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
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 022955
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 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year..........$15,249,477
Number of shares outstanding as of February 28, 1999...............1,164,728
As of March 29, 1999, the aggregate market value of Common Stock of Bay Banks of
Virginia, Inc. held by non-affiliates was approximately $37,853,660, based upon
the last sales price per share known to management on February 15, 1999
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's 1998 Annual Report to Shareholders are incorporated
by reference into Part II of this Form 10-KSB.
Portions of the registrant's definitive Proxy Statement for its' Annual Meeting
of Shareholders to be held on May 17, 1999 are incorporated by reference into
Part III of this Form 10-KSB.
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Form 10-KSB
TABLE OF CONTENTS
ITEM NUMBER PAGE NUMBER
- --------------------------------------------------------------------------------
PART I
1. DESCRIPTION OF BUSINESS 3
2. DESCRIPTION OF PROPERTY 5
3. LEGAL PROCEEDINGS 5
4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS 5
PART II
5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 5
6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 6
7. FINANCIAL STATEMENTS 6
8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON FINANCIAL DISCLOSURE 6
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS
AND CONTROL PERSONS; COMPLIANCE WITH
SECTION 16(A) OF THE EXCHANGE ACT 6
10. EXECUTIVE COMPENSATION 6
11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT 6
12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS 6
13. EXHIBITS AND REPORTS ON FORM 8-K
SUPPLEMENTAL DATA
SIGNATURES 7
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.
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was incorporated under the laws of the Commonwealth of Virginia on June 30, 1997
in connection with the holding company 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, one office in Warsaw, Virginia and one
office in Montross, 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 subsidiary, Bank of Lancaster opened
for business in 1930 and has partnered with the community to ensure responsible
growth and development since that time.
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.
The counties composing the Bank's marketplace are situated on the Chesapeake Bay
and its tributaries. Second and summer homes are prevalent as is the retirement
community. 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 Company expanded its market area in February 1998 with the purchase of two
branches from the former Signet Bank. A branch was purchased in Warsaw,
Virginia, located in Richmond County, as well as a branch in Montross, Virginia,
located in Westmoreland County. These two locations complimented the rural focus
of the Company, and further allowed entry into an expanded marketplace with a
great deal of deposit and loan potential.
The Company had $200,203,712 in total assets and $178,855,077 in total deposits
as of December 31, 1998. Net earnings for the year ended December 31, 1998, were
$1,930,900. Loan demand was steady as balances increased to $114,578,525. The
loan portfolio is composed of mainly residential first mortgages.
Lending Activities. The Company provides a wide range of real estate, consumer,
and commercial lending services to the customers in its market area.
Real Estate Lending. The Company's real estate loan portfolio is the largest
segment of the loan portfolio. Real estate mortgage loans in aggregate increased
to $84,202,736 during 1998. This balance is 73.5% of the total portfolio. The
Bank offers fixed and adjustable rate loans on one-to-four family residential
properties. These mortgages are underwritten and documented within the
guidelines of the Regulations of the Federal Reserve Board of Governors. The
Bank underwrites mainly adjustable rate mortgages as the market place allows.
Construction loans with a twelve month term are also a major component of the
Bank's portfolio. Underwritten at 80% loan to value, and to qualified builders
and individuals, the loans are disbursed as construction progresses and verified
by Bank inspection.
The Company also offers secondary market loan origination. Through the Bank,
customers may apply for a home mortgage that will be underwritten in accordance
with the guidelines of the Federal Home Loan Mortgage Corporation. These loans
are then sold in the secondary market. The Bank earns origination fees through
offering this service. Customers, upon approval, receive a fixed rate of
interest with terms that vary from 10 through 30 years. Since these loans are
sold into the secondary market, there is no impact on future interest income or
the loan repricing structure of the Bank.
Consumer Lending. Consumer loans totaled $18,696,840 as of December 31, 1998.
This is 16.3% of the total loan portfolio. In an effort to offer a full range of
services, consumer lending includes automobile and boat financing, home
improvement loans, and unsecured personal loans. These loans historically entail
greater risk than residential real estate loans, but also offer a higher return
for the Bank.
Commercial Lending. Commercial lending activities include small business loans,
asset based loans, and other secured and unsecured loans and lines of credit.
Commercial loan balances were $11,678,949 at year end and
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10.2% of the total portfolio. Commercial lending also entails greater risk than
residential mortgage lending, and therefore offers a greater yield. The
borrowers ability to make repayment from cash flows of the business, as well as
some form of business collateral are the basis for establishing such an account.
Business Development. The Bank offers several services to commercial customers.
These services include Analysis Checking, Cash Management Deposit Accounts, Wire
Services, and a full line of Commercial Lending options. The Bank also offers
Small Business Administration "Low Document" Loan products. This allows
commercial customers to apply for favorable rate loans for the development of
business opportunities.
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, Bankers Title of
Fredricksburg, which generally sells title insurance to mortgage loan customers,
including customers of the Bank and the other financial institutions that have
an equity interest in the agency.
As of December 31, 1998, the Company and its subsidiaries had 73 full time
equivalent employees.
Competition. The Bank's trade area includes the counties of Lancaster,
Northumberland, Middlesex, Richmond and Westmoreland. Being rural in nature, the
Bank's marketplace is highly competitive. 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.
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 Bank is supervised and regularly examined by the Federal Reserve Board and
the State Corporation Commission. 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.
