<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[_] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER..........0-22955
BAY BANKS OF VIRGINIA, INC.
(EXACT NAME OF THE REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-1838100
(STATE OF INCORPORATION) (IRS EMP. ID NO.)
100 SOUTH MAIN STREET, KILMARNOCK, VA 22482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(ZIP CODE)
(804)435-1171
(REGISTRANTS TELEPHONE NUMBER INCLUDING AREA CODE)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act during of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days X yes ____ no
----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 1,158,562 shares of common
stock at June 30, 2000.
<PAGE>
FORM 10-Q
For the interim period ending June 30, 2000.
INDEX
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
CONSOLIDATED STATEMENTS OF EARNINGS FOR THE
SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2000 AND 1999 (UNAUDITED)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
JUNE 30, 2000 (UNAUDITED), DECEMBER 31, 1999 AND 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PARENT ONLY BALANCE SHEETS AS OF
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
PARENT ONLY STATEMENTS OF EARNINGS FOR THE
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED) AND 1999
PARENT ONLY STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 2000 AND 1999 (UNAUDITED)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
FINANCIAL HIGHLIGHTS FOR THE SIX MONTHS ENDED JUNE 30, 2000
COMPARED TO JUNE 30, 1999 (UNAUDITED)
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The accompanying notes are an integral part of these financial statements
<TABLE>
<CAPTION>
Bay Banks of Virginia, Inc.
Consolidated Balance Sheets
(Unaudited) June 30, 2000 Dec 31, 1999
<S> <C> <C>
ASSETS
Cash and due from banks 6,927,471 5,360,621
Federal funds sold 1,803,163 0
Investments Available for Sale 52,432,641 53,169,880
Gross Loans 144,471,130 131,961,820
Allowance for loan losses (1,256,329) (1,197,843)
Premises and equipment 5,532,011 4,953,723
Accrued interest receivable 1,692,576 1,598,605
Other real estate owned 480,115 592,702
Other assets 3,523,170 3,333,168
Total assets 215,605,948 199,772,677
LIABILITIES
Demand deposits 21,221,170 20,888,591
Savings and NOW deposits 96,389,565 96,848,391
Other time deposits 59,722,535 59,964,985
Total deposits 177,333,270 177,701,967
Fed Funds Purchased 0 0
Securities Sold for Repurchase 2,718,691 1,283,324
Other Short Term Borrowings 14,700,000
Other liabilities 1,106,390 1,081,526
Total liabilities 195,858,351 180,066,816
SHAREHOLDERS' EQUITY
Common stock - $5 par value;
Authorized - 5,000,000 shares 5,792,808 5,826,617
Additional paid-in capital 3,769,659 3,735,576
Retained Earnings 11,698,553 11,572,592
Accumulated other comprehensive income/(loss) (1,513,423) (1,428,924)
Total shareholders' equity 19,747,597 19,705,861
Total liabilities and shareholders' equity 215,605,948 199,772,677
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements
<TABLE>
<CAPTION>
Bay Banks of Virginia, Inc.
Consolidated Statements of Earnings
(Unaudited)
Qtr Ended Qtr Ended Year-to-date Year-to-date
Jun 30, 2000 Jun 30, 1999 Jun 30, 2000 Jun 30, 1999
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable (incl fees) 3,042,440 2,473,030 5,881,783 4,909,615
Securities 781,690 943,422 1,592,353 1,809,156
Federal funds sold 22,646 54,557 35,815 162,162
Total interest income 3,846,776 3,471,009 7,509,951 6,880,933
INTEREST EXPENSE
Deposits 1,852,919 1,589,433 3,630,824 3,209,624
Federal funds purchased 41,686 0 51,136 0
Securities Sold to Repurchase 32,380 0 52,407 0
Other Short Term Borrowings 100,871 0 100,871 0
Total interest expense 2,027,856 1,589,433 3,835,238 3,209,624
Net Interest Income 1,818,920 1,881,576 3,674,713 3,671,309
Provision for loan losses 60,000 130,000 130,000 200,000
Net interest income after provision 1,758,920 1,751,576 3,544,713 3,471,309
NONINTEREST INCOME
Income from fiduciary activities 158,042 136,512 322,288 258,846
Service charges on deposit accounts 92,962 92,947 176,268 175,707
Other service charges and fees 118,598 139,280 192,490 197,420
Net securities gains -3,450 0 -4,400 0
Other income 89,509 78,571 112,507 122,095
Total noninterest income 455,661 447,310 799,153 754,068
NONINTEREST EXPENSES
Salaries and employee benefits 829,734 733,474 1,629,403 1,443,998
Occupancy expense 175,731 83,804 345,572 153,633
Other expense 631,218 679,455 1,174,831 1,257,725
Total noninterest expenses 1,636,683 1,496,733 3,149,806 2,855,356
