bayk-10q_20190930.htm

(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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. ☒ yes ☐ no

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ yes ☐ no

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ yes ☒ no

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 13,334,506 shares of common stock on November 1, 2019.

	(unaudited)
(Dollars in thousands, except share data)	September 30, 2019			December 31, 2018 (1)
ASSETS
Cash and due from banks	$	7,419		$	7,685
Interest-earning deposits		23,894			18,981
Federal funds sold		92			625
Certificates of deposit		3,498			3,746
Available-for-sale securities, at fair value		80,748			82,232
Restricted securities		6,684			7,600
Loans receivable, net of allowance for loan losses of $7,495 and $7,902, respectively		924,268			894,191
Loans held for sale		268			368
Premises and equipment, net		20,532			18,169
Accrued interest receivable		3,104			3,172
Other real estate owned, net		2,178			3,597
Bank owned life insurance		19,632			19,270
Goodwill		10,374			10,374
Mortgage servicing rights		910			977
Core deposit intangible		1,675			2,193
Deferred tax asset, net		740			1,510
Other assets		6,203			5,927
Total assets	$	1,112,219		$	1,080,617
LIABILITIES
Noninterest-bearing demand deposits	$	124,670		$	114,122
Savings and interest-bearing demand deposits		372,404			359,400
Time deposits		396,614			368,670
Total deposits		893,688			842,192
Securities sold under repurchase agreements		6,323			6,089
Federal Home Loan Bank advances		68,000			100,000
Subordinated notes, net of issuance costs		6,906			6,893
Other liabilities		12,445			7,967
Total liabilities		987,362			963,141
SHAREHOLDERS’ EQUITY
Common stock ($5 par value; authorized - 30,000,000 shares; outstanding - 13,334,302 and 13,201,682 shares, respectively) (2)		66,671			66,008
Additional paid-in capital		36,781			36,972
Unearned employee stock ownership plan shares		(1,593	)		(1,734	)
Retained earnings		22,658			17,557
Accumulated other comprehensive income (loss), net		340			(1,327	)
Total shareholders’ equity		124,857			117,476
Total liabilities and shareholders’ equity	$	1,112,219		$	1,080,617

	For the Three Months Ended						For the Nine Months Ended
(Dollars in thousands, except per share data)	September 30, 2019			September 30, 2018			September 30, 2019			September 30, 2018
INTEREST INCOME
Loans, including fees	$	11,930		$	10,124		$	34,849		$	29,853
Securities:
Taxable		553			498			1,725			1,392
Tax-exempt		113			119			327			356
Federal funds sold		6			3			31			14
Interest-earning deposit accounts		145			106			432			399
Certificates of deposit		18			18			57			54
Total interest income		12,765			10,868			37,421			32,068
INTEREST EXPENSE
Deposits		3,123			2,027			9,019			5,427
Securities sold under repurchase agreements		4			3			11			10
Subordinated notes and other borrowings		142			128			417			384
Federal Home Loan Bank advances		465			441			1,784			1,140
Total interest expense		3,734			2,599			11,231			6,961
Net interest income		9,031			8,269			26,190			25,107
Provision for loan losses		495			509			871			481
Net interest income after provision for loan losses		8,536			7,760			25,319			24,626
NONINTEREST INCOME
Income from fiduciary activities		201			151			621			596
Service charges and fees on deposit accounts		243			251			727			538
Wealth management		185			144			654			558
Interchange fees, net		108			105			330			221
Other service charges and fees		32			30			88			91
Secondary market sales and servicing		293			152			632			528
Increase in cash surrender value of bank owned life insurance		122			123			362			374
Net gains (losses) on sale of available-for-sale securities		1			—			(1	)		—
Net gains (losses) on disposition of other assets		—			51			(2	)		(18	)
Gain (loss) on rabbi trust assets		—			5			130			(11	)
Gain on curtailment of post-retirement benefit plan		—			—			—			352
Other		15			(16	)		44			101
Total noninterest income		1,200			996			3,585			3,330
NONINTEREST EXPENSE
Salaries and employee benefits		3,666			4,022			11,532			12,407
Occupancy		805			924			2,510			2,536
Data processing		541			546			1,738			1,852
Bank franchise tax		209			178			655			531
Telecommunications and other technology		258			195			727			603
FDIC assessments		(7	)		151			371			521
Foreclosed property		48			45			110			110
Consulting		156			214			418			937
Advertising and marketing		124			126			300			347
Directors’ fees		148			146			525			382
Audit and accounting		193			236			586			839
Legal		20			123			130			380
Merger-related		—			—			—			363
Core deposit intangible amortization		164			196			517			610
Net other real estate owned losses (gains)		375			(112	)		441			(169	)
Other		747			542			2,108			1,966
Total noninterest expense		7,447			7,532			22,668			24,215
Income before income taxes		2,289			1,224			6,236			3,741
Income tax expense		448			198			1,180			645
Net income	$	1,841		$	1,026		$	5,056		$	3,096
Basic and diluted earnings per share	$	0.14		$	0.08		$	0.39		$	0.24

								Unearned
								Employee Stock					Accumulated
	Shares of				Additional			Ownership					Other			Total
	Common		Common		Paid-in			Plan			Retained		Comprehensive			Shareholders’
(Dollars in thousands)	Stock		Stock		Capital			Shares			Earnings		Income (Loss), net			Equity
Balances at December 31, 2018		13,201,682	$	66,008	$	36,972		$	(1,734	)	$	17,557	$	(1,327	)	$	117,476
Net income		—		—		—			—			5,056		—			5,056
Other comprehensive income		—		—		—			—			—		1,667			1,667
Stock options exercised, net		5,173		26		(17	)		—			—		—			9
Director stock grant		18,396		92		56			—			—		—			148
Restricted stock awards		109,051		545		(545	)		—			—		—			—
ESOP collateral release		—		—		—			141			—		—			141
Share-based compensation expense		—		—		315			—			—		—			315
Cumulative effect adjustment of adoption of accounting principle		—		—		—			—			45		—			45
Balances at September 30, 2019		13,334,302	$	66,671	$	36,781		$	(1,593	)	$	22,658	$	340		$	124,857

							Unearned
							Employee Stock					Accumulated
	Shares of				Additional		Ownership					Other			Total
	Common		Common		Paid-in		Plan			Retained		Comprehensive			Shareholders’
(Dollars in thousands)	Stock		Stock		Capital		Shares			Earnings		Loss, net			Equity
Balances at December 31, 2017		13,203,605	$	66,018	$	37,142	$	(1,129	)	$	13,679	$	(1,156	)	$	114,554
Net income		—		—		—		—			3,096		—			3,096
Other comprehensive loss		—		—		—		—			—		(1,536	)		(1,536	)
Stock options exercised, net		22,491		112		19		—			—		—			131
Director stock grant		12,620		64		62		—			—		—			126
ESOP collateral release		—		—		—		123			—		—			123
Share-based compensation expense		—		—		53		—			—		—			53
Balances at September 30, 2018		13,238,716	$	66,194	$	37,276	$	(1,006	)	$	16,775	$	(2,692	)	$	116,547

								Unearned
								Employee Stock					Accumulated
	Shares of				Additional			Ownership					Other		Total
	Common		Common		Paid-in			Plan			Retained		Comprehensive		Shareholders’
(Dollars in thousands)	Stock		Stock		Capital			Shares			Earnings		Income, net		Equity
Balances at July 1, 2019		13,332,484	$	66,662	$	36,699		$	(1,668	)	$	20,817	$	107	$	122,617
Net income		—		—		—			—			1,841		—		1,841
Other comprehensive income		—		—		—			—			—		233		233
Restricted stock awards		1,818		9		(9	)		—			—		—		—
ESOP collateral release		—		—		—			75			—		—		75
Share-based compensation expense		—		—		91			—			—		—		91
Balances at September 30, 2019		13,334,302	$	66,671	$	36,781		$	(1,593	)	$	22,658	$	340	$	124,857

							Unearned
							Employee Stock					Accumulated
	Shares of				Additional		Ownership					Other			Total
	Common		Common		Paid-in		Plan			Retained		Comprehensive			Shareholders’
(Dollars in thousands)	Stock		Stock		Capital		Shares			Earnings		Loss, net			Equity
Balances at July 1, 2018		13,226,096	$	66,130	$	37,207	$	(1,047	)	$	15,749	$	(2,315	)	$	115,724
Net income		—		—		—		—			1,026		—			1,026
Other comprehensive loss		—		—		—		—			—		(377	)		(377	)
Director stock grant		12,620		64		62		—			—		—			126
ESOP collateral release		—		—		—		41			—		—			41
Share-based compensation expense		—		—		7		—			—		—			7
Balances at September 30, 2018		13,238,716	$	66,194	$	37,276	$	(1,006	)	$	16,775	$	(2,692	)	$	116,547

	For the Nine Months Ended
(Dollars in thousands)	September 30, 2019			September 30, 2018
Cash Flows From Operating Activities
Net income	$	5,056		$	3,096
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		1,279			1,261
Net premium amortization on available-for-sale securities		397			167
Amortization of subordinated notes issuance costs		13			12
Amortization of core deposit intangible		517			610
Accretion of fair value adjustment on acquired time deposits		(96	)		(150	)
Accretion of fair value discounts on acquired loans		(993	)		(1,408	)
Provision for loan losses		871			481
Share-based compensation expense		315			115
Net losses on the sale of available-for-sale securities		1			—
Increase (decrease) in other real estate owned valuation allowance		423			(33	)
Net losses (gains) on sale of other real estate owned		18			(136	)
Net losses on the disposition of fixed and other assets		2			18
Decrease in value of mortgage servicing rights		67			18
Originations of loans held for sale (HFS)		(42,847	)		(17,096	)
Proceeds from HFS loan sales		43,411			19,039
Gains on HFS sold loans		(464	)		(292	)
Increase in cash surrender value of bank owned life insurance		(362	)		(374	)
Gain on curtailment of post-retirement benefit plan		—			(352	)
Increase in other assets, deferred tax asset, and accrued interest receivable		(2,914	)		(675	)
Increase in other liabilities		4,438			1,487
Net cash provided by operating activities		9,132			5,788
Cash Flows From Investing Activities
Proceeds from maturities and principal paydowns of available-for-sale securities		3,636			3,477
Proceeds from sales and calls of available-for-sale securities		4,560			—
Purchases of available-for-sale securities		(5,000	)		(9,650	)
Sales (purchases) of restricted securities, net		916			(963	)
Maturities of certificates of deposit		248			248
Decrease in federal funds sold		533			6,764
Net increase in loans		(30,300	)		(89,709	)
Proceeds from sale of other real estate owned		1,324			3,159
Net purchases of premises and equipment		(167	)		(2,113	)
Net cash used in investing activities		(24,250	)		(88,787	)
Cash Flows From Financing Activities
Net increase in demand, savings, and other interest-bearing demand deposits		23,552			36,435
Net increase in time deposits		28,040			10,997
Stock options exercised, net		9			131
Net increase (decrease) in securities sold under repurchase agreements and other borrowings		164			(3,415	)
(Decrease) increase in Federal Home Loan Bank advances		(32,000	)		10,000
Net cash provided by financing activities		19,765			54,148
Net increase (decrease) in cash and due from banks		4,647			(28,851	)
Cash and cash equivalents (including interest-earning deposits) at beginning of period		26,666			51,367
Cash and cash equivalents (including interest-earning deposits) at end of period	$	31,313		$	22,516
Supplemental Schedule of Cash Flow Information
Cash paid for:
Interest	$	11,264		$	6,983
Income taxes		—			700
Non-cash investing and financing activities:
Unrealized gain (loss) on available-for-sale securities		2,109			(1,944	)
Changes in deferred taxes resulting from other comprehensive income transactions		(443	)		408
Loans transferred to other real estate owned		346			2,369
Cumulative effect adjustment of adoption of accounting principle		(45	)		—
Employee stock ownership plan transactions		(141	)		(123	)
Director stock grant		148			64

Bay Banks of Virginia, Inc. (the “Company”) is the holding company for Virginia Commonwealth Bank (the “Bank”), for VCB Financial Group, Inc. (the “Financial Group”), and for Steptoes Holdings, LLC (“Steptoes Holdings”). The consolidated financial statements of the Company include the accounts of the Company, the Bank, the Financial Group, and Steptoes Holdings.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to the general practices within the banking industry. 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. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or for any other interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share, or shareholders’ equity as previously reported.

