PR Newswire | Oct 29, 2020 05:52PM EDT

10/29 16:51 CDT

Bay Banks of Virginia, Inc. Reports Third Quarter and Year-to-date 2020 Results RICHMOND, Va., Oct. 29, 2020

RICHMOND, Va., Oct. 29, 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 nine months ended September 30, 2020.

On August 13, 2020, the company and Blue Ridge Bankshares, Inc. (NYSE American: BRBS) ("Blue Ridge") jointly announced the signing of a definitive merger agreement pursuant to which the companies will combine in an all-stock merger (the "Merger") to create a leading Virginia-based community bank. Under the terms of the merger agreement, shareholders of the company will receive 0.50 shares of Blue Ridge common stock for each share of the company's common stock they own. Upon completion of the Merger, the company's shareholders will own approximately 54% and Blue Ridge shareholders will own approximately 46% of the combined company's stock. The Merger is subject to customary closing conditions, including regulatory approvals and approval from the shareholders of both companies. The company anticipates the Merger will close in the first quarter of 2021.

The company reported net income of $1.5 million, or $0.11 per diluted share, for the third quarter of 2020 compared to a net loss of $8.1 million or $(0.62) per diluted share, for the second quarter of 2020 and net income of $1.8 million, or $0.14 per diluted share, for the third quarter of 2019. For the nine months ended September 30, 2020, the company reported a net loss of $6.6 million, or $(0.51) per diluted share, compared to net income of $5.1 million, or $0.39 per diluted share, for the nine months ended September 30, 2019. Net loss for the nine months ended September 30, 2020 included a $10.4 million ($9.8 million after tax1), or $0.751 per diluted share, charge for the impairment of goodwill reported in the second quarter of 2020. For the three months ended September 30, 2020, results included approximately $1.5 million ($1.4 million after tax1), or $0.111 per diluted share, of expenses incurred in connection with the anticipated Merger.

In addition to the goodwill impairment charge and Merger-related expenses, net income (loss) for the three and nine months ended September 30, 2020 included loan loss provision expense of $869 thousand and $5.7 million, respectively. A significant portion of the provision for loan losses in 2020 relates to estimated reserve needs as a result of the COVID-19 pandemic. Excluding the $10.4 million goodwill impairment charge and $1.5 million of Merger-related expenses, pre-tax, pre-loan loss provision income for the third quarter of 2020 was $4.5 million1 compared to $4.1 million1 and $2.8 million1 for the second quarter of 2020 and third quarter of 2019, respectively.

The company has actively participated in the Paycheck Protection Program ("PPP") under the Coronavirus Aid, Relief, and Economic Security Act, closing nearly 700 loans totaling $56.8 million and receiving $2.4 million in processing fees. Of the processing fees received, $287 thousand and $532 thousand were recognized in interest income in the third-quarter and year-to-date periods ended September 30, 2020, while the remaining fees were deferred and will be recognized over the life of the loans, accelerated for pre-payments.

From the onset of the global pandemic, the company has proactively addressed the needs of its commercial and individual borrowers, modifying loans allowing 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 modified loans as of September 30, 2020. Of the following balances, $39.5 million were to borrowers in the hotel/motel industry, $18.6 million were to borrowers in the restaurant and restaurant-related industry, and $9.3 million were to borrowers in the retail industry.

Loan Type Loan Count Principal Balance (in thousands) % of Loan Type

Mortgage loans on real estate:

Residential first mortgages 14 $ 2,886 1%

Commercial mortgages (non-owner occupied) 23 47,102 17%

Construction, land and land development 13 22,879 17%

Commercial mortgages (owner occupied) 17 10,520 14%

Residential revolving and junior mortgages 1 257 1%

Commercial and industrial 87 17,575 9%

Consumer 2 8 0%

Total 157 $ 101,227 10%

Randal R. Greene, President and Chief Executive Officer, commented: "The global pandemic and resulting government mandates have caused tremendous hardships for families and businesses. Last quarter, I stated we'd begin in the last half of the year to gain some clarity into the lasting impact the COVID-19 virus may have on the financial health of our borrowers. Our borrowers have benefited from payment deferrals and, I'm pleased to report, many are back to paying status during the third quarter. Even though there is some improvement, some of our borrowers are still struggling with the extended economic downturn. Our branch lobbies are open at this time, though branch traffic is not at pre-pandemic levels; I believe the virus has accelerated the adoption of digital access. In spite of these difficult times, our employees have supported our customers, grown our loan portfolio and deposit franchise, and driven increased operating profitability. Excluding the effect of the unusual expense items, the company earned $4.5 million1 on a pre-tax, pre-loan loss provision basis, exceeding any levels earned in recent periods."