Federal Reserve Board regulations permit bank holding companies to engage in
non-banking activities closely related to banking or to managing or controlling
banks. These activities include the making or servicing of loans, performing
certain data processing services, and certain leasing and insurance agency
activities.
The 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. Further, 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.
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As a bank holding company, Bay Banks of Virginia, Inc. is required to file with
the Federal Reserve Board an annual report and such additional information as it
may require pursuant to the Act. The Federal Reserve Board may also conduct
examinations of Bay Banks of Virginia, Inc. and any or all of its subsidiaries.
ITEM 2: DESCRIPTION OF PROPERTY
The Company owns no property, however its subsidiary, the Bank of Lancaster owns
the following properties:
<TABLE>
<CAPTION>
<S> <C> <C>
Main Office Northside Branch White Stone Branch
The Bank of Lancaster Lancaster Square Center Route 3
100 South Main Street Kilmarnock, Virginia White Stone, Virginia
Kilmarnock, Virginia
Montross Branch Warsaw Branch
Route 3, Kings Highway West Richmond Road
Montross, Virginia Warsaw, Virginia
</TABLE>
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 $12,000 annually with $600 annual increases. The Bank is in the sixth
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, 1998 were $1,179,556.
Further information regarding property of the Bank is incorporated herein by
reference from Note 5 of the Company's 1998 Annual Report to Shareholders.
ITEM 3: LEGAL PROCEEDINGS
The Company is currently not involved in any material legal proceeding other
than the ordinary litigation incidental to its business.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter
ended December 31, 1998.
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, 1998, there were 707 stockholders of record.
A limited number transfers have occurred since year-end in which the
price per share was $32.50. Further market information is as follows:
5
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<TABLE>
<CAPTION>
COMMON EQUITY MARKET DATA
SALES PRICE SALES PRICE
1998 HI LOW DIVIDEND 1997 HI LOW DIVIDEND
<S> <C> <C> <C> <C> <C> <C> <C>
QTR 1 $27.50 $27.50 0.17 QTR 1 $23.50 $22.00 0.155
QTR 2 $33.00 $31.50 0.17 QTR 2 $23.75 $23.75 0.155
QTR 3 $33.00 $32.00 0.17 QTR 3 $26.50 $23.75 0.155
QTR 4 $33.50 $31.00 0.19 QTR 4 $26.50 $26.50 0.170
</TABLE>
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 1998 Annual Report to
Shareholders.
ITEM 7: FINANCIAL STATEMENTS
Financial statements of the Company are incorporated herein by reference to the
1998 Annual Report to Shareholders.
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 in the last two fiscal years.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT.
The only Non-Director Executive Officer of the Company is listed below. The
required information on the Directors of the Company is detailed in the
Definitive Proxy Statement and is incorporated herein by reference.
<TABLE>
<CAPTION>
NON-DIRECTOR EXECUTIVE OFFICERS
Term Principal
Executive Age Position Years Occupation
- ----------------------------------------------------------------
<S> <C> <C>
Paul T. Sciacchitano 48 Treasurer 5 Bank of Lancaster
E.V.P. and
Chief Financial
Officer
</TABLE>
ITEM 10: EXECUTIVE COMPENSATION
Executive compensation is listed in the Definitive Proxy Statement to
Shareholders and is incorporated herein by reference.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Security ownership of certain beneficial owners and management is detailed in
the Definitive Proxy Statement to Shareholders, and is incorporated herein by
reference.
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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Certain relationships and related transactions are detailed in the Definitive
Proxy Statement to Shareholders and are incorporated herein by reference.
ITEM 13: EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(a) The following exhibits are filed as part of this Form 10-KSB and this
list includes the Exhibit Index.
NO. DESCRIPTION
--- -----------
3.0 Articles of Incorporation and Bylaws of Bay Banks of Virginia,
Inc. (Incorporated by reference to Appendix I to Exhibit A of
previously filed Form 424B3, Commission File number 333-2259
dated March 23, 1997.)
10.1 (ii)(A) Bay Banks of Virginia, Inc. Incentive Stock option plan
(Incorporated by reference to the previously filed Form S-4EF,
Item 6, Material Contracts. SEC number 333-22579 dated February
28, 1997.)
10.2 Non Employee directors stock option plan. Bay Banks of Virginia
Non Employee Directors Plan is filed herewith.
11.0 Statement re: Computation of per share earnings. (Incorporated by
reference to Note 1 in the 1998 Annual Report to Shareholders.)
13.0 1998 Annual Report to Shareholders for the year ended
December 31, 1998.
23.0 Consent of Auditors is filed herewith.
27.0 Financial Data Schedule is filed herewith.
(b) Reports on Form 8-K.
No reports were filed by the registrant during the quarter ended
December 31, 1998.
SIGNATURES
In accordance with the requirements of Section 13 (or 15d) of the 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 1999.
Bay Banks of Virginia, Inc.
/s/ Austin L. Roberts, III
-------------------------------------
Austin L. Roberts, III,
President and Chief Executive Officer
In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant, in the
capacities indicated on the 27th day of March 1999.
/s/ Ammon G. Dunton, Jr.
-------------------------------
Ammon G. Dunton, Jr.
Chairman, Board of Directors
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/s/ Austin L. Roberts, III
-------------------------------
Austin L. Roberts, III
President and CEO
/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
/s/ Paul T. Sciacchitano
-------------------------------
Paul T. Sciacchitano
Treasurer
8
Exhibit 10.2
1998 Non Employee Directors Stock Option Plan.
Purpose. The Plan will benefit the Company by promoting a greater identity of
interest between non-employee directors of the Company and its subsidiaries
(each referred to as a "Participant") and its stockholders by increasing each
participants proprietary interest in the Company through the aware of options to
purchase Company common stock (each referred to as an "Option").