All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820), which is guidance for the modifications to fair value measurement disclosure requirements. This ASU removes, modifies and adds disclosure requirements for Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”). The disclosure requirement for the valuation process of level 3 fair value measurements was removed from ASC 820. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The disclosure requirements added to ASC 820 were the changes in unrealized gains and losses for the period included in other comprehensive income for the recurring level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop level 3 fair value measurements. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The additional disclosure requirements will be applied prospectively and the other modifications will be applied retrospectively. The Company is currently evaluating the effect that this ASU will have on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Accounting Standards Codification 326), which is new guidance for the accounting for credit losses on instruments within its scope. This ASU introduces a new model for current expected credit losses (“CECL”), which will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures, including loans, held-to-maturity debt securities, loan commitments, financial guarantees, net investments in leases, reinsurance, and trade receivables. The CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. In addition, this standard will replace the current available-for-sale debt securities other-than-temporary impairment model with an estimate of expected credit losses only when the fair value falls below the amortized cost of the asset. Credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The available-for-sale debt security model will also require the use of an allowance to record estimated credit losses and subsequent recoveries. This ASU also addresses purchased financial assets with credit deterioration. Disclosure requirements are expanded regarding an entity’s assumptions, models, and methods for estimating the allowance for loan losses. The Company has a CECL cross-functional working group that is implementing the standard supported by its third-party vendor. On July 17, 2019, the FASB voted to delay the effective date of this ASU for smaller reporting companies (“SRCs”) (including the Company) and non-SEC registrants to interim and annual periods beginning after December 15, 2022. The FASB directed its staff to draft a proposed ASU outlining this delay for public comment. On October 16, 2019, the FASB voted to officially extend the effective date of ASU 2016-13 for SRCs and non-SEC registrants as originally proposed on July 17, 2019. This ASU is effective for interim and annual reporting periods beginning after December 15, 2022.

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842) (“ASU 2016-02”). This ASU increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. This ASU was effective for the fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is a lessee in several lease agreements, such as for office space, which were considered operating leases and not recognized on its consolidated balance sheet for the year ended December 31, 2018. On January 1, 2019, the Company adopted the requirements of ASU 2016-02, and as part of the transition to the new standard, the Company measured and recognized leases that existed on January 1, 2019 using a modified retrospective approach. The adoption of ASU 2016-02 resulted in the

recognition of operating Right-of-Use (“ROU”) assets and operating lease liabilities of $3.5 million and $3.8 million, respectively, primarily related to real estate leases for branches and office space and information technology related equipment. The Company does not have any finance leases as stipulated in ASC 842. A cumulative effect adjustment of $45 thousand was recorded upon adoption of ASU 2016-02, which is reflected in the Company’s statement of shareholders’ equity. Refer to Note 7 for additional information and disclosures regarding ASU 2016-02.

The aggregate amortized costs and fair values of available-for-sale securities as of the dates stated were as follows.

Securities with fair values of $11.1 million and $17.5 million were pledged as collateral for securities sold under repurchase agreements as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019 and December 31, 2018, all of the securities pledged for repurchase agreements were state and municipal obligations. All of the repurchase agreements had remaining contractual maturities that were overnight and continuous. Securities sold under repurchase agreements were $6.3 million and $6.1 million as of September 30, 2019 and December 31, 2018, respectively, and are included in liabilities on the consolidated balance sheets. The securities pledged to each agreement are reviewed daily and can be changed at the option of the Bank with minimal risk of loss due to fair value changes.

The following tables present securities in an unrealized loss position as of September 30, 2019 and December 31, 2018, by period of the unrealized loss and number of securities. The unrealized loss positions were primarily related to interest rate movements and not the credit quality of the issuers. All agency securities and state and municipal securities are investment grade or better, and their losses are considered temporary. Management does not intend to sell nor expect to be required to sell these securities, and all amortized cost bases are expected to be recovered.

The following table presents the amortized cost and fair value by contractual maturity of available-for-sale securities as of the dates stated. Expected maturities may differ from contractual maturities, as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $3.9 million and $5.1 million as of September 30, 2019 and December 31, 2018, respectively. The Company also has an investment in the Federal Reserve Bank of Richmond (“FRB”) stock, which totaled $2.6 million as of September 30, 2019 and $2.3 million as of December 31, 2018 and a stock investment in the Bank’s primary correspondent bank totaling $220 thousand as of September 30, 2019 and December 31, 2018. The investments in both FHLB and FRB stock are required investments related to the Bank’s membership with the FHLB and FRB. These securities do not have a readily determinable fair value as their ownership is restricted, and they lack an active market for trading. Additionally, pursuant to charter provisions related to the FHLB and FRB stock, all repurchase transactions of such stock must occur at par. Accordingly, these securities are carried at cost and are periodically evaluated for impairment.

Loans are reported at their recorded investment, which is the outstanding principal balance net of any unearned income and costs, such as deferred fees and costs, charge-offs, and discounts or premiums on acquired or purchased loans. Interest on loans is recognized in earnings over the contractual term of the loan and is calculated using the effective interest method on principal amounts outstanding. Loan fees and certain direct origination costs are deferred and recognized as an adjustment of the related loan yield over the contractual term of the loan, adjusted for early pay-offs or principal curtailments, as applicable.

All interest accrued but not collected for loans that are placed on nonaccrual or charged-off are reversed against interest income at the time the loans are placed on nonaccrual or charged-off. Any subsequent interest received on these loans is recognized as interest income under the cash basis method of accounting or applied as a reduction of the principal balance of the loan until the loan qualifies for return to accrual status. Generally, a loan is returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured, or the loan becomes well-secured and in the process of collection.

As of September 30, 2019 and December 31, 2018, the Company had $351.2 million and $294.6 million, respectively, of loans pledged to the FHLB as collateral for borrowings. After adjustments by the FHLB, the total lendable collateral was $277.2 million and $229.1 million as of September 30, 2019 and December 31, 2018, respectively.

The following tables present the recorded investment for past due, based upon contractual terms, and nonaccrual loans as of the dates stated. A loan past due 90 days or more is generally placed on nonaccrual unless it is both well-secured and in the process of collection. Loans presented below as 90 days or more past due and still accruing include purchased credit-impaired (“PCI”) loans.

September 30, 2019	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total Loans
Mortgage loans on real estate:
Construction, land and land development	$	30	$	—	$	692	$	722	$	118,556	$	119,278
Commercial mortgages (non-owner occupied)		74		—		433		507		192,973		193,480
Commercial mortgages (owner occupied)		232		—		380		612		83,031		83,643
Residential first mortgages		1,473		25		1,773		3,271		297,914		301,185
Residential revolving and junior mortgages		—		—		762		762		32,932		33,694
Commercial and industrial		76		—		2,874		2,950		183,331		186,281
Consumer		216		—		280		496		13,975		14,471
Total loans	$	2,101	$	25	$	7,194	$	9,320	$	922,712	$	932,032

December 31, 2018	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total Loans
Mortgage loans on real estate:
Construction, land and land development	$	552	$	—	$	740	$	1,292	$	108,183	$	109,475
Commercial mortgages (non-owner occupied)		50		—		996		1,046		179,028		180,074
Commercial mortgages (owner occupied)		—		56		1,064		1,120		86,121		87,241
Residential first mortgages		1,341		55		1,361		2,757		296,137		298,894
Residential revolving and junior mortgages		115		—		782		897		37,416		38,313
Commercial and industrial		—		—		48		48		164,560		164,608
Consumer		329		—		215		544		23,196		23,740
Total loans	$	2,387	$	111	$	5,206	$	7,704	$	894,641	$	902,345

The following tables include an aging analysis, based upon contractual terms, of the recorded investment of PCI loans included in the tables above, as of the dates stated.

September 30, 2019	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total PCI Loans
Mortgage loans on real estate:
Construction, land and land development	$	—	$	—	$	—	$	—	$	1,368	$	1,368
Commercial mortgages (non-owner occupied)		—		—		—		—		125		125
Commercial mortgages (owner occupied)		—		—		—		—		265		265
Residential first mortgages		—		25		—		25		3,092		3,117
Residential revolving and junior mortgages		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer		—		—		—		—		43		43
Total purchased credit-impaired loans	$	—	$	25	$	—	$	25	$	4,893	$	4,918

December 31, 2018	30-89 Days Past Due		90 Days or More Past Due and Still Accruing		Nonaccrual		Total Past Due and Nonaccrual		Current		Total PCI Loans
Mortgage loans on real estate:
Construction, land and land development	$	23	$	—	$	—	$	23	$	1,355	$	1,378
Commercial mortgages (non-owner occupied)		—		—		—		—		142		142
Commercial mortgages (owner occupied)		—		56		—		56		237		293
Residential first mortgages		92		55		—		147		3,317		3,464
Residential revolving and junior mortgages		—		—		—		—		—		—
Commercial and industrial		—		—		—		—		—		—
Consumer		—		—		—		—		46		46
Total purchased credit-impaired loans	$	115	$	111	$	—	$	226	$	5,097	$	5,323

The following table presents the changes in accretable yield for PCI loans for the period stated.

Loans in the Company’s loan portfolio are risk rated on a periodic basis by experienced credit personnel.

Pass – Several pass credit risk ratings comprise loans in this category. These ratings are assigned based on varying levels of risk, ranging from credits that are secured by cash or marketable securities to management attention credits that have all characteristics of an acceptable credit risk but warrant more than the normal level of monitoring.

Special Mention – Adverse trends in the borrower’s financial position are evident and warrant management’s close attention. Any collateral may not be fully adequate to secure the loan balance.

Substandard – A loan in this category has a well-defined weakness in the primary repayment source that jeopardizes the timely collection of the loan. There is a distinct possibility that a loss may result if the weakness is not corrected.

Doubtful – Default has already occurred and it is likely that foreclosure or repossession procedures have begun or will begin in the near future. Weaknesses make collection or liquidation in full, based on currently existing information, highly questionable and improbable.

Loss – Uncollectible and of such little value that continuance as an asset is not warranted.

The following tables present the Company’s risk rating of loans by loan type as of the dates stated.