Operating Results

Third Quarter 2020 compared to Second Quarter 2020

* Income before income taxes for the third quarter of 2020 was $2.1 million compared to a loss before income taxes of $8.3 million for the second quarter of 2020. Income before income taxes for the third quarter of 2020 included $1.5 million of Merger-related expenses, while the loss before income taxes for the second quarter of 2020 included a $10.4 million goodwill impairment charge, as reported previously. * Interest income for the three months ended September 30, 2020 was $12.1 million, on average interest-earning assets of $1.19 billion, compared to $12.0 million, on average interest-earning assets of $1.16 billion, for the three months ended June 30, 2020. Interest income in the third and second quarters of 2020 included accretion of acquired loan discounts of $97 thousand and $93 thousand, respectively. Yields on average interest-earning assets were 4.03% and 4.17% for the third and second quarters of 2020, respectively. Yields on average interest-earning assets in the third quarter of 2020 were negatively affected by lower yields on loans originated or renewed at lower rates. PPP loans, which the company began originating early in the second quarter of 2020, had a negative 4 and 3 basis point effect on loan yields in the third and second quarters of 2020, respectively. Partially offsetting the decline in yield were higher average balances of gross loans in the third quarter of 2020 of $31.8 million. * Interest expense was $2.7 million and $3.0 million for the three months ended September 30, 2020 and June 30, 2020, respectively, and cost of funds was 0.96% and 1.12% for the sequential quarter periods. Average interest-bearing liabilities were $925.8 million and $914.8 million for the third and second quarters of 2020, respectively. Cost of deposits was 0.82% for the third quarter of 2020, down 15 basis points from 0.97% for the second quarter of 2020. * Net interest margin ("NIM") was 3.14% for the third quarter of 2020 compared to 3.11% for the second quarter of 2020. The increase in NIM was primarily attributable to lower cost of funds, including higher average noninterest-bearing demand deposit balances, partially offset by lower yields on interest-earning assets. * Provision for loan losses was $869 thousand for the third quarter of 2020 compared to $2.0 million for the second quarter of 2020. The third quarter of 2020 provision expense was primarily attributable to specific reserves on loans to borrowers adversely effected by the COVID-19 pandemic. Of the second quarter of 2020 provision 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. * Noninterest income for the three months ended September 30, 2020 and June 30, 2020 was $2.3 million and $2.2 million, respectively. Secondary market sales and servicing income increased $351 thousand in the third quarter of 2020 compared to the second quarter of 2020, driven by an increase in the demand for purchase money and refinance mortgages and a positive fair market value adjustment to the company's mortgage servicing rights asset. In addition, wealth management fee income increased $122 thousand on a sequential quarter basis. Partially offsetting these increases was lower referral fee income of $410 thousand in the third quarter of 2020. As previously reported, the company earns referral fees for referring loan customers to a third-party financial institution to execute interest rate swaps. * Noninterest expense for the three months ended September 30, 2020 and June 30, 2020 was $8.6 million and $17.5 million, respectively. The third quarter of 2020 included $1.5 million of Merger-related expenses compared to none for the second quarter of 2020, while the second quarter of 2020 included a $10.4 million goodwill impairment charge, as previously reported. The company's efficiency ratio was 74.1% and 156.7% for the third and second quarters of 2020, respectively. The company's efficiency ratio excluding Merger-related expenses and the goodwill impairment charge was 61.6%1 and 63.6%1 for the third and second quarters of 2020, respectively. * Income tax expense for the third quarter of 2020 was $655 thousand, reflective of a 30.5% effective income tax rate, while income tax benefit for the second quarter of 2020 was $217 thousand, reflective of a 2.6% effective income tax rate. The effective income tax rate in the third quarter of 2020 was higher than the statutory federal income tax rate of 21% primarily as a result of nondeductible Merger-related expenses. The 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.

Year-to-date 2020 compared to Year-to-date 2019

* Loss before income taxes for the nine months ended September 30, 2020 was $6.3 million compared to income before income taxes of $6.2 million for the nine months ended September 30, 2019. The loss before income taxes for the nine months ended September 30, 2020 included a $10.4 million goodwill impairment charge recorded in the second quarter of 2020 and $1.5 million of Merger-related expenses recorded in the third quarter of 2020. * Interest income for the nine months ended September 30, 2020 was $36.3 million, on average interest-earning assets of $1.14 billion, compared to $37.5 million for the nine months ended September 30, 2019, on average interest-earning assets of $1.04 billion. Interest income in the first nine months of 2020 included accretion of acquired loan discounts of $381 thousand, while interest income in the first nine months of 2019 included $993 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.24% and 4.85% for the nine months ended September 30, 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 during the period, the repricing of variable rate loans, 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 8 basis point effect on yield. Partially offsetting these negative effects were higher average balances of gross loans in the 2020 period of $90.9 million. * Interest expense was $9.3 million and $11.2 million for the nine months ended September 30, 2020 and 2019, respectively, and cost of funds was 1.16% and 1.55% for the respective periods. Average balances of noninterest-bearing demand accounts increased $50.0 million for the 2020 period from the 2019 period. Average interest-bearing liabilities were $904.2 million and $854.1 million for the nine months ended September 30, 2020 and 2019, respectively. * NIM was 3.15% for the first nine months of 2020 compared to 3.39% for the same period 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 $5.7 million for the first nine months of 2020 compared to $871 thousand for the same period of 2019. Provision for loan losses in the 2020 period 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 September 30, 2020 due to the COVID-19 pandemic, gross loan growth, excluding PPP loans, of approximately $71.9 million, and higher specific reserves on impaired loans. The company recorded no provision for loan losses for PPP loans due to the U.S. government guarantee. * Noninterest income for the nine months ended September 30, 2020 and 2019 was $5.9 million and $3.6 million, respectively. The 2020 period included higher secondary market sales and servicing income of $1.4 million and $1.1 million of referral fee income, while the 2019 period included no income from such activities. * Noninterest expense for the nine months ended September 30, 2020 and 2019 were $33.4 million and $22.7 million, respectively. Excluding the goodwill impairment charge of $10.4 million and Merger-related expenses of $1.5 million incurred in the 2020 period, noninterest expense decreased $1.1 million on a comparative period basis. Decreases in certain 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 expense for the first nine months of 2020 was $378 thousand, reflective of a 6.0% effective income tax rate, while income tax expense for the first nine months of 2019 was $1.2 million, reflective of an 18.9% effective income tax rate. Income tax expense for the first nine months of 2020 includes the result of income tax expense before the goodwill impairment charge, offset by the related deferred tax benefit, and the effect of nondeductible Merger-related expenses, as noted previously.

