Notes to Financial Statements, incorporated herein by reference. As of December 31, 1997, there were 62,550 unexercised Incentive Stock Option Grants issued with various maturities throughout the next 10 years. All options granted were at fair market value as of the date of grant. ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference to pages 9 through 13 of the 1997 Annual Report to Shareholders. ITEM 7: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements of the Company begin on page 14 of the 1997 Annual Report to Shareholders and are incorporated herein by reference. ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements between the Company and its independent auditors. PART III ITEM 9: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Non-Director Executive Officer of the Company is listed below. The Directors are listed in the Proxy Statement and are incorporated herein by reference to pages 2 through 4. There were no late filings of the Form 4. NON-DIRECTOR EXECUTIVE OFFICERS Executive Age Position Years - ----------- --- --------- ----- Paul T. Sciacchitano 47 Treasurer as of July 1, 1997 ITEM 10: EXECUTIVE COMPENSATION Executive compensation is listed in the Proxy Statement and is incorporated herein by reference to pages 6 and 7. ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership of certain beneficial owners and management is detailed in the Proxy Statement, and is incorporated herein by reference to pages 5 and 6. ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain relationships and related transactions are detailed in the Proxy Statement and are incorporated herein by reference to pages 5 and 6. ITEM 13: EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. Exhibit Index ( 2) Plan of reorganization. Incorporated by reference to the previously filed Form S-4EF Registration Statement; SEC file number 333-22579 dated February 28, 1997. Also to incorporate by reference the previously filed Form 424B3, SEC file number 333-22579 dated March 23, 1997. ( 3) (i)(ii)Articles of Incorporation and Bylaws. Incorporated by reference to Appendix I to Exhibit A of previously filed Form 424B3, SEC file number 333-22579 dated March 23, 1997. ( 4) (i)Rights of Holders. Incorporated by reference to the previously filed Form 424B3, SEC file number 333-22579 dated March 23, 1997; Page 5 of the Summary of Proxy, Comparison in the Rights of Shareholders. Pages 14-15 of the Certain Effects of the Reorganization, Comparison in the Rights of Shareholders. With regard to Dissenters Rights, Exhibit B, Article 15 Dissenters Rights, pages B1-B6. ( 9) not applicable (10) (ii)(A)Material Contracts. Incorporated by reference to the previously filed Form S-4EF, Item 6, Material Contracts, SEC file number 333-22579 dated February 28, 1997. (11) not applicable (13) Annual Report to Shareholders is filed herewith. (16) not applicable (18) not applicable (21) Subsidiaries of the registrant are filed herewith. (22) None (23) Attached (24) not applicable (27) not required (28) not applicable (99) not applicable (b) Reports on Form 8-K. Incorporated herein by reference, there was one 8-K filing during the forth quarter of 1997. Form 8-K, SEC file number 000-22995 was filed on November 18, 1997. SIGNATURES Pursuant to the requirements of Section 13 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 on the 27th day of March 1998. BAY BANKS OF VIRGINIA, INC. /s/ Austin L. Roberts, III -------------------------- Austin L. Roberts, III, President and Chief Executive Officer Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in their capacities on the 27th day of March 1998. SIGNATURES OF DIRECTORS /s/ Ammon G. Dunton, Jr. ------------------------ Ammon G. Dunton, Jr. Chairman, Board of Directors /s/ Austin L. Roberts, III -------------------------- Austin L. Roberts, III, President and Chief Executive Officer /s/ Weston F. Conley, Jr. ------------------------- Weston F. Conley, Jr Director /s/ William A. Creager ---------------------- William A. Creager Director /s/ Thomas A. Gosse -------------------- Thomas A. Gosse Director /s/ W. Bruce Sanders ---------------------- W. Bruce Sanders Director EX-13 2 EXHIBIT 13 FINANCIAL HIGHLIGHTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
PERCENT AT YEAR END 1997 1996 CHANGE Assets $168,725 $159,333 5.9% Loans (Net) 104,203 100,711 3.5% Deposits 149,605 142,110 5.3% Stockholders Equity 18,692 16,785 11.4% Book Value Per Share $ 16.24 $ 14.81 9.7% AVERAGES FOR THE YEAR Assets $161,831 $156,834 3.2% Loans (Net) 102,662 94,681 8.4% Deposits 144,257 140,755 2.5% Stockholders Equity 16,844 15,771 6.8% FOR THE YEAR Interest Income $ 12,166 $ 11,628 4.6% Interest Expense 6,225 6,105 2.0% Net Interest Income 5,942 5,523 7.6% Income from Operations 1,957 1,778 10.1% Net Income 1,960 1,832 7.0% Per Share $ 1.71 $ 1.64 4.3% Cash Dividends 724 642 12.8% Per Share $ 0.63 $ 0.58 8.6% SIGNIFICANT RATIOS Return on Assets 1.2% 1.2% Return on Equity 10.5% 11.6% Loan Loss Reserve to Net Loans 0.8% 1.1%
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist readers in understanding and evaluating the financial condition and results of operation of Bay Banks of Virginia, Inc., (the "Company"). This discussion should be read in conjunction with the financial statements and other financial information contained elsewhere in this annual report. Bay Banks of Virginia, Inc. is a one-bank holding company, organized under the laws of Virginia on February 10, 1997. As of July 1, 1997, Bay Banks of Virginia, Inc. assumed ownership of 100% of the stock of the Bank of Lancaster. Prior to this date the Company operated as the Bank of Lancaster. 1997 COMPARED TO 1996 Bay Banks of Virginia, Inc. recorded earnings for 1997 of $1,959,832 or $1.71 per share as compared to 1996 earnings of $1,831,616 and $1.64 per share. This increase in net income of 7.0% was a result of improved net interest income after provision for loan loss and improved non-interest income. Net interest income after provision for loan loss for 1997 increased to $5,739,136, up 10.0% as compared to $5,218,200 for 1996. Non-interest income for 1997 increased to $1,243,986, up 9.0% as compared to 1996 non-interest income. Other non-interest expenses increased to $4,375,265, up 9.8% over 1996 expenses of $3,985,040. 1996 COMPARED TO 1995 Earnings for the Bank of Lancaster were $1,831,616 for 1996, up 20.2% over 1995 earnings of $1,523,831. 1996 earnings per share were $1.64 as compared to 1995 earnings per share of $1.39. Net interest income after provision for loan losses was $5,218,200 for 1996 as compared to $4,676,167 for 1995. This represents an increase of 11.6% over net interest income after provision for loan losses for 1995. Non-interest income for 1996 was $1,140,515, up 22.0% over 1995 non-interest income of $935,046. Non-interest expenses for 1996 were $3,985,040, up 6.9% as compared to 1995 expenses of $3,726,532. NET INTEREST INCOME The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid on deposits and other sources of funding. It is affected by variations in interest rates, the volume and mix of earning assets and interest-bearing liabilities, and the levels of non-performing assets. Net interest income was $5.9 million in 1997, $5.5 million in 1996 and $4.7 million in 1995. This represents an increase in net interest income of 7.6% for 1997 over 1996 and 16.7% for 1996 over 1995. Competitive pressures on loan rates have contributed to reduced growth in the net interest margin. While loan volume remained stable, quoted rates have trended downward which resulted in a slower growth rate in the Company's net interest margin. New products and services are being introduced regularly as consumer tastes and preferences change. Net interest yield on a fully tax equivalent basis was 5.7%, 5.4% and 4.7% for 1997, 1996 and 1995 respectively. NON-INTEREST INCOME Non-interest income increased to $1.2 million for 1997 from $1.1 million in 1996 and $935 thousand in 1995. This represents an increase of 9.1% for 1997 over 1996 and 22.0% for 1996 over 1995. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED Non-interest income is composed of income from fiduciary activities (trust department), service charges on deposit accounts, other service charges and fees, gains on securities, and other miscellaneous income. Trust performance improved by $131 thousand during 1997 for an increase of 32.1% over 1996. Trust income increased by 15.8% or $55 thousand between 1996 and 1995. Service charges on deposits increased marginally by $1 thousand, while other service charges improved by $25 thousand during 1997. Other miscellaneous income includes lease income, gains on the sale of foreclosed property, gains on the sale of fixed assets and other miscellaneous income. Other income decreased marginally between 1997 and 1996 from $159 thousand to $157 thousand. Other income for 1995 was $50 thousand. While securities trading is not part of the core operating business of the Company and is therefore not budgeted, the Company may sell a portion of it's investment portfolio as a means to fund loan growth. Sales of securities during 1997 resulted in net gains of $3 thousand. NON-INTEREST EXPENSE During 1997, non-interest expense increased to $4.4 million from $4.0 million in 1996 and $3.7 million in 1995. This represents an increase of 9.8% for 1997 over 1996 and 6.9% for 1996 over 1995. Non-interest expense is composed of salaries and benefits, occupancy expense, FDIC assessments and other expense. Salary and benefit expense is the major component of non-interest expense, and has increased 6.4% and 10.6% for 1997 and 1996 respectively. Occupancy expense decreased 2% during 1997 over 1996 as a direct result of the full depreciation of most fixed assets at the White Stone Branch. For the comparable period, 1996 over 1995, occupancy increased 7.4%. Other miscellaneous expenses increased 20.7% during 1997 over 1996 and 13.7% during 1996 over 1995. ASSETS As of December 31, 1997, the Company had total assets of $168.7 million as compared to 1996 balances of $159.3 million. Total assets increased by 5.9% for 1997 over 1996. Continued deposit growth, investments in securities, and moderate loan growth contributed to asset growth during 1997. LOANS Loan demand was moderate as balances increased by $3.5 million or 3.5% during 1997. Year-end 1997 loan balances were $104.2 million as compared to $100.7 million at year-end 1996. The loan portfolio is composed of mainly residential first mortgages. Real estate mortgage loans in aggregate increased to $78.9 million during 1997, from a total of $75 million for 1996. Commercial loan balances declined marginally while consumer installment loans increased to $16.2 million for 1997 as compared to $15.8 million for 1996. Of total loans, residential mortgages compose 75.6%, commercial loans 9.3%, and consumer installment 15.1%. PROVISION/ALLOWANCE FOR LOAN LOSSES The provision for loan losses is a charge against earnings necessary to maintain the allowance for loan losses at a level consistent with management's evaluation of the loan portfolio. The 1997 provision was $203 thousand as compared to $305 thousand for 1996 and $58 thousand for 1995. Loans charged off during 1997 totaled $368 thousand and $233 thousand for 1996. Recoveries were $6 thousand and $23 thousand for 1997 and 1996 respectively. Net loans charged off for 1995 were $106 thousand. Net 10 loans charged off to year-end total loans was .4% for 1997 and .2% and .1% for 1996 and 1995 respectively. The allowance for credit losses, as a percentage of year-end loans, was .8% for 1997 and 1.0% in both 1996 and 1995 respectively. As of December 31, 1997, non-accruing loans were $126 thousand as compared to $17 thousand and $77 thousand for 1996 and1995 respectively. Other Real Estate, including foreclosed property, at year-end 1997 was $1.4 million as compared to $629 thousand for 1996. The Company maintains items in other real estate at fair value and therefore expects no losses on any of the properties. Loans still accruing interest but delinquent ninety days or more were $593 thousand or .6% of total loans at December 31, 1997. These balances were $607 thousand and .6% for the comparable period in 1996. The allowance for loan losses is analyzed for adequacy on a quarterly basis to determine the required amount of provision. A loan-by-loan review is conducted on all classified loans. Inherent losses on these individual loans are determined and these losses are compared to historical loss data for that loan type. Management then reviews the various analyses and determines the appropriate allowance. As of December 31,1997, management considers the allowance for credit losses to be a reasonable estimate of potential loss exposure inherent in the loan portfolio. DEPOSITS As of December 31, 1997, the Company maintained total deposits of $149.6 million. This compares to $142.1 and $140.3 million for 1996 and 1995 respectively. Total deposit growth was 5.3% and 1.2% for 1997 over 1996 and 1996 over 1995 respectively. Savings and NOW account balances declined by $7.6 million while other time deposits grew by $15.1 million. Early in 1997, the Company offered time deposit products with incentive rates in an effort to attract new deposits into the Bank. At approximately the same time, Signet Bank, a regional financial institution, announced the sale of its branches in our market area. The increase in time deposits was a combination of approximately $10 million in new deposits from customers of other banks and approximately $3 million which transferred from savings to certificates of deposit within the Bank. SECURITIES As of December 31, 1997, total investment securities were $44.1 million. Year-end balances for 1996 were $45.2 million. The Company reduced investment balances during 1997 to fund loan growth and to provide adequate operating liquidity. All of the Company's securities are classified as available for sale. Available for sale securities are eligible for sale for general liquidity needs, should loan demand require funding, or if prepayment risk requires action. Available for sale securities are carried at fair market value. LIQUIDITY, INTEREST RATE SENSITIVITY AND INFLATION Sources of liquidity include core deposits, the investment portfolio and balances held as Federal Funds sold. Cash flows are managed to ensure availability of liquidity to fund loan growth or unanticipated declines in deposit balances. As of December 31, 1997, approximately 14.6% of the investment portfolio matures or reprices within one year or less. This compares to a 10.1% maturity and repricing ratio for 1996. The loan portfolio of the Company also provides a source of liquidity. As of December 31, 1997, 18.0% of all fixed and variable rate loans mature or reprice within one year or less. This compares to 38.6% in 1996. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTINUED At year-end 1997, the Company had approximately $6.4 million in securities with maturities of one year or less and Federal Funds sold balances of $11.6 million. Additional liquidity sources include overnight lines of credit with corresponding banks equaling $12 million. The Company employs a variety of measurement techniques to identify and manage its exposure to changing interest rates and subsequent changes in liquidity. The Company employs an advanced simulation model that estimates interest income volatility and interest rate risk, and regularly investigates potential external influences. The Company, in addition, utilizes an Asset Liability Committee composed of appointed members of management and Board of Directors. The end result is managerial attention to interest income volatility that may result from changes in the level of interest rates, basic interest rate spreads, the shape of the yield curve and changing product patterns. The financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative purchasing power of money, over time, due to inflation. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same magnitude as the prices of goods and services. Another impact of inflation is on non-interest expenses, which tend to rise during periods of general inflation. The values of real estate held as collateral by the Company for loans and foreclosed property could be affected by inflation or changing prices due to market conditions. Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates. As discussed previously, management attempts to maintain a favorable position between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations. CAPITAL RESOURCES Equity growth in the Company is supported by three methods; retained earnings, dividend reinvestment and the exercise of stock options granted to officers. The primary method of supporting growth is achieved through retained earnings. During 1997, the Company paid dividends to stockholders totaling 36.9% of net income. This pay out ratio was 35% in 1996 and 38.1% in 1995. Based upon this ratio, earnings retained by the Company fall in the range of 63.1% to 61.9% for the three-year period. In addition, the Company employs a dividend reinvestment plan in which each stockholder has the option of participation. The plan provides the Company's stockholders an opportunity to use dividends received to purchase authorized but unissued shares at 95% of the current market price and with no commission. Total capital, or shareholders' equity, as of December 31, 1997 was $18.7 million. This is an increase of 11.4% over the 1996 capital position of $16.8 million. The Company accounts for unrealized gains or losses in the investment portfolio by adjusting capital for any after tax effect of that gain or loss at the end of a given accounting period. Unrealized gains were $271 thousand at December 31, 1997. This compares to an unrealized loss of $48 thousand at year-end 1996. 12 The Company is required to maintain minimum amounts of capital to total "risk weighted" assets as defined by Federal Reserve Capital Guidelines. According to "Capital Guidelines for Bank Holding Companies," the Company is required to maintain a minimum Total Capital to Risk Weighted Asset ratio of 10.0%, a Tier 1 Capital to Risk Weighted Asset ratio of 6% and a Tier 1 Capital to Adjusted Average Asset ratio of 5%. As of December 31, 1997, the Company maintained these ratios at 17.1%, 10.6%, and 10.2% respectively. The Company's Leverage Ratio for this period was 10.2%. As of May 1996, the Company declared a 2 for 1 stock split. All per share data for prior years will reflect the effects of the split. Year-end book value per share of common stock was $16.24 at December 31, 1997, $14.81 in 1996, and $13.96 in 1995. Cash dividends paid during 1997 were $724 thousand or $.63 per share, and for 1996 and 1995 cash dividends were $642 thousand and $581 thousand respectively. Total shares outstanding at December 31, 1997 and 1996 were 1,150,826 and 1,133,218 respectively. YEAR 2000 ISSUES The Year 2000 issue is a significant business issue that relates to the fact that many computer programs use a two-digit code to recognize and store the years' date. These programs were written to assume that the century is 1900; subsequently, some programs will not recognize the date change that occurs with the new millenium. The Company recognizes Year 2000 planning and compliance as a major business and operations issue. The Board of Directors are informed on an ongoing basis of all steps taken to insure a smooth transition into the year 2000. Further, management has developed a plan and timeline to evaluate the risks and exposures that the Company faces on a technological and operational level. This plan is a five part approach which includes making all necessary parties aware of the situation, assessing all impacts, renovation of operating systems, validation of all changes for effectiveness, and implementation of the necessary policies and procedures to ensure compliance. A Year 2000 team composed of senior management and key operational officers has been in place for over one year. Among the tasks accomplished to date are the identification and cataloging of all software, hardware, maintenance contracts and third-party vendors. Each identified party has been contacted and a dialogue established to ensure the necessary compliance with regulatory time constraints. Testing of all hardware and software will be completed well before June of 1999. Additionally, operating and capital budgets incorporate anticipated expenditures necessary to ensure compliance. The Company expects to be in conformity with the FFEIC Y2K Statement and be fully compliant prior to December 31, 1999. FORWARD LOOKING INFORMATION Bay Banks of Virginia, Inc., a single-bank holding company has, through its subsidiary the Bank of Lancaster, acquired two branches of Signet Bank. These two branches are located in the neighboring counties of Richmond and Westmoreland. Effective February 17, 1998, the acquisition added $22.2 million in deposits and $926 thousand in loans to the balance sheet of the Company. The Richmond County branch is located in the Town of Warsaw and contributed $7.6 million in deposits and $104 thousand in loans. The Westmoreland County branch is located in the Town of Montross and added $14.6 million in deposits and $822 thousand in loans. Both branches fit the current rural nature of the Company and add growth potential to the loan portion of the balance sheet. It is anticipated that the deposits of these branches will be invested in bonds for the short term, and converted to loan balances over time. Investments will continue to meet sound investment policy standards while providing the maximum available contribution to the net interest margin. 13 CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996
1997 1996 ------------ ------------ ASSETS Cash and due from banks.................................................... $ 3,302,389 $ 3,995,017 Federal funds sold......................................................... 11,556,000 4,537,000 Securities available-for-sale.............................................. 44,066,442 45,249,656 Loans receivable, net...................................................... 104,202,928 100,711,314 Premises and equipment..................................................... 2,840,140 2,840,420 Accrued interest receivable................................................ 1,247,958 1,250,380 Other real estate owned.................................................... 1,378,795 629,043 Other assets............................................................... 130,832 120,381 ------------ ------------ Total assets............................................................... $168,725,484 $159,333,211 ------------ ------------ ------------ ------------ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Demand deposits............................................................ $ 11,717,193 $ 11,674,974 Savings and NOW deposits................................................... 90,891,939 98,517,380 Other time deposits........................................................ 46,995,674 31,917,532 ------------ ------------ Total deposits............................................................. 149,604,806 142,109,886 Other liabilities.......................................................... 428,560 438,458 ------------ ------------ Total liabilities.......................................................... 150,033,366 142,548,344 ------------ ------------ SHAREHOLDERS' EQUITY Common stock -- $5 par value Authorized -- 5,000,000 shares; Outstanding -- 1,150,826 and 1,133,218 shares........................... 5,754,130 5,666,088 Additional paid-in capital................................................. 3,164,510 2,887,618 Retained earnings.......................................................... 