PR Newswire | Aug 3, 2020 05:29PM EDT

Update to Company's COVID-19 Pandemic Response

08/03 16:28 CDT

Bay Banks of Virginia, Inc. Reports Second Quarter and First Half 2020 Results; Update to Company's COVID-19 Pandemic Response RICHMOND, Va., Aug. 3, 2020

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.

Loan Type Loan Count Principal Balance % of Loan Type

Mortgage loans on real estate:

Residential first mortgages 138 $ 29,004 10 %

Commercial mortgages (non-owner occupied) 44 61,564 22 %

Construction, land and land development 17 26,206 20 %

Commercial mortgages (owner occupied) 52 21,484 29 %

Residential revolving and junior mortgages 10 1,552 5 %

Commercial and industrial 119 22,702 12 %

Consumer 7 144 2 %

Total 387 $ 162,656

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.

Industry Segment Loan Count Principal Balance

Hotels and motels 22 $ 61,770

Restaurants and related services 53 20,557

Retail and retail services 98 56,213

Churches, assisted living, and other 25 9,645

Total 198 $ 148,185

* 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 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) June 30, 2020 December 31, 2019 (1)

ASSETS

Cash and due from banks $ 10,778 $ 6,096

Interest-earning deposits 28,667 34,358

Federal funds sold 467 1,359

Certificates of deposit 2,506 2,754

Available-for-sale securities, at fair value 92,560 99,454

Restricted securities 5,327 5,706

Loans receivable, net of allowance for loan losses of $12,007 and 1,040,848 916,628 $7,562, respectively

Loans held for sale 2,521 1,231

Premises and equipment, net 18,330 20,141

Accrued interest receivable 4,128 3,035

Other real estate owned, net 1,903 1,916

Bank owned life insurance 19,985 19,752

Goodwill - 10,374

Mortgage servicing rights 687 935

Core deposit intangible 1,228 1,518

Other assets 8,291 6,666

Total assets $ 1,238,226 $ 1,131,923

LIABILITIES

Noninterest-bearing demand deposits $ 185,201 $ 137,933

Savings and interest-bearing demand deposits 413,025 382,607

Time deposits 408,672 389,900

Total deposits 1,006,898 910,440

Securities sold under repurchase agreements 1,035 6,525

Federal Home Loan Bank advances 35,000 45,000

Federal Reserve Bank advances 33,160 -

Subordinated notes, net of unamortized issuance costs 31,056 31,001

Other liabilities 11,387 12,772

Total liabilities 1,118,536 1,005,738

SHAREHOLDERS' EQUITY

Common stock ($5 par value; authorized - 30,000,000 shares; 66,670 66,309 outstanding - 13,334,049 and 13,261,801 shares, respectively) (2)

Additional paid-in capital 36,729 36,658

Unearned employee stock ownership plan shares (1,394) (1,525)

Retained earnings 16,519 24,660

Accumulated other comprehensive income, net 1,166 83

Total shareholders' equity 119,690 126,185

Total liabilities and shareholders' equity $ 1,238,226 $ 1,131,923

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

(2) Preferred stock is authorized; however, none was outstanding as of June 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 share data) June 30, 2020 March 31, 2020 June 30, 2019

INTEREST INCOME

Loans, including fees $ 11,290 $ 11,352 $ 11,458

Securities:

Taxable 573 652 577

Tax-exempt 89 94 97

Federal funds sold - 2 18

Interest-earning deposit accounts 8 104 152

Certificates of deposit 14 14 19

Total interest income 11,974 12,218 12,321

INTEREST EXPENSE

Deposits 2,411 2,848 3,088

Securities sold under repurchase agreements 1 2 4

Subordinated notes and other borrowings 510 512 138

Federal Home Loan Bank advances 90 234 614

Federal Reserve Bank advances 20 - -

Total interest expense 3,032 3,596 3,844

Net interest income 8,942 8,622 8,477

Provision for loan losses 2,027 2,777 62

Net interest income after provision for loan losses 6,915 5,845 8,415

NONINTEREST INCOME

Trust management 203 193 206

Service charges and fees on deposit accounts 137 236 246

Wealth management 228 247 262

Interchange fees, net 130 98 121

Other service charges and fees 28 33 27

Secondary market sales and servicing 731 202 267

Increase in cash surrender value of bank owned life insurance 116 118 121

Net gains (losses) on sales and calls of available-for-sale securities 3 26 (2)

Net gains (losses) on disposition of other assets 1 (7) (1)