September 30, 2019	Construction, Land and Land Development		Commercial Mortgages (Non-Owner Occupied)		Commercial Mortgages (Owner Occupied)		Residential First Mortgages		Residential Revolving and Junior Mortgages		Commercial and Industrial		Consumer		Total Loans
Rating:
Pass	$	117,219	$	192,922	$	82,738	$	297,409	$	32,878	$	182,195	$	14,177	$	919,538
Special mention		—		—		150		922		87		17		—		1,176
Substandard		2,059		558		755		2,854		729		4,069		294		11,318
Doubtful		—		—		—		—		—		—		—		—
Total loans	$	119,278	$	193,480	$	83,643	$	301,185	$	33,694	$	186,281	$	14,471	$	932,032

December 31, 2018	Construction, Land and Land Development		Commercial Mortgages (Non-Owner Occupied)		Commercial Mortgages (Owner Occupied)		Residential First Mortgages		Residential Revolving and Junior Mortgages		Commercial and Industrial		Consumer		Total Loans
Rating:
Pass	$	107,306	$	178,936	$	85,897	$	295,372	$	37,206	$	162,392	$	23,389	$	890,498
Special mention		68		—		107		1,071		—		893		121		2,260
Substandard		2,101		1,138		1,237		2,451		1,107		1,323		230		9,587
Doubtful		—		—		—		—		—		—		—		—
Total loans	$	109,475	$	180,074	$	87,241	$	298,894	$	38,313	$	164,608	$	23,740	$	902,345

The allowance for loan losses (“ALL”) reflects management’s estimate of probable loan losses inherent in the loan portfolio as of the balance sheet date. Management uses a disciplined process and methodology to establish the ALL each quarter-end. To determine the total ALL, the Company estimates the reserves needed for each homogenous type of the loan portfolio, in addition to loans analyzed individually for impairment. Depending on the nature of each loan type, considerations include historical loss experience, adverse situations that may affect a borrower’s ability to repay, credit scores, past due history, estimated value of any underlying collateral, prevailing local and national economic conditions, and internal policies and procedures including credit risk management and underwriting. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as conditions change.

The ALL consists of specific, general, and unallocated components. The specific component is determined by identifying impaired loans (as described below) then evaluating each one individually to calculate the amount of impairment. Impaired loans measured individually for impairment generally include (1) any loan risk rated Special Mention or worse where the borrower has filed for bankruptcy; (2) all loans risk rated Substandard or worse with balances of $400 thousand or more; and (3) all loans classified as a troubled debt restructuring (“TDR”). For the general component of the ALL, the Company collectively evaluates any loans not evaluated individually for a specific reserve, including impaired loans risk rated Substandard or worse with balances less than $400 thousand. All loans evaluated collectively are grouped into types, and historical loss experience is calculated and applied to each loan type and the resultant reserve is adjusted for qualitative factors. Qualitative factors include changes in local and national economic indicators, such as unemployment rates, interest rates, gross domestic product growth, and real estate market trends; the level of past due and nonaccrual loans; risk ratings on individual loans; strength of credit policies and procedures; loan officer experience; borrower credit scores; and other intrinsic risks related to the types and geographic locations of loans. These qualitative adjustments reflect management’s judgment of risks inherent in the loan types. An unallocated component is maintained, if needed, to cover uncertainties that could affect management’s estimate of probable losses.

The following table presents the ALL by loans evaluated for impairment individually and collectively by loan type as of the dates stated.

September 30, 2019	Mortgage Loans on Real Estate		Commercial and Industrial		Consumer		Total
Allowance for loan losses applicable to:
Loans individually evaluated for impairment	$	750	$	141	$	116	$	1,007
Loans collectively evaluated for impairment		4,331		1,511		646		6,488
Purchased credit-impaired loans		—		—		—		—
Total allowance for loan losses	$	5,081	$	1,652	$	762	$	7,495
Loan balances applicable to:
Loans individually evaluated for impairment	$	6,302	$	2,689	$	116	$	9,107
Loans collectively evaluated for impairment		720,103		183,592		14,312		918,007
Purchased credit-impaired loans		4,875		—		43		4,918
Total loans	$	731,280	$	186,281	$	14,471	$	932,032
December 31, 2018
Allowance for loan losses applicable to:
Loans individually evaluated for impairment	$	1,036	$	—	$	121	$	1,157
Loans collectively evaluated for impairment		3,931		1,374		1,440		6,745
Purchased credit-impaired loans		—		—		—		—
Total allowance for loan losses	$	4,967	$	1,374	$	1,561	$	7,902
Loan balances applicable to:
Loans individually evaluated for impairment	$	7,485	$	—	$	121	$	7,606
Loans collectively evaluated for impairment		701,235		164,608		23,573		889,416
Purchased credit-impaired loans		5,277		—		46		5,323
Total loans	$	713,997	$	164,608	$	23,740	$	902,345

The following tables present an analysis of the change in the ALL by loan type for the periods presented.

For the Three Months Ended September 30, 2019	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
Beginning Balance	$	5,052		$	1,537		$	890		$	7,479
Charge-offs		(209	)		—			(345	)		(554	)
Recoveries		24			1			50			75
Provision		214			114			167			495
Ending Balance	$	5,081		$	1,652		$	762		$	7,495

For the Three Months Ended September 30, 2018	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
Beginning Balance	$	4,244		$	944		$	1,925		$	7,113
Charge-offs		(54	)		—			(418	)		(472	)
Recoveries		60			—			77			137
Provision		157			186			166			509
Ending Balance	$	4,407		$	1,130		$	1,750		$	7,287

For the Nine Months Ended September 30, 2019	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
Beginning Balance	$	4,967		$	1,374		$	1,561		$	7,902
Charge-offs		(368	)		—			(1,163	)		(1,531	)
Recoveries		67			1			185			253
Provision		415			277			179			871
Ending Balance	$	5,081		$	1,652		$	762		$	7,495

For the Nine Months Ended September 30, 2018	Mortgage Loans on Real Estate			Commercial and Industrial			Consumer			Total
Beginning Balance	$	3,864		$	878		$	3,028		$	7,770
Charge-offs		(168	)		(116	)		(1,095	)		(1,379	)
Recoveries		103			1			311			415
Provision (recovery of)		608			367			(494	)		481
Ending Balance	$	4,407		$	1,130		$	1,750		$	7,287

The following table presents the Company’s recorded investment and the borrowers’ unpaid principal balances for impaired loans, excluding PCI loans, with the associated ALL amount, if applicable, by loan type as of the dates stated.

	As of September 30, 2019						As of December 31, 2018
	Recorded Investment		Borrowers’ Unpaid Principal Balance		Related Allowance		Recorded Investment		Borrowers’ Unpaid Principal Balance		Related Allowance
With no related allowance:
Construction, land and land development	$	324	$	395	$	—	$	335	$	406	$	—
Commercial mortgages (non-owner occupied)		—		—		—		386		386		—
Commercial mortgages (owner occupied)		425		425		—		—		—		—
Residential first mortgages		1,027		1,027		—		—		—		—
Residential revolving and junior mortgages		—		—		—		1,028		1,028		—
Commercial and industrial		—		—		—		—		—		—
Consumer		—		—		—		—		—		—
Total impaired loans with no related allowance		1,776		1,847		—		1,749		1,820		—
With an allowance recorded:
Construction, land and land development		173		173		38		275		275		132
Commercial mortgages (non-owner occupied)		433		433		33		443		443		18
Commercial mortgages (owner occupied)		1,052		1,052		53		1,069		1,069		57
Residential first mortgages		2,785		2,785		543		3,447		3,447		565
Residential revolving and junior mortgages		83		83		83		502		502		264
Commercial and industrial		2,689		2,689		141		—		—		—
Consumer		116		116		116		121		121		121
Total impaired loans with allowance recorded		7,331		7,331		1,007		5,857		5,857		1,157
Total impaired loans:
Construction, land and land development		497		568		38		610		681		132
Commercial mortgages (non-owner occupied)		433		433		33		829		829		18
Commercial mortgages (owner occupied)		1,477		1,477		53		1,069		1,069		57
Residential first mortgages		3,812		3,812		543		3,447		3,447		565
Residential revolving and junior mortgages		83		83		83		1,530		1,530		264
Commercial and industrial		2,689		2,689		141		—		—		—
Consumer		116		116		116		121		121		121
Total impaired loans	$	9,107	$	9,178	$	1,007	$	7,606	$	7,677	$	1,157

The following table presents the average recorded investment and interest income recognized for impaired loans, excluding PCI loans, by loan type for the periods presented.

	For the Three Months Ended								For the Nine Months Ended
	September 30, 2019				September 30, 2018				September 30, 2019				September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Construction, land and land development	$	326	$	1	$	93	$	—	$	330	$	4	$	147	$	1
Commercial mortgages (non-owner occupied)		—		—		—		—		—		—		—		—
Commercial mortgages (owner occupied)		427		6		1,013		8		405		20		985		29
Residential first mortgages		1,039		14		1,472		21		1,113		43		1,282		62
Residential revolving and junior mortgages		—		—		416		1		—		—		415		4
Commercial and industrial		—		—		—		—		—		—		—		—
Consumer		—		—		—		3		—		—		—		—
Total impaired loans with no allowance		1,792		21		2,994		33		1,848		67		2,829		96
With an allowance recorded:
Construction, land and land development		175		3		524		8		224		18		512		24
Commercial mortgages (non-owner occupied)		434		3		445		11		436		30		223		11
Commercial mortgages (owner occupied)		1,055		14		935		13		1,061		42		945		39
Residential first mortgages		3,039		34		2,394		32		3,181		93		2,277		94
Residential revolving and junior mortgages		128		2		130		2		397		7		125		7
Commercial and industrial		1,344		30		—		—		672		30		—		—
Consumer		118		2		—		—		119		6		—		8
Total impaired loans with allowance recorded		6,293		88		4,428		66		6,090		226		4,082		183
Total impaired loans:
Construction, land and land development		501		4		617		8		554		22		659		25
Commercial mortgages (non-owner occupied)		434		3		445		11		436		30		223		11
Commercial mortgages (owner occupied)		1,482		20		1,948		21		1,466		62		1,930		68
Residential first mortgages		4,078		48		3,866		53		4,294		136		3,559		156
Residential revolving and junior mortgages		128		2		546		3		397		7		540		11
Commercial and industrial		1,344		30		—		—		672		30		—		—
Consumer		118		2		—		3		119		6		—		8
Total impaired loans	$	8,085	$	109	$	7,422	$	99	$	7,938	$	293	$	6,911	$	279

The following table presents a reconciliation of nonaccrual loans to impaired loans as of the dates stated.

For economic or legal reasons related to a borrower’s financial condition, management may grant a concession to a borrower that it would not otherwise consider. In cases where borrowers are experiencing financial difficulties and are granted new terms that provide for a reduction of either interest or principal or an extension of the maturity date at a stated interest rate lower than the current market rate for new debt with similar risks, the related loan is classified as a troubled debt restructuring. Management strives to identify borrowers in financial difficulty early and may work with them to modify their loan(s) to more affordable terms before their loan

reaches nonaccrual status. These modified terms may include rate reductions, principal forgiveness, payment forbearance, and other actions intended to minimize the economic loss to the Company and are classified as TDRs.

TDRs are considered impaired loans and are individually evaluated for impairment for the ALL. The following tables present by loan type information related to loans modified as TDRs for the periods presented.

No loans designated as TDRs subsequently defaulted in the three or nine months ended September 30, 2019 or 2018.

The following table presents a roll-forward of accruing and nonaccrual TDRs for the period presented.

The following table presents the number and carrying values of properties included in other real estate owned (“OREO”) as of the dates stated.

There were three residential mortgage loans totaling $255 thousand in the process of foreclosure as of September 30, 2019.