Third Quarter 2020 compared to Third Quarter 2019

* Income before income taxes for the third quarter of 2020 was $2.1 million compared to income before income taxes of $2.3 million for the third quarter of 2019. Income before income taxes for the third quarter of 2020 includes $1.5 million of Merger-related expenses. * Interest income for the three months ended September 30, 2020 was $12.1 million, on average interest-earning assets of $1.19 billion, compared to $12.8 million, on average interest-earning assets of $1.04 billion, for the three months ended September 30, 2019. Interest income in the third quarter of 2020 included accretion of acquired loan discounts of $97 thousand, while interest income in the third quarter of 2019 included $357 thousand of accretion of acquired loan discounts. Yields on average interest-earning assets were 4.03% and 4.87% for the third quarters of 2020 and 2019, respectively. Yields on average interest-earning assets in the third quarter of 2020 were negatively affected by lower yields on loans originated, including PPP loans, in 2020, the repricing of variable rate loans, and lower accretion of acquired loan discounts, which had a negative 10 basis point effect. * Interest expense was $2.7 million and $3.7 million for the three months ended September 30, 2020 and 2019, respectively, and cost of funds was 0.96% and 1.52% for the respective periods. Average interest-bearing liabilities were $925.8 million and $851.4 million for the third quarters of 2020 and 2019, respectively. Cost of deposits was 0.82% for the third quarter of 2020, down 58 basis points from 1.40% for the third quarter of 2019. * NIM was 3.14% for the third quarter of 2020 compared to 3.45% for the third quarter of 2019. The decrease in NIM was primarily attributable to lower yields on loans, partially offset by lower cost of funds. * Provision for loan losses was $869 thousand in the third quarter of 2020 compared to $495 thousand in the third quarter of 2019. * Noninterest income for the three months ended September 30, 2020 and 2019 was $2.3 million and $1.2 million, respectively. Higher noninterest income in the 2020 period was primarily due to higher secondary market sales and servicing income of $789 thousand and higher wealth management fee income of $165 thousand. * Noninterest expense for the three months ended September 30, 2020 and 2019 was $8.6 million and $7.4 million, respectively. The company's efficiency ratio was 74.1% and 72.8% for the third quarters of 2020 and 2019, respectively. The company's efficiency ratio, excluding the $1.5 million of Merger-related expenses incurred in the 2020 period, was 61.6%1 and 72.8%1 for the third quarters of 2020 and 2019, respectively. * Income tax expense for the third quarter of 2020 was $655 thousand, reflective of a 30.5% effective income tax rate, due to the reasons noted previously. Income tax expense for the third quarter of 2019 was $448 thousand, reflective of an 19.6% effective income tax rate.