Net Income before income taxes 577,898 702,153 1,194,060 1,370,021
Income tax expense 161,500 174,000 334,000 338,000
Net Income after income taxes 416,398 528,153 860,060 1,032,021
Average shares outstanding 1,158,437 1,169,070 1,160,875 1,167,870
Earnings per share 0.36 0.45 0.74 0.88
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements
<TABLE>
<CAPTION>
Bay Banks of Virginia, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended: June 30, 2000 June 30, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income 860,060 1,032,021
Adjustments to reconcile Net Income to Cash:
Depreciation 204,374 220,656
Provision for Loan Losses 130,000 200,000
Net (Gain) / Loss on Sale of Securities (4,400) 0
(Increase) / Decrease in Accrued Interest Receivable (93,971) (154,417)
Increase / (Decrease) in Accrued Interest Payable 19,866 (30,619)
Increase / (Decrease) in Short Term Borrowings 16,135,367 678,772
(Increase) / Decrease in Other Assets (566,970) (1,801,274)
Increase / (Decrease) in Other Liabilities 24,864 (1,051,463)
Net Cash Provided / (Used) by Operating Activities 16,709,190 (906,324)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of AFS Securities (2,134,440) (9,855,822)
Proceeds from sales of AFS Securities 2,115,300 0
Principal returns & maturities of AFS Securities 1,038,471 4,587,395
(Increase) / Decrease in Loans outstanding (12,509,309) (3,480,503)
(Increase) / Decrease in Fed Funds Sold (1,803,163) 9,445,405
Purchases of Premises and Equipment (754,694) 138,509
(Increase) / Decrease in Other Real Estate Owned 112,587 544,300
Net Cash Provided / (Used) in Investing Activities (13,935,248) 1,379,284
CASH FLOWS FROM FINANCING ACTIVITIES
Increase / (Decrease) in Demand, Savings, & NOW deposits (126,247) 4,211,154
Increase / (Decrease) in Time Deposits (242,450) (4,395,443)
Proceeds from issuance of Common Stock 189,735 33,433
Repurchase of Common Stock (189,756) 0
Dividends paid (487,238) (446,000)
Other (351,136) 0
Net Cash Provided / (Used) in Financing Activities (1,207,092) (596,856)
Net Increase / (Decrease) in Cash & Due from Banks 1,566,850 (123,896)
Cash & Due From Banks on 12/31/99 5,360,621 5,268,229
Cash & Due From Banks on 6/30/00 6,927,471 5,144,333
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements
Bay Banks of Virginia, Inc.
Consolidated Statement of Changes
in Shareholders' Equity
(Unaudited)
<TABLE>
<CAPTION>
Accumulated
Other Other
Common Paid-in Retained Comprehensive Total
Stock Capital Earnings Income/(Loss) Equity
<S> <C> <C> <C> <C> <C>
Balance on 12/31/97 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 of 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
Dividends paid ($0.70/share) (809,825) (809,825)
Sale of common stock:
Dividends Reinvested 59,420 280,124 - - 339,544
Stock Options exercised 10,090 84,660 (94,710) - 40
---------- ---------- ---------- ---------- ----------
Balance on 12/31/98 5,823,640 3,529,294 10,528,706 626,500 20,508,140
Comprehensive Income:
Net Income 2,175,378 2,175,378
Net changes in unrealized
appreciation of available-
for-sale securities, net of
taxes of $1,058,856 (2,055,424) (2,055,424)
---------- ---------- ---------- ---------- ----------
Total Comprehensive Income - - 2,175,378 (2,055,424) 119,954
Dividends paid ($0.78/share) (910,279) (910,279)
Stock repurchases (58,385) (122,510) (214,349) (395,244)
Sale of common stock:
Dividends Reinvested 56,152 310,127 - - 366,279
Stock Options exercised 5,210 18,665 (6,864) - 17,011
---------- ---------- ---------- ---------- ----------
Balance on 12/31/99 5,826,617 3,735,576 11,572,592 (1,428,924) 19,705,861
Comprehensive Income:
Net Income 860,060 860,060
Net changes in unrealized
appreciation of available-
for-sale securities, net of
taxes of $43,529 (84,499) (84,499)
---------- ---------- ---------- ---------- ----------
Total Comprehensive Income - - 860,060 (84,499) 775,561
Dividends paid ($0.39/share) (487,238) (487,238)
Stock repurchases (61,245) (128,216) (246,861) (436,322)
Sale of common stock:
Dividends Reinvested 25,936 158,849 - - 184,785
Stock Options exercised 1,500 3,450 - 4,950
---------- ---------- ---------- ---------- ----------
Balance on 6/30/00 5,792,808 3,769,659 11,698,553 (1,513,423) 19,747,597
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Bay Banks of Virginia, Inc. owns 100% of the Bank of Lancaster, `the Bank,' and
100% of Bay Trust Company of Virginia, Inc, `the Trust Company.' The
consolidated financial statements include the accounts of the Bank, the Trust
Company, and Bay Banks of Virginia.