9,502,341 8,279,343 Net unrealized appreciation (depreciation) on available-for-sale securities.............................................................. 271,137 (48,182) ------------ ------------ Total shareholders' equity................................................. 18,692,118 16,784,867 ------------ ------------ Total liabilities and shareholders' equity................................. $168,725,484 $159,333,211 ------------ ------------ ------------ ------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 14 CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ----------- ----------- ----------- INTEREST INCOME Loans receivable............................................... $ 9,390,600 $ 8,641,234 $ 8,379,711 Securities..................................................... 2,385,736 2,649,754 2,746,916 Federal funds sold............................................. 390,144.... 337,142.... 147,670 ----------- ----------- ----------- Total interest income.......................................... 12,166,480 11,628,130 11,274,297 ----------- ----------- ----------- INTEREST EXPENSE Deposits....................................................... 6,203,107 6,099,275 6,534,397 Federal funds purchased........................................ 21,737 5,655 5,733 ----------- ----------- ----------- Total interest expense......................................... 6,224,844 6,104,930 6,540,130 ----------- ----------- ----------- Net Interest Income............................................ 5,941,636 5,523,200 4,734,167 Provision for loan losses...................................... 202,500 305,000 58,000 ----------- ----------- ----------- Net interest income after provision for loan losses............ 5,739,136 5,218,200 4,676,167 ----------- ----------- ----------- NONINTEREST INCOME Income from fiduciary activities............................... 538,089 407,227 351,710 Service charges on deposit accounts............................ 232,219 231,307 243,385 Other service charges and fees................................. 314,040 288,877 233,192 Net securities gains........................................... 2,806 54,072 57,255 Other income................................................... 156,832 159,032 49,504 ----------- ----------- ----------- Total noninterest income....................................... 1,243,986 1,140,515 935,046 ----------- ----------- ----------- NONINTEREST EXPENSES Salaries and employee benefits................................. 2,208,792 2,075,737 1,876,302 Occupancy expense.............................................. 554,192 565,193 526,146 Deposit insurance premium...................................... 17,082 22,956 161,674 Other expense.................................................. 1,595,199 1,321,154 1,162,410 ----------- ----------- ----------- Total noninterest expenses..................................... 4,375,265 3,985,040 3,726,532 ----------- ----------- ----------- Income before income taxes..................................... 2,607,857 2,373,675 1,884,681 Income tax expense............................................. 648,025 542,059 360,850 ----------- ----------- ----------- Net Income..................................................... $ 1,959,832 $ 1,831,616 $ 1,523,831 ----------- ----------- ----------- ----------- ----------- ----------- BASIC EARNINGS PER SHARE Average shares outstanding.................................. 1,146,438 1,116,396 1,097,764 Net income per share of common stock........................ $ 1.71 $ 1.64 $ 1.39 DILUTED EARNINGS PER SHARE Average shares outstanding.................................. 1,162,677 1,127,482 1,107,218 Net income per share of common stock........................ $ 1.69 $ 1.62 $ 1.38
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 15 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Net Unrealized Appreciation (Depreciation) Additional on Available- Total Common Paid-in Retained for-Sale Shareholders' Stock Capital Earnings Securities Equity ---------- ---------- ----------- -------------- ------------- Balance at December 31, 1994........ $2,725,325 $2,379,098 $ 8,933,520 $ (737,443) $13,300,500 Net income for 1995................. -- -- 1,523,831 -- 1,523,831 Cash dividends paid -- $0.53 per share.................. -- -- (581,172) -- (581,172) Sale of common stock -- Dividend reinvestment plan....... 42,650 224,743 -- -- 267,393 Stock options exercised............. 1,210 1,290 -- -- 2,500 Net changes in unrealized appreciation on available-for- sale securities, net of taxes of $491,547......................... -- -- -- 954,178 954,178 ---------- ---------- ----------- -------------- ------------- Balance at December 31, 1995........ 2,769,185 2,605,131 9,876,179 216,735 15,467,230 Net income for 1996................. -- -- 1,831,616 -- 1,831,616 Cash dividends paid -- $0.58 per share.................. -- -- (642,102) -- (642,102) Stock dividend...................... 2,786,350 -- (2,786,350) -- -- Sale of common stock -- Dividend reinvestment plan....... 67,663 231,607 -- -- 299,270 Stock options exercised............. 42,890 50,880 -- -- 93,770 Net changes in unrealized depreciation on available-for- sale securities, net of taxes of $136,472......................... -- -- -- (264,917) (264,917) ---------- ---------- ----------- -------------- ------------- Balance at December 31, 1996 5,666,088 2,887,618 8,279,343 (48,182) 16,784,867 Net income for 1997................. -- -- 1,959,832 -- 1,959,832 Cash dividends paid -- $.63 per share................... -- -- (723,741) -- (723,741) Sale of common stock -- Dividend reinvestment plan....... 70,847 265,852 -- -- 336,699 Stock options exercised............. 17,195 11,040 (13,093) -- 15,142 Net changes in unrealized depreciation on available-for- sale securities, net of taxes of $164,498......................... -- -- -- 319,319 319,319 ---------- ---------- ----------- -------------- ------------- Balance at December 31, 1997........ $5,754,130 $3,164,510 $ 9,502,341 $ 271,137 $18,692,118 ---------- ---------- ----------- -------------- ------------- ---------- ---------- ----------- -------------- -------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 16 CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------------ ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income..................................................... $ 1,959,832 $ 1,831,616 $ 1,523,831 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................................ 419,181..... 385,535 348,749 Provision for loan losses................................... 202,500 305,000 58,000 Net securities gains........................................ (2,806) (54,072) (57,255) (Gain) loss on sale of foreclosed real estate............... 6,633 (92,271) -- Deferred income taxes....................................... 107,422 113,602 93,232 Loss on sale of equipment................................... -- 6,003 269 Accrued income and other assets............................. (8,029) 158,567 358,467 Other liabilities........................................... (288,138) 27,561 15,266 ------------ ----------- ----------- Net cash provided by operating activities...................... 2,396,595 2,681,541 2,340,559 ------------ ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Net change in interest-bearing deposits........................ -- 2,000,000 (2,000,000) Proceeds from maturities of held-to-maturity securities........ -- -- 2,422,400 Proceeds from maturities of available-for-sale securities...... 5,486,179 6,193,055 1,944,937 Proceeds from sale of available-for-sale securities............ 4,362,527 2,526,924 6,900,504 Purchases of available-for-sale securities..................... (8,172,549) (8,316,000) (3,472,791) Net change in Federal funds sold............................... (7,019,000) 844,000 (3,682,000) Net increase in loans.......................................... (3,694,114) (8,078,450) (6,309,205) Proceeds from sale of foreclosed real estate................... 