Balance Sheet

* Total assets were $1.25 billion and $1.13 billion at September 30, 2020 and December 31, 2019, respectively. * Loans, net of allowance for loan losses, were $1.04 billion at September 30, 2020 compared to $916.6 million at December 31, 2019, a $125.1 million increase, including $56.8 million of PPP loans. Excluding PPP loans, net loan growth for the first nine months of 2020 was $68.3 million, an annualized rate of approximately 10%. * Deposits were $1.03 billion at September 30, 2020 compared to $910.4 million at December 31, 2019, a $117.2 million increase, including an increase of $52.9 million of noninterest-bearing demand account balances. Noninterest-bearing demand accounts comprised 18.6% of total deposits at September 30, 2020, an increase from 15.2% and 13.6% at December 31, 2019 and September 30, 2019, respectively. * Shareholders' equity was $121.4 million and $126.2 million at September 30, 2020 and December 31, 2019, respectively, a decrease of $4.8 million. The decrease in shareholders' equity in the 2020 period was primarily attributable to a year-to-date net loss of $6.6 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 $9.041 and $8.641 at September 30, 2020 and December 31, 2019, respectively. * The company made no purchases of its common stock outstanding in the first nine months 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 September 30, 2020 and December 31, 2019. * Annualized return (loss) on average assets for the quarters ended September 30, 2020, June 30, 2020, and September 30, 2019 was 0.48%, (2.64)%, and 0.66%, respectively, while annualized return (loss) on average shareholders' equity for the same periods was 4.95%, (25.40)%, and 5.97%, respectively. Excluding the $1.5 million of Merger-related expenses reported in the third quarter of 2020, annualized return on average assets and annualized return on average shareholders' equity for the three months ended September 30, 2020 were 0.93%1 and 9.64%1, respectively. Excluding the goodwill impairment charge of $10.4 million incurred in the second quarter of 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

* Nonperforming assets were $18.3 million, or 1.46% of total assets, as of September 30, 2020, compared to $6.4 million, or 0.56% of total assets, as of December 31, 2019, and $9.4 million, or 0.84% of total assets, as of September 30, 2019. The increase in nonperforming assets from December 31, 2019 to September 30, 2020 was primarily attributable to $12.7 million of higher balances of nonaccrual loans to borrowers adversely affected by the COVID-19 pandemic. * The ratio of allowance for loan losses to total gross loans was 1.22%, 0.82%, and 0.80% at September 30, 2020, December 31, 2019, and September 30, 2019, respectively. Due to the full U.S. government guarantee on PPP loans, the company has recorded no allowance for loan losses for $56.8 million of PPP loans outstanding as of September 30, 2020. Excluding PPP loans from the denominator of the ratio of allowance for loan losses to total gross results in a ratio of 1.29%1 as of September 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 $1.5 million, $1.9 million, and $2.9 million as of September 30, 2020, December 31, 2019, and September 30 2019, respectively.

Outlook

Greene concluded: "The recent up-tick in virus cases and the stalling of further government actions to support the economy could further impact our borrowers' ability to satisfy their loans. These factors and the low interest rate environment expected for several years puts pressure on banks, such as ours. We believe the ensuing combination with Blue Ridge, positioning us with a larger balance sheet and a more diversified revenue base, should be to our advantage."

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 ability to close the Merger on the expected terms and schedule; difficulties, delays and unforeseen costs in completing the Merger and in integrating the company's and Blue Ridge's businesses; the ability to realize cost savings and other benefits of the Merger; business disruption during the pendency of or following the Merger; 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; and other factors discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2019 and other reports filed with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made. Except to the extent required by applicable law or regulation, the company undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

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

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

BAY BANKS OF VIRGINIA, INC.CONSOLIDATED BALANCE SHEETS

(unaudited)

(Dollars in thousands, except share data) September 30, December 31, 2020 2019 (1)

ASSETS

Cash and due from banks $ 9,324 $ 6,096

Interest-earning deposits 50,069 34,358

Federal funds sold 152 1,359

Certificates of deposit 1,266 2,754

Available-for-sale securities, at fair value 87,853 99,454

Restricted securities 5,022 5,706

Loans receivable, net of allowance for loan 1,041,711 916,628losses of $12,899 and $7,562, respectively

Loans held for sale 2,687 1,231

Premises and equipment, net 17,859 20,141

Accrued interest receivable 4,664 3,035

Other real estate owned, net 1,113 1,916

Bank owned life insurance 20,103 19,752

Goodwill - 10,374

Mortgage servicing rights 845 935

Core deposit intangible 1,094 1,518

Other assets 7,820 6,666

Total assets $ 1,251,582 $ 1,131,923

LIABILITIES

Noninterest-bearing demand deposits $ 190,843 $ 137,933

Savings and interest-bearing demand deposits 424,001 382,607

Time deposits 412,837 389,900

Total deposits 1,027,681 910,440

Securities sold under repurchase agreements 1,117 6,525

Federal Home Loan Bank advances 25,000 45,000

Federal Reserve Bank advances 32,637 -

Subordinated notes, net of unamortized issuance 31,083 31,001costs

Other liabilities 12,635 12,772

Total liabilities 1,130,153 1,005,738

SHAREHOLDERS' EQUITY

Common stock ($5 par value; authorized -30,000,000 shares; outstanding - 13,342,104 and 66,711 66,30913,261,801 shares, respectively) (2)

Additional paid-in capital 36,816 36,658

Unearned employee stock ownership plan shares (1,326) (1,525)

Retained earnings 18,012 24,660

Accumulated other comprehensive income, net 1,216 83

Total shareholders' equity 121,429 126,185

Total liabilities and shareholders' equity $ 1,251,582 $ 1,131,923

(1) Derived from audited December 31, 2019 Consolidated Financial Statements.

(2) Preferred stock is authorized; however, none was outstanding as of September 30, 2020 and December 31, 2019.

