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