Bay Banks of Virginia, Inc. Reports First Quarter 2020 Results Response to COVID-19 Pandemic

RICHMOND, Va., May 7, 2020/PRNewswire/ -- Bay Banks of Virginia, Inc. (OTCQB: BAYK), holding company of Virginia Commonwealth Bank and VCB Financial Group, Inc., announced financial results for the first quarter of 2020 and the company's response to the COVID-19 pandemic.

The company reported a net loss of $14 thousand, or $0.00 per diluted share, for the first quarter of 2020 compared to net income of $2.0 million, or $0.15 per diluted share, for the fourth quarter of 2019 and net income of $1.5 million, or $0.11 per diluted share, for the first quarter of 2019. The net loss for the first quarter of 2020 includes loan loss provision expense of $2.8 million (pre-tax), a significant portion of which related to estimated reserve needs as a result of the COVID-19 pandemic.

The company reported that it has been operating under a pre-determined pandemic plan since the beginning of March. From the onset of the national pandemic, it proactively addressed the needs of its commercial and individual borrowers modifying nearly 180 loans, with balances of approximately $86.5 million, in the month of March 2020. The modifications allow for the short-term deferral of principal payments or of principal and interest payments.

Beginning on March 20, 2020, the company's retail branch lobbies were accessible by appointment; all its drive-through access points were open, as well as access to banking services using readily-available technology. On April 13, 2020, the company temporarily closed four retail branches and reduced hours of certain other branches. The company anticipates the branches will be re-opened during the third quarter of this year. These adjustments were primarily in response to the 'stay-at-home' order issued by the governor of Virginia on March 30, 2020. The changes in branch staffing along with certain other positions result in noninterest expense savings of approximately $225 thousand, which will be realized over the second and third quarters of 2020.

Beginning on April 3, 2020, the company actively participated in the Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, closing 405 loans totaling $45.3 million and earning $1.8 million in processing fees, pursuant to the first appropriation of government funding, which was depleted on April 16, 2020. Beginning on April 27, 2020 and through the end of April, an additional 107 loans were closed totaling $5.5 million and resulting in $250 thousand in processing fees, pursuant to the second appropriation of PPP government funding. Through the PPP, the federal government partnered with banks to provide over $650 billion to small businesses to support payrolls and other operating expenses.

Randal R. Greene, President and Chief Executive Officer, commented: "2020 started strong; with vibrant economies in our markets and with the leadership of our new Chief Revenue Officer, we were off to a great year. On a pre-tax, pre-provision basis, we earned $2.7 million1 in the first quarter of 2020 compared to $2.8 million1 in the fourth quarter of 2019. Excluding the higher accretion of loan discounts of $740 thousand in the fourth quarter of 2019, pre-tax, pre-provision earnings improved $663 thousand. Of the $2.8 million we recorded in provision for loan losses during the quarter, $1.5 million was an estimate of credit issues related to the impact of the virus on our borrowers' businesses and their ability to repay us. First quarter loan growth, on an annualized basis, was nearly 20%, and we, like other banks our size, were feeling loan yield pressure as market rates were coming down. We aggressively reduced deposit rates, bringing overall deposit costs down 10 basis points in this first quarter.

"At the beginning of 2020, few would have predicted our economy would come to a halt due to a pandemic. As a nimble community bank, our focus quickly shifted to supporting our customers, modifying their loans, and assisting them in deciphering the many stimulus programs rolled out by our federal government. I couldn't be more proud of how our teams responded, both the team that executed the Paycheck Protection Program loans for our customers and our branch employees that interface day-to-day with the public during this complicated situation. As of the end of April, 100% of our customers that applied for a PPP loan had been approved for one. I have received an overwhelming amount of positive feedback from customers we've helped, many that have temporarily lost revenues they've worked years to build."