BAY BANKS OF VIRGINIA, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Three Months Ended

(Dollars in thousands, except per September 30, June 30, September 30,share data) 2020 2020 2019

INTEREST INCOME

Loans, including fees $ 11,371 $ 11,290 $ 11,930

Securities:

Taxable 596 573 553

Tax-exempt 88 89 113

Federal funds sold - - 6

Interest-earning deposit accounts 6 8 145

Certificates of deposit 9 14 18

Total interest income 12,070 11,974 12,765

INTEREST EXPENSE

Deposits 2,104 2,411 3,123

Securities sold under repurchase - 1 4agreements

Subordinated notes and other 510 510 142borrowings

Federal Home Loan Bank advances 50 90 465

Federal Reserve Bank advances 29 20 -

Total interest expense 2,693 3,032 3,734

Net interest income 9,377 8,942 9,031

Provision for loan losses 869 2,027 495

Net interest income after provision 8,508 6,915 8,536for loan losses

NONINTEREST INCOME

Trust management 220 203 201

Service charges and fees on deposit 155 137 243accounts

Wealth management 350 228 185

Interchange fees, net 149 130 108

Other service charges and fees 33 28 32

Secondary market sales and servicing 1,082 731 293

Increase in cash surrender value of 117 116 122bank owned life insurance

Net gains on sales and calls of - 3 1available-for-sale securities

Net gains on disposition of other 12 1 -assets

Net gains on rabbi trust assets 74 114 -

Referral fees 86 496 -

Other 8 7 15

Total noninterest income 2,286 2,194 1,200

NONINTEREST EXPENSE

Salaries and employee benefits 3,801 3,839 3,666

Occupancy 700 705 805

Data processing 491 498 541

Bank franchise tax 256 257 209

Telecommunications and other 396 371 258technology

FDIC assessments 262 147 (7)

Foreclosed property 22 28 48

Consulting 54 70 156

Advertising and marketing 47 26 124

Directors' fees 187 188 148

Audit and accounting 92 170 193

Legal (210) 154 20

Core deposit intangible amortization 134 142 164

Net other real estate owned losses 176 81 375

Goodwill impairment - 10,374 -

Merger-related 1,456 - -

Other 782 403 747

Total noninterest expense 8,646 17,453 7,447

Income (loss) before income taxes 2,148 (8,344) 2,289

Income tax expense (benefit) 655 (217) 448

Net income (loss) $ 1,493 $ (8,127) $ 1,841

Basic and diluted earnings (loss) $ 0.11 $ (0.62) $ 0.14per share

BAY BANKS OF VIRGINIA, INC.CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Nine Months Ended

(Dollars in thousands, except per share data) September 30, September 30, 2020 2019

INTEREST INCOME

Loans, including fees $ 34,013 $ 34,849

Securities:

Taxable 1,821 1,725

Tax-exempt 270 327

Federal funds sold 2 31

Interest-earning deposit accounts 119 432

Certificates of deposit 37 57

Total interest income 36,262 37,421

INTEREST EXPENSE

Deposits 7,364 9,019

Securities sold under repurchase agreements 3 11

Subordinated notes and other borrowings 1,531 417

Federal Home Loan Bank advances 374 1,784

Federal Reserve Bank advances 49 -

Total interest expense 9,321 11,231

Net interest income 26,941 26,190

Provision for loan losses 5,673 871

Net interest income after provision for loan 21,268 25,319losses

NONINTEREST INCOME

Trust management 615 621

Service charges and fees on deposit accounts 529 727

Wealth management 824 654

Interchange fees, net 378 330

Other service charges and fees 94 88

Secondary market sales and servicing 2,015 632

Increase in cash surrender value of bank owned 351 362life insurance

Net gains (losses) on sales and calls of 29 (1)available-for-sale securities

Net gains (losses) on disposition of other 5 (2)assets

Net (losses) gains on rabbi trust assets (76) 130

Referral fees 1,052 -

Other 54 44

Total noninterest income 5,870 3,585

NONINTEREST EXPENSE

Salaries and employee benefits 11,267 11,532

Occupancy 2,156 2,510

Data processing 1,526 1,738

Bank franchise tax 770 655

Telecommunications and other technology 1,176 727

FDIC assessments 557 371

Foreclosed property 58 110

Consulting 195 418

Advertising and marketing 140 300

Directors' fees 568 525

Audit and accounting 402 586

Legal 135 130

Core deposit intangible amortization 425 517

Net other real estate owned losses 256 441

Goodwill impairment 10,374 -

Merger-related 1,456 -

Other 1,947 2,108

Total noninterest expense 33,408 22,668

(Loss) income before income taxes (6,270) 6,236

Income tax expense 378 1,180

Net (loss) income $ (6,648) $ 5,056

Basic and diluted (loss) earnings per share $ (0.51) $ 0.39

BAY BANKS OF VIRGINIA, INC.Supplemental Financial Data (Unaudited)