Eligibility. Each non-employee director of the Company and any of its
subsidiaries is eligible to participate in the Plan. The Company and Bank
currently have ten non-employee directors. Each Participant will receive an
Option for 250 shares of Company common stock on May 18, 1998 and on each
succeeding anniversary (the "Grant Date") during the term of the Plan. If an
individual serves as a director of both the Company and the Bank or any other
subsidiary, that individual will be eligible only for a single grant under the
Plan in any one year.
Administration. The Plan will be administered by the Board of Directors. The
Board has no discretion in determining who will receive an Option or the number
of shares allocated to a Participant or the terms of any Option. The terms are
set forth in the Plan and are summarized below.
Options. A total of 25,000 shares of Company common stock may be issued upon the
exercise of Options granted under the Plan. The maximum number of shares that
may be issued under the Plan, and the terms of outstanding Options, will be
proportionately adjusted to reflect an future stock dividend, stock split, or
similar changes in the capitalization of the Company.
Terms of the Options. The exercise price per share of an Option will be the fair
market value of the common stock on the Grant Date. The price may be paid in
cash or by surrendering shares of Company common stock to the Company. Options
will first become exercisable six months after the Grand Date and will have a
term of ten years
Options are nontransferable except by will or the laws fo descent and
distribution. During the Participant's lifetime, the Participant's Options may
be exercised only by the Participant.
A Participant will not have any rights as a shareholder with respect to shares
covered by Options until the Option is exercised.
Federal Income Tax Consequences. No income is recognized by a Participant on
account of the grant of an Option. Income is recognized on the date that an
Option is exercised. The amount of income recognized by the Participant is equal
to the difference between the fair market value of the shares received upon such
exercise and the Options price. Any gain or loss that is recognized on a
subsequent disposition of the shares is taxed as a long or short term capital
gain or loss.
The Company is entitled to claim a federal income tax deduction upon the
exercise of an Option. The amount of the Company's deduction is equal to the
amount of income recognized by the Participant.
Amendments. The Board of Directors may amend or discontinue the Plan at any
time, provided that no amendment may impair the rights of any Option holder
without his or her consent, and further provided that any amendment shall be
subject to approval of stockholder if such approval is necessary to comply with
any tax or regulatory requirement.
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Management's Discussion and Analysis of Financial Condition and Operations
The following discussion is intended to assist readers in understanding
and evaluating the financial condition and results of operations 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.
1998 Compared to 1997
Bay Banks of Virginia, Inc. recorded earnings for 1998 of $1,930,900 or
$1.67 per share as compared to 1997 earnings of $1,959,832 and $1.71 per share.
This decrease in net income of 1.5% was a result of certain anticipated
non-recurring expenses, which were directly related to branch acquisition, Year
2000 compliance, and further systems upgrades. Net interest income for 1998
increased to $6,429,975, up 8.2% as compared to $5,941,636 for 1997.
Non-interest income, before net securities gains, for 1998 increased to
$1,549,378, up 24.8% as compared to 1997 non-interest income of $1,241,180.
Other non-interest expenses increased to $5,487,747, up 25.4% over 1997 expenses
of $4,375,265.
1997 Compared to 1996
Earnings for the Bank of Lancaster were $1,959,832 for 1997, up 7.0%
over 1996 earnings of $1,831,616. 1997 earnings per share were $1.71 as compared
to 1996 earnings per share of $1.64. Net interest income was $5,941,636 for 1997
as compared to $5,523,200 for 1996. This represents an increase of 7.6% over net
interest income for 1996. Non-interest income, before net securities gains, for
1997 was $1,241,180, up 14.2% over 1996 non-interest income of $1,086,443.
Non-interest expenses for 1997 were $4,375,265, up 9.8% as compared to 1996
expenses of $3,985,040.
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 $6.4 million in 1998, $5.9 million in 1997 and
$5.5 million in 1996. This represents an increase in net interest income of 8.2%
for 1998 over 1997 and 7.6% for 1997 over 1996. Competitive pressures on loan
and deposit rates continue to adversely affect the rate of growth in the net
interest margin. While loan balances increased, quoted rates have trended
downward. The result was a slower growth rate in the Company's net interest
margin. Net interest yield on a fully tax equivalent basis was 5.3%, 5.7% and
5.4% for 1998, 1997 and 1996 respectively.
Non-Interest Income
Total non-interest income increased to $1.8 million for 1998 from $1.2
million in 1997 and $1.1 million in 1996. This represents an increase of 41.0%
for 1998 over 1997 and 9.1% for 1997 over 1996.
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 income
declined by $43 thousand during 1998 for a decrease of 1% as compared to 1997.
Trust income increased by $131 thousand or 32% between 1997 and 1996. Service
charges on deposits increased by $89 thousand, while other service charges
increased by $124 thousand during 1998. Other miscellaneous income includes
lease income, gains on the sale of foreclosed property, gains on the sale of
fixed assets and other miscellaneous income.
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Other income increased between 1998 and 1997 to $294 thousand from $157 thousand
for an increase of 87.7%. The majority of this improvement is due to increasing
success in the sale of non-deposit products, such as mutual funds and annuities,
and growth in secondary market mortgage origination fee income. Other income for
1996 was $159 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 1998 resulted in net gains of $205 thousand. Management seized upon the
opportunities presented by a strong bond market to re-align the mix and maturity
schedule of the investment portfolio to better meet the strategic and cash flow
needs of the Company.