On January 1, 2019, the Company adopted the requirements of ASU 2016-02. As part of the adoption of this accounting standard, the Company evaluated its population of existing real estate and equipment leases as of January 1, 2019. The purpose was to determine

whether the Company’s existing contractual arrangements constitute a lease, or contains an embedded lease, which would be in scope under ASU 2016-02, and whether such leases would meet the requirements of an operating or financing lease under the new standard. Based on this evaluation, the Company identified 16 operating leases for land, buildings, and equipment with remaining lease terms ranging from one to ten years. Most of the Company’s leases include renewal options, with renewal terms extending the lease obligation up to as much as five years. Lease terms may include renewal or extension options to the extent they are reasonably certain to be exercised as assessed at lease commencement. As of and for the nine months ended September 30, 2019, the Company did not have any leases that met the standard definition of a finance lease nor did it engage in any sale-leaseback transactions, have any short-term leases, or have any sublease income.

For operating leases, ROU assets and lease liabilities are recognized at the commencement date of the respective lease. ROU assets represent the Company’s right to use leased assets over the term of the lease. Lease liabilities represent the Company’s contractual obligation to make lease payments over the lease term and are measured as the present value of the lease payments over the lease term. ROU assets are measured as the amount of the lease liability adjusted for certain items such as prepaid lease payments, unamortized lease incentives, and unamortized direct costs. ROU assets are amortized on a straight-line basis less the periodic interest expense adjustment of the lease liability and the amortization is included in occupancy expense in the Company’s consolidated statements of operations. For the three and nine months ended September 30, 2019, operating lease expense totaled $225 thousand and $685 thousand, respectively. The discount rate used for the present value calculations for lease liabilities was the rate implicit in the lease if determinable, and when the rate was not determinable, the Company used its incremental, collateralized borrowing rate with the FHLB for the period that most closely coincided with the respective lease term as of the commencement date of the lease.

During the first quarter of 2019, the Company commenced a new operating lease for the Richmond, Virginia office of the Financial Group, which resulted in the recognition of an operating ROU asset and lease liability of $826 thousand. During the second quarter of 2019, the Company commenced a new operating lease for a retail branch in Henrico County, Virginia, which resulted in the recognition of an operating ROU asset and lease liability of $478 thousand and $473 thousand, respectively.

The following table presents the ROU assets and lease liabilities as of the date stated. ROU assets and lease liabilities are included in other assets and other liabilities, respectively, in the Company’s consolidated balance sheets.

The following table presents the weighted average remaining lease term and discount rate associated with the Company’s operating leases as of the date stated.

The following table presents a maturity analysis of the Company’s operating lease liabilities for the five years ending subsequent to September 30, 2019 and in total thereafter.

The following table presents supplemental cash flow information related to the Company’s operating leases for the period stated.

As part of the implementation of ASU 2016-02, the Company elected various practical expedients. The Company elected to retain the operating lease classification for all of its existing leases as of January 1, 2019 under the former lease accounting standard. The Company elected not to reassess whether existing leases contained embedded lease arrangements or whether there were initial directs costs that should have been considered as part of the transition to ASU 2016-02. The Company also elected not to recognize an ROU asset and lease obligation for contracts with an initial term of twelve months or less. The expense associated with these short-term leases is included in noninterest expense in the consolidated statements of operations. To the extent that a lease arrangement includes both lease and non-lease components, the Company has elected not to account for these separately. Lastly, the Company has elected in its accounting policies to utilize a fair value threshold, such that a contract with an ROU asset or lease obligation below a minimum threshold of $7.5 thousand is excluded from the provisions of ASU 2016-02.

The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock. Basic earnings per share amounts are computed by dividing net income (the numerator) by the weighted average number of common shares outstanding (the denominator). Diluted earnings per share amounts assume the conversion, exercise, or issuance of all potential common stock instruments, unless the effect is to reduce the loss or increase earnings per common share (anti-dilutive). For both computations, the weighted average number of the Company’s employee stock ownership plan (“ESOP”) shares not committed to be released to participant accounts are not assumed to be outstanding. The weighted average ESOP shares excluded from the computation were 197,804 and 203,904 for the three and nine months ended September 30, 2019, respectively. The weighted average ESOP shares excluded from the computation were 147,383 and 154,376 for the three and nine months ended September 30, 2018, respectively. For the three months ended September 30, 2019 and 2018, options on 119,047 and 88,784 shares, respectively, were not included in computing diluted earnings per share because their effects would have been anti-dilutive. For the nine months ended September 30, 2019 and 2018, options on 119,047 and 88,784 shares, respectively, were not included in computing diluted earnings per share because their effects would have been anti-dilutive.

As of September 30, 2019 and December 31, 2018, the Bank had $68.0 million and $100.0 million of outstanding FHLB borrowings, consisting of five and four advances, respectively. Advances on the FHLB line are secured by a blanket lien on qualified one-to-four family real estate, commercial real estate, and multifamily residential loans. Immediately available credit, as of September 30, 2019, was $186.4 million against a total line of credit of $272.4 million. As of September 30, 2019, the Bank had $18.0 million of letters of credit issued by the FHLB for the benefit of the Virginia Department of the Treasury as collateral for public deposits held by the Bank to comply with the Security of Public Deposits Act. The $18.0 million is not an outstanding borrowing, as of September 30, 2019, but does reduce the available credit under the FHLB credit line.

The following table presents information regarding the five advances outstanding as of September 30, 2019.

On May 28, 2015, the Company entered into a purchase agreement with 29 accredited investors under which the Company issued an aggregate of $7.0 million of subordinated notes (the “2025 Notes”) to the accredited investors. The 2025 Notes have a maturity date of May 28, 2025 and bear interest, payable on the first of March and September of each year, at a fixed interest rate of 6.50% per year. The 2025 Notes are not convertible into common stock or preferred stock and are not callable by the holders. The Company has the right to redeem the 2025 Notes, in whole or in part, without premium or penalty, at any interest payment date on or after May 28, 2020, but in all cases in a principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. If an event of default occurs, such as the bankruptcy of the Company, the holder of a 2025 Note may declare the principal amount of the 2025 Notes to be due and immediately payable. The 2025 Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s existing and future senior indebtedness. The 2025 Notes qualify as Tier 2 capital at the consolidated company level for regulatory reporting. The aggregate carrying value of the 2025 Notes, including capitalized debt issuance costs, was $6.9 million as of September 30, 2019 and December 31, 2018. For the three and nine months ended September 30, 2019 and 2018, the effective interest rate on the notes was 6.83% and 6.85%, respectively.

The aggregate carrying value of debt secured by shares of Company stock, issued and outstanding, in the Company’s ESOP was $1.6 million and $1.7 million as of September 30, 2019 and December 31, 2018, respectively, and is included in other liabilities on the consolidated balance sheets. The debt is comprised of four fixed rate amortizing notes, three of which carry an interest rate of 3.25% and one that carries an interest rate of 4.50% with maturity dates ranging from March 1, 2025 to December 31, 2027, and one variable rate amortizing note with a maturity date of June 14, 2024. Shares that collateralize these loans are not allocated to ESOP participants’ accounts.

The Company uses fair value to record certain assets and liabilities and to determine fair value disclosures. Authoritative accounting guidance (ASC 820, Fair Value Measurements (“ASC 820”)) clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value also assumes that the reporting entity would sell the asset or transfer the liability in the principal or most advantageous market.

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Available-for-sale securities: Available-for-sale securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured

utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third-party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2). In certain cases, where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The Company engages a third-party to determine the fair value of its available-for-sale securities.

Rabbi trust assets: The Company has a rabbi trust for the benefit of participants in the company’s deferred compensation benefit plan. The assets held by the rabbi trust are invested at the direction of the individual participants and are generally invested in marketable investment securities such as common stocks and mutual funds or short-term investments (e.g., cash) (Level 1). Rabbi trust assets are included in other assets on the consolidated balance sheets.

Mortgage servicing rights (“MSRs”): The Company currently owns MSRs from two residential loan portfolios, one serviced for Fannie Mae and one serviced for Freddie Mac. The MSRs are recorded at and adjusted to fair value on a recurring basis, with changes in fair value recorded in results of operations.

The Company engages a third-party to determine the fair value of MSRs. The third-party employs a model to determine fair value, which establishes pools of performing loans, calculates cash flows for each pool, and applies a discount rate to each pool. Loans are segregated into 12 pools based on each loan’s term and seasoning (age). All loans have fixed interest rates. Cash flows are then estimated by utilizing assumed service costs and prepayment speeds. Monthly service costs were assumed to be $6.50 per loan as of September 30, 2019 and as of December 31, 2018. Prepayment speeds are determined primarily based on the average interest rate of the loans in each pool. The prepayment scale used is the Public Securities Association (“PSA”) model, where “100% PSA” means prepayments are zero in the first month, then increase by 0.2% of the loan balance each month until reaching 6.0% in month 30. Thereafter, the 100% PSA model assumes an annual prepayment of 6.0% of the remaining loan balance. The average PSA speed assumption in the fair value model is 188% and 133% as of September 30, 2019 and December 31, 2018, respectively. A discount rate of 12.5% was then applied to each pool as of September 30, 2019 and as of December 31, 2018. The discount rate is intended to represent the estimated market yield for the highest quality grade of comparable servicing. MSRs are classified as Level 3.

The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of the dates stated.

The following table presents the change in financial assets valued using Level 3 inputs for the periods stated.

The $1.0 million transfer from level 2 to level 3 fair value for corporate bonds was attributable to a lack of observable market transactions as of September 30, 2019.

Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. The measurement of loss associated with impaired loans can be based on either the discounted cash flows of the loan or the fair value of the collateral less estimated costs to sell, if the loan is collateral-dependent. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. Any given loan may have multiple types of collateral; however, the majority of the Company’s loan collateral is real estate. The value of real estate collateral is generally determined utilizing a market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2). However, if the collateral value is significantly adjusted due to differences in the comparable properties, or is discounted by the Company because of lack of marketability, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Fair value adjustments to impaired loans, if any, are recorded in the period incurred as provision for loan losses on the consolidated statements of operations.

Other Real Estate Owned, net: OREO is measured at fair value less estimated costs to sell, generally based on an appraisal conducted by an independent, licensed appraiser, or using other methods such as a brokered price opinion of a third-party real estate agent. If the collateral value is significantly adjusted due to differences in the comparable properties or is discounted by the Company because of lack of marketability, then the fair value is considered Level 3. Fair value adjustments, if any, are recorded in the period incurred and included in other noninterest expense on the consolidated statements of operations.

The following tables present the Company’s assets that were measured at fair value on a nonrecurring basis as of the dates stated.

The following tables present quantitative information about Level 3 fair value measurements as of the dates stated.

The carrying values of cash and due from banks, interest-earning deposits, federal funds sold or purchased, noninterest-bearing deposits, savings and interest-bearing deposits, and securities sold under repurchase agreements are payable on demand or are of such short duration that carrying value approximates market value (Level 1).

The carrying values of certificates of deposit, loans held for sale, and accrued interest receivable are payable on demand or are of such short duration that carrying value approximates market value (Level 2).

The carrying value of restricted securities approximates fair value based on the redemption provisions of the issuer (Level 3).

The fair value of performing loans is estimated by discounting the future cash flows using two sets of data sources. First, recent originations occurring over the prior twelve months were evaluated, and second, market data showing originations over the prior three months was evaluated. The selected rate was the greater of the two sources. For all loans other than a selective consumer loan portfolio, credit loss severity rates were calculated using the probability of default and the loss given default percentages derived from market data. For the consumer loan portfolio, historical delinquency data was obtained by the servicer of the portfolio. The fair value of impaired loans is measured as described within the Impaired Loans section of this note. The fair value of loans does consider the lack of liquidity and uncertainty in the market that might affect the valuation (Level 3).