As of and for the

As of and for the Three Months Ended Year Ended

September 30, June 30, March 31, December September 30, December 31, 31,

(Dollars in thousands, except per share amounts) 2020 2020 2020 2019 2019 2019

Select Consolidated Balance Sheet Data

Total assets $ 1,251,582 $ 1,238,226 $ 1,183,553 $ 1,131,923 $ 1,112,219

Cash, interest-earning deposits and federal funds 59,545 39,912 56,006 41,813 31,405sold

Available-for-sale securities, at fair value 87,853 92,560 94,618 99,454 80,748

Loans:

Mortgage loans on real estate 806,283 798,109 762,404 730,788 731,280

Commercial and industrial 187,219 193,740 198,278 181,730 186,281

Paycheck Protection Program 56,788 55,496 - - -

Consumer 6,443 7,855 9,846 11,985 14,471

Loans receivable 1,056,733 1,055,200 970,528 924,503 932,032

Unamortized net deferred loan fees (2,123) (2,345) (333) (313) (269)

Allowance for loan losses (ALL) (12,899) (12,007) (10,172) (7,562) (7,495)

Net loans 1,041,711 1,040,848 960,023 916,628 924,268

Loans held for sale 2,687 2,521 747 1,231 268

Other real estate owned, net 1,113 1,903 1,679 1,916 2,178

Total liabilities $ 1,130,153 $ 1,118,536 $ 1,056,151 $ 1,005,738 $ 987,362

Deposits:

Noninterest-bearing demand deposits 190,843 185,201 136,437 137,933 124,670

Savings and interest-bearing demand deposits 424,001 413,025 394,637 382,607 372,404

Time deposits 412,837 408,672 433,393 389,900 396,614

Total deposits 1,027,681 1,006,898 964,467 910,440 893,688

Securities sold under repurchase agreements 1,117 1,035 3,284 6,525 6,323

Federal Home Loan Bank advances 25,000 35,000 45,000 45,000 68,000

Federal Reserve Bank advances 32,637 33,160 - - -

Subordinated notes, net of unamortized issuance 31,083 31,056 31,029 31,001 6,906costs

Shareholders' equity 121,429 119,690 127,402 126,185 124,857

Interest income $ 12,070 $ 11,974 $ 12,218 $ 12,997 $ 12,765 $ 50,418

Interest expense 2,693 3,032 3,596 3,854 3,734 15,085

Net interest income 9,377 8,942 8,622 9,143 9,031 35,333

Provision for loan losses 869 2,027 2,777 311 495 1,182

Noninterest income 2,286 2,194 1,391 1,373 1,200 4,958

Noninterest expense 8,646 17,453 7,308 7,734 7,447 30,402

Income (loss) before income taxes 2,148 (8,344) (72) 2,471 2,289 8,707

Income tax expense (benefit) 655 (217) (58) 469 448 1,649

Net income (loss) $ 1,493 $ (8,127) $ (14) $ 2,002 $ 1,841 $ 7,058

BAY BANKS OF VIRGINIA, INC.Supplemental Financial Data (Unaudited)

As of and for the

As of and for the Three Months Ended Year Ended

September 30, June 30, March 31, December 31, September December 31, 30,

(Dollars in thousands, except per share amounts) 2020 2020 2020 2019 2019 2019

Basic earnings (loss) per share $ 0.11 $ (0.62) $ - $ 0.15 $ 0.14 $ 0.54

Diluted earnings (loss) per share 0.11 (0.62) - 0.15 0.14 0.54

Book value per share 9.10 8.98 9.55 9.51 9.36

Tangible book value per share (1) 9.04 8.90 8.69 8.64 8.49

Shares outstanding at end of period 13,342,104 13,334,049 13,346,789 13,261,801 13,334,302

Weighted average shares outstanding, basic 13,090,035 13,080,689 13,056,576 13,071,708 13,077,600 13,053,080

Weighted average shares outstanding, diluted 13,137,990 13,080,689 13,056,576 13,145,522 13,132,459 13,111,853

Performance Measures and Other Metrics(tax-equivalent basis):

Yield on average interest-earning assets 4.03 % 4.17 % 4.56 % 4.87 % 4.87 % 4.85 %

Accretion of discounts on acquired loans $ 97 $ 93 $ 189 $ 929 $ 357 $ 1,922

Cost of funds 0.96 % 1.12 % 1.44 % 1.54 % 1.52 % 1.55 %

Cost of deposits 0.82 % 0.97 % 1.24 % 1.34 % 1.40 % 1.37 %

Net interest spread 2.88 % 2.83 % 2.90 % 3.09 % 3.13 % 3.09 %

Net interest margin (NIM) 3.14 % 3.11 % 3.22 % 3.43 % 3.45 % 3.40 %

Average interest-earnings assets to total average 95.6 % 94.1 % 94.4 % 94.2 % 94.0 % 94.0 %assets

Return (loss) on average assets (annualized) 0.48 % -2.64 % 0.00 % 0.71 % 0.66 % 0.64 %

Operating return on average assets (annualized) 0.93 % 0.54 % 0.00 % 0.71 % 0.66 % 0.64 %(1)