107,127 919,897 165,152 Proceeds from sale of equipment................................ -- 5,400 300 Purchase of premises and equipment............................. (418,901) (343,192) (310,258) Additions to other real estate owned........................... (863,512) (54,055) (219,978) ------------ ----------- ----------- Net cash used in investing activities.......................... (10,212,243) (4,302,421) (4,560,939) ------------ ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net change in demand, savings and NOW deposit accounts............................................ (7,583,222) 1,517,935 1,200,794 Net increase in time deposits.................................. 15,078,142 302,618 2,138,330 Proceeds from issuance of common stock......................... 351,841 393,040 269,893 Dividends paid................................................. (723,741) (642,102) (581,172) ------------ ----------- ----------- Net cash provided by financing activities...................... 7,123,020 1,571,491 3,027,845 ------------ ----------- ----------- Net increase (decrease) in cash and due from banks............. (692,628) (49,389) 807,465 Cash and due from banks at January 1........................... 3,995,017 4,044,406 3,236,941 ------------ ----------- ----------- Cash and due from banks at December 31......................... $ 3,302,389 $ 3,995,017 $ 4,044,406 ------------ ----------- ----------- ------------ ----------- ----------- SUPPLEMENTAL DISCLOSURES: Interest paid.................................................. $ 6,479,608 $ 6,114,860 $ 6,524,363 ------------ ----------- ----------- ------------ ----------- ----------- Income taxes paid.............................................. $ 428,000 $ 265,200 $ 485,060 ------------ ----------- ----------- ------------ ----------- ----------- Loans transferred to foreclosed real estate.................... $ 846,078 $ 328,825 $ 681,387 ------------ ----------- ----------- ------------ ----------- -----------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 17 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements of the Company include the accounts of Bay Banks of Virginia, Inc. and its subsidiary, Bank of Lancaster. All significant intercompany balances and transactions have been eliminated in consolidation. NATURE OF BUSINESS. Bay Banks of Virginia, Inc. is a one-bank holding company that conducts substantially all of its operations through its subsidiary, Bank of Lancaster. The Bank is state-chartered and a member of the Federal Reserve System and services individual and commercial customers, the majority of which are in the Northern Neck of Virginia. The Bank has two offices located in Kilmarnock and one office in White Stone, Virginia and offers a full range of deposit and loan products to its retail and commercial customers. A substantial amount of the Bank's deposits are interest-bearing. The majority of the Bank's loan portfolio is secured by real estate. USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The amounts recorded in the financial statements may be affected by those estimates and assumptions. Actual results may vary from those estimates. Estimates are used primarily in developing the allowance for loan losses, in estimating the economic life of loan fees and costs, in computing deferred tax assets, in determining the estimated useful lives of premises and equipment, and in the valuation of other real estate owned. SECURITIES AVAILABLE-FOR-SALE. Debt and equity securities are classified as available-for-sale and carried at fair value, with unrealized gains and losses, net of tax, excluded from income and reported as a separate component of stockholders' equity until realized. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. LOANS RECEIVABLE. Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any unearned discount and fees and costs on originating loans. Loan origination fees and certain direct origination costs for real estate mortgage loans are capitalized and recognized as an adjustment of the yield of the related loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. PREMISES AND EQUIPMENT. Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the premises and equipment. OTHER REAL ESTATE OWNED. Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other income. 18 NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES -- (CONCLUDED) INCOME TAXES. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. PENSION BENEFITS. The noncontributory defined benefit pension plan covers substantially all full-time employees. The plan provides benefits that are based on employees' average compensation during the five consecutive years of highest compensation. The funding policy is to make the minimum annual contribution that is required by applicable regulations, plus such amounts as may be determined to be appropriate from time-to-time. TRUST ASSETS AND INCOME. Assets held by the trust department, other than cash on deposit, are not included in these financial statements, since such items are not assets of the Bank. Trust fees are recorded on the accrual basis. EARNINGS PER SHARE. Earnings per share is calculated by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The assumed exercise of stock options is included in the calculation of diluted earnings per share. SFAS No. 128, EARNINGS PER SHARE, was adopted for 1997 with all prior-period earnings per share data restated. The statement requires dual presentation of earnings per share and diluted earnings per share on the Consolidated Statements of Income and other computational changes. The adoption of SFAS No. 128 did not have a material effect on previously reported earnings per share. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS. In the ordinary course of business the Bank has entered into off-balance-sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. RECLASSIFICATIONS. Certain amounts in the financial statements have been reclassified to conform with classifications adopted in 1997. NOTE 2. SECURITIES AVAILABLE-FOR-SALE The carrying amount of debt and other securities and their approximate fair values at December 31, 1997 and 1996, follow:
Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ----------- ---------- ---------- ----------- December 31, 1997: U.S. Treasury securities.................. $ 8,589,730 $ 10,934 $ 11,257 $ 8,589,407 U.S. Government agencies.................. 12,519,772 38,751 82,539 12,475,984 State and municipal securities............ 18,023,431 442,111 5,943 18,459,599 Other securities.......................... 4,516,375 30,243 5,166 4,541,452 ----------- ---------- ---------- ----------- $43,649,308 $522,039 $104,905 $44,066,442 ----------- ---------- ---------- ----------- ----------- ---------- ---------- ----------- December 31, 1996: U.S. Treasury securities.................. $11,785,375 $ 7,152 $ 81,063 $11,711,463 U.S. Government agencies.................. 13,950,194 18,955 243,509 13,725,640 State and municipal securities............ 16,824,659 321,286 76,858 17,069,088 Other securities.......................... 2,762,431 1,807 20,773 2,743,465 ----------- ---------- ---------- ----------- $45,322,659 $349,200 $422,203 $45,249,656 ----------- ---------- ---------- ----------- ----------- ---------- ---------- -----------
19 NOTES TO FINANCIAL STATEMENTS CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE 2. SECURITIES AVAILABLE-FOR-SALE -- (CONCLUDED) Gross realized gains and gross realized losses on sales of securities were as follows:
1997 1996 1995 ------- ------- ------- Gross realized gains.................................................... $21,370 $54,072 $57,255 Gross realized losses................................................... $18,564 $ -- $ --
The scheduled maturities of securities available-for-sale at December 31, 1997, were as follows:
Available-for-Sale Securities ------------------------- Amortized Cost Fair Value ----------- ----------- Due in one year or less................................................... $ 6,384,761 $ 6,372,966 Due from one year to five years........................................... 19,275,910 19,456,489 Due from five to ten years................................................ 14,956,460 15,221,244 Due after ten years....................................................... 3,032,177 3,015,743 ----------- ----------- $43,649,308 $44,066,442 ----------- ----------- ----------- -----------
Securities carried at $1,996,320 at December 31, 1997, and $1,995,173 at December 31, 1996, were pledged to secure public deposits required by law. NOTE 3. LOANS The components of loans in the balance sheets were as follows:
1997 1996 ------------ ------------ Real estate mortgage loans.............................................. $ 78,926,222 $ 75,006,256 Commercial loans........................................................ 9,648,530 10,744,057 Installment loans, net.................................................. 16,221,617 15,769,161 ------------ ------------ 104,796,369 101,519,474 Net deferred loan costs and fees........................................ 267,268 211,944 Allowance for loan losses............................................... (860,709) (1,020,104) ------------ ------------ $104,202,928 $100,711,314 ------------ ------------ ------------ ------------
Loans upon which the accrual of interest has been discontinued totaled $126,040 and $17,349 at December 31, 1997 and 1996, respectively. An analysis of the change in the allowance for loan losses follows:
1997 1996 1995 ---------- ---------- --------- Balance, beginning of year..................................... $1,020,104 $ 925,170 $ 962,005 Provision for loan losses...................................... 202,500 305,000 58,000 Recoveries..................................................... 6,295 23,247 10,792 Loans charged off.............................................. (368,190) (233,313) (105,627) ---------- ---------- --------- Balance, end of year........................................... $ 860,709 $1,020,104 $ 925,170 ---------- ---------- --------- ---------- ---------- ---------
Loans having carrying values of $846,078 and $329,756 were transferred to foreclosed real estate in 1997 and 1996, respectively. 20 NOTE 4. OTHER TIME DEPOSITS The aggregate amount of other time deposits each with a minimum denomination of $100,000, was $10,209,461 and $7,469,000 at December 31, 1997 and 1996, respectively. NOTE 5. PREMISES AND EQUIPMENT Components of premises and equipment included in the balance sheets at December 31, 1997 and 1996, were as follows:
1997 1996 ---------- ---------- Land......................................................................... $ 309,736 $ 309,736 Buildings and improvements................................................... 2,215,262 2,108,448 Furniture and equipment...................................................... 2,762,401 2,456,264 ---------- ---------- Total cost................................................................... 5,287,399 4,874,448 Less accumulated depreciation................................................ 2,447,259 2,034,028 ---------- ---------- Net book value............................................................... $2,840,140 $2,840,420 ---------- ---------- ---------- ----------
NOTE 6. INCOME TAXES The provision for income taxes consisted of the following for the years ended December 31:
1997 1996 1995 -------- -------- -------- Currently payable................................................... $540,603 $428,457 $267,618 Deferred............................................................ 107,422 113,602 93,232 -------- -------- -------- $648,025 $542,059 $360,850 -------- -------- -------- -------- -------- --------
The reasons for the differences between the statutory Federal income tax rates and the effective tax rates are summarized as follows:
1997 1996 1995 -------- -------- -------- Statutory rates..................................................... 34.0% 34.0% 34.0% Increase (decrease) resulting from: Effect of tax-exempt income......................................... (9.2) (11.2) (15.1) Other, net.......................................................... -- -- .2 -------- -------- -------- 24.8% 22.8% 19.1% -------- -------- -------- -------- -------- --------
21 NOTES TO FINANCIAL STATEMENTS CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE 6. INCOME TAXES -- (CONCLUDED) The components of the net deferred tax assets and liabilities included in other assets are as follows at December 31:
1997 1996 1995 --------- --------- --------- Deferred tax assets Allowance for loan losses..................................... $ 169,564 $ 223,758 $ 191,481 Net unrealized loss on available-for-sale securities.......... -- 24,820 -- Deferred compensation......................................... 110,672 98,758 87,807 Other, net.................................................... 27,296 20,863 6,555 Alternative minimum tax....................................... -- -- 92,752 --------- --------- --------- 307,532 368,199 378,595 --------- --------- --------- Deferred tax liabilities Net unrealized gain on available-for-sale securities.......... (145,997) -- (111,652) Pension plan.................................................. (75,371) (58,390) (45,633) Deferred loan fees and costs.................................. (212,951) (162,410) (87,055) Other, net.................................................... (33,795) (29,909) (44,501) --------- --------- --------- (468,114) (250,709) (288,841) --------- --------- --------- Net deferred tax asset........................................... $(160,582) $ 117,490 $ 89,754 --------- --------- --------- --------- --------- ---------
NOTE 7. DEFINED BENEFIT PENSION PLAN Net pension cost related to the defined benefit pension plan consisted of the following components for the years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 ----------- ----------- ----------- Service cost (benefits earned)............................. $ 65,953 $ 64,671 $ 58,046 Interest cost on projected benefit obligation.............. 84,486 78,249 74,866 Actual return on plan assets............................... (86,523) (46,653) (82,623) Net amortization and deferral.............................. (21,359) (56,392) (3,014) ----------- ----------- ----------- $ 42,557 $ 39,875 $ 47,275 ----------- ----------- ----------- ----------- ----------- -----------
The following table sets forth the plan's funded status and the amounts recognized in the accompanying balance sheets as of December 31, 1997, 1996 and 1995:
1997 1996 1995 ----------- ----------- ----------- Actuarial present value of benefit obligations: Vested benefits............................................ $ (931,485) $ (828,434) $ (766,516) ----------- ----------- ----------- ----------- ----------- ----------- Accumulated benefits....................................... $ (901,243) $ (800,430) $ (785,290) ----------- ----------- ----------- ----------- ----------- ----------- Projected benefits......................................... $(1,263,114) $(1,080,000) $(1,000,658) Plan assets at fair value.................................. 1,409,704 1,278,515 1,199,548 ----------- ----------- ----------- Plan assets in excess of projected benefit obligation...... 146,590 198,515 198,890 Unrecognized net gain...................................... (3,904) (103,848) (139,810) Unrecognized net asset..................................... (109,841) (128,147) (146,453) Unrecognized prior service cost............................ 188,850 205,222 221,594 ----------- ----------- ----------- Asset on balance sheets.................................... $ 221,695 $ 171,742 $ 134,221 ----------- ----------- ----------- ----------- ----------- ----------- Contributions.............................................. $ 92,510 $ 77,396 $ 71,180 ----------- ----------- ----------- ----------- ----------- -----------