Time deposits are presented at estimated fair value by discounting the future cash flows using recent issuance rates over the prior three months and a market rate analysis of recent offering rates (Level 3).

The fair value of the Company’s subordinated notes is estimated by utilizing recent issuance rates for subordinated debt offerings of similar issuer size (Level 3).

The fair value of FHLB advances is estimated by discounting the future cash flows using current interest rates offered for similar advances (Level 2).

Commitments to extend and standby letters of credit are generally not sold or traded. The estimated fair values of off-balance sheet credit commitments, including standby letters of credit and guarantees written, are not readily available due to the lack of cost-effective and reliable measurement methods for these instruments.

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair value of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

The following tables summarize the Company’s financial assets and liabilities at carrying values and estimated fair values on a nonrecurring basis as of the dates stated.

	Carrying Value as of		Fair Value as of		Fair Value Measurements as of September 30, 2019 Using
	September 30, 2019		September 30, 2019		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	7,419	$	7,419	$	7,419	$	—	$	—
Interest-earning deposits		23,894		23,894		23,894		—		—
Federal funds sold		92		92		92		—		—
Certificates of deposit		3,498		3,498		—		3,498		—
Restricted securities		6,684		6,684		—		—		6,684
Loans receivable, net		924,268		911,497		—		—		911,497
Loans held for sale		268		268		—		268		—
Accrued interest receivable		3,104		3,104		—		3,104		—
Financial Liabilities:
Noninterest-bearing demand deposits		124,670		124,670		124,670		—		—
Savings and interest-bearing demand deposits		372,404		372,404		372,404		—		—
Time deposits		396,614		398,254		—		—		398,254
Securities sold under repurchase agreements		6,323		6,323		6,323		—		—
FHLB advances		68,000		67,886		—		67,886		—
Subordinated notes, net		6,906		7,032		—		—		7,032

	Carrying Value as of		Fair Value as of		Fair Value Measurements as of December 31, 2018 Using
	December 31, 2018		December 31, 2018		Level 1		Level 2		Level 3
Financial Assets:
Cash and due from banks	$	7,685	$	7,685	$	7,685	$	—	$	—
Interest-earning deposits		18,981		18,981		18,981		—		—
Federal funds sold		625		625		—		625		—
Certificates of deposit		3,746		3,746		3,746		—		—
Restricted securities		7,600		7,600		—		—		7,600
Loans receivable, net		894,191		877,114		—		—		877,114
Loans held for sale		368		368		—		368		—
Accrued interest receivable		3,172		3,172		—		3,172		—
Financial Liabilities:
Noninterest-bearing demand deposits		114,122		114,122		114,122		—		—
Savings and interest-bearing demand deposits		359,400		359,400		359,400		—		—
Time deposits		368,670		369,347		—		—		369,347
Securities sold under repurchase agreements		6,089		6,089		6,089		—		—
FHLB advances		100,000		99,727		—		99,727		—
Subordinated notes, net		6,893		7,046		—		—		7,046

The components of accumulated other comprehensive income (loss), net of deferred income taxes, are presented in the following tables for the periods presented.

On October 7, 2019, the Company announced that it had completed a private placement of $25.0 million in fixed-to-floating rate subordinated notes due 2029 (the “2029 Notes”). The 2029 Notes have been structured to qualify as Tier 2 capital under bank regulatory guidelines, and the proceeds from the sale of the 2029 Notes will be utilized for general corporate purposes, including the potential repayment of the 2025 Notes (which become callable in May 2020) and supporting capital levels at the Bank. The 2029 Notes will initially bear interest at 5.625% per annum, beginning October 7, 2019 through October 14, 2024, payable semi-annually in arrears. From October 15, 2024 through October 14, 2029, or up to an early redemption date, the interest rate shall reset quarterly to an interest rate per annum equal to the then current three-month SOFR (as defined in the 2029 Notes) plus 433.5 basis points, payable quarterly in arrears. Beginning on October 15, 2024 through maturity, the 2029 Notes may be redeemed, at the Company's option, on any scheduled interest payment date. The 2029 Notes will mature on October 15, 2029.

On October 18, 2019, the Company announced that its Board of Directors had authorized the repurchase of up to 400,000 shares or approximately 3% of the Company’s currently outstanding common stock through December 31, 2020 (the “Repurchase Program”). The actual timing, quantities, prices, and manner of any share repurchases will be determined by the Company in its discretion and will depend on a number of factors, including the market price of the Company’s common stock, share repurchases required under the Company’s employee benefit plans, general market and economic conditions, and applicable legal and regulatory requirements. The Repurchase Program may be modified, amended, or terminated by the Company’s Board of Directors at any time. There is no guarantee as to the number of shares that the Company will repurchase under the Repurchase Program.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is intended to assist in understanding the results of operations and the financial condition of Bay Banks of Virginia, Inc. (the “Company”), the holding company for Virginia Commonwealth Bank (the “Bank”) and VCB Financial Group, Inc. (the “Financial Group”). This discussion should be read in conjunction with the consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).

This report contains statements concerning the Company’s expectations, plans, objectives, future financial performance, and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. These forward-looking statements include statements about the Company’s plans, obligations, expectations and intentions, and other statements that are not historical facts. Words such as “anticipates,” “believes,” “intends,” “should,” “expects,” “will,” and variations of similar expressions are intended to identify forward-looking statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to: changes in interest rates, general economic conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System (the “Federal Reserve”); the quality or composition of the loan and investment portfolios; demand for loan products; deposit flows; competition; expansion activities; demand for financial services in the Company’s market area; accounting principles, policies, and guidelines; changes in banking, tax, and other laws and regulations and interpretations or guidance thereunder; and other factors detailed in the Company’s publicly filed documents, including the factors described in Item 1A., “Risk Factors,” in the 2018 Form 10-K. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.

All dollar amounts included in the tables of this discussion are in thousands, except per share data, unless otherwise stated. There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2018 Form 10-K.

The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest expense. Net interest margin is net interest income expressed as a percentage of average interest-earning assets. Changes in the volume and/or mix of interest-earning assets and interest-bearing liabilities, the associated yields and rates, the level of noninterest-bearing deposits, and the volume of nonperforming assets have an effect on net interest income, net interest margin, and net income.

The following table presents average interest-earning assets and interest-bearing liabilities, taxable-equivalent yields on such assets, and rates (costs) paid on such liabilities, net interest margin (“NIM”), and net interest spread, as of and for the periods stated. Yields and costs are annualized.

	Average Balances, Income and Expense, Yields and Rates
	As of and for the Three Months Ended September 30,
	2019							2018							2019 Compared to 2018
	Average		Income/		Yield/			Average		Income/		Yield/			Income/ Expense			Variance Attributable to (8)
	Balance		Expense		Cost			Balance		Expense		Cost			Variance			Rate			Volume
INTEREST-EARNING ASSETS:
Taxable securities	$	71,752	$	553		3.06	%	$	63,304	$	498		3.12	%	$	55		$	(11	)	$	66
Tax-exempt securities (1)		16,086		143		3.53	%		19,149		151		3.12	%		(8	)		16			(24	)
Total securities		87,838		696		3.14	%		82,453		649		3.12	%		47			5			42
Gross loans (2) (3)		923,606		11,930		5.12	%		821,778		10,126		4.89	%		1,804			549			1,255
Interest-earning deposits and federal funds sold		28,301		151		2.12	%		21,769		110		2.00	%		41			8			33
Certificates of deposits		3,498		18		2.04	%		3,111		17		2.17	%		1			(1	)		2
Total interest-earning assets		1,043,243		12,795		4.87	%		929,111		10,902		4.66	%	$	1,893		$	561		$	1,332
Noninterest-earning assets		66,743							65,098
Total average assets	$	1,109,986						$	994,209
INTEREST-BEARING LIABILITIES:
Savings deposits	$	57,770	$	40		0.27	%	$	62,258	$	47		0.30	%	$	(7	)	$	(4	)	$	(3	)
Demand deposits		71,905		26		0.14	%		78,556		38		0.19	%		(12	)		(9	)		(3	)
Time deposits (4)		392,868		2,163		2.18	%		365,444		1,462		1.59	%		701			591			110
Money market deposits		241,360		894		1.47	%		171,529		480		1.11	%		414			219			195
Total deposits		763,903		3,123		1.62	%		677,787		2,027		1.19	%		1,096			797			299
Securities sold under repurchase agreements		6,439		4		0.25	%		5,724		3		0.21	%		1			1			—
Subordinated notes and ESOP debt		8,550		142		6.59	%		7,932		128		6.40	%		14			4			10
FHLB advances		72,500		465		2.54	%		70,543		441		2.48	%		24			12			12
Total interest-bearing liabilities		851,392		3,734		1.74	%		761,986		2,599		1.35	%	$	1,135		$	814		$	321
Noninterest-bearing deposits		123,541							108,594
Other noninterest-bearing liabilities		11,654							8,175
Total average liabilities		986,587							878,755
Average shareholders' equity		123,399							115,454
Total average liabilities and shareholders' equity	$	1,109,986						$	994,209
Net interest income and NIM (5)			$	9,061		3.45	%			$	8,303		3.57	%	$	758		$	(253	)	$	1,011
Total cost of funds (6)						1.52	%						1.19	%
Net interest spread (7)						3.13	%						3.31	%

Interest income, on a taxable-equivalent basis, for the three months ended September 30, 2019 was $12.8 million, an increase of $1.9 million from the third quarter of 2018, primarily attributable to higher average interest-earning assets of $1.04 billion in the 2019 period compared to $929.1 million in the 2018 period, an increase of $114.1 million ($101.8 million attributable to gross loans) and higher yields on gross loans in the 2019 period. Yields on average interest-earning assets were 4.87% and 4.66% for the third quarters of 2019 and 2018, respectively. The increase in yield on average interest-earning assets was primarily attributable to higher loan yields in the 2019 period.

Loans acquired in the Merger were discounted to estimated fair value (for credit losses and interest rates) as of the effective date of the Merger. A portion of the acquisition accounting adjustments (discounts) to record the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans for those loans that were deemed to be, as of the Merger date, purchased performing and over the period of expected cash flows from the loans that were deemed to be purchased credit-impaired (“PCI”). The amount of accretion income recognized within a period is based on many factors, including among other factors, loan prepayments and curtailments; therefore, amounts recognized are subject to volatility. Accretion of discounts on acquired loans was $357 thousand in the third quarters of 2019 and 2018.

Average interest-earning assets comprised 94.0% and 93.5% of the Company’s average assets for the three months ended September 30, 2019 and 2018, respectively.

Interest expense for the three months ended September 30, 2019 was $3.7 million, an increase of $1.1 million from the third quarter of 2018, primarily attributable to higher costs of interest-bearing liabilities, particularly time and money market deposits. Average interest-bearing liabilities increased by $89.4 million to $851.4 million in the 2019 period compared to $762.0 million in the 2018 period. The increase in average interest-bearing liabilities was primarily attributable to deposit growth, particularly money market deposits, which increased $69.8 million quarter-over-quarter. Higher cost of funds (1.52% and 1.19% for the third quarters of 2019 and 2018, respectively) was primarily due to competition for deposits in the Company’s markets.

Net interest income, on a taxable-equivalent basis, for the three months ended September 30, 2019 was $9.1 million, an increase of $758 thousand from the three months ended September 30, 2018.