Return (loss) on average equity (annualized) 4.95 % -25.40 % -0.04 % 6.39 % 5.97 % 5.79 %

Operating return (loss) on average equity 9.64 % 5.18 % -0.04 % 6.39 % 5.97 % 5.79 %(annualized) (1)

Efficiency ratio 74.1 % 156.7 % 73.0 % 73.5 % 72.8 % 75.5 %

Operating efficiency ratio (1) 61.6 % 63.6 % 73.0 % 73.5 % 72.8 % 75.5 %

Average assets $ 1,246,989 $ 1,230,249 $ 1,143,879 $ 1,126,663 $ 1,109,986 $ 1,107,670

Average interest-earning assets 1,192,670 1,158,248 1,079,351 1,061,227 1,043,243 1,041,622

Average interest-bearing liabilities 925,812 914,832 871,597 860,421 851,392 855,703

Average shareholders' equity 120,570 127,960 126,955 125,285 123,399 121,859

Shareholders' equity to total assets ratio 9.7 % 9.7 % 10.8 % 11.1 % 11.2 %

Tangible shareholders' equity to tangible total 9.6 % 9.6 % 9.9 % 10.2 % 10.3 %assets (1)

Asset Quality Data and Ratios:

Nonaccrual loans $ 17,198 $ 12,279 $ 5,441 $ 4,476 $ 7,194

Other real estate owned, net 1,113 1,903 1,679 1,916 2,178

Total nonperforming assets 18,311 14,182 7,120 6,392 9,372

Net charge-offs (recoveries) (23) 193 166 245 478 1,522

Net charge-offs (recoveries) to average loans -0.01 % 0.08 % 0.07 % 0.11 % 0.21 % 0.17 %(annualized)

Total nonperforming assets to total assets 1.46 % 1.15 % 0.60 % 0.56 % 0.84 %

Gross loans to total assets 84.3 % 85.0 % 82.0 % 81.6 % 83.8 %

ALL to gross loans 1.22 % 1.14 % 1.05 % 0.82 % 0.80 %

ALL to gross loans, excluding PPP loans (1) 1.29 % 1.20 % 1.05 % 0.82 % 0.80 %

Discounts on acquired loans $ 1,523 $ 1,640 $ 1,750 $ 1,935 $ 2,886

Non-GAAP financial measure. See GAAP to Non-GAAP financial measure(1) reconciliation at the end of the Supplemental Financial Data tables that follow.

BAY BANKS OF VIRGINIA, INC.Supplemental Financial Data (Unaudited)

As of and for the

As of and for the Three Months Ended Year Ended

September 30, June 30, March 31, December 31, September 30, December 31,

(Dollars in thousands, except per share amounts) 2020 2020 2020 2019 2019 2019

Reconciliation of Non-GAAP Financial Measures (1)

Tangible book value per share

Total shareholders' equity $ 121,429 $ 119,690 $ 127,402 $ 126,185 $ 124,857

Less: intangible assets, net of deferred tax 864 970 11,456 11,573 11,697liability on core deposit intangible (a)(b)

Tangible shareholders' equity $ 120,565 $ 118,720 $ 115,946 $ 114,612 $ 113,160

Shares outstanding at end of period 13,342,104 13,334,049 13,346,789 13,261,801 13,334,302

Tangible book value per share $ 9.04 $ 8.90 $ 8.69 $ 8.64 $ 8.49

Tangible shareholders' equity to tangible totalassets

Total assets $ 1,251,582 $ 1,238,226 $ 1,183,553 $ 1,131,923 $ 1,112,219

Less: intangible assets, net of deferred tax 864 970 11,456 11,573 11,697liability on core deposit intangible (a)(b)

Tangible total assets $ 1,250,718 $ 1,237,256 $ 1,172,097 $ 1,120,350 $ 1,100,522

Tangible shareholders' equity $ 120,565 $ 118,720 $ 115,946 $ 114,612 $ 113,160

Tangible shareholders' equity to tangible total 9.6 % 9.6 % 9.9 % 10.2 % 10.3 %assets

Allowance for loan losses to gross loans, excludingPPP loans

Gross loans $ 1,054,610 $ 1,052,855 $ 970,195 $ 924,190 $ 931,763

Less: PPP loans 56,788 55,496 - - -

Gross loans excluding PPP loans $ 997,822 $ 997,359 $ 970,195 $ 924,190 $ 931,763

Allowance for loan losses $ 12,899 $ 12,007 $ 12,007 $ 7,562 $ 7,495

Allowance for loan losses to gross loans, excluding 1.29 % 1.20 % 1.05 % 0.82 % 0.80 %PPP loans

Select noninterest expenses, after-tax basis (ATB)

Goodwill impairment $ - $ 10,374 $ - $ - $ - $ -

Goodwill impairment, ATB (b)(c) - 9,784 - - - -

Merger-related expenses (MRE) 1,456 - - - - -

MRE, ATB (b)(d) 1,412 - - - - -

Weighted average shares outstanding year-to-date, 13,075,761 13,068,598 N/A N/A N/A N/Adiluted

