RICHMOND, Va., Aug. 3, 2020 /PRNewswire/ -- Bay Banks of Virginia, Inc. (OTCQB: BAYK), holding company of Virginia Commonwealth Bank and VCB Financial Group, Inc., announced financial results for the three and six months ended June 30, 2020 and an update to the company's response to the COVID-19 pandemic.

The company reported a net loss of $8.1 million, or $(0.62) per diluted share, for the second quarter of 2020 compared to a net loss of $14 thousand, or $0.00 per diluted share, for the first quarter of 2020 and net income of $1.7 million, or $0.13 per diluted share, for the second quarter of 2019. For the six months ended June 30, 2020, the company reported a net loss of $8.1 million, or $(0.62) per diluted share, compared to net income of $3.2 million, or $0.25 per diluted share, for the six months ended June 30, 2019. Net loss for the three- and six-month periods of 2020 included a $10.4 million ($9.8 million after tax¹), or $0.75¹ per diluted share, charge for the impairment of goodwill. The $10.4 million goodwill impairment charge resulted from a second quarter impairment assessment triggered by the adverse effect the deterioration of the macroeconomic environment due to the COVID-19 pandemic has had on the company's market value relative to its book value.

In addition to the goodwill impairment charge, net loss for the three and six months ended June 30, 2020 included loan loss provision expense of $2.0 million and $4.8 million, respectively, a significant portion of which related to estimated reserve needs as a result of the COVID-19 pandemic. Excluding the $10.4 million goodwill impairment charge, pre-tax, pre-loan loss provision income for the three months ended June 30, 2020 was $4.1 million¹ compared to $2.7 million¹ and $2.2 million¹ for the three months ended March 31, 2020 and June 30, 2019, respectively.

Beginning on April 3, 2020, the company has actively participated in the Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act, closing nearly 680 loans totaling $55.5 million and receiving $2.3 million in processing fees in the second quarter of 2020. Of the nearly 680 loans, approximately 95% were for less than $350 thousand, with an overall average loan balance of $82 thousand. Of the processing fees received from the PPP, $246 thousand were recognized in interest income in the second quarter of 2020, while the remaining fees were deferred and will be recognized over the life of the loans, accelerated for pre-payments. Through the PPP, the federal government partnered with banks to provide over $650 billion to small businesses to support payrolls and other operating expenses.

From the onset of the national pandemic, the company has proactively addressed the needs of its commercial and individual borrowers modifying nearly 390 loans with balances totaling approximately $163 million, or 15.4% of total gross loans, through June 30, 2020. The modifications allow for the short-term deferral of principal payments or of principal and interest payments. The following table presents the loan balances and number by loan type and the percentage these loans comprise within each loan type for which modifications were made. Dollar amounts are presented in thousands.

Randal R. Greene, President and Chief Executive Officer, commented: "It was a quarter that tested the resiliency of our institution. Branch hours were reduced and physical access limited, yet we experienced an increase in the adoption of digital channel access. The Paycheck Protection Program was executed in-house, supporting primarily our customers and our communities; 100% of our customers that requested a PPP loan received one. Following regulatory guidance, we worked with our borrowers modifying their loans, providing needed relief while they manage through the economic devastation brought by the pandemic. Our support teams worked remotely, while our technology infrastructure remained effective. Our second quarter results demonstrated we remain focused on improving our operating metrics. I believe our institution has excelled." 

Excluding the charge-off of goodwill, on a pre-tax, pre-provision basis, we earned $4.1 million¹ in the second quarter of 2020, significantly higher than any recent quarter in the company's history. In the midst of this pandemic, we are continuing to execute our strategy. We are selectively growing loans in our primary markets, selling most of our originated residential mortgages, driving deposit costs lower, and controlling noninterest expenses. Loans, excluding PPP loans, have grown 8% in the first half of 2020, though many of these opportunities were in our pipeline before the onset of the virus. We are experiencing downward pressure on our net interest margin, as the federal funds rate has been lowered 200 basis points in the last four quarters, 150 basis points in the first quarter of 2020. In response, we've aggressively lowered our deposit costs resulting in deposit costs of 0.97% in the second quarter of this year compared to 1.42% in the second quarter of 2019. And, we are prudently building our reserve for loan losses in response to losses we have estimated to have been incurred through the end of the second quarter due to the pandemic."