Non-Interest Expense
During 1998, non-interest expense increased to $5.4 million from $4.4
million in 1997 and $4.0 million in 1996. This represents an increase of 25.4%
for 1998 over 1997 and 9.8% for 1997 over 1996. 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 22.6% and 6.4% for 1998 and 1997 respectively.
Bay Banks of Virginia purchased two branches from another bank in
February 1998. Of the 22.6% increase in salary and benefit expense, 10.6% was
directly attributable to staffing increases resulting from the purchased
branches. The remaining 12.0% increase is a result of annual salary increases
and the hiring of several part-time tellers and full time loan department
personnel. Occupancy expense increased 14.2% during 1998 over 1997 as a direct
result of the purchase of the aforementioned branches, as well as systems
upgrades of the Company's data processing equipment. For the comparable period,
1997 over 1996, occupancy expenses decreased 2.0%. Other miscellaneous expenses
increased 33.3% during 1998 over 1997 and 20.7% during 1997 over 1996.
Other miscellaneous expenses were impacted by numerous increases
throughout the expense schedules. Most notably by non-recurring expenses related
to the purchase of the two branches mentioned above. Certain legal and
consulting fees, extensive non-depreciable leasehold improvements related to the
branch purchase, as well as Year 2000 compliance have resulted in the majority
of the increase in other miscellaneous expense.
Assets
As of December 31, 1998, the Company had total assets of $200.2 million
as compared to 1997 balances of $169.0 million. Total assets increased by 18.5%
for 1998 over 1997. Deposit growth and investments in securities were mainly
attributable to the purchase of two branches. With the purchase, deposits
increased $22.2 million, and were subsequently converted into loans and
investments. In addition, loan growth was strong during 1998, which further
contributed to asset growth.
Loans
Loan demand was steady as balances increased by $9.8 million or 9.3%
during 1998. Year-end 1998 gross loan balances were $114.5 million as compared
to $104.8 million at year-end 1997. The loan portfolio is composed of mainly
residential first mortgages. Real estate mortgage loans in aggregate increased
to $84.2 million during 1998, from a total of $78.9 million for 1997. Commercial
loan balances increased to $11.7 million from $9.6 million, and consumer
installment loans increased to $18.7 million for 1998 as compared to $16.2
million for 1997. Of total loans, residential mortgages compose 73.5%,
commercial loans 10.2%, and consumer installment 16.3%.
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 1998 provision was $208 thousand as
compared to $203 thousand for 1997. Loans charged off during 1998 totaled $77
thousand and for 1997 $368 thousand. Recoveries were $20 thousand and $6
thousand for 1998 and 1997 respectively. Net loans
11
<PAGE>
charged off to year-end total loans were .05% for 1998 and .4% for 1997. The
allowance for credit losses, as a percentage of year-end loans, was .9% for 1998
and .8% for 1997.
As of December 31, 1998, loans upon which the accrual of interest had
been discontinued totaled $79 thousand as compared to $126 thousand for year-end
1997. Other Real Estate, including foreclosed property, at year-end 1998 was
$1.2 million as compared to $1.4 million for 1997. 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
$231 thousand or .2% of total loans at December 31, 1998. These balances were
$593 thousand and .6% for the comparable period in 1997.
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 31,1998, management considers the
allowance for loan losses to be a reasonable estimate of potential loss exposure
inherent in the loan portfolio.
Deposits
As of December 31, 1998, the Company maintained total deposits of $178.9
million. This compares to $149.6 and $142.1 million for 1997 and 1996
respectively. Total deposit growth was 19.2% for 1998 over 1997, and 5.3% for
1997 over 1996. Non-interest bearing deposits increased to $19.6 million during
1998 from $11.7 million at year-end 1997. Savings and NOW account balances
increased to $105.3 million during 1998 from $90.9 million at year-end 1997.
Other time deposits grew to $53.7 million from $47 million at year-end 1997. The
comparable deposit balances for 1996 were, non-interest bearing $11.7 million,
savings and NOW $98.5 million, and other time deposits were $31.9 million.
Securities
As of December 31, 1998, total investment securities were $59.0 million.
Year-end balances for 1997 were $44.1 million, and for 1996 $45.2 million. The
Company increased investment balances during 1998 as a result of the acquisition
of deposits with the purchase of the branches mentioned above. 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.
Throughout 1998, the Company sold $10.3 million from the investment
portfolio, and purchased $37.5 million. This activity is greater than historical
activity for two reasons. First, management recognized early in 1998 that the
maturity structure and the mix of investment types needed attention. With the
acquisition of $22.3 million of excess deposits as related to the branch
acquisition, and the anticipated need to deploy those funds into the investment
portfolio, management conducted a year long analysis and re-structure of the
investment portfolio. The resulting balance changes between year-end 1998 and
1997 were as follows: U.S. Treasury balances decreased to $4.5 million from
$8.6; U.S. Agency balances increased to $17.1 million from $12.5 million; state
and municipal bonds increased to $25.4 million from $18.5 million, and other
bonds increased to $11.8 million from $4.5 million. The realignment resulted in
net gains on sale of securities totaling $205 thousand for 1998.
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, 1998, approximately 9.25% of the investment
portfolio will mature or reprice within one year or less. This compares to a
14.6% maturity and repricing ratio for 1997. The loan portfolio of the
12
<PAGE>
Company also provides a source of liquidity. As of December 31, 1998, 34.46% of
all fixed and variable rate loans mature or reprice within one year or less.