Operating Results

First Quarter 2020 compared to Fourth Quarter 2019

• Loss before income taxes for the first quarter of 2020 was $72 thousand compared to income before income taxes of $2.5 million for the fourth quarter of 2019.
• Interest income for the three months ended March 31, 2020 was $12.2 million, on average interest-earning assets of $1.08 billion, compared to $13.0 million, on average interest-earning assets of $1.06 billion, for the three months ended December 31, 2019. Interest income in the first quarter of 2020 included accretion of acquired loan discounts of $189 thousand, while interest income in the fourth quarter of 2019 included $929 thousand of accretion of acquired loan discounts. Higher accretion in the fourth quarter of 2019 was primarily attributable to significant paydowns and payoffs of loans acquired in the company's 2017 merger with Virginia BanCorp, Inc. Yields on average interest-earning assets were 4.56% and 4.87% for the first quarter of 2020 and the fourth quarter of 2019, respectively, including the effect of accretion. Yields on average interest-earning assets in the fourth quarter of 2019 were positively affected by higher accretion of acquired loan discounts, which had a positive 28 basis point effect compared to yields in the first quarter of 2020. Yields on average interest-earning assets, excluding the effect of accretion, in the first quarter of 2020 were also negatively affected by lower yielding investment securities due to calls of higher yielding securities, and lower yields on loans originated in late 2019 and in the first quarter of 2020. Partially offsetting the decline in yields excluding accretion was higher average balances of loans.
• Interest expense was $3.6 million and $3.9 million for the three months ended March 31, 2020 and December 31, 2019, respectively, and cost of funds was 1.44% and 1.54% for the sequential quarter periods. Average interest-bearing liabilities were $871.6 million and $860.4 million for the first quarter of 2020 and the fourth quarter of 2019, respectively. Cost of deposits was 1.24% for the first quarter of 2020, down 10 basis points from 1.34% for the fourth quarter of 2019, reflective of the company's efforts to reduce deposit rates since mid-2019.
• Net interest margin ("NIM") was 3.22% for the first quarter of 2020 compared to 3.43% for the fourth quarter of 2019. Higher accretion in the fourth quarter of 2019 contributed 28 basis points to the sequential quarter decline, which was partially offset by lower cost of funds.
• Provision for loan losses was $2.8 million for the first quarter of 2020 compared to $311 thousand for the fourth quarter of 2019. Of the first quarter 2020 amount, approximately $1.5 million was attributable to estimated reserve needs due to the negative economic impact of the COVID-19 pandemic. Of this $1.5 million, approximately $200 thousand was due to risk rating downgrades of loans to borrowers in industry segments highly affected by COVID-19, such as hotels, restaurants, churches, and assisted-living facilities; the remaining $1.3 million relates to a qualitative loss factor applied to the majority of the company's loan portfolio for negative COVID-19 economic implications, such as unemployment. The remaining $1.3 million of the provision for loan losses was primarily due to gross loan growth of $46.0 million and higher specific reserves recorded in the quarter.
• Noninterest income for both the three months ended March 31, 2020 and December 31, 2019 was $1.4 million. The 2020 quarter included approximately $471 thousand of fee income for referring loan customers to a third-party financial institution to execute interest rate swaps, while the 2019 quarter included no income from such activities. Partially offsetting this increase was a $263 thousand unrealized loss in the 2020 quarter on assets held in a rabbi trust for the benefit of participants in the company's deferred compensation plan compared to an unrealized gain of $62 thousand in the 2019 quarter. Additionally, lower secondary market sales and servicing income of $202 thousand in the first quarter of 2020 compared to $309 thousand in the fourth quarter of 2019 was primarily the result of a $161 thousand negative valuation adjustment to the company's mortgage servicing rights asset in the first quarter of 2020 compared to a $25 thousand gain in the fourth quarter of 2019.
• Noninterest expense for the three months ended March 31, 2020 and December 31, 2019 was $7.3 million and $7.7 million, respectively. Lower noninterest expense in the first quarter of 2020 was primarily attributable to lower salaries and employee benefits, primarily due to a lower management incentive accrual recorded in the first quarter of 2020 and the unrealized loss on rabbi trust assets. The company's efficiency ratio was 73.0% and 73.5% for the first quarter of 2020 and fourth quarter of 2019, respectively.
• Income tax benefit for the first quarter of 2020 was $58 thousand, reflective of an 80.6% effective income tax rate, while income tax expense for the fourth quarter of 2019 was $469 thousand, reflective of a 19.0% effective income tax rate. The effective income tax rate of 80.6% in the first quarter of 2020 was primarily due to the amount of tax-exempt income relative to the company's pre-tax net loss for the quarter.