22 NOTE 7. DEFINED BENEFIT PENSION PLAN -- (CONCLUDED) Assumptions used in the determination of pension plan information consisted of the following as of December 31, 1997, 1996 and 1995:
1997 1996 1995 ---- ---- ---- Discount rate............................ 8% 8% 8% Rate of increase in compensation levels................................ 5% 6% 6% Expected long-term rate of return on plan assets................................ 9% 9% 9%
NOTE 8. DEFINED CONTRIBUTION RETIREMENT PLAN The Company has a 401(k) retirement plan covering substantially all employees who have completed six months of service. Employees may contribute up to 15% of their salaries and the Company matches 100% of the first 2% and 25% of the next 2% of employees' contributions. Additional contributions can be made at the discretion of the Board of Directors. Total contributions to the plan were $31,663, $33,360 and $22,326 in 1997, 1996 and 1995, respectively. NOTE 9. EMPLOYEE STOCK OWNERSHIP PLAN The Company has a noncontributory Employee Stock Ownership Plan for the benefit of all eligible employees who have completed twelve months of service and who have attained the age of 21. Contributions to the plan are at the discretion of the Board of Directors. Contributions to the plan were $80,000, $80,000 and $60,000 in 1997, 1996 and 1995, respectively. NOTE 10. SHAREHOLDERS' EQUITY The Company is authorized to issue 2,000,000 shares of preferred stock with a par value of $5 per share. No preferred stock had been issued. The rights and preferences of any preferred shares will be determined by the Board of Directors upon issuance of the stock. The Company has a dividend reinvestment plan under which shareholders may choose to receive additional shares of common stock in lieu of cash dividends. Shares are issued at 95% of the market price on the dividend payment date. Shares totaling 14,169 and 15,756 were issued in 1997 and 1996, respectively. NOTE 11. STOCK OPTION PLAN The Company has two incentive stock option plans. The 1985 incentive stock option plan expired in 1995 and no additional shares may be granted under this plan. Under the incentive stock option plan adopted in 1994, the Company may grant options to certain key employees for up to 75,000 shares. At December 31, 1997, the 1994 plan had 62,550 shares available for grant. Under both plans, the exercise price of each option equals the market price of the Company's common stock on the date of grant and an option's maximum term is ten years. Options granted are exercisable only after meeting certain performance targets during a specified time period. If the targets are not met, the options lapse. 23 NOTES TO FINANCIAL STATEMENTS CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE 11. STOCK OPTION PLAN -- (CONCLUDED) A summary of the status of the incentive stock option plans as of December 31, 1997, 1996 and 1995, and changes during the years ending on those dates is presented below:
Exercisable Stock Options ------------------------------------------------ Outstanding Granted Exercised Outstanding Beginning During During At End of Year the Year the Year of Year ----------- -------- --------- ----------- 1997 Shares.......................................... 31,148 12,450 (4,048) 39,550 Weighted average exercise price................. $ 14.04 $ 17.00 $ 7.73 $ 15.62 1996 Shares.......................................... 32,736 8,200 (9,788) 31,148 Weighted average exercise price................. $ 12.09 $ 16.50 $ 9.58 $ 14.04 1995 Shares.......................................... 24,120 9,100 (484) 32,736 Weighted average exercise price................. $ 10.29 $ 6.50 $ 5.16 $ 12.09
At December 31, 1997, exercise prices on outstanding options ranged from $7.73 to $17.00 per share and the weighted average remaining contractual life was 7.5 years. The Company accounts for its stock option plans in accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, which does not allocate costs to stock options granted at current market values. The Company could, as an alternative, allocate costs to stock options using option pricing models, as provided in Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Because of the limited number of options granted and the limited amount of trading activity in the Company's stock, management believes that the Company's stock options are best accounted for in accordance with APB Opinion No. 25. However, had the Company accounted for its stock options in accordance with SFAS No. 123, net earnings and earnings per share would have been as follows for each of the years ending December 31,
1997 1996 1995 -------- ------- ------- Pro-forma reduction in net income....................................... $(13,000) $(8,000) $(7,000) -------- ------- ------- -------- ------- ------- Pro-forma earnings per share............................................ $ 1.70 $ 1.63 $ 1.38 -------- ------- ------- -------- ------- -------
Pro-forma amounts were computed using a 6% discount rate over the term of the options and dividend rates which approximate current payments. NOTE 12. FINANCIAL INSTRUMENTS The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of those instruments reflect the extent of the Company's involvement in particular classes of financial instruments. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the 24 NOTE 12. FINANCIAL INSTRUMENTS -- (CONCLUDED) contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk. COMMITMENTS TO EXTEND CREDIT. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable; inventory, property, plant, and equipment; and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. A summary of the notional amounts of financial instruments with off-balance-sheet risk at December 31, 1997 and 1996, follows:
1997 1996 ---------- ---------- Commitments to extend credit................................................. $7,633,634 $8,083,472 Lines of credit to directors................................................. 960,229 1,719,834 Standby letters of credit.................................................... 327,537 427,117 Credit card arrangements..................................................... 2,941,150 2,861,750
NOTE 13. SIGNIFICANT GROUP CONCENTRATION OF CREDIT RISK Most of the Company's business activity is with customers located in the counties of Lancaster and Northumberland, Virginia. The Company makes residential, commercial and consumer loans and approximately 75% of the loan portfolio is composed of real estate mortgage loans, which primarily are for single family residences. The adequacy of collateral on real estate mortgage loans is highly dependent on changes to real estate values. NOTE 14. RELATED PARTIES The Company has entered into transactions with its directors and principal officers of the Company, their immediate families and affiliated companies in which they are the principal stockholders (related parties). The aggregate amount of loans to such related parties was approximately $2,129,000 and $2,352,000 at December 31, 1997 and 1996, respectively. All such loans, in the opinion of the management, were made in the normal course of business on the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions. 25 NOTES TO FINANCIAL STATEMENTS CONTINUED DECEMBER 31, 1997, 1996 AND 1995 NOTE 15. COMMITMENTS AND CONTINGENCIES In the ordinary course of business, the Company has various outstanding commitments and contingent liabilities that are not reflected in the accompanying financial statements. At December 31, 1997, the Company was not involved in any litigation. NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the financial instruments at December 31, 1997, are shown in the following table. The carrying amounts in the table are included in the balance sheet under the applicable captions.