Net interest margin was 3.45% and 3.57% for the three months ended September 30, 2019 and 2018, respectively. The decrease in NIM was primarily attributable to the increase in cost of funds quarter-over-quarter, as noted above, partially offset by higher yields on gross loans in the 2019 period.

Interest expense on the 2029 Notes, issued on October 7, 2019, will have a negative effect on the Company’s cost of funds and NIM beginning in the fourth quarter of 2019.

The following table presents average interest-earning assets and interest-bearing liabilities, taxable-equivalent yields on such assets, and rates (costs) paid on such liabilities, NIM, and net interest spread, as of and for the periods stated. Yields and costs are annualized.

	Average Balances, Income and Expense, Yields and Rates
	As of and for the For the Nine Months Ended September 30,
	2019							2018							2019 Compared to 2018
																		Variance Attributable to (8)
	Average Balance		Income/ Expense		Yield/ Cost			Average Balance		Income/ Expense		Yield/ Cost			Income/ Expense Variance			Rate			Volume
INTEREST-EARNING ASSETS:
Taxable securities	$	70,549	$	1,725		3.27	%	$	62,490	$	1,392		2.98	%	$	333		$	153		$	180
Tax-exempt securities (1)		17,436		414		3.17	%		19,195		451		3.14	%		(37	)		4			(41	)
Total securities		87,985		2,139		3.25	%		81,685		1,843		3.02	%		296			158			138
Gross loans (2) (3)		916,289		34,849		5.08	%		799,080		29,853		4.99	%		4,996			617			4,379
Interest-earning deposits and federal funds sold		27,088		463		2.29	%		32,217		413		1.71	%		50			116			(66	)
Certificates of deposits		3,653		57		2.09	%		3,186		54		2.27	%		3			(5	)		8
Total interest-earning assets		1,035,015	$	37,508		4.85	%		916,168	$	32,163		4.69	%	$	5,345		$	886		$	4,459
Noninterest-earning assets		66,308							64,718
Total average assets	$	1,101,323						$	980,886
INTEREST-BEARING LIABILITIES:
Savings deposits	$	57,648	$	128		0.30	%	$	63,078	$	139		0.29	%	$	(11	)	$	1		$	(12	)
Demand deposits		73,727		95		0.17	%		81,236		121		0.20	%		(26	)		(15	)		(11	)
Time deposits (4)		382,179		6,036		2.11	%		367,524		4,030		1.47	%		2,006			1,845			161
Money market deposits		239,548		2,760		1.54	%		158,077		1,137		0.96	%		1,623			1,037			586
Total deposits		753,102		9,019		1.60	%		669,915		5,427		1.08	%		3,592			2,868			724
Securities sold under repurchase agreements		6,418		11		0.23	%		6,575		10		0.20	%		1			1			—
Subordinated notes and ESOP debt		8,578		417		6.50	%		7,969		384		6.44	%		33			4			29
FHLB advances		86,015		1,784		2.77	%		68,059		1,140		2.24	%		644			343			301
Total interest-bearing liabilities		854,113	$	11,231		1.76	%		752,518	$	6,961		1.24	%	$	4,270		$	3,217		$	1,053
Noninterest-bearing deposits		116,055							105,166
Other noninterest-bearing liabilities		10,450							8,724
Total average liabilities		980,618							866,408
Average shareholders' equity		120,705							114,478
Total average liabilities and shareholders' equity	$	1,101,323						$	980,886
Net interest income and NIM (5)			$	26,277		3.39	%			$	25,202		3.67	%	$	1,075		$	(2,331	)	$	3,406
Total cost of funds (6)						1.55	%						1.08	%
Net interest spread (7)						3.09	%						3.46	%

Interest income, on a taxable-equivalent basis, for the nine months ended September 30, 2019 was $37.5 million, an increase of $5.3 million from the first nine months of 2018, primarily attributable to higher average interest-earning assets of $1.04 billion in the 2019 period compared to $916.2 million in the 2018 period, an increase of $118.8 million ($117.2 million attributable to gross loans). Accretion of discounts on acquired loans in the first nine months of 2019 was $993 thousand compared to $1.4 million in the first nine months of 2018, a decline of $415 thousand. Yields on average interest-earning assets were 4.85% and 4.69% for the first nine months

of 2019 and 2018, respectively. The higher yield on average interest-earning assets in the 2019 period was primarily due to higher loan yields, partially offset by lower accretion of acquired loan discounts, which had a negative 5 basis point effect.

Average interest-earning assets comprised 94.0% and 93.4% of the Company’s average assets for the nine months ended September 30, 2019 and 2018, respectively.

Interest expense for the nine months ended September 30, 2019 was $11.2 million, an increase of $4.3 million from the first nine months of 2018, primarily attributable to higher costs of interest-bearing liabilities. Average interest-bearing liabilities increased by $101.6 million to $854.1 million in the 2019 period compared to $752.5 million in the 2018 period. The increase in average interest-bearing liabilities was primarily attributable to deposit growth, particularly money market deposits, which increased $81.5 million quarter-over-quarter. Higher cost of funds (1.55% and 1.08% for the first nine months of 2019 and 2018, respectively) were primarily due to competition for deposits in the Company’s markets, the repricing of maturing time deposits, and higher rates paid on Federal Home Loan Bank of Atlanta (“FHLB”) advances.

Net interest income, on a taxable-equivalent basis, for the nine months ended September 30, 2019 was $26.3 million, an increase of $1.1 million from the nine months ended September 30, 2018.

Net interest margin was 3.39% and 3.67% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in NIM was primarily attributable to the increase in cost of funds, as noted above, and lower accretion of discounts on acquired loans in the 2019 period, partially offset by higher yields on gross loans in the 2019 period.

The following table presents the provision for loan losses for the periods presented.

Provision for loan losses was $495 thousand for the three months ended September 30, 2019, while provision for loan losses was $509 thousand for the same period of 2018. Provision in the 2019 period was primarily attributable to net charge-offs from a select portfolio of purchased consumer loans, a specific reserve for a commercial and industrial loan, and gross loan growth of $14.4 million. Provision for loan losses in the 2018 period was primarily attributable to gross loan growth of $52.7 million.

Provision for loan losses was $871 thousand for the nine months ended September 30, 2019, while provision for loan losses for the first nine months of 2018 was $481 thousand. Provision for loan losses in the first nine months of 2019 was primarily attributable to net charge-offs, additions to the specific reserves in the third quarter of 2019, as noted previously, and gross loan growth of $29.7 million. Provision for loan losses in the 2018 period was primarily attributable to loan growth, partially offset by a $580 thousand benefit to correct for an overstatement in the Company’s allowance for loan losses as of December 31, 2017, as previously reported.

The following tables present a summary of noninterest income and the dollar and percentage change for the periods presented.

	Three Months Ended
	September 30, 2019		September 30, 2018			$ Change			% Change
Income from fiduciary activities	$	201	$	151		$	50			33.1	%
Service charges and fees on deposit accounts		243		251			(8	)		(3.2	%)
Wealth management		185		144			41			28.5	%
Interchange fees, net		108		105			3			2.9	%
Other service charges and fees		32		30			2			6.7	%
Secondary market sales and servicing		293		152			141			92.8	%
Increase in cash surrender value of bank owned life insurance		122		123			(1	)		(0.8	%)
Net gains on sale of available-for-sale securities		1		—			1			100.0	%
Net gains on disposition of other assets		—		51			(51	)		(100.0	%)
Gain on rabbi trust assets		—		5			(5	)		(100.0	%)
Other		15		(16	)		31			193.8	%
Total noninterest income	$	1,200	$	996		$	204			20.5	%

	Nine Months Ended
	September 30, 2019			September 30, 2018			$ Change			% Change
Income from fiduciary activities	$	621		$	596		$	25			4.2	%
Service charges and fees on deposit accounts		727			538			189			35.1	%
Wealth management		654			558			96			17.2	%
Interchange fees, net		330			221			109			49.3	%
Other service charges and fees		88			91			(3	)		(3.3	%)
Secondary market sales and servicing		632			528			104			19.7	%
Increase in cash surrender value of bank owned life insurance		362			374			(12	)		(3.2	%)
Net losses on sale of available-for-sale securities		(1	)		—			(1	)		(100.0	%)
Net losses on disposition of other assets		(2	)		(18	)		16			88.9	%
Gain (loss) on rabbi trust assets		130			(11	)		141			1,281.8	%
Gain on curtailment of post-retirement benefit plan		—			352			(352	)		(100.0	%)
Other		44			101			(57	)		(56.4	%)
Total noninterest income	$	3,585		$	3,330		$	255			7.7	%

Higher noninterest income in the three months ended September 30, 2019 was primarily attributable to higher secondary market sales and servicing income, as the Company focuses on selling a greater volume of mortgages originated. The third quarter of 2018 included $51 thousand of net gains on the disposition of other assets, including a gain on the sale of a former branch building and land.

Higher noninterest income in the nine months ended September 30, 2019 was primarily attributable to higher service charges and fees on deposit accounts, higher interchange fees (net), higher secondary market sales and servicing income, and a gain on rabbi trust assets. In the 2018 period, lower service charges and fees on deposit accounts income was primarily attributable to the suspension of certain fees in the early months of 2018 due to the core system conversion initiated in the fourth quarter of 2017 as a result of the Merger. The first nine months of 2018 included a gain on the curtailment of the Company’s post-retirement benefit plan on March 1, 2018.

The following tables present a summary of noninterest expense and the dollar and percentage change for the periods presented.

	Three Months Ended
	September 30, 2019			September 30, 2018			$ Change			% Change
Salaries and employee benefits	$	3,666		$	4,022		$	(356	)		(8.9	%)
Occupancy		805			924			(119	)		(12.9	%)
Data processing		541			546			(5	)		(0.9	%)
Bank franchise tax		209			178			31			17.4	%
Telecommunications and other technology		258			195			63			32.3	%
FDIC assessments		(7	)		151			(158	)		(104.6	%)
Foreclosed property		48			45			3			6.7	%
Consulting		156			214			(58	)		(27.1	%)
Advertising and marketing		124			126			(2	)		(1.6	%)
Directors’ fees		148			146			2			1.4	%
Audit and accounting		193			236			(43	)		(18.2	%)
Legal		20			123			(103	)		(83.7	%)
Core deposit intangible amortization		164			196			(32	)		(16.3	%)
Net other real estate owned loss		375			(112	)		487			434.8	%
Other		747			542			205			37.8	%
Total noninterest expense	$	7,447		$	7,532		$	(85	)		(1.1	%)

	Nine Months Ended
	September 30, 2019		September 30, 2018			$ Change			% Change
Salaries and employee benefits	$	11,532	$	12,407		$	(875	)		(7.1	%)
Occupancy		2,510		2,536			(26	)		(1.0	%)
Data processing		1,738		1,852			(114	)		(6.2	%)
Bank franchise tax		655		531			124			23.4	%
Telecommunications and other technology		727		603			124			20.6	%
FDIC assessments		371		521			(150	)		(28.8	%)
Foreclosed property		110		110			—			—	%
Consulting		418		937			(519	)		(55.4	%)
Advertising and marketing		300		347			(47	)		(13.5	%)
Directors’ fees		525		382			143			37.4	%
Audit and accounting		586		839			(253	)		(30.2	%)
Legal		130		380			(250	)		(65.8	%)
Merger-related		—		363			(363	)		(100.0	%)
Core deposit intangible amortization		517		610			(93	)		(15.2	%)
Net other real estate owned losses (gains)		441		(169	)		610			360.9	%
Other		2,108		1,966			142			7.2	%
Total noninterest expense	$	22,668	$	24,215		$	(1,547	)		(6.4	%)

Lower noninterest expense in the three months ended September 30, 2019 compared to the same period of 2018 was primarily due to lower salaries and employee benefits, Federal Deposit Insurance Corporation (“FDIC”) assessments, and legal costs. Lower salaries and employee benefits in the 2019 period were primarily due to fewer full-time equivalents. In the third quarter of 2019, the Company received a small bank assessment credit from the FDIC of $171 thousand. Lower legal costs in the 2019 period were primarily due to expenses incurred in the 2018 period related primarily to services for the Company’s employee benefit plans. Additionally, in the third quarter of 2019, the Company reported a $375 thousand net loss on the sale and valuation of other real estate owned, while a net gain of $112 thousand was reported in the 2018 period. Other noninterest expense in the third quarter of 2018 included a $172 thousand benefit to correct for an overstatement of other expenses in 2017 related to contributions to the Company’s employee stock ownership plan, as previously reported.