This compares to 38.6% in 1997.
At year-end 1998, the Company had approximately $5.4 million in
securities with maturities of one year or less and Federal Funds sold balances
of $12.0 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 has, in addition, utilized an Asset
Liability Committee composed of appointed members of management and Board of
Directors. The end result is significant 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 1998, the Company paid dividends to stockholders totaling 41.9%
of net income. This pay out ratio was 36.9% in 1997 and 35.1% in 1996. Based
upon this ratio, earnings retained by the Company fall in the range of 58.1% to
64.9% 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, 1998 was
$20.5 million. This is an increase of 9.7% over the 1997 capital position of
$18.7 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. Net unrealized gains were $627 thousand at
December 31, 1998. This compares to unrealized gains of $271 thousand at
year-end 1997.
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
6.0%, a Tier 1 Capital to Risk Weighted Asset ratio of 5.5% and a Tier 1 Capital
to Adjusted Average Asset ratio of 3%. As of December 31,
13
<PAGE>
1998, the Company maintained these ratios at 16.9%, 15.1%, and 9.0%
respectively. The Company's Leverage Ratio for this period was 10.0%.
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 $17.60 at December 31, 1998, $16.24 in 1997,
and $14.81 in 1996. Cash dividends paid during 1998 were $810 thousand or $.70
per share, and for 1997 and 1996 cash dividends were $724 thousand and $642
thousand respectively. Total shares outstanding at December 31, 1998 and 1997
were 1,164,728 and 1,150,826 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 millennium. The Company recognizes Year 2000 planning and compliance as
a major business and operations issue. The Board of Directors is 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 Statements
In addition to the historical information contained herein, this
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of the Bank, and the
Holding Company's actual results could differ significantly from those discussed
in the forward-looking statements. Some of the factors that could cause or
contribute to such differences are discussed herein, but also include changes in
economic conditions in the Company's (or Bank's) market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market, and competition. Any of these factors could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected.
Exhibit 13
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
January 28, 1999
Newport News, Virginia
1
<PAGE>
BAY BANKS OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 5,268,229 $ 3,302,389
Federal funds sold 12,007,706 11,556,000
Securities available-for-sale 58,951,384 44,066,442
Loans receivable, net 113,976,610 104,202,928
Premises and equipment 4,699,797 2,840,140
Accrued interest receivable 1,537,745 1,247,958
Other real estate owned 1,179,556 1,378,795
Other assets 2,582,685 411,419
----------------- ----------------
Total assets $ 200,203,712 $ 169,006,071
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 19,851,650 $ 11,717,193
Savings and NOW deposits 105,347,377 90,891,939
Other time deposits 53,656,050 46,995,674
----------------- ----------------
Total deposits 178,855,077 149,604,806
Other liabilities 840,495 709,147
----------------- ----------------
Total liabilities 179,695,572 150,313,953
----------------- ----------------
SHAREHOLDERS' EQUITY
Common stock - $5 par value
Authorized - 5,000,000 shares;
Outstanding - 1,164,728 and 1,150,826 shares 5,823,640 5,754,130
Additional paid-in capital 3,529,294 3,164,510
Retained earnings 10,528,706 9,502,341
Accumulated other comprehensive income 626,500 271,137
----------------- ----------------
Total shareholders' equity 20,508,140 18,692,118
----------------- ----------------
Total liabilities and shareholders' equity $ 200,203,712 $ 169,006,071
================= ================
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE>
BAY BANKS OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
INTEREST INCOME
Loans receivable $ 9,522,678 $ 9,390,600 $ 8,641,234
Securities 3,176,277 2,385,736 2,649,754
Federal funds sold 796,291 390,144 337,142
-------------- -------------- --------------
Total interest income 13,495,246 12,166,480 11,628,130
-------------- -------------- --------------
INTEREST EXPENSE
Deposits 7,054,088 6,203,107 6,099,275
Federal funds purchased 11,183 21,737 5,655
-------------- -------------- --------------
Total interest expense 7,065,271 6,224,844 6,104,930
-------------- -------------- --------------
NET INTEREST INCOME 6,429,975 5,941,636 5,523,200
Provision for loan losses 208,367 202,500 305,000
-------------- -------------- --------------
Net interest income after provision
for loan losses 6,221,608 5,739,136 5,218,200
-------------- -------------- --------------
NON-INTEREST INCOME
Income from fiduciary activities 495,398 538,089 407,227
Service charges on deposit accounts 321,100 232,219 231,307
Other service charges and fees 438,437 314,040 288,877
Net securities gains 204,853 2,806 54,072
Other income 294,443 156,832 159,032
-------------- -------------- --------------
Total non-interest income 1,754,231 1,243,986 1,140,515
-------------- -------------- --------------
NON-INTEREST EXPENSES
Salaries and employee benefits 2,708,184 2,208,792 2,075,737
Occupancy expense 632,697 554,192 565,193
Deposit insurance premium 20,765 17,082 22,956
Other expense 2,126,101 1,595,199 1,321,154
-------------- -------------- --------------
Total non-interest expenses 5,487,747 4,375,265 3,985,040
-------------- -------------- --------------