Operating Results

Second Quarter 2020 compared to First Quarter 2020

• Loss before income taxes for the second quarter of 2020 was $8.4 million compared to a loss before income taxes of $72 thousand for the first quarter of 2020. The loss before income taxes for the second quarter of 2020 included a $10.4 million goodwill impairment charge, as noted previously.
• Interest income for the three months ended June 30, 2020 was $12.0 million, on average interest-earning assets of $1.16 billion, compared to $12.2 million, on average interest-earning assets of $1.08 billion, for the three months ended March 31, 2020. Interest income in the second quarter of 2020 included accretion of acquired loan discounts of $93 thousand, while interest income in the first quarter of 2020 included $189 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.17% and 4.56% for the second and first quarters of 2020, respectively. Yields on average interest-earning assets in the second quarter of 2020 were negatively affected by lower yields on loans originated, the repricing of variable rate loans due to the decline in index rates, the addition of lower yielding PPP loans, which had a negative 3 basis point effect on yield, and lower accretion of acquired loan discounts, which had a negative 3 basis point effect. Partially offsetting the decline in yield was higher average balances of gross loans in the second quarter of 2020 of $86.6 million.
• Interest expense was $3.0 million and $3.6 million for the three months ended June 30, 2020 and March 31, 2020, respectively, and cost of funds was 1.12% and 1.44% for the sequential quarter periods. Average interest-bearing liabilities were $914.8 million and $871.6 million for the second and first quarters of 2020, respectively. Cost of deposits was 0.97% for the second quarter of 2020, down 27 basis points from 1.24% for the first quarter of 2020, reflective of the company's efforts to reduce deposit rates since mid-2019, which was accelerated in the second quarter of 2020 as the federal funds rate was decreased 150 basis points in the first quarter of 2020, and an increase of average noninterest-bearing demand deposit accounts of $42.8 million on a sequential quarter basis. The company accessed the Federal Reserve Bank's PPP Liquidity Facility, which provides funding for PPP loans at a fixed rate of 35 basis points over the term the funded PPP loan is outstanding. PPP loans securing the PPP Liquidity Facility are afforded preferential regulatory capital treatment. As of June 30, 2020, outstanding advances under the PPP Liquidity Facility totaled $33.2 million.
• Net interest margin ("NIM") was 3.11% for the second quarter of 2020 compared to 3.22% for the first quarter of 2020. The 11 basis point decrease in NIM was primarily attributable to lower yields on loans originated in the second quarter of 2020, including PPP loans, and the repricing of variable rate loans, partially offset by lower cost of funds.
• Provision for loan losses was $2.0 million for the second quarter of 2020 compared to $2.8 million for the first quarter of 2020. Of the second quarter of 2020 amount, approximately $1.4 million was attributable to qualitative loss factors to provide for losses estimated to have been incurred as of June 30, 2020, as a result of challenges certain borrowers are facing due to the pandemic, evidenced, in part, by loan deferrals and modifications granted to these borrowers. The remaining provision for loan losses in the second quarter of 2020 was due to gross loan growth of $27.0 million, excluding PPP loans, higher specific reserves, and charge-offs. No provision for loan losses was recorded on PPP loans as these loans are subject to a full U.S. government guarantee.
• Noninterest income for the three months ended June 30, 2020 and March 31, 2020 was $2.2 million and $1.4 million, respectively, an increase of $803 thousand. Of the increase, $529 thousand was attributable to higher secondary market sales and servicing income in the second quarter of 2020, driven by an increase in the demand for purchase money and refinance mortgages. Also contributing to the increase on a sequential quarter basis was a $114 thousand unrealized gain in the second quarter of 2020 on assets held in a rabbi trust for the benefit of participants in the company's deferred compensation plan compared to an unrealized loss of $263 thousand in the first quarter of 2020.
• Noninterest expenses for the three months ended June 30, 2020 and March 31, 2020 were $17.5 million and $7.3 million, respectively. Excluding the goodwill impairment charge of $10.4 million, noninterest expenses decreased $229 thousand on a sequential quarter basis. The company's efficiency ratio was 156.7% and 73.0% for the second and first quarters of 2020, respectively. The company's efficiency ratio excluding the goodwill impairment charge was 63.6%¹ and 73.0%¹ for the second and first quarters of 2020, respectively.
• Income tax benefit for the second quarter of 2020 was $217 thousand, reflective of a 2.6% effective income tax rate, while income tax benefit for the first quarter of 2020 was $58 thousand, reflective of an 80.6% effective income tax rate. Income tax benefit in the second quarter of 2020 was a result of income tax expense before the goodwill impairment charge, offset by an income tax benefit (reversal of a deferred tax liability) of $590 thousand related to a portion of the goodwill. The effective income tax rate of 80.6% in the first quarter of 2020 was primarily due to the amount of tax-exempt income relative to the company's pre-tax net loss for the quarter.