The accounting and reporting policies of the registrant conform to generally
accepted accounting principals and to the general practices within the banking
industry. This interim statement has not been audited. However, in management's
opinion, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the consolidated financial statements have
been included.
These consolidated financial statements should be read in conjunction with the
financial statements and notes to financial statements included in the
registrant's 1999 Annual Report to Shareholders.
Bay Banks of Virginia, Inc.
Parent Only Balance Sheets
The accompanying notes are an integral part of these financial statements
(Unaudited)
<TABLE>
<CAPTION>
Jun 30, 2000 Dec 31, 1999
<S> <C> <C>
ASSETS
Cash and due from banks 510,618 2,113,231
Due from Subsidiaries - -
Federal funds sold - -
Investments (incl unreal G/L) - -
Loans - -
Allowance for loan losses - -
Premises and equipment 41,189 -
Other real estate owned - -
Other assets 369,991 -
Investment In Subsidiary Bank of Lancaster 18,366,368 18,751,030
Investment in Subsidiary Bay Trust Company 1,921,314 238,479
Investment In Subsidiary Chesapeake Holdings 701 701
Organizational Expenses 27,855 32,254
Total assets 21,238,036 21,135,695
LIABILITIES
Total deposits - -
Fed Funds Purchased - -
Other liabilities 1,397 432
Total liabilities 1,397 432
SHAREHOLDERS' EQUITY
Common stock - $5 par value; Authorized - 5,000,000 shares
Outstanding - 1,158,562 and 1,165,323 5,792,808 5,826,617
Additional paid-in capital 12,366,485 12,332,403
Retained Earnings 3,077,346 2,976,243
Total shareholders' equity 21,236,639 21,135,263
Total liabilities and shareholders' equity 21,238,036 21,135,695
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements
Bay Banks of Virginia, Inc.
Parent Only Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Qtr ended Qtr ended Year-to-date Year-to-date
6/30/00 6/30/99 6/30/00 6/30/99
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable (incl fees) - - - -
Securities - - - -
Federal funds sold - - - -
Total interest income - - - -
INTEREST EXPENSE
Deposits - - - -
Total interest expense - - - -
NET INTEREST INCOME - - - -
Provision for loan losses - - - -
Net interest income after provision - - - -
NONINTEREST INCOME
Income from fiduciary activities - - - -
Other service charges and fees - - - -
Net securities gains - - - -
Other income 44,392 - 44,392 -
Dividend Income from Subsidiary 230,000 200,000 455,000 425,000
Undistributed Earnings of Bank of Lancaster 163,609 338,128 376,435 616,996
Undistributed Earnings of Bay Trust 23,489 - 22,834 -
Undistributed Earnings of Chesapeake Hldgs - - - (50)
Total noninterest income 461,490 538,128 898,661 1,041,946
NONINTEREST EXPENSES
Salaries and employee benefits - - - -
Occupancy expense - - - -
Deposit insurance premium - - - -
Other expense 56,973 850 62,361 10,268
Total noninterest expenses 56,973 850 62,361 10,268
Income before income taxes 404,517 537,278 836,300 1,031,678
Income tax expense - - - -
NET INCOME 404,517 537,278 836,300 1,031,678
</TABLE>
<PAGE>
The accompanying notes are an integral part of these financial statements
Bay Banks of Virginia, Inc.
Parent Only Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Year-to-date Year-to-date
June 30, 2000 June 30, 1999
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income 836,300 1,031,678
Adjustments to reconcile Net Income to Net Cash Provided by Operating Activities:
Equity in undistributed (earnings) losses of subsidiaries (398,173) (616,946)
(Increase) / Decrease in other assets (322,283) 733,284
Increase / (Decrease) in other liabilities 964 (409)
Other - -
Net Cash Provided (used) by Operating Activities 116,808 1,147,607
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for investments in and advances to subsidiaries (900,000) -
Sale or repayment of investments in and advances to subsidiaries - -
Other - -
Net Cash Provided (used) by Investing Activities (900,000) -
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from advances from subsidiaries - -
Repayment of advances from subsidiaries - -
Proceeds from issuance of common stock 189,735 200,134
Payments to repurchase common stock (189,462) -
Dividends paid (487,239) (447,040)
Other (332,455) (728,942)
Net Cash Provided (used) by Financing Activities (819,421) (975,848)
Net increase (decrease) in Cash & Cash Equivalents (1,602,613) 171,759
Cash & Cash Equivalents on December 31, 1999 2,113,231 2,470,587
Cash & Cash Equivalents on June 30, 2000 510,618 2,642,346
</TABLE>
<PAGE>
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The following discussion is intended to assist in understanding the results of
operations and the financial condition of Bay Banks of Virginia, Incorporated,
"the Company," a two bank holding company. This discussion should be read in
conjunction with the following Financial Highlights Table, the above
consolidated financial statements and the notes thereto.