Income before income taxes 2,488,092 2,607,857 2,373,675
Income tax expense 557,192 648,025 542,059
-------------- -------------- --------------
NET INCOME $ 1,930,900 $ 1,959,832 $ 1,831,616
============== ============== ==============
BASIC EARNINGS PER SHARE
Average shares outstanding 1,156,634 1,146,438 1,116,396
Net income per share of common stock $ 1.67 $ 1.71 $ 1.64
DILUTED EARNINGS PER SHARE
Average shares outstanding 1,176,462 1,162,677 1,127,482
Net income per share of common stock $ 1.64 $ 1.69 $ 1.62
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
BAY BANKS OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income (Loss) Equity
------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 2,769,185 $ 2,605,131 $ 9,876,179 $ 216,735 $ 15,467,230
------------- ------------- ------------- ------------- ------------
Comprehensive income:
Net income - - 1,831,616 - 1,831,616
Net changes in unrealized
depreciation on available-
for-sale securities, net of
taxes of $136,472 - - - (264,917) (264,917)
------------- ------------- ------------- ------------ ------------
Total comprehensive income - - 1,831,616 (264,917) 1,566,699
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
------------- ------------- ------------- ------------ ------------
Balance at December 31, 1996 5,666,088 2,887,618 8,279,343 (48,182) 16,784,867
------------- ------------- ------------- ------------ ------------
Comprehensive income:
Net income - - 1,959,832 - 1,959,832
Net changes in unrealized
appreciation on available-for-
sale securities, net of taxes
of $164,498 - - - 319,319 319,319
------------- ------------- ------------- ------------ ------------
Total comprehensive income - - 1,959,832 319,319 2,279,151
Cash dividends paid -
$0.63 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
------------- ------------- ------------- ------------ ------------
Balance at December 31, 1997 5,754,130 3,164,510 9,502,341 271,137 18,692,118
------------- ------------- ------------- ------------ ------------
Comprehensive income:
Net income - - 1,930,900 - 1,930,900
Net changes in unrealized
appreciation on available-for-
sale securities, net of taxes
of $176,746 - - - 355,363 355,363
------------- ------------- ------------- ------------- ------------
Total comprehensive income - - 1,930,900 355,363 2,286,263
Cash dividends paid -
$0.70 per share - - (809,825) - (809,825)
Sale of common stock--
Dividend reinvestment plan 59,420 280,124 - - 339,544
Stock options exercised 10,090 84,660 (94,710) - 40
------------- ------------- ------------- ------------- ------------
Balance at December 31, 1998 $ 5,823,640 $ 3,529,294 $ 10,528,706 $ 626,500 $ 20,508,140
============= ============= ============= ============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE>
BAY BANKS OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,930,900 $ 1,959,832 $ 1,831,616
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 457,260 419,181 385,535
Provision for loan losses 208,367 202,500 305,000
Net securities gains (204,853) (2,806) (54,072)
(Gain) loss on sale of foreclosed real estate (61,191) 6,633 (92,271)
Deferred income taxes 56,741 107,422 113,602
Loss on sale of equipment 4,180 - 6,003
Accrued income and other assets (2,461,053) (288,616) 158,567
Other liabilities (102,139) (7,551) 27,561
--------------- -------------- --------------
Net cash provided by (used in)
operating activities (171,788) 2,396,595 2,681,541
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits - - 2,000,000
Proceeds from maturities of available-for-sale securities 13,039,287 5,486,179 6,193,055
Proceeds from sale of available-for-sale securities 10,316,274 4,362,527 2,526,924
Purchases of available-for-sale securities (37,503,541) (8,172,549) (8,316,000)
Net change in Federal funds sold (451,706) (7,019,000) 844,000
Net increase in loans (9,982,049) (3,694,114) (8,078,450)
Proceeds from sale of foreclosed real estate 599,196 107,127 919,897
Proceeds from sale of equipment - - 5,400
Purchase of premises and equipment (2,321,097) (418,901) (343,192)
Additions to other real estate owned (338,766) (863,512) (54,055)
-------------- -------------- --------------
Net cash used in investing activities (26,642,402) (10,212,243) (4,302,421)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand, savings and
NOW deposit accounts 22,589,895 (7,583,222) 1,517,935
Net increase in time deposits 6,660,376 15,078,142 302,618
Proceeds from issuance of common stock 339,584 351,841 393,040
Dividends paid (809,825) (723,741) (642,102)
-------------- -------------- --------------
Net cash provided by financing activities 28,780,030 7,123,020 1,571,491
-------------- -------------- --------------
Net increase (decrease) in cash and due from banks 1,965,840 (692,628) (49,389)
Cash and due from banks at January 1 3,302,389 3,995,017 4,044,406
-------------- -------------- --------------
Cash and due from banks at December 31 $ 5,268,229 $ 3,302,389 $ 3,995,017
============== ============== ==============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 7,048,074 $ 6,479,608 $ 6,114,860
============== ============== ==============
Income taxes paid $ 533,685 $ 428,000 $ 265,200
============== ============== ==============
Loans transferred to foreclosed real estate $ 306,381 $ 846,078 $ 328,825
============== ============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 five offices: two
located in Kilmarnock, an office in White Stone, Warsaw and
Montross, Virginia, which offer 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.
(Continued)
6
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Concluded)
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.
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 1998.