Net gains (losses) on rabbi trust assets 114 (263) 40

Referral fees 496 471 -

Other 7 37 8

Total noninterest income 2,194 1,391 1,295

NONINTEREST EXPENSE

Salaries and employee benefits 3,839 3,628 3,892

Occupancy 705 751 837

Data processing 498 537 609

Bank franchise tax 257 256 230

Telecommunications and other technology 371 358 262

FDIC assessments 147 148 162

Foreclosed property 28 7 19

Consulting 70 71 147

Advertising and marketing 26 67 109

Directors' fees 188 192 213

Audit and accounting 170 140 189

Legal 154 191 27

Core deposit intangible amortization 142 149 173

Net other real estate owned losses 81 - 72

Goodwill impairment 10,374 - -

Other 403 813 651

Total noninterest expense 17,453 7,308 7,592

(Loss) income before income taxes (8,344) (72) 2,118

Income tax (benefit) expense (217) (58) 395

Net (loss) income $ (8,127) $ (14) $ 1,723

Basic and diluted (loss) earnings per share $ (0.62) $ - $ 0.13

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

For the Six Months Ended

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

INTEREST INCOME

Loans, including fees $ 22,642 $ 22,919

Securities:

Taxable 1,225 1,172

Tax-exempt 183 214

Federal funds sold 2 25

Interest-earning deposit accounts 112 287

Certificates of deposit 28 39

Total interest income 24,192 24,656

INTEREST EXPENSE

Deposits 5,260 5,896

Securities sold under repurchase agreements 3 7

Subordinated notes and other borrowings 1,021 275

Federal Home Loan Bank advances 324 1,319

Federal Reserve Bank advances 20 -

Total interest expense 6,628 7,497

Net interest income 17,564 17,159

Provision for loan losses 4,804 376

Net interest income after provision for loan losses 12,760 16,783

NONINTEREST INCOME

Trust management 396 420

Service charges and fees on deposit accounts 373 484

Wealth management 475 469

Interchange fees, net 228 222

Other service charges and fees 61 56

Secondary market sales and servicing 933 339

Increase in cash surrender value of bank owned life insurance 233 240

Net gains (losses) on sales and calls of available-for-sale securities 29 (2)

Net losses on disposition of other assets (7) (1)

Net (losses) gains on rabbi trust assets (150) 130

Referral fees 966 -

Other 46 28

Total noninterest income 3,583 2,385

NONINTEREST EXPENSE

Salaries and employee benefits 7,466 7,893

Occupancy 1,456 1,705

Data processing 1,035 1,197

Bank franchise tax 514 446

Telecommunications and other technology 780 469

FDIC assessments 295 378

Foreclosed property 35 62

Consulting 141 262

Advertising and marketing 93 176

Directors' fees 381 377

Audit and accounting 310 393

Legal 346 110

Core deposit intangible amortization 291 353

Net other real estate owned losses 80 66

Goodwill impairment 10,374 -

Other 1,163 1,335

Total noninterest expense 24,760 15,222

(Loss) income before income taxes (8,417) 3,946

Income tax (benefit) expense (276) 732

Net (loss) income $ (8,141) $ 3,214

Basic and diluted (loss) earnings per share $ (0.62) $ 0.25

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

As of and for the

As of and for the Three Months Ended Year Ended

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

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

Select Consolidated Balance Sheet Data

Total assets $ 1,238,226 $ 1,183,553 $ 1,131,923 $ 1,112,219 $ 1,094,260

Cash, interest-earning deposits and federal funds sold 39,912 56,006 41,813 31,405 24,604

Available-for-sale securities, at fair value 92,560 94,618 99,454 80,748 81,169

Loans:

Mortgage loans on real estate 798,109 762,404 730,788 731,280 713,247

Commercial and industrial 193,740 198,278 181,730 186,281 187,531

Paycheck Protection Program 55,496 - - - -

Consumer 7,855 9,846 11,985 14,471 16,889

Loans receivable 1,055,200 970,528 924,503 932,032 917,667

Unamortized net deferred loan fees (2,345) (333) (313) (269) (275)

Allowance for loan losses (ALL) (12,007) (10,172) (7,562) (7,495) (7,479)

Net loans 1,040,848 960,023 916,628 924,268 909,913

Loans held for sale 2,521 747 1,231 268 593

Other real estate owned, net 1,903 1,679 1,916 2,178 3,168

Total liabilities $ 1,118,536 $ 1,056,151 $ 1,005,738 $ 987,362 $ 971,643

Deposits:

Noninterest-bearing demand deposits 185,201 136,437 137,933 124,670 116,229

Savings and interest-bearing demand deposits 413,025 394,637 382,607 372,404 374,175