Bay Banks of Virginia, Inc.
Financial Highlights
The accompanying notes are an integral part of these financial statements
(Unaudited)
<TABLE>
<CAPTION>
Six months ended 6/30/00 6/30/99 Change
(Dollars in thousands)
<S> <C> <C> <C>
FINANCIAL CONDITION
Average Assets 207,303 199,240 4.05%
Average Interest-earning Assets 194,672 183,970 5.82%
Average Earning Assets to Total Average Assets 93.9% 92.3% 1.70%
Period-end Interest-bearing Liabilities 173,531 156,199 11.10%
Average Interest-bearing Liabilities 165,053 157,848 4.56%
Average Equity, after FAS 115 19,739 19,718 0.10%
Tier 1 Capital 19,473 18,713 4.06%
Net Risk-weighted Assets 144,568 124,915 15.73%
Tier 2 Capital 1,256 1,146 9.62%
RESULTS OF OPERATIONS
Net Interest Income before Provision 3,675 3,671 0.09%
Net Income 860 1,032 -16.67%
Annualized Yield on Average Interest-earning Assets 7.95% 7.76% 2.45%
Annualized Yield on Average Interest-bearing Liabilities 4.65% 4.07% 14.25%
Annualized Net Yield on Average Interest-earning Assets 4.02% 4.27% -5.85%
Annualized Net Interest Rate Spread 3.30% 3.69% -10.57%
RATIOS
Total Capital to Risk-weighted Assets (10% min) 14.3% 15.9% -9.82%
Tier 1 Capital to Risk-weighted Assets (6% min) 13.5% 15.0% -10.09%
Leverage Ratio (5% min) 9.5% 9.5% -0.16%
Annualized Return on Average Assets 0.8% 1.0% -19.91%
Annualized Return on Average Equity 8.7% 10.5% -16.75%
Period-end shares outstanding 1,158,562 1,169,945 -0.97%
Average shares outstanding 1,160,875 1,167,870 -0.60%
PER SHARE DATA
Basic Earnings per average share (EPS) (six months) 0.74 0.88 -16.16%
Cash Dividends per average share (six months) 0.42 0.38 10.52%
Book Value per share
before FAS 115 18.35 17.66 3.89%
after FAS 115 17.04 17.04 0.02%
</TABLE>
EARNINGS SUMMATION
For the six months ended June 30, 2000, net income was $860,060 as
compared to $1,032,021 for the comparable period in 1999, a decrease of 16.67%.
Earnings per average share for the first six months of 2000 were $.74 as
compared to $.88 for the first six months of 1999, a decrease of 16.16%. Return
on average equity was 8.7% for the first six months of 2000 as compared to 10.5%
for the first six months of 1999, a decrease of 16.75%. Return on average assets
was 0.8% for the first six months of 2000 as compared to 1.0% for the first six
months of 1999, a decrease of 19.91%. Net interest income for the first six
months of 2000 was $3,674,713 as compared to $3,671,309 for the first six months
of 1999, an increase of 0.09%. Average interest-earning assets totaled $194.7
million for the first six months of 2000 as compared to $184.0 million for the
comparable period of 1999, an increase of 5.82%. Average interest-bearing
liabilities totaled $165.1 million for the first six months of 2000 as compared
<PAGE>
to $157.8 million for the comparable period of 1999, an increase of 4.56%. The
annualized yield on average interest-earning assets for the first six months of
2000 was 7.95% as compared to 7.76% for the comparable period of 1999, an
increase of 2.45%. The annualized yield (cost) on interest-bearing liabilities
for the first six months of 2000 was 4.65% as compared to 4.07% for the
comparable period of 1999, an increase of 14.25%. Average interest-earning
assets as a percent of total average assets was 93.9% for the first six months
of 2000 as compared to 92.3% for the comparable period of 1999, an increase of
1.7%. Average total assets for the first six months of 2000 was $207.3 million
as compared to $199.2 million for the first six months of 1999, growth of 4.05%.
For the six months ended June 30, 2000, yields on interest-earning
assets have improved mainly due to increases in volume. Interest-earning assets
are comprised mainly of the loan portfolio at $144.5 million, then the
investment portfolio at $52.4 million, and then federal funds sold at $1.8
million. For the six month periods ended June 30, 2000, compared to June 30,
1999, on a fully tax equivalent basis, taxable investment yields improved from
6.25% to 6.28%, tax-exempt investment yields declined from 7.53% to 7.42%, and
total investment yields declined from 6.60% to 6.55%. In the first six months of
2000, gross loans on average volumes yielded 8.53% as compared to 8.54% for the
comparable period of 1999. Yield on total average earning assets improved from
7.76% to 7.95% for the first six months of 2000 compared to the first six months
of 1999.