Lower noninterest expense in the nine months ended September 30, 2019 compared to the same period of 2018 was primarily attributable to lower salaries and employee benefits, consulting, legal, and audit and accounting expenses. Lower salaries and employee benefits were primarily due to fewer full time equivalents in the 2019 period. In addition, costs associated with the succession of the Company’s Chief Financial Officer in the 2018 period and costs related to fees incurred in the first nine months of 2018 in the completion of the Company’s 2017 year-end financial reporting, totaled approximately $1.2 million, which increased salaries and employee benefits, consulting, and audit and accounting expenses during this period. Lower consulting costs in the 2019 period were also due to implementation of an enterprise risk management platform and three-year strategic plan during the 2018 period. Audit and accounting fees in the nine months ended September 30, 2018 also included expenses associated with a Sarbanes-Oxley Act readiness assessment. Noninterest expenses in the nine months ended September 30, 2018 included $363 thousand of merger-related expenses, while there were no merger-related expenses in the 2019 period.

The following table presents income tax expense and effective income tax rate for the periods presented.

Loans charged-off during the third quarter of 2019, net of recoveries, totaled $478 thousand compared to $335 thousand for the third quarter of 2018, resulting in an annualized net charge-off ratio of 0.21% and 0.17% for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019, the annualized net charge-off ratio was 0.19% compared to 0.16% for the nine months ended September 30, 2018.

The ratio of allowance for loan losses (“ALL”) to gross loans was 0.80% as of September 30, 2019 compared to 0.88% as of December 31, 2018. The decline in the ratio of ALL to gross loans since December 31, 2018 was primarily attributable to the reduction in balances (and related ALL) attributable to a select portfolio of purchased consumer loans, including those acquired in the Merger, which had a higher ALL percentage to loans relative to that for other loans in the portfolio. The Company’s ALL does not

include discounts recorded on loans acquired in the Merger, which were $2.9 million and $3.9 million as of September 30, 2019, and December 31, 2018, respectively.

The following table presents certain asset quality measures as of the dates stated.

The increase in nonperforming assets as of September 30, 2019 is primarily attributable to a commercial and industrial loan participation to a professional service firm being classified as substandard and placed on nonaccrual during the third quarter of 2019. During the third quarter of 2019, the borrower announced its plan to liquidate and subsequently filed for Chapter 7 bankruptcy. The outstanding balance of the loan as of September 30, 2019 was $2.7 million. As of June 30, 2019, the outstanding balance of the loan was $5.9 million and was classified as special mention. As of October 31, 2019, the outstanding balance of the loan was $1.5 million. This increase in nonperforming assets in the third quarter of 2019 was partially offset by a $990 thousand reduction of other real estate owned, net (“OREO”), as the Company continued to reduce its foreclosed properties portfolio.

Total assets increased by $31.6 million to $1.11 billion as of September 30, 2019 from $1.08 billion as of December 31, 2018, primarily due to net loan growth in the first nine months of 2019 of $30.1 million.

The following tables present information about the securities portfolio on a taxable-equivalent basis as of the dates stated. As of September 30, 2019 and December 31, 2018, available-for-sale securities represented 7.3% and 7.6% of total assets, respectively.

The following table presents the composition of loans in dollar amounts and as a percentage of total loans as of the dates stated.

	September 30, 2019						December 31, 2018
	Amount			Percent of Total			Amount			Percent of Total
Mortgage loans on real estate:
Construction, land and land development	$	119,278			12.9	%	$	109,475			12.2	%
Commercial mortgages (non-owner occupied)		193,480			20.8	%		180,074			20.0	%
Commercial mortgages (owner occupied)		83,643			9.0	%		87,241			9.7	%
Residential first mortgages		301,185			32.2	%		298,894			33.1	%
Residential revolving and junior mortgages		33,694			3.6	%		38,313			4.2	%
Commercial and industrial		186,281			20.0	%		164,608			18.2	%
Consumer		14,471			1.6	%		23,740			2.6	%
Total loans		932,032			100.0	%		902,345			100.0	%
Net unamortized deferred loan fees		(269	)					(252	)
Allowance for loan losses		(7,495	)					(7,902	)
Loans receivable, net	$	924,268					$	894,191

During the nine months ended September 30, 2019, gross loans increased by $29.7 million, an annualized growth rate of over 4%, from December 31, 2018. Excluding the payoff of approximately $31.8 million of purchased portfolio loans in the first nine months of 2019, including those acquired in the Merger, gross loan growth for the nine months ended September 30, 2019 on an annualized basis was approximately 9%. The largest components of this increase were a $21.7 million increase in commercial and industrial loans and a $9.8 million increase in commercial mortgages, partially offset by a $9.3 million decline in consumer loans and a $2.3 million decline in residential loans.

The following table presents the Company’s ALL by loan type and the percent of loans in each category to total loans as of the dates stated.

The decline in ALL from December 31, 2018 to September 30, 2019 was primarily due to net charge-offs of $1.3 million, $978 thousand of which was attributable to a select portfolio of purchased consumer loans, which balances are declining but require a higher ALL percentage to loans relative to that for other loans in the portfolio, partially offset by provision for loan losses of $871 thousand recorded for the nine months ended September 30, 2019.

OREO as of September 30, 2019 was $2.2 million, consisting of 21 properties (16 of which were land lots), compared to $3.6 million of OREO (26 properties) as of December 31, 2018, or a $1.4 million decrease. This decrease was primarily attributable to the sale of nine residential properties ($1.6 million carrying amount) during the first nine months of 2019 and a valuation allowance of $175 thousand in the third quarter of 2019, partially offset by the addition of four residential properties ($347 thousand carrying amount) during the first nine months of 2019.

As of September 30, 2019, total deposits were $893.7 million compared to $842.2 million at December 31, 2018, a $51.5 million, or 8% annualized, increase. Time deposits and savings and interest-bearing demand deposits increased $27.9 million and $13.0 million, respectively, in the nine months ended September 30, 2019. Noninterest-bearing demand deposits increased $10.5 million since December 31, 2018 to $125.7 million as of September 30, 2019, a 12% annualized increase.

Maturities of large denomination time deposits (equal to or greater than $100 thousand) as of September 30, 2019 are presented in the following table.

As of September 30, 2019, the Company had four fixed rate FHLB advances totaling of $58.0 million and one variable rate FHLB advance of $10.0 million outstanding. As of December 31, 2018, the Company had three fixed rate FHLB advances totaling $90.0 million and one variable rate FHLB advance of $10.0 million outstanding. The following table presents various information regarding FHLB advances as of and for the periods presented.

Liquidity represents an institution’s ability to meet present and future financial obligations (such as commitments to fund loans or meet depositors’ requirements) through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-earning deposits with other banks, federal funds sold, and investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates are major factors for liquidity. Management believes that the Company maintains overall liquidity that is sufficient to satisfy its depositors’ requirements and its customers’ credit needs.

As of September 30, 2019, cash and cash equivalents totaled $31.4 million; investment securities maturing in one year or less totaled $9.5 million; and loans maturing in one year or less totaled $206.2 million. This resulted in a liquidity ratio as of September 30, 2019 of 22.2% compared to 21.5% as of December 31, 2018. The Company determines this ratio by dividing the sum of cash and cash equivalents, and investment securities and loans maturing in one year or less, by total assets.

The Company has a secured borrowing line with the FHLB of $272.4 million, with $186.4 million available as of September 30, 2019, and unsecured federal funds lines of credit with various correspondent banks totaling $41.0 million. Federal funds lines of credit are uncommitted and can be cancelled at any time by the lending bank.

As of September 30, 2019, the Company was not aware of any other known trends, events, or uncertainties that have or are reasonably likely to have a material effect on liquidity.

Capital resources represent funds, earned or obtained, over which a financial institution can exercise greater long-term control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources, and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allows management to effectively leverage its capital to maximize return to shareholders. The Company’s capital, also known as shareholders’ equity, is comprised primarily of outstanding common stock, additional paid-in capital, and retained earnings.

Shareholders’ equity is primarily affected by net income and net unrealized gains or losses on available-for-sale securities, net of taxes. The available-for-sale securities portfolio is reported at fair value with unrealized gains or losses, net of taxes, recognized as accumulated other comprehensive income (loss) on the Company’s consolidated balance sheets. Another factor affecting accumulated other comprehensive income (loss) is changes in the fair value of the Company’s pension and post-retirement benefit plans and changes in said plan obligations. Shareholders’ equity before accumulated other comprehensive income (loss), net of taxes, was $124.5 million as of September 30, 2019 compared to $118.8 million as of December 31, 2018. The increase of $5.7 million was primarily attributable to net income of $5.1 million for the nine months ended September 30, 2019. Accumulated other comprehensive income (loss), net of taxes, decreased by $1.7 million from December 31, 2018 to September 30, 2019, primarily due to an increase in unrealized net gains, net of taxes, in the Company’s available-for-sale securities portfolio.

Book value per share of the Company’s common stock, including accumulated other comprehensive income (loss), net of tax, increased to $9.36 as of September 30, 2019 from $8.90 as of December 31, 2018.

The Bank is subject to minimum regulatory capital ratios as defined by the Federal Reserve. As of September 30, 2019, the Bank’s capital ratios continue to be in excess of regulatory minimums and the Bank was well capitalized by these guidelines.

The Bank is required to comply with the following minimum capital ratios: (i) a Common Equity Tier 1 Capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 Capital ratio of 6.0% of risk-weighted assets; (iii) a Total Risked-based Capital ratio of 8.0% of risk-weighted assets; and (iv) a Leverage ratio of 4.0% of total assets. The following additional capital requirements related to the “capital conservation buffer” have been phased in over a four-year period, beginning on January 1, 2016. As fully phased in on January 1, 2019, the rules require the Bank to maintain: (i) a minimum ratio of Common Equity Tier 1 to risk-weighted assets of 4.5%, plus a 2.5% capital conservation buffer, resulting in a minimum ratio of Common Equity Tier 1 to risk-weighted assets of 7.0%, (ii) a minimum ratio of Tier 1 Capital to risk-weighted assets of 6.0%, plus the 2.5% capital conservation buffer, resulting in a minimum Tier 1 Capital ratio of 8.5%, (iii) a minimum ratio of Total Risk-based Capital to risk-weighted assets of 8.0%, plus the 2.5% capital conservation buffer, resulting in a minimum Total Risk-based Capital ratio of 10.5%, and (iv) a minimum Leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. The capital conservation buffer requirement was phased in beginning January 1, 2016, increasing by 0.625% each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer

is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of Common Equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

The following tables present capital ratios for the Bank, minimum capital ratios required, and ratios defined as “well capitalized” by the Bank’s regulators as of the dates stated.