Time deposits 408,672 433,393 389,900 396,614 385,218

Total deposits 1,006,898 964,467 910,440 893,688 875,622

Securities sold under repurchase agreements 1,035 3,284 6,525 6,323 6,983

Federal Home Loan Bank advances 35,000 45,000 45,000 68,000 70,000

Federal Reserve Bank advances 33,160 - - - -

Subordinated notes, net of unamortized issuance costs 31,056 31,029 31,001 6,906 6,902

Shareholders' equity 119,690 127,402 126,185 124,857 122,617

Interest income $ 11,974 $ 12,218 $ 12,997 $ 12,765 $ 12,321 $ 50,418

Interest expense 3,032 3,596 3,854 3,734 3,844 15,085

Net interest income 8,942 8,622 9,143 9,031 8,477 35,333

Provision for loan losses 2,027 2,777 311 495 62 1,182

Noninterest income 2,194 1,391 1,373 1,200 1,295 4,958

Noninterest expense 17,453 7,308 7,734 7,447 7,592 30,402

(Loss) income before income taxes (8,344) (72) 2,471 2,289 2,118 8,707

Income tax (benefit) expense (217) (58) 469 448 395 1,649

Net (loss) income $ (8,127) $ (14) $ 2,002 $ 1,841 $ 1,723 $ 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

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

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

Basic (loss) earnings per share $ (0.62) $ - $ 0.15 $ 0.14 $ 0.13 $ 0.54

Diluted (loss) earnings per share (0.62) - 0.15 0.14 0.13 0.54

Book value per share 8.98 9.55 9.51 9.36 9.20

Tangible book value per share (1) 8.90 8.69 8.64 8.49 8.31

Shares outstanding at end of period 13,334,049 13,346,789 13,261,801 13,334,302 13,332,484

Weighted average shares outstanding, basic 13,080,689 13,056,576 13,071,708 13,077,600 13,059,824 13,053,080

Weighted average shares outstanding, diluted 13,080,689 13,056,576 13,145,522 13,132,459 13,104,943 13,111,853

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

Yield on average interest-earning assets 4.17 % 4.56 % 4.87 % 4.87 % 4.77 % 4.85 %

Accretion of discounts on acquired loans $ 93 $ 189 $ 929 $ 357 $ 197 $ 1,922

Cost of funds 1.12 % 1.44 % 1.54 % 1.52 % 1.58 % 1.55 %

Cost of deposits 0.97 % 1.24 % 1.34 % 1.40 % 1.42 % 1.37 %

Net interest spread 2.83 % 2.90 % 3.09 % 3.13 % 2.97 % 3.09 %

Net interest margin (NIM) 3.11 % 3.22 % 3.43 % 3.45 % 3.29 % 3.40 %

Average interest-earnings assets to total average assets 94.1 % 94.4 % 94.2 % 94.0 % 93.9 % 94.0 %

Return (loss) on average assets (annualized) -2.64 % 0.00 % 0.71 % 0.66 % 0.62 % 0.64 %

Operating return on average assets (annualized) (1) 0.54 % 0.00 % 0.71 % 0.66 % 0.62 % 0.64 %

Return (loss) on average equity (annualized) -25.40 % -0.04 % 6.39 % 5.97 % 5.72 % 5.79 %

Operating return (loss) on average equity (annualized) (1) 5.18 % -0.04 % 6.39 % 5.97 % 5.72 % 5.79 %

Efficiency ratio 156.7 % 73.0 % 73.5 % 72.8 % 77.7 % 75.5 %

Operating efficiency ratio (1) 63.6 % 73.0 % 73.5 % 72.8 % 77.7 % 75.5 %

Average assets $ 1,230,249 $ 1,143,879 $ 1,126,663 $ 1,109,986 $ 1,105,411 $ 1,107,670

Average interest-earning assets 1,158,248 1,079,351 1,061,227 1,043,243 1,037,527 1,041,622

Average interest-bearing liabilities 914,832 871,597 860,421 851,392 857,355 855,703

Average shareholders' equity 127,960 126,955 125,285 123,399 120,559 121,859

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

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

Asset Quality Data and Ratios:

Nonaccrual loans $ 7,991 $ 5,441 $ 4,476 $ 7,194 $ 4,577

Other real estate owned, net 1,903 1,679 1,916 2,178 3,168

Total nonperforming assets 9,894 7,120 6,392 9,372 7,745

Net charge-offs 193 166 245 478 441 1,522

Net charge-offs to average loans (annualized) 0.08 % 0.07 % 0.11 % 0.21 % 0.19 % 0.17 %

Total nonperforming assets to total assets 0.80 % 0.60 % 0.56 % 0.84 % 0.71 %

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

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

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

Discounts on acquired loans $ 1,640 $ 1,750 $ 1,935 $ 2,886 $ 3,265

(1) Non-GAAP financial measure. See GAAP to Non-GAAP financial measurereconciliation at the end of the Supplemental Financial Data tables thatfollow.