First Quarter 2020 compared to First Quarter 2019

• Loss before income taxes for the first quarter of 2020 was $72 thousand compared to income before income taxes of $1.8 million for the first quarter of 2019.
• Interest income for the three months ended March 31, 2020 was $12.2 million, on average interest-earning assets of $1.08 billion, compared to $12.3 million, on average interest-earning assets of $1.02 billion, for the three months ended March 31, 2019. Interest income in the first quarters of 2020 and 2019 included accretion of acquired loan discounts of $189 thousand and $439 thousand, respectively. Yields on average interest-earning assets were 4.56% and 4.90% for the first quarters of 2020 and 2019, respectively. The decrease in yield on average interest-earning assets was primarily due to lower yields on loans in the 2020 period and higher accretion of acquired loan discounts in the 2019 period, which had a positive 11 basis point effect compared to the first quarter of 2020.
• Interest expense was $3.6 million and $3.7 million for the three months ended March 31, 2020 and 2019, respectively, and cost of funds was 1.44% and 1.54%, for the respective periods. Average interest-bearing liabilities were $871.6 million and $853.6 million for the first quarters of 2020 and 2019, respectively. Interest expense on the company's $25 million of 5.625% subordinated notes issued on October 7, 2019 and maturing on October 15, 2029 (the "2029 Notes") contributed $375 thousand and 12 basis points to interest expense and cost of funds, respectively, in the first quarter of 2020. Offsetting the higher funding cost contributed by the 2029 Notes was lower deposit costs, which declined 10 basis points to the first quarter of 2020 from the first quarter of 2019. Higher average balances of noninterest-bearing deposits, which increased $24.1 million to March 31, 2020 from March 31, 2019, contributed to the decline in deposit cost.
• NIM was 3.22% for the first quarter of 2020 compared to 3.45% for the first quarter of 2019. The decrease in NIM was primarily attributable to lower accretion of acquired loan discounts and lower yields on interest-earning assets, partially offset by lower cost of funds.
• Provision for loan losses was $2.8 million in the first quarter of 2020 compared to $314 thousand in the first quarter of 2019. Higher provision for loan losses in the 2020 quarter was primarily attributable to estimated reserve needs related to COVID-19, gross loan growth, and higher specific reserves, as noted above.
• Noninterest income for the three months ended March 31, 2020 and 2019 was $1.4 million and $1.1 million, respectively. Higher noninterest income in the 2020 quarter was primarily due to referral fee income for customer interest rate swaps and higher secondary market sales and servicing income, partially offset by a net unrealized loss on rabbi trust assets of $263 thousand in the 2020 quarter compared to a $90 thousand net unrealized gain in the 2019 quarter.
• Noninterest expense for the three months ended March 31, 2020 and 2019 was $7.3 million and $7.6 million, respectively, primarily due to lower salaries and employee benefits in the 2020 quarter. The company's efficiency ratio for the first quarter of 2020 was 73.0% compared to 78.1% for the same quarter of 2019.
• Income tax benefit for the first quarter of 2020 was $58 thousand, reflective of an 80.6% effective income tax rate. Income tax expense for the first quarter of 2019 was $337 thousand, reflective of an 18.4% effective rate.

Balance Sheet

• Total assets were $1.18 billion and $1.13 billion at March 31, 2020 and December 31, 2019, respectively.
• Loans, net of allowance for loan losses, were $960.0 million at March 31, 2020 compared to $916.6 million at December 31, 2019, a $43.4 million increase and an annualized growth rate of 19%.
• Deposits were $964.5 million at March 31, 2020 compared to $910.4 million at December 31, 2019. Noninterest-bearing demand accounts comprised 14.1% of total deposits at March 31, 2020, a decrease from 15.2% at December 31, 2019, and an increase from 13.1% at March 31, 2019.
• Shareholders' equity was $127.4 million and $126.2 million at March 31, 2020 and December 31, 2019, respectively, an increase of $1.2 million. The increase in shareholders' equity in the first quarter of 2020 was primarily attributable to $866 thousand of net unrealized gains on the company's available-for-sale securities portfolio. Tangible book value, calculated as shareholders' equity less goodwill and core deposit intangible assets, net of the associated deferred tax liability, divided by common shares outstanding, was $8.691 and $8.641 at March 31, 2020 and December 31, 2019, respectively.
• The company made no repurchases of its common stock outstanding in the first quarter of 2020, pursuant to a share repurchase program authorized by its board of directors in the fourth quarter of 2019.
• Capital ratios for Virginia Commonwealth Bank were above regulatory minimum guidelines for well-capitalized banks as of March 31, 2020 and December 31, 2019.
• Annualized return on average assets for the quarters ended March 31, 2020, December 31, 2019, and March 31, 2019 was 0.00%, 0.71%, and 0.55%, respectively, while annualized return on average shareholders' equity for the same periods was (0.04)%, 6.39%, and 5.05%, respectively.