7
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 2. SECURITIES AVAILABLE-FOR-SALE
The carrying amount of debt and other securities and their
approximate fair values at December 31, 1998 and 1997, follow:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
U.S. Treasury securities $ 4,541,642 $ 25,251 $ 18 $ 4,566,875
U.S. Government
agencies 17,123,791 123,513 48,610 17,198,694
State and municipal
securities 24,829,813 532,103 7,433 25,354,483
Other securities 11,506,895 325,722 1,285 11,831,332
------------- ------------- ------------- ------------
$ 58,002,141 $ 1,006,589 $ 57,346 $ 58,951,384
============= ============= ============= ============
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
============= ============= ============= ============
</TABLE>
Gross realized gains and gross realized losses on sales of
securities were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Gross realized gains $ 204,853 $ 21,370 $ 54,072
Gross realized losses $ - $ 18,564 $ -
</TABLE>
The scheduled maturities of securities available-for-sale at
December 31, 1998, were as follows:
<TABLE>
<CAPTION>
Available-for-Sale Securities
Amortized Fair
Cost Value
<S> <C> <C>
Due in one year or less $ 5,420,957 $ 5,451,781
Due from one year to five years 21,251,572 21,606,272
Due from five to ten years 26,783,499 27,331,013
Due after ten years 4,546,113 4,562,318
--------------- ---------------
$ 58,002,141 $ 58,951,384
=============== ===============
</TABLE>
Securities carried at $3,542,047 at December 31, 1998, and
$1,996,320 at December 31, 1997, were pledged to secure public
deposits required by law.
8
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 3. LOANS
The components of loans in the balance sheets were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Real estate mortgage loans $ 84,202,736 $ 78,926,222
Commercial loans 11,678,949 9,648,530
Installment loans, net 18,696,840 16,221,617
--------------- ---------------
114,578,525 104,796,369
Net deferred loan costs and fees 410,020 267,268
Allowance for loan losses (1,011,935) (860,709)
--------------- ---------------
$ 113,976,610 $ 104,202,928
=============== ===============
</TABLE>
Loans upon which the accrual of interest has been discontinued
totaled $78,563 and $126,040 at December 31, 1998 and 1997,
respectively.
An analysis of the change in the allowance for loan losses follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Balance, beginning of year $ 860,709 $ 1,020,104 $ 925,170
Provision for loan losses 208,367 202,500 305,000
Recoveries 19,618 6,295 23,247
Loans charged off (76,759) (368,190) (233,313)
--------------- --------------- ---------------
Balance, end of year $ 1,011,935 $ 860,709 $ 1,020,104
=============== =============== ===============
</TABLE>
Loans having carrying values of $306,381 and $846,078 were
transferred to foreclosed real estate in 1998 and 1997,
respectively.
NOTE 4. OTHER TIME DEPOSITS
The aggregate amount of other time deposits each with a minimum
denomination of $100,000, was $12,551,614 and $10,209,461 at
December 31, 1998 and 1997, respectively.
NOTE 5. PREMISES AND EQUIPMENT
Components of premises and equipment included in the balance sheets
at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Land $ 538,686 $ 309,736
Buildings and improvements 3,358,727 2,215,262
Furniture and equipment 3,706,689 2,762,401
--------------- ---------------
Total cost 7,604,102 5,287,399
Less accumulated depreciation 2,904,305 2,447,259
--------------- ---------------
Net book value $ 4,699,797 $ 2,840,140
=============== ===============
</TABLE>
9
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 6. INCOME TAXES
The provision for income taxes consisted of the following for the
years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Currently payable $ 613,933 $ 540,603 $ 428,457
Deferred (56,741) 107,422 113,602
--------------- --------------- ---------------
$ 557,192 $ 648,025 $ 542,059
=============== =============== ===============
</TABLE>
The reasons for the differences between the statutory Federal income
tax rates and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Statutory rates 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income (12.1) (9.2) (11.2)
Other, net .5 - -
--------------- --------------- ---------------
22.4% 24.8% 22.8%
=============== =============== ===============
</TABLE>
The components of the net deferred tax assets and liabilities
included in other assets (liabilities) are as follows at December
31:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Deferred tax assets
Allowance for loan losses $ 220,981 $ 169,564 $ 223,758
Net unrealized loss on
available-for-sale securities - 24,820
Deferred compensation 121,543 110,672 98,758
Other, net 26,978 27,296 20,863
--------------- --------------- ---------------
369,502 307,532 368,199
--------------- --------------- ---------------
Deferred tax liabilities
Net unrealized gain on available-
for-sale securities (322,743) (145,997) -
Pension plan (84,682) (75,371) (58,390)
Deferred loan fees and costs (159,713) (212,951) (162,410)
Other, net (82,951) (33,795) (29,909)
--------------- --------------- ---------------
(650,089) (468,114) (250,709)
--------------- --------------- ---------------
Net deferred tax asset (liability) $ (280,587) $ (160,582) $ 117,490
=============== =============== ===============
</TABLE>
10
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 7. PENSION PLAN
The following tables set forth the Pension Plan's changes in benefit
obligation, plan assets, funded status, assumptions and the
components of net periodic benefit cost recognized in the Bank's
financial statements at December 31:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligations at
beginning of year $ 1,263,114 $ 1,080,000
Service cost 82,844 65,953
Interest cost 99,089 84,486
Actuarial gain 94,005 80,519
Benefits paid (49,008) (47,844)
--------------- ---------------
Benefit obligation at end of year 1,490,044 1,263,114
--------------- ---------------
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 1,409,704 1,278,515
Actual return on plan assets 17,432 86,523
Employer contributions 91,028 92,510
Benefits paid (49,008) (47,844)
--------------- ---------------
Fair value of plan assets at
end of year 1,469,156 1,409,704
--------------- ---------------
Funded status (20,888) 146,590
Unrecognized prior service cost 172,478 188,850
Unrecognized transition obligation (91,535) (109,841)
Unrecognized actuarial gain (loss) 189,011 (3,904)
--------------- ---------------
Prepaid benefit cost $ 249,066 $ 221,695
=============== ===============
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31:
Discount rate 7.5% 8.0%
Expected return on plan assets 9.0% 9.0%
Rate of compensation increase 5.0% 5.0%
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ 82,844 $ 65,953 $ 64,671
Interest cost 99,089 84,486 78,249
Expected return on plan assets (116,342) (105,948) (99,524)
Amortization of deferred
actuarial gain (1,587)
Amortization of prior service cost 16,372 16,372 16,372
Amortization of transition obligation (18,306) (18,306) (18,306)
--------------- --------------- ---------------
Net periodic benefit cost $ 63,657 $ 42,557 $ 39,875
=============== =============== ===============
</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 $36,321, $31,663
and $33,360 in 1998, 1997 and 1996, respectively.