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

As of and for the

As of and for the Three Months Ended Year Ended

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

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

Reconciliation of Non-GAAP Financial Measures (1)

Tangible book value per share

Total shareholders' equity $ 119,690 $ 127,402 $ 126,185 $ 124,857 $ 122,617

Less: intangible assets, net of deferred tax liability on 970 11,456 11,573 11,697 11,828core deposit intangible (a)(b)

Tangible shareholders' equity $ 118,720 $ 115,946 $ 114,612 $ 113,160 $ 110,789

Shares outstanding at end of period 13,334,049 13,346,789 13,261,801 13,334,302 13,332,484

Tangible book value per share $ 8.90 $ 8.69 $ 8.64 $ 8.49 $ 8.31

Tangible shareholders' equity to tangible total assets

Total assets $ 1,238,226 $ 1,183,553 $ 1,131,923 $ 1,112,219 $ 1,094,260

Less: intangible assets, net of deferred tax liability on 970 11,456 11,573 11,697 11,828core deposit intangible (a)(b)

Tangible total assets $ 1,237,256 $ 1,172,097 $ 1,120,350 $ 1,100,522 $ 1,082,432

Tangible shareholders' equity $ 118,720 $ 115,946 $ 114,612 $ 113,160 $ 110,789

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

Allowance for loan losses to gross loans, excluding PPP loans

Gross loans $ 1,052,855 $ 970,195 $ 924,190 $ 931,763 $ 917,392

Less: PPP loans 55,496 - - - -

Gross loans excluding PPP loans $ 997,359 $ 970,195 $ 924,190 $ 931,763 $ 917,392

Allowance for loan losses $ 12,007 $ 10,172 $ 7,562 $ 7,495 $ 7,479

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

Select noninterest expenses, after-tax basis (ATB)

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

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

Weighted average shares outstanding, diluted 13,080,689 13,056,576 13,145,522 13,132,459 13,104,943 13,111,853

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

Operating return on average assets (annualized)

Net (loss) income $ (8,127) $ (14) $ 2,002 $ 1,841 $ 1,723 $ 7,058

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

Operating net income (loss) $ 1,657 $ (14) $ 2,002 $ 1,841 $ 1,723 $ 7,058

Average assets $ 1,230,249 $ 1,143,879 $ 1,126,663 $ 1,109,986 $ 1,105,411 $ 1,107,670

Operating return on average assets (annualized) 0.54 % 0.00 % 0.71 % 0.66 % 0.62 % 0.64 %

Operating return (loss) on average equity (annualized)

Net (loss) income $ (8,127) $ (14) $ 2,002 $ 1,841 $ 1,723 $ 7,058

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

Operating net income (loss) $ 1,657 $ (14) $ 2,002 $ 1,841 $ 1,723 $ 7,058

Average shareholders' equity $ 127,960 $ 126,955 $ 125,285 $ 123,399 $ 120,559 $ 121,859

Operating return (loss) on average equity (annualized) 5.18 % -0.04 % 6.39 % 5.97 % 5.72 % 5.79 %

Operating efficiency ratio

Total noninterest expense $ 17,453 $ 7,308 $ 7,734 $ 7,447 $ 7,592 $ 30,402

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

Operating noninterest expense 7,079 7,308 7,734 7,447 7,592 30,402

Net interest income 8,942 8,622 9,143 9,031 8,477 35,333

Noninterest income 2,194 1,391 1,373 1,200 1,295 4,958

Operating efficiency ratio 63.6 % 73.0 % 73.5 % 72.8 % 77.7 % 75.5 %

Pre-tax, pre-loan loss provision income, excluding goodwillimpairment

Net (loss) income $ (8,127) $ (14) $ 2,002 $ 1,841 $ 1,723 $ 7,058

Add: Income tax (benefit) expense (217) (58) 469 448 395 1,649

Add: Provision for loan losses 2,027 2,777 311 495 62 1,182

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

Pre-tax, pre-loan loss provision income, excluding goodwill $ 4,057 $ 2,705 $ 2,782 $ 2,784 $ 2,180 $ 9,889impairment

(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.

(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 are meaningful becausemanagement uses them to assess the financial performance of the company.Calculations of these non-GAAP financial measures may not be comparable to thecalculation of similarly titled measures reported by other companies.

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SOURCE Bay Banks of Virginia, Inc.