First Half 2020 compared to First Half 2019

• Loss before income taxes for the first half of 2020 was $8.4 million compared to income before income taxes of $3.9 million for the first half of 2019. The loss before income taxes for the first half of 2020 included a $10.4 million goodwill impairment charge recorded in the second quarter of 2020, as noted previously.
• Interest income for the six months ended June 30, 2020 was $24.2 million, on average interest-earning assets of $1.19 billion, compared to $24.7 million for the six months ended June 30, 2019, on average interest-earning assets of $1.03 billion. Interest income in the first half of 2020 included accretion of acquired loan discounts of $282 thousand, while interest income in the first half of 2019 included $636 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.36% and 4.83% for the first halves of 2020 and 2019, respectively. The lower yield on average interest-earning assets in the 2020 period was primarily due to lower yields on loans originated in the period, the repricing of variable rate loans, the addition of lower yielding PPP loans, which had a negative 2 basis point effect on yield, and lower accretion of acquired loan discounts, which had a negative 6 basis point effect. Partially offsetting these negative effects were higher average balances of gross loans in the 2020 period of $69.4 million.
• Interest expense was $6.6 million and $7.5 million for the six months ended June 30, 2020 and 2019, respectively, and cost of funds was of 1.27% and 1.56% for the respective periods. Lower cost of funds in the first half of 2020 was primarily reflective of the company's efforts to reduce deposit rates since mid-2019, lower borrowing costs, particularly Federal Home Loan Bank of Atlanta advances, and higher average balances of noninterest-bearing demand accounts of $42.2 million in the 2020 period. Average interest-bearing liabilities were $893.2 million and $855.5 million for the first half of 2020 and 2019, respectively.
• NIM was 3.17% for the first half of 2020 compared to 3.37% for the first half of 2019. Lower NIM in the 2020 period was primarily due to lower yields on average interest earning assets, primarily loans, and lower accretion of acquired loan discounts, partially offset by lower cost of funds.
• Provision for loan losses was $4.8 million for the first half of 2020 compared to $376 thousand for the first half of 2019.  Provision for the first half of 2020 was primarily attributable to qualitative loss factors for increases in state unemployment rates, including Virginia, and for losses estimated to have been incurred as of June 30, 2020 due to the COVID-19 pandemic, as noted above, gross loan growth of approximately $72.9 million, excluding PPP loans, higher specific reserves, and charge-offs. As previously noted, the company recorded no provision for loan losses for PPP loans.
• Noninterest income for the six months ended June 30, 2020 and 2019 was $3.6 million and $2.4 million, respectively. The 2020 period included approximately $966 thousand of fee income for referring loan customers to a third-party financial institution to execute interest rate swaps, while the 2019 period included no income from such activities. Additionally, the 2020 period included higher secondary market sales and servicing income of approximately $594 thousand. Partially offsetting these increases was a $150 net unrealized loss on rabbi trust assets in the 2020 period compared to a $130 net unrealized gain in the 2019 period.
• Noninterest expenses for the six months ended June 30, 2020 and 2019 were $24.5 million and $15.2 million, respectively. Excluding the goodwill impairment charge of $10.4 million, noninterest expenses decreased $836 thousand on a comparative period basis. Lower noninterest expenses in the 2020 period were primarily attributable to reduced headcount and occupancy costs, resulting from temporary and permanent branch closures, and overall general expense control.
• Income tax benefit for the first half of 2020 was $276 thousand, reflective of an 3.3% effective income tax rate, while income tax expense for the first half of 2019 was $732 thousand, reflective of an 18.6% effective income tax rate. Income tax benefit in the first half of 2020 was a result of income tax expense before the goodwill impairment charge, offset by the related deferred tax benefit.