Yields on average interest-bearing deposits comparing the months of
June, 2000, to June, 1999, were as follows. Savings yields were 4.96% compared
to 4.06%, NOW accounts were 2.99% compared to 2.77%, money market demand
accounts were 3.69% compared 2.92%, and certificates of deposit were 5.66%
compared to 4.97%. The resulting total yields on deposits in June, 2000, were
4.22% compared to 4.08% in June, 1999.
Rising current interest rate trends have resulted in a narrowing spread
in net interest margins within the Bank. As of June 30, 2000, the Bank had
interest-earning assets that mature within 3 months totaling $17.2 million, in
3-12 months totaling $29.7 million, in 1-5 years totaling $92.7 million, and
over 5 years totaling $66.9 million. In comparison, interest-bearing liabilities
maturing within 3 months totaled $74.1 million, in 3-12 months totaled $51.9
million, in 1-5 years totaled $47.5 million, and over 5 years totaled nil. The
resulting short-term liability sensitivity has resulted in deposit rates
increasing more rapidly than loan rates. Management is currently reviewing loan
and deposit products to develop offerings that will be less subject to interest
rate risk.
LIQUIDITY
Bay Banks maintains adequate short-term assets to meet the company's
liquidity needs as anticipated by management. Federal funds sold and investments
that mature in one year or less provide the major sources of funding for
liquidity needs. On June 30, 2000, federal funds sold totaled $1.8 million and
securities maturing in one year or less totaled $2.9 million, for a total pool
of $4.7 million. The liquidity ratio as of June 30, 2000 was 29.77% as compared
to 30.40% as of December 31, 1999. Bay Banks of Virginia determines this ratio
by dividing net liabilities into the sum of cash and cash equivalents, unpledged
investment securities and Federal Funds Sold. Management, through historical
analysis, has deemed 15% an adequate liquidity ratio.
Steady loan demand and nominal deposit growth have resulted in the
utilization of Federal Home Loan Bank lines during the first quarter of 2000.
The Bank has a total available line with the Federal Home Loan Bank of $20.0
million. As of June 30, 2000, $14.7 million was borrowed against that line. In
addition, the Bank maintained additional available credit of $11.1 million.
In the short term, The Bank will continue to be liability-sensitive.
Simply stated, deposit rates are increasing faster than loan rates. This trend
is evidenced by the following analysis. For the six months ended June 30, 2000,
compared to the six months ended June 30, 1999, the annualized yield paid on
interest-bearing liabilities is greater by 14.25%, but the annualized yield on
average earning assets is greater by only 2.45%. Although, comparing those same
periods, average interest-earning assets are greater by 5.82%, and average
interest-bearing liabilities are greater by 4.56%, net interest income before
provision for loan losses is greater by only 0.09%.
Another factor causing the liability sensitivity is the Bank's recent
draws on its Federal Home Loan Bank (FHLB) line of credit. This can be seen in
Other Short Term Borrowings. This source of funds demands a higher rate than
traditional deposits. Traditional average interest-bearing deposits have grown
only 1.1% for the six months ended June 30, 2000, compared to the same period in
1999.
CAPITAL RESOURCES
From December 31, 1999, to June 30, 2000, total shareholder's equity
has grown by 0.22%. It is impacted by unrealized losses on securities in the
amount of $1,513,422 as of June 30, 2000. These unrealized losses at year-end
were $1,428,923. Unrealized gains or losses, net of taxes, are recognized as
accumulated comprehensive income or loss on the balance sheet and statement of
changes in shareholder's equity. Shareholder's equity before unrealized losses
was $21.3 million on June 30, 2000, and $21.1 million on December 31, 1999. This
represents an increase of $126 thousand or 0.6% during the six-month period.
<PAGE>
Book value per average share for the first six months of 2000, compared
to the same period in 1999, remained the same at $17.04. Book value per average
share before accumulated comprehensive income for the first six months of 2000,
compared to the same period in 1999, grew from $17.66 to $18.35, an increase of
3.89%. Cash dividends paid for the six months ended June 30, 2000, were $487
thousand, or $0.42 per average share, compared to $444 thousand, or $0.38 per
average share, for the comparable period ended June 30, 1999, an increase of
10.52%. Total shares outstanding on June 30, 2000, were 1,158,562, compared to
1,169,945 on June 30, 1999. Average shares outstanding for the six months
ended June 30, 2000 were 1,160,875, compared to 1,167,870 for the comparable
period ended June 30, 1999.