In the normal course of business, the Company offers various financial products to its customers to meet their credit and liquidity needs. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and stand-by letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional commitments as it does for on-balance sheet commitments. Subject to its normal credit standards and risk monitoring procedures, the Company makes contractual commitments to extend credit. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Conditional commitments are issued by the Company in the form of performance stand-by letters of credit, which guarantee the performance of a customer to a third party. Additionally, but to a much lesser extent, the Company issues financial stand-by letters of credit, which guarantee payment to the underlying beneficiary (i.e., third party) if the customer fails to meet its designated financial obligation.

The following table presents off balance sheet commitments as of the dates stated.

There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s 2018 Form 10-K.

Refer to Note 2, Amendments to the Accounting Standards Codification, in the Notes to the Consolidated Financial Statements contained in Item 1 of this report, for information related to the adoption of amendments to the Accounting Standards Codification.

As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the

effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 (the “Exchange Act”). In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the disclosure controls and procedures are met. The design of any disclosure control and procedure is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions. Based upon the evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified by the Securities and Exchange Commission’s reports and forms, and that such information is accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure, as of September 30, 2019.

There was no change to the Company’s internal control over financial reporting during the three months ended September 30, 2019 that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

In the ordinary course of its operations, the Company is a party to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.

There have been no material changes to the risk factors disclosed in the 2018 Form 10-K.

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.


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
	None

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS		4

CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2019 (UNAUDITED) AND DECEMBER 31, 2018		4

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)		5

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)		6

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)		7

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018 (UNAUDITED)		9

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		10

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		29

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		39

ITEM 4. CONTROLS AND PROCEDURES		39

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		40

ITEM 1A. RISK FACTORS		40

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		40

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		40

ITEM 4. MINE SAFETY DISCLOSURES		40

ITEM 5. OTHER INFORMATION		40

ITEM 6. EXHIBITS		41

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
September 30, 2019	Cost		Gains		(Losses)			Value
U.S. Government agencies and mortgage backed securities	$	50,324	$	286	$	(192	)	$	50,418
State and municipal obligations		16,717		382		(3	)		17,096
Corporate bonds		13,173		65		(4	)		13,234
Total available-for-sale securities	$	80,214	$	733	$	(199	)	$	80,748

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
December 31, 2018	Cost		Gains		(Losses)			Value
U.S. Government agencies and mortgage backed securities	$	51,126	$	35	$	(1,279	)	$	49,882
State and municipal obligations		20,484		60		(327	)		20,217
Corporate bonds		12,194		23		(84	)		12,133
Total available-for-sale securities	$	83,804	$	118	$	(1,690	)	$	82,232

			Less than 12 months					12 months or more					Total
September 30, 2019	Number of Securities		Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
U.S. Government agencies and mortgage backed securities		38	$	4,763	$	(27	)	$	19,845	$	(165	)	$	24,608	$	(192	)
State and municipal obligations		2		916		(3	)		—		—			916		(3	)
Corporate bonds		1		1,009		(4	)		—		—			1,009		(4	)
Total temporarily impaired securities		41	$	6,688	$	(34	)	$	19,845	$	(165	)	$	26,533	$	(199	)

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

	September 30, 2019				December 31, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	7,024	$	7,015	$	1,080	$	1,079
Due after one year but less than five years		45,512		45,714		47,065		46,358
Due after five years but less than ten years		23,101		23,465		26,615		26,149
Due after ten years		4,577		4,554		9,044		8,646
Total available-for-sale securities	$	80,214	$	80,748	$	83,804	$	82,232

	For the Nine Months Ended
	September 30, 2019
Balance as of December 31, 2018	$	1,083
Accretion of acquisition accounting adjustment		(305	)
Reclassifications from nonaccretable balance, net		62
Other changes, net		153
Balance as of September 30, 2019	$	993

	September 30, 2019			December 31, 2018
Nonaccrual loans	$	7,194		$	5,206
Nonaccrual loans collectively evaluated for impairment		(1,601	)		(2,040	)
Nonaccrual impaired loans		5,593			3,166
TDRs on accrual		3,514			4,115
Other impaired loans on accrual		—			325
Total impaired loans	$	9,107		$	7,606

	Accruing			Nonaccrual			Total
Balance as of December 31, 2018	$	4,115		$	1,477		$	5,592
Charge-offs		—			—			—
Payments and other adjustments		(584	)		(122	)		(706	)
New TDR designation		52			—			52
Release TDR designation		—			—			—
Transfer		(69	)		69			—
Balance as of September 30, 2019	$	3,514		$	1,424		$	4,938

	September 30, 2019				December 31, 2018
	Number of		Carrying		Number of		Carrying
	Properties		Value		Properties		Value
Residential		4	$	388		6	$	1,339
Land		16		1,530		17		1,741
Commercial properties		1		260		3		517
Total other real estate owned, net		21		2,178		26		3,597

	September 30, 2019
Operating lease right-of-use assets	$	4,222

Operating lease liabilities	$	4,521

	September 30, 2019
Weighted average remaining lease term	8 years
Weighted average discount rate		3.12	%

2019	$	207
2020		944
2021		977
2022		601
2023		351
Thereafter		2,057
Total		5,137
Less interest		(616	)
Lease liability	$	4,521

	For the Nine Months Ended
	September 30, 2019
Cash paid for amount included in the measurement of lease liabilities:
Operating cash outflows from operating leases	$	744
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,304

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Net income	$	1,841	$	1,026	$	5,056	$	3,096
Weighted average shares outstanding, basic		13,077,600		13,080,372		13,046,694		13,059,845
Dilutive shares:
Stock options		32,756		56,060		33,034		60,334
Restricted stock		22,103		6,117		12,639		8,536
Weighted average shares outstanding, dilutive		13,132,459		13,142,549		13,092,367		13,128,715
Basic and diluted earnings per share	$	0.14	$	0.08	$	0.39	$	0.24

			Originated	Stated			Maturity
	Balance		Date	Interest Rate			Date
Adjustable rate hybrid	$	10,000	4/12/2013		4.68	%	4/13/2020
Fixed rate credit		20,000	7/3/2019		2.22	%	1/3/2020
Fixed rate hybrid		10,000	8/7/2019		1.79	%	8/7/2020
Convertible		5,000	8/27/2019		0.54	%	8/27/2029
Fixed rate credit		23,000	9/4/2019		2.19	%	10/4/2019
Total FHLB borrowings	$	68,000			2.39	%


Level 1 –		Valuation is based on quoted prices in active markets for identical assets and liabilities.

Level 2 –		Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 –		Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.

	MSRs			Corporate Bonds
Balance as of January 1, 2019	$	977		$	3,671
Purchases		—			—
Transfer from level 2 to level 3		—			1,035
Fair value adjustments		(67	)		(16	)
Sales		—			—
Balance as of September 30, 2019	$	910		$	4,690

	Balance as of September 30, 2019		Valuation Technique	Unobservable Input	Range (Weighted Average)
Impaired loans, net	$	6,324	Discounted appraised value	Selling cost Lack of marketability	7% 13%-100% (31%)
			Discounted cash flows	Discount rate	5%-7% (6%)
Other real estate owned, net		2,178	Discounted appraised value	Selling cost Lack of marketability	2%-11% (8%) 12%-100% (36%)

	For the Nine Months Ended September 30, 2019
	Net Unrealized Gains (Losses) on Securities			Pension and Post-retirement Benefit Plans			Accumulated Other Comprehensive Income (Loss), net
Balance as of January 1, 2019	$	(1,252	)	$	(75	)	$	(1,327	)
Change in net unrealized holding gain on available-for-sale securities, net of deferred income tax expense of $443		1,667			—			1,667
Balance as of September 30, 2019	$	415		$	(75	)	$	340


	Nine Months Ended September 30, 2018
	Net Unrealized Gains (Losses) on Securities			Pension and Post-retirement Benefit Plans			Accumulated Other Comprehensive Income (Loss), net
Balance as of January 1, 2018	$	(489	)	$	(667	)	$	(1,156	)
Change in net unrealized holding loss on available-for-sale securities, net of deferred income tax benefit of $408		(1,536	)		—			(1,536	)
Balance as of September 30, 2018	$	(2,025	)	$	(667	)	$	(2,692	)

	For the Three Months Ended September 30, 2019
	Net Unrealized Gains (Losses) on Securities			Pension and Post-retirement Benefit Plans			Accumulated Other Comprehensive Income (Loss), net
Balance as of July 1, 2019	$	182		$	(75	)	$	107
Change in net unrealized holding gain on available-for-sale securities, net of deferred income tax expense of $62		233			—			233
Balance as of September 30, 2019	$	415		$	(75	)	$	340


	For the Three Months Ended September 30, 2018
	Net Unrealized Gains (Losses) on Securities			Pension and Post-retirement Benefit Plans			Accumulated Other Comprehensive Income (Loss), net
Balance as of July 1, 2018	$	(1,648	)	$	(667	)	$	(2,315	)
Change in net unrealized holding loss on available-for-sale securities, net of deferred income tax benefit of $100		(377	)		—			(377	)
Balance as of September 30, 2018	$	(2,025	)	$	(667	)	$	(2,692	)

	September 30, 2019			December 31, 2018
Loans 90 days or more past due and still accruing (1)	$	—		$	—
Nonaccrual loans (1)		7,194			5,206
Total nonperforming loans		7,194			5,206
Other real estate owned, net		2,178			3,597
Total nonperforming assets	$	9,372		$	8,803
Allowance for loan losses	$	7,495		$	7,902
ALL to gross loans		0.80	%		0.88	%
Nonperforming assets to total assets		0.84	%		0.81	%
Nonperforming loans to gross loans		0.77	%		0.58	%

		Within 3 Months				3-6 Months				6-12 Months				Over 12 Months				Total				Percent of Total Deposits
Time deposits		$	40,204			$	26,476			$	45,531			$	102,926			$	215,137				24.6	%

	Nine Months Ended September 30, 2019									Year Ended December 31, 2018
	Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate			Period-End Balance		Highest Month-End Balance		Average Balance		Weighted Average Rate
FHLB advances	$	68,000	$	100,000	$	86,015		2.77	%	$	100,000	$	100,000	$	71,753		2.38	%

As of September 30, 2019	Actual Ratio			Minimum Capital Requirement Ratio			Well- Capitalized Ratio
Total risk-based capital		12.85	%		10.50	%		10.00	%
Tier 1 capital		12.05	%		8.50	%		8.00	%
Common equity tier 1		12.05	%		7.00	%		6.50	%
Tier 1 leverage ratio		10.32	%		4.00	%		5.00	%

	September 30, 2019		December 31, 2018
Total loan commitments outstanding	$	166,217	$	160,479
Stand-by letters of credit		5,977		2,848


31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018, (iv) Consolidated Statements of Changes in Shareholders’ Equity for the three and nine months ended September 30, 2019 and 2018, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, and (vi) Notes to Consolidated Financial Statements.

	Bay Banks of Virginia, Inc.
	(Registrant)

November 7, 2019	By:	/s/ Randal R. Greene
		Randal R. Greene
		President and Chief Executive Officer
		(Principal Executive Officer)

	By:	/s/ Judy C. Gavant
		Judy C. Gavant
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)