Second Quarter 2020 compared to Second Quarter 2019

• Loss before income taxes for the second quarter of 2020 was $8.4 million compared to income before income taxes of $2.1 million for the second quarter of 2019. The loss before income taxes for the second quarter of 2020 included a $10.4 million goodwill impairment charge, as noted previously.
• Interest income for the three months ended June 30, 2020 was $12.0 million, on average interest-earning assets of $1.16 billion, compared to $12.3 million, on average interest-earning assets of $1.04 billion, for the three months ended June 30, 2019. Interest income in the second quarter of 2020 included accretion of acquired loan discounts of $93 thousand, while interest income in the second quarter of 2019 included $197 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.17% and 4.77% for the second quarters of 2020 and 2019, respectively. Yields on average interest-earning assets in the second quarter of 2020 were negatively affected by lower yields on loans originated in the quarter, including PPP loans, the repricing of variable rate loans, and lower accretion of acquired loan discounts.
• Interest expense was $3.0 million and $3.8 million for the three months ended June 30, 2020 and 2019, respectively, and cost of funds was 1.12% and 1.58% for the respective periods. Average interest-bearing liabilities were $914.8 million and $857.4 million for the second quarters of 2020 and 2019, respectively. Cost of deposits was 0.97% for the second quarter of 2020, down 45 basis points from 1.42% for the second quarter of 2019, reflective of the company's efforts to reduce deposit rates and $60.3 million of higher average balances noninterest-bearing demand deposit accounts in the 2020 period.
• NIM was 3.11% for the second quarter of 2020 compared to 3.29% for the second quarter of 2019. The 18 basis point decrease in NIM was primarily attributable to lower yields on loans originated in the second quarter of 2020, including PPP loans, and the repricing of variable rate loans, partially offset by lower cost of funds.
• Provision for loan losses was $2.0 million in the second quarter of 2020 compared to $62 thousand in the second quarter of 2019. Higher provision for loan losses in the 2020 quarter was primarily attributable to estimated reserve needs related to the COVID-19 pandemic, gross loan growth, excluding PPP loans, and higher specific reserves.
• Noninterest income for the three months ended June 30, 2020 and 2019 was $2.2 million and $1.3 million, respectively. Higher noninterest income in the 2020 period was primarily due to higher secondary market sales and servicing income of $464 thousand and $496 thousand of fee income for referring loan customers to a third-party financial institution to execute interest rate swaps, while the 2019 quarter included no referral fee income.
• Noninterest expense for the three months ended June 30, 2020 and 2019 was $17.5 million and $7.6 million, respectively. Excluding, the $10.4 million goodwill impairment charge recorded in the 2020 period, noninterest expenses decreased $513 thousand on a comparative period basis. The company's efficiency ratio was 156.7% and 77.7% for the second quarters of 2020 and 2019, respectively. The company's efficiency ratio, excluding the goodwill impairment charge, was 63.6%¹ and 77.7%¹ for the second quarters of 2020 and 2019, respectively.
• Income tax benefit for the second quarter of 2020 was $217 thousand, reflective of a 2.6% effective income tax rate, as noted above. Income tax expense for the first quarter of 2019 was $395 thousand, reflective of an 18.6% effective income tax rate.

Balance Sheet

• Total assets were $1.24 billion and $1.13 billion at June 30, 2020 and December 31, 2019, respectively.
• Loans, net of allowance for loan losses, were $1.04 billion at June 30, 2020 compared to $916.6 million at December 31, 2019, a $124.2 million increase, including $55.5 million of PPP loans originated in 2020. Excluding PPP loans, net loan growth for the first half of 2020 was $68.7 million, an annualized rate of approximately 15%.
• Deposits were $1.01 billion at June 30, 2020 compared to $910.4 million at December 31, 2019, a $96.5 million increase, including an increase of $47.3 million of noninterest-bearing demand account balances. Higher noninterest-bearing accounts were partially attributable to PPP loans, which were funded in these accounts. Noninterest-bearing demand accounts comprised 18.4% of total deposits at June 30, 2020, an increase from 15.2% and 13.3% at December 31, 2019 and June 30, 2019, respectively.
• Shareholders' equity was $119.7 million and $126.2 million at June 30, 2020 and December 31, 2019, respectively, a decrease of $6.5 million. The decrease in shareholders' equity in the 2020 period was primarily attributable to a net loss of $8.2 million, partially offset by net unrealized gains of approximately $1.1 million on the company's available-for-sale securities portfolio. Tangible book value, calculated as shareholders' equity less goodwill and core deposit intangible assets, net of the associated deferred tax liability, divided by common shares outstanding, was $8.90¹ and $8.64¹ at June 30, 2020 and December 31, 2019, respectively.
• The company made no repurchases of its common stock outstanding in the first or second quarters of 2020, pursuant to a share repurchase program authorized by its board of directors in the fourth quarter of 2019.
• Capital ratios for Virginia Commonwealth Bank were above regulatory minimum guidelines for well-capitalized banks as of June 30, 2020 and December 31, 2019.
• Annualized return (loss) on average assets for the quarters ended June 30, 2020, March 31, 2020, and June 30, 2019 was (2.64)%, 0.00%, and 0.62%, respectively, while annualized return (loss) on average shareholders' equity for the same periods was (25.40)%, (0.04)%, and 5.72%, respectively. Excluding the goodwill impairment charge in the second quarter 2020, annualized return on average assets and annualized return on average shareholders' equity for the three months ended June 30, 2020 were 0.54%¹ and 5.18%¹, respectively. 