Goodwill impairment and MRE, ATB effect on earnings $ (0.11) $ (0.75) $ - $ - $ - $ -(loss) per diluted share

Operating return on average assets (annualized)

Net income (loss) $ 1,493 $ (8,127) $ (14) $ 2,002 $ 1,841 $ 7,058

Add: Goodwill impairment, ATB - 9,784 - - - -

Add: MRE, ATB 1,412 - - - - -

Operating net income (loss) $ 2,905 $ 1,657 $ (14) $ 2,002 $ 1,841 $ 7,058

Average assets $ 1,246,989 $ 1,230,249 $ 1,143,879 $ 1,126,663 $ 1,109,986 $ 1,107,670

Operating return on average assets (annualized) 0.93 % 0.54 % 0.00 % 0.71 % 0.66 % 0.64 %

Operating return (loss) on average equity(annualized)

Net income (loss) $ 1,493 $ (8,127) $ (14) $ 2,002 $ 1,841 $ 7,058

Add: Goodwill impairment, ATB - 9,784 - - - -

Add: MRE, ATB 1,412 - - - - -

Operating net income (loss) $ 2,905 $ 1,657 $ (14) $ 2,002 $ 1,841 $ 7,058

Average shareholders' equity $ 120,570 $ 127,960 $ 126,955 $ 125,285 $ 123,399 $ 121,859

Operating return (loss) on average equity 9.64 % 5.18 % -0.04 % 6.39 % 5.97 % 5.79 %(annualized)

Operating efficiency ratio

Total noninterest expense $ 8,646 $ 17,453 $ 7,308 $ 7,734 $ 7,447 $ 30,402

Less: Goodwill impairment - 10,374 - - - -

Less: MRE 1,456 - - - - -

Operating noninterest expense 7,190 7,079 7,308 7,734 7,447 30,402

Net interest income 9,377 8,942 8,622 9,143 9,031 35,333

Noninterest income 2,286 2,194 1,391 1,373 1,200 4,958

Operating efficiency ratio 61.6 % 63.6 % 73.0 % 73.5 % 72.8 % 75.5 %

Pre-tax, pre-loan loss provision income, excludinggoodwill impairment and MRE

Net income (loss) $ 1,493 $ (8,127) $ (14) $ 2,002 $ 1,841 $ 7,058

Add: Income tax expense (benefit) 655 (217) (58) 469 448 1,649

Add: Provision for loan losses 869 2,027 2,777 311 495 1,182

Add: Goodwill impairment - 10,374 - - - -

Add: MRE 1,456 - - - - -

Pre-tax, pre-loan loss provision income, excluding $ 4,473 $ 4,057 $ 2,705 $ 2,782 $ 2,784 $ 9,889goodwill impairment and MRE

(a) Excludes mortgage servicing rights.

(b) Assumes a federal income tax rate of 21%.

(c) $7.6 million of the $10.4 million goodwill charged-off in the secondquarter of 2020 originated as a result of the company's tax-free merger withVirginia BanCorp, Inc. in 2017 and is nondeductible for federal income taxpurposes. The remaining $2.8 million of goodwill originated from branchacquisitions from 1994-2000, the basis of which had been fully amortized forincome tax purposes, resulting in a deferred tax liability. Due to the goodwillimpairment charge, the company recorded an income tax benefit (and reversal ofthe deferred tax liability) of approximately $590 thousand in the secondquarter of 2020.

(d) Of the $1,456 thousand of Merger-related expenses incurred in the thirdquarter of 2020, the company has determined, at this time, that $1,246 thousandis nondeductible for federal income tax purposes.

(1) Set forth above are calculations of each of the non-GAAP (generallyaccepted accounting principles) financial measures included in the SupplementalFinancial Data tables. Tangible book value per share, tangible shareholders'equity to tangible total assets ratio, allowance for loan losses to grossloans, excluding PPP loans, select noninterest expenses on an after-tax basis,operating return on average assets, operating efficiency ratio, and pre-tax,pre-loan loss provision income are supplemental financial measures that are notrequired nor presented in accordance with GAAP. Management believes tangiblebook value per share and tangible shareholders' equity to tangible total assetsratios are meaningful because they are measures management uses to assesscapital levels. Management believes the ratio of allowance for loan losses togross loans, excluding PPP loans, is meaningful because management uses it toassess allowance levels excluding the impact of PPP loans which carry noallowance for loan losses due to the full U.S. government guarantee. Managementbelieves that select noninterest expenses on an after-tax basis, operatingreturn on average assets, operating efficiency ratios, and pre-tax, pre-loanloss provision income, excluding goodwill impairment and Merger-relatedexpenses are meaningful because management uses them to assess the financialperformance of the company. Calculations of these non-GAAP financial measuresmay not be comparable to the calculation of similarly titled measures reportedby other companies.

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SOURCE Bay Banks of Virginia, Inc.