11
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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 in 1998, 1997 and 1996,
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 11,884 and
14,169 were issued in 1998 and 1997, 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, 1998, the 1994
plan had 53,920 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.
A summary of the status of the incentive stock option plans as of
December 31, 1998, 1997 and 1996, 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>
1998
Shares 39,550 5,900 (5,300) 40,150
Weighted average exercise price $ 15.62 $ 23.50 $ 18.07 $ 16.45
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
</TABLE>
At December 31, 1998, exercise prices on outstanding options ranged
from $11.00 to $23.50 per share and the weighted average remaining
contractual life was 6.75 years.
(Continued)
12
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 11. STOCK OPTION PLAN (Concluded)
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>
1998 1997 1996
<S> <C> <C> <C>
Pro-forma reduction in
net income $ (16,000) $ (13,000) $ (8,000)
=============== =============== ===============
Pro-forma earnings per share $ 1.66 $ 1.70 $ 1.63
=============== =============== ===============
</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
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.
(Continued)
13
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 12. FINANCIAL INSTRUMENTS (Concluded)
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, 1998 and 1997, follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------
<S> <C> <C>
Commitments to extend credit $ 11,739,000 $ 7,633,634
Lines of credit to directors 1,029,700 960,229
Standby letters of credit 232,150 327,537
Credit card arrangements 2,515,440 2,941,150
</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
73% 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 $2,598,000 and $2,129,000 at December 31,
1998 and 1997, 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.
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,
1998, 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, 1998, 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 $ 5,268 $ 5,268
Federal funds sold 12,008 12,008
Securities available-for-sale 58,951 58,951
Loans, net of allowance for loan losses 113,977 113,826
</TABLE>
(Continued)
14
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS (Concluded)
<TABLE>
<CAPTION>
Dollars in Thousands
---------------------------------
Carrying Fair
Amount Value
--------------- ---------------
<S> <C> <C>
Financial liabilities:
Non-interest bearing deposits $ 19,852 $ 22,323
Savings and NOW deposits 105,347 104,761
Other time deposits 53,656 53,590
Off-balance-sheet liabilities:
Commitments to extend credit 15,516 15,516
</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.
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.
15
<PAGE>
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
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, 1998, 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 1998
----------- ----------
<S> <C> <C>
Total capital to risk weighted assets 6.0 8.1
Tier 1 capital to risk weighted assets 5.5 12.6
Tier 1 capital to adjusted average assets 3.0 7.8
</TABLE>
16
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Bay Banks of Virginia, Inc.
We consent to the incorporation by reference in this Annual Report on
Form 10-KSB of our report dated January 28, 1999, relating to the consolidated
financial statements of Bay Banks of Virginia, Inc. as of December 31, 1998,
1997, and 1996, and for each of the years in the three-year period ended
December 31, 1998.
EGGLESTON SMITH P.C.
Newport News, Virginia
March 25, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,268,229
<INT-BEARING-DEPOSITS> 159,003,427
<FED-FUNDS-SOLD> 12,007,706
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 58,951,384
<INVESTMENTS-CARRYING> 58,002,141
<INVESTMENTS-MARKET> 58,951,384
<LOANS> 114,578,525
<ALLOWANCE> 1,011,935
<TOTAL-ASSETS> 200,203,712
<DEPOSITS> 178,855,077
<SHORT-TERM> 0
<LIABILITIES-OTHER> 840,495
<LONG-TERM> 0
0
0
<COMMON> 5,823,640
<OTHER-SE> 14,684,500
<TOTAL-LIABILITIES-AND-EQUITY> 20,508,140
<INTEREST-LOAN> 9,522,678
<INTEREST-INVEST> 3,176,277
<INTEREST-OTHER> 796,291
<INTEREST-TOTAL> 13,495,246
<INTEREST-DEPOSIT> 7,054,088
<INTEREST-EXPENSE> 7,065,271
<INTEREST-INCOME-NET> 6,429,975
<LOAN-LOSSES> 208,367
<SECURITIES-GAINS> 204,853
<EXPENSE-OTHER> 5,487,747
<INCOME-PRETAX> 2,488,092
<INCOME-PRE-EXTRAORDINARY> 2,488,092
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,930,900
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.64
<YIELD-ACTUAL> 7.30
<LOANS-NON> 78,563
<LOANS-PAST> 1,069,057
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 860,709
<CHARGE-OFFS> 76,759
<RECOVERIES> 19,618
<ALLOWANCE-CLOSE> 1,011,935
<ALLOWANCE-DOMESTIC> 1,011,935
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