The Company began a share repurchase program in August of 1999 and has
continued the program into 2000. The company has implemented a share repurchase
plan not to exceed 40,000 shares. Through June 30, 2000, the company has
repurchased 23,926 shares since inception, for a total reduction in
shareholders' equity of $831,566. The average number of shares repurchased since
inception has been 2175 per month. During 2000, management does not expect the
program to significantly exceed this level of monthly share repurchases.
During the second quarter of 2000, the Trust Company completed
renovations of its office space at 1 North Main Street, Kilmarnock, and took
occupancy. As a result, the value of the Trust Company's total fixed assets
grew to $890 thousand on June 30, 2000. This compares to total fixed assets
valued at $194 thousand on December 31, 1999.
The Company is subject to minimum regulatory capital ratios as defined
by FFIEC guidelines. As of June 30, 2000, the Company maintained Tier 1 capital
of $19.5 million, net risk weighted assets of $144.6 million, and Tier 2 capital
of $1.3 million. The Tier 1 capital to risk weighted assets ratio was 13.5%, the
total capital ratio was 14.3%, and the tier 1 leverage ratio was 9.5%. These
ratios continue to be well in excess of regulatory minimums. Please refer to the
Financial Highlights Table.
FINANCIAL CONDITION
Total assets on June 30, 2000, compared to December 31, 1999, have
grown by 7.93% in the first six months of 2000. Cash and cash equivalents
totaled $6.9 million on June 30, 2000, compared to $5.4 million at year-end
1999.
Total loans, during the six months ended June 30, 2000, increased by
9.3%. During the same six-month period, real estate mortgage loans increased
10.61% to $106.1 million, real estate construction loans increased 17.6% to $6.4
million, commercial loans decreased 6.16% to $10.4 million, and installment
loans increased 8.8% to $20.3 million. Real estate lending continues to be the
main area of growth in the loan portfolio. Current local market conditions are
favorable for a continued trend through 2000. The Bank of Lancaster currently
maintains $6.0 million in first mortgage construction loans committed but not
yet fully funded. In addition, home equity lines committed and but not fully
funded total $5.8 million.
For the six months ended June 30, 2000, the Company charged off loans
totaling $74.0 thousand. For the comparable period in 1999, total loans charged
off were $73.9 thousand. The Company maintained $480 thousand of other real
estate owned, or "OREO," as of June 30, 2000. As of year-end 1999, the balance
was $593 thousand. The Company is aggressively marketing all OREO properties,
and management expects no loss on any of these properties. All properties
maintained as other real estate owned are carried at the lesser of book or
market value.
Increases in the provision for loan losses amounted to $130,000 through
the first six months, and the allowance for loan losses as of June 30, 2000, was
$1,256,329. The allowance for loan losses, as a percentage of average total
loans through the first six months of 2000 was .91%.
As of June 30, 2000, there were $36,551 worth of loans on non-accrual
status. Loans on non-accrual status as of June 30, 1999 were $44,028. Loans
still accruing interest but delinquent for 90 days or more were $750,117 on June
30, 2000, as compared to $447,379 on June 30, 1999.
The allowance for loan losses is analyzed for adequacy on a quarterly
basis to determine the necessary provision. A loan by loan review is conducted
of all loan classes and inherent losses on these individual loans are
determined. This valuation is then compared to historical data in an effort to
determine the prevailing trends. A third component of the process is the
analysis of a tabular presentation of loss allocation percentages by loan type.
Through this process the Company assesses the appropriate provision for the
coming quarter. As of June 30, 2000, management deemed the loan loss reserve
reasonable for the loss risk identified in the loan portfolio.
As of June 30, 2000, investment securities totaled $54.7 million at
book value. This compares with December 1999 book value of $55.3 million. This
represents an increase of 1.1% of the total portfolio during the six months
ended June 30, 2000. The investment portfolio is comprised of the following, at
book value. U.S. Treasury securities are 1% of the portfolio at $0.5 million,
U.S. Government agencies represent 16% at $8.6 million, state and municipal
securities represent 42% at $22.7 million, mortgage-backed securities represent
7% at $3.9 million, and other securities represent 34% at $18.9 million. The
investment portfolio is maintained entirely at market value under Financial
Accounting Standard rule 115, "FAS-115." FAS-115 requires that the Company
classify its investment portfolio in any combination of held-for-trading, held-
to-maturity, or available-for-sale. Investments classified as held-for-trading
must recognize gains or losses at market value in the current period's statement
of earnings. Investments held-for-trading are considered short-term investments
and are not intended to be held to call or maturity. Investments classified as
held-to-maturity require no recognition of change in market value, however, the
investments must be held to call or maturity, and therefore cannot be sold prior
to such time. Investments that are classified as available-for-sale, as are the
Company's, are valued each accounting period. This valuation is known as
`marking to market' the investment portfolio. The market value adjustment is
then applied to the individual investment types, and the tax-effected adjustment
is applied to shareholder's equity. This tax-effected adjustment to
<PAGE>
shareholder's equity is classified as Comprehensive Income on the Statement of
Changes in Shareholder's Equity. Management has elected to mark the entire
investment portfolio to market. The resulting accumulated adjustment to book
value as of June 30, 2000, was an unrealized loss of $2.3 million. The
corresponding accumulated adjustment to shareholders' equity was $1.5 million,
as mentioned earlier. These losses are booked monthly as an adjustment to book
value based upon market conditions, and are not realized as an adjustment to
earnings until the securities are actually sold. Management does not anticipate
the realization of losses on investments during 2000.