Dollars in Thousands ------------------ Carrying Fair Amount Value -------- ------- Financial assets: Cash and due from banks......................................................... $ 3,302 $ 3,302 Federal funds sold.............................................................. 11,556 11,556 Securities available-for-sale................................................... 44,066 44,066 Loans, net of allowance for loan losses......................................... 104,203 101,824 Financial liabilities: Non-interest bearing deposits................................................... $ 11,717 $11,717 Savings deposits................................................................ 90,892 90,892 Other time deposits............................................................. 46,996 46,996 Off-balance-sheet liabilities: Commitments to extend credit.................................................... 11,863 11,863
The above presentation of fair values is required by Statement on Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS. The fair values shown do not necessarily represent the amounts which would be received on immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instrument. The carrying amounts of cash and due from banks, federal funds sold, demand and savings deposits, and commitments to extend credit represent items which do not present significant market risks, are payable on demand, or are of such short duration that market value approximates carrying value. Securities available-for-sale are valued at the quoted market prices for the individual securities held. The fair value of loans is estimated by discounting future cash flows using the current interest rates at which similar loans would be made to borrowers. Other time deposits are presented at estimated fair value using interest rates currently offered for deposits of similar remaining maturities. Fair values for off-balance-sheet lending commitments approximates the carrying value. 26 NOTE 17. RESTRICTIONS ON RETAINED EARNINGS Federal regulations limits the payment of dividends in any calendar year to the net profits for the year combined with the retained net profits of the preceding two calendar years, without prior approval of the regulators. NOTE 18. REGULATORY MATTERS The Company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). At December 31, 1997, the Company met all capital adequacy requirements to which it is subject. The Company was required to maintain the following regulatory ratios:
Actual Regulatory December Minimum 1997 ---------- -------- Total capital to risk weighted assets........................................... 10.00% 17.1% Tier 1 capital to risk weighted assets.......................................... 6.00% 10.6% Tier 1 capital to adjusted average assets....................................... 5.00% 10.2%
27 INDEPENDENT AUDITORS' REPORT To the Board of Directors Bay Banks of Virginia, Inc. Kilmarnock, Virginia We have audited the accompanying consolidated balance sheets of Bay Banks of Virginia, Inc. and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, cash flows and changes in shareholders' equity for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bay Banks of Virginia, Inc. and subsidiary as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. February 27, 1998 Newport News, Virginia 28 TEN-YEAR COMPARISONS Ten Year Comparison of Earnings and Dividends
Earnings Net Dividends Per Common Dividends Income Paid Share* Per Share ----------- --------- ---------- --------- 1988.......................................... $ 1,065,553 $260,511 $ 1.11 $ 0.27 1989.......................................... 1,182,475 320,628 1.21 0.33 1990.......................................... 1,084,450 358,845 1.09 0.36 1991.......................................... 1,143,747 397,891 1.12 0.39 1992.......................................... 1,302,311 437,638 1.25 0.42 1993.......................................... 1,510,011 476,530 1.42 0.45 1994.......................................... 1,378,185 529,060 1.28 0.49 1995.......................................... 1,523,831 581,172 1.39 0.53 1996.......................................... 1,831,616 642,102 1.63 0.58 1997.......................................... 1,959,832 723,741 1.71 0.63
Ten Year Comparison of Financial Condition
Securities Loans Total Assets Deposits -------------- --------------- --------------- ---------------- 1988................. $ 18,817,434 $ 55,203,952 $ 80,783,657 $ 72,889,071 1989................. 19,503,010 54,212,414 82,583,023 73,640,906 1990................. 20,991,291 62,549,697 89,336,951 78,097,670 1991................. 23,695,961 72,517,658 105,437,755 94,529,157 1992................. 26,623,125 80,126,043 119,380,580 107,399,662 1993................. 44,668,423 80,178,153 140,445,645 127,024,243 1994................. 52,293,024 87,642,815 150,646,340 136,950,209 1995................. 46,000,953 93,212,634 156,167,460 140,289,333 1996................. 45,249,656 100,711,314 159,333,211 142,109,886 1997................. 44,066,442 104,202,928 168,725,484 149,604,806
*Per share data is adjusted for a 10% stock dividend in 1989, a 2 for 1 stock split in 1991, and a 2 for 1 stock split in 1996. 29 EX-21 3 EXHIBIT 21 [TO COME] EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS Board of Directors Bay Banks of Virginia, Inc. We consent to the incorporation by reference in this Annual Report on Form 10-KSB of our report dated February 27, 1998, relating to the consolidated financial statements of Bay Banks of Virginia, Inc. as of December 31, 1997, 1996, and 1995, and for each of the years in the three-year period ended December 31, 1997. EGGLESTON SMITH P.C. Newport News, Virginia March 25, 1998 EX-27 5 EXHIBIT 27 -FINANCIAL DATA SCHEDULE
9 1 YEAR DEC-31-1997 DEC-31-1997 3,302,389 137,887,613 11,556,000 0 44,066,442 43,649,308 44,066,442 104,202,928 860,709 168,725,484 149,604,806 0 428,560 0 0 0 5,754,130 12,937,988 18,692,118 9,390,600 2,385,736 390,144 12,166,480 6,203,107 6,224,844 5,941,636 202,500 2,806 4,375,265 2,607,857 2,607,857 0 0 1,959,832 1.71 1.69 7.84 126,034 1,576,996 23,500 0 1,020,104 368,190 6,295 860,709 860,709 0 0
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