Asset Quality

• Loans in industry segments highly affected by the COVID-19 pandemic were subject to risk rating downgrades as of March 31, 2020. During the second quarter of 2020, risk ratings for certain loans in these segments were adjusted as additional information became available. The following table presents industry segments the company believes may be negatively affected by the pandemic and the balances of loans and numbers in each segment. Loans to borrowers in these segments totaled approximately $148.2 million, or 14.1% of the company's gross loans as of June 30, 2020. Dollar amounts are presented in thousands.

• Nonperforming assets were $9.9 million, or 0.80% of total assets, as of June 30, 2020, compared to $6.4 million, or 0.56% of total assets, as of December 31, 2019, and $7.7 million, or 0.71% of total assets, as of June 30, 2019. The increase in nonperforming assets from December 31, 2019 to June 30, 2020 was primarily attributable to $3.5 million of higher nonaccrual loan balances, mainly commercial and industrial loans to borrowers adversely affected by the COVID-19 pandemic.
• The ratio of allowance for loan losses to total gross loans was 1.14%, 0.82%, and 0.82% at June 30, 2020, December 31, 2019, and June 30, 2019, respectively. The 32 basis point increase in the ratio of allowance for loan losses to total gross loans for the first half of 2020 was primarily due to qualitative loss factors applied to the majority of the company's loan portfolio for higher state unemployment rates, particularly in Virginia, and for estimated losses incurred as of June 30, 2020, as a result of challenges facing certain borrowers due to the COVID-19 pandemic, evidenced, in part, by loan deferrals and modifications granted to these borrowers. Due to the full U.S. government guarantee on PPP loans, the company has recorded no allowance for loan losses for the $55.5 million of PPP loans outstanding as of June 30, 2020. Excluding PPP loans from the denominator of the ratio of allowance for loan losses to total gross results in a ratio of 1.20%¹ as of June 30, 2020. Further, the company's allowance for loan losses does not include discounts recorded on loans acquired in the company's 2017 merger with Virginia BanCorp, Inc., which were $1.6 million, $1.9 million, and $3.3 million as of June 30, 2020, December 31, 2019, and June 30 2019, respectively.

Outlook

Greene concluded: "As I look to the last half of the year, we expect to begin to gain some clarity into the lasting impact the COVID-19 virus may have on the financial health of our borrowers. Our borrowers that have benefited from payment deferrals will face the end of deferral periods in the coming quarters. This timing, of course, is dependent on slowing the spread of the virus and further actions that could be taken by governments to support the economy. The economic surge as various states lifted pandemic orders was a positive; however, this economic surge appears to be followed by a surge in COVID-19 cases creating less certainty as to the length and severity of the economic slowdown. And it appears the low interest rate environment is expected for the near future, all putting pressure on community banks. We believe that our strong balance sheet and healthy capital levels should be to our advantage until some state of normalcy resumes."

About Bay Banks of Virginia, Inc.

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

Caution About Forward-Looking Statements

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

For further information, contact Randal R. Greene, President and Chief Executive Officer, at 844-404-9668 or Judy C. Gavant, Executive Vice President and Chief Financial Officer, at 804-518-2606 or [email protected].

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

 

 

 

 

 

 

 

 

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