As of June 30, 2000, total deposits were $177.3 million. Compared to
$177.7 at year-end 1999, growth is essentially flat. Comparing types of deposit
balances on June 30, 2000, to year-end 1999, results in the following. Non-
Interest-bearing demand deposits increased by 1.6% to $21.2 million, NOW
accounts increased by 6.6% to $26.5 million, money market demand accounts
increased by 2.3% to $10.7 million, savings accounts decreased by 3.8% to $59.1
million, and time deposits decreased by 0.4% to $59.7 million.
RESULTS OF OPERATIONS
NON INTEREST INCOME
Non-interest income for the first six months of 2000 totaled $799,153
compared to $754,068 for the same period in 1999. This is an increase of 6.0%.
Non-interest income includes income from fiduciary activities, service charges
on deposit accounts, other income, and gains on the sale of securities. Of these
categories, fiduciary activities and service charges on deposit accounts
contribute the majority. For the six months ended June 30, 2000, income from
fiduciary activities totaled $322,288 and service charges on deposit accounts
amounted to $176,268. Other service charges and fee income was $192,490 for the
first six months of 2000. For the first six months of 1999, these totals were
$258,876, $175,707, and $197,490, respectively.
As of January 1, 2000, the trust and fiduciary activities of the
Company and the Bank are being conducted through a newly organized subsidiary,
Bay Trust Company of Virginia, Incorporated, `the Trust Company.' The Trust
Company acquired the assets of the former trust department of the Bank of
Lancaster, and formally began operations on January 1, 2000. The restructuring
of the Trust Company into a separate holding company, organized as a state
member bank, is expected to result in an expanded market area and expanded
services within the market area. Over time, management expects the income from
fiduciary activities to improve at a rate greater than historically realized.
Management continues to explore methods of improving fee based services
to its' customers. Continued expansion of fiduciary services, diversification of
business lines, and expansion of fee based services provided to bank customers
are among the areas under regular review.
NON INTEREST EXPENSE
Non-interest expenses totaled $3.1 million during the first six months
of 2000 as compared to $2.9 million for the same period in 1999, an increase of
10.3%. Non-interest expenses include salaries and benefits, occupancy expense,
and other operating expense. Of these categories, salaries and benefits are the
major expense. Through the six months ended June 30, 2000, salary and benefit
expense was $1,629,403, occupancy was $345,572, and other operating expense was
$1,174,830. For 1999, the totals were $1,443,998, $153,633, and $1,257,725,
respectively.
Organizational costs for the Trust Company were partially recognized
during 1999. Non-interest expenses related to the subsidiary are expected to
increase during 2000 as the Trust Company has completed renovation and is now
occupying office space in Kilmarnock, Virginia. In addition, the Trust Company
is expected to hire additional staff throughout 2000.
Management continues to review and analyze non-interest expenses for
greater efficiency. During the first quarter of 2000, non-interest expenses were
impacted by the formation of Bay Trust Company, as mentioned earlier. Further,
during the twelve months from March 1999 to March 2000, the Bank of Lancaster
committed significant resources to employee training, continuing computer
systems upgrades, facilities renovation and management, and management and
consulting services. During the third quarter, management expects non-interest
expenses to be effected by the acquisition of three First Virginia Bank branch
offices and their related deposit accounts.
FORWARD LOOKING STATEMENT
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
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
Banks' market area, and competition. Any of these factors could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The accompanying notes are an integral part of these financial statements
Bay Banks of Virginia, Inc.