Asset Quality

• Loans in industry segments highly affected by the COVID-19 pandemic, which include primarily hotels, restaurants, churches, and assisted-living facilities, were subject to risk rating downgrades as of March 31, 2020. Loans to borrowers in these segments totaled approximately $88.5 million, or 9% of the company's gross loans as of March 31, 2020.
• Nonperforming assets were $7.1 million, or 0.60% of total assets, as of March 31, 2020, compared to $6.4 million, or 0.56% of total assets, as of December 31, 2019, and $9.1 million, or 0.82% of total assets, as of March 31, 2019. The company previously reported it participated in a loan to a professional service firm that filed for Chapter 7 bankruptcy in the third quarter of 2019. As of March 31, 2020, the loan had been resolved and the company collected all principal and interest to which it was due.
• The ratio of allowance for loan losses to total gross loans was 1.05%, 0.82%, and 0.86% at March 31, 2020, December 31, 2019, and March 31, 2019, respectively. The 23 basis point increase in the ratio of allowance for loan losses to total gross loans for the first quarter of 2020 was primarily due to a qualitative loss factor applied to the majority of the company's loan portfolio for negative economic implications, such as unemployment, from the COVID-19 pandemic. The company's allowance for loan losses does not include discounts recorded on loans acquired in the company's 2017 merger with Virginia BanCorp, Inc., which were $1.8 million, $1.9 million, and $3.5 million as of March 31, 2020, December 31, 2019, and March 31, 2019, respectively.

Outlook

Greene concluded: "At the end of March, our asset quality measures would not suggest we are facing the credit challenges that likely lie ahead. This level of economic slow-down supported by significant government intervention is unprecedented in recent history. How long the slow-down will last is on all of our minds and recent discussions of getting the country back to work are encouraging. As we have supported our employees, customers and communities during this difficult time, we are cognizant that we too have a business to manage. Having a strong balance sheet, healthy capital levels, and good liquidity are key as we move through the next several quarters."

About Bay Banks of Virginia, Inc.

Bay Banks of Virginia, Inc. is the bank holding company for Virginia Commonwealth Bank and VCB Financial Group, Inc. Founded in the 1930s, Virginia Commonwealth Bank is headquartered in Richmond, Virginia. With 18 banking offices, including one loan production office, located throughout the greater Richmond region of Virginia, the Northern Neck region of Virginia, Middlesex County, and the Hampton Roads region of Virginia, the bank serves businesses, professionals, and consumers with a wide variety of financial services, including retail and commercial banking, and mortgage banking. VCB Financial Group provides management services for personal and corporate trusts, including estate planning, estate settlement and trust administration, and investment and wealth management services.

Caution About Forward-Looking Statements

This press release contains statements concerning the company's expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute "forward-looking statements" as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the company include, but are not limited to: the effect of the COVID-19 pandemic, including its potential adverse effect on economic conditions, and the company's employees, customers, loan losses, and financial performance; changes in interest rates and general economic conditions; the legislative/regulatory climate; monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and Federal Reserve Board; the quality or composition of the loan or investment portfolios; demand for loan products; deposit flows; competition; demand for financial services in the company's market area; acquisitions and dispositions; implementation of new technologies and the ability to develop and maintain secure and reliable electronic systems; and tax and accounting rules, principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. Except to the extent required by applicable law or regulation, the company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

For further information, contact Randal R. Greene, President and Chief Executive Officer, at 844-404-9668 or Judy C. Gavant, Executive Vice President and Chief Financial Officer, at 804-518-2606 or inquiries@baybanks.com.

1 See discussion of non-GAAP financial measures at the end of the Supplemental Financial Data tables that follow.