Net Interest Income Analysis
(Unaudited)
<TABLE>
<CAPTION>
(Fully taxable equivalent basis) Six months Six months
ended ended
6/30/2000 6/30/1999
(Thousands) Average Income/ Annualized Average Income/ Annualized
Balance Expense Yield/Rate Balance Expense Yield/Rate
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Investments (Book Value):
Taxable Investments 42,668 1,339 6.28% 44,766 1,398 6.25%
Tax-Exempt Investments (1) 13,055 320 7.42% 17,050 424 7.53%
Total Investments 55,723 1,659 6.55% 61,815 1,822 6.60%
Gross Loans (2) 137,947 5,882 8.53% 115,552 4,936 8.54%
Interest-bearing Deposits 100 - 0.00% - - 0.00%
Fed Funds Sold 569 36 6.29% 6,602 162 4.91%
TOTAL INTEREST EARNING ASSETS 194,339 7,577 7.95% 183,970 6,920 7.76%
INTEREST-BEARING LIABILITIES:
Deposits:
Savings Deposits 60,225 1,394 4.63% 69,123 1,414 4.09%
NOW Deposits 25,844 374 2.89% 25,611 357 2.79%
CD's (greater than or equal to) $100,000 14,671 429 5.85% 11,575 295 5.09%
CD's (less than) $100,000 47,335 1,247 5.27% 40,024 973 4.86%
Money Market Deposit Accounts 10,742 187 3.48% 10,741 158 2.94%
Total Deposits 158,816 3,631 4.57% 157,075 3,196 4.07%
Fed Funds Purchased 757 51 6.75% - - 0.00%
Securities Sold to Repurchase 2,311 52 4.53% 774 14 3.55%
Other Short Term Borrowings 3,051 101 6.61% - - 0.00%
TOTAL INTEREST-BEARING LIABILITIES 164,936 3,835 4.65% 157,848 3,210 4.07%
Net Interest Income/Yield on Earning Assets 3,741 4.02% 3,711 4.27%
Net Interest Rate Spread 3.30% 3.69%
</TABLE>
Notes:
------
(1)-Yield assumes a federal tax rate of 34%
(2)-Includes Visa Program & nonaccrual loans.
<PAGE>
The accompanying notes are an integral part of these financial statements
Bay Banks of Virginia, Inc.
Interest Rate Sensitivity Gap Analysis
(Unaudited)
<TABLE>
<CAPTION>
As of 6/30/2000
(Thousands) Within 3 3-12 1-5 Years Over 5 Total
months Months Years
<S> <C> <C> <C> <C> <C>
INTEREST EARNING ASSETS:
Interest-Bearing Due From Banks - 100 - - 100
Fed Funds Sold 1,803 - - - 1,803
Investments (Market Value) 578 2,333 22,855 26,667 52,433
Loans 14,865 18,284 69,842 40,209 143,200
TOTAL EARNING ASSETS 17,246 20,717 92,697 66,876 197,536
INTEREST-BEARING LIABILITIES:
NOW Accounts 8,757 - 17,780 - 26,537
MMDA's 7,070 - 3,642 - 10,712
Savings 40,807 - 18,334 - 59,141
CD's greater than or equal to $100,000 10,066 28,195 6,041 24 44,326
CD's less than or equal to $100,000 4,687 9,015 1,694 - 15,396
Total Deposits 71,387 37,210 47,491 24 156,112
Fed Funds Purchased - - - - -
Securities Sold to Repurchase 2,719 - - - 2,719
Other Short Term Borrowings - 14,700 - - 14,700
TOTAL INTEREST-BEARING LIABILITIES 74,106 51,910 47,491 24 173,531
Rate Sensitive Gap (56,860) (31,193) 45,206 66,852 24,005
Cumulative Gap (56,860) (88,053) (42,847) 24,005
</TABLE>
Note: Visa Receivables are classified as
"Within 3 Month" Loans.
Management is currently developing plans to improve the Company's liability-
sensitive position.
PART II.
ITEM 1. LEGAL PROCEEDINGS
None to report.
ITEM 2. CHANGES IN SECURITIES
None to report
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to report.
ITEM 5. OTHER INFORMATION
None to report.
<PAGE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index:
( 3)(i)(ii) Articles of Incorporation and Bylaws. N/A
( 4)(i) Rights of Holders. N/A
(10)(ii)(A) Material Contracts. N/A
(11) Statement: Computation of Earnings per Share N/A
(15) Letter: Unaudited financial information N/A
(18) Letter: Change in accounting principals N/A
(19) Report furnished to security holders N/A
Published report regarding matters submitted
to a vote of security holders N/A
(23) Consent of council N/A
(24) Power of Attorney N/A
(27) Financial Data Schedule Attached
(99) Additional Exhibits N/A
(b) Reports on Form 8-K:
One report on form 8-K was filed with the Securities and Exchange
Commission on 6/30/2000 announcing an agreement with First Virginia Bank and
First Virginia Bank Hampton Roads regarding the divestiture of three First
Virginia Bank branches.
SIGNATURES
BAY BANKS OF VIRGINIA
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Bay Banks of Virginia, Inc.
---------------------------
(Registrant)
8/11/2000 /s/ Austin L. Roberts, III
--------------------------
President and
Chief Executive Officer
8/11/2000 /s/ Richard C. Abbott
---------------------
Assistant Treasurer
