-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T5qdfcDm14blYZhzvs0wwoR+H5e7JhW51VhTTE89w9M9rmqm+uwEdOqpDwswYEa7 WZqvHKpkoVvCCDK7RPnmKg== 0000916641-00-000407.txt : 20000331 0000916641-00-000407.hdr.sgml : 20000331 ACCESSION NUMBER: 0000916641-00-000407 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BAY BANKS OF VIRGINIA INC CENTRAL INDEX KEY: 0001034594 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 541838100 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22955 FILM NUMBER: 586653 BUSINESS ADDRESS: STREET 1: 100 S MAIN STREET CITY: KILMARNICK STATE: VA ZIP: 22482 BUSINESS PHONE: 8044351171 MAIL ADDRESS: STREET 1: 100 S MAIN STREET CITY: KILMARNOCK STATE: VA ZIP: 22482 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-22955 BAY BANKS OF VIRGINIA, INC. (Exact name of registrant as specified in its charter) VIRGINIA 54-1838100 (State of Incorporation) (I.R.S. Employer Identification no.) 100 SOUTH MAIN STREET, KILMARNOCK, VIRGINIA 22482 (Address of principal executive offices) (Zip Code) Registrants telephone number...................................804.435.1171 Securities registered under Section 12(b) of the Exchange Act.........NONE Securities registered under Section 12(g) of the Exchange Act: Common Stock ($5.00 Par Value) (Title of Class) Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X NO . --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter)is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of voting stock held by non-affiliates of the registrant based on the closing sale price of the registrant's common stock on March 23, 2000, was $41,368,967. The number of shares outstanding of the registrant's common stock as of March 23, 2000: 1,165,323. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's 1999 Annual Report to Shareholders are incorporated by reference into Part II of this Form 10-K. Portions of the registrant's definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 15, 2000 are incorporated by reference into Part III of this Form 10-K. Form 10-K TABLE OF CONTENTS
ITEM NUMBER PAGE NUMBER - ------------- ---------------------------------------------------------- PART I 1. BUSINESS STATISTICAL INFORMATION 2. PROPERTIES 3. LEGAL PROCEEDINGS 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS PART II 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 6. SELECTED FINANCIAL DATA 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE PART III 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 11. EXECUTIVE COMPENSATION 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS PART IV 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K SIGNATURES
PART 1 ITEM 1: BUSINESS Nature of Business. Bay Banks of Virginia, Inc. (the "Company") is a bank holding company that conducts substantially all of its operations through its subsidiary, Bank of Lancaster, (the "Bank"). Bay Banks of Virginia, Inc. was incorporated under the laws of the Commonwealth of Virginia on June 30, 1997 in connection with the holding company reorganization of the Bank of Lancaster. The Bank is a state-chartered bank and a member of the Federal Reserve System. The Bank services individual and commercial customers, the majority of which are in the Northern Neck of Virginia. The Bank has two offices located in Kilmarnock, Virginia, one office in White Stone, Virginia, one office in Warsaw, Virginia, and one office in Montross, Virginia. A substantial amount of the Bank's deposits are interest bearing, and the majority of the Bank's loan portfolio is secured by real estate. Deposits of the Bank are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation. The subsidiary, Bank of Lancaster, opened for business in 1930 and has partnered with the community to ensure responsible growth and development since that time. In August of 1999, Bay Banks of Virginia formed Bay Trust Company. This subsidiary of the Holding Company was created to purchase and manage the assets of the trust department of the Bank of Lancaster. This sale and transfer of assets was completed as of the close of business on December 31, 1999. As of January 1, 2000, the Bank of Lancaster no longer owns or manages the trust function, and thereby will no longer receive an income stream from the trust department. The Bank offers a full range of banking and related financial services, including checking, savings, and other depository services, commercial and industrial loans, residential and commercial mortgages, home equity loans, and consumer installment loans. The Bank's Trust Department also offers a broad range of trust and related fiduciary services. The counties composing the Bank's marketplace are situated on the Chesapeake Bay and its tributaries. Second and summer homes are prevalent as is the retirement community. Resorts and health care providers are the largest employers in the community. Agriculture, fishing, boat repair, general retail, financial, construction, and services directed toward the retirement community are other major economic sectors. The Company had $199,772,678 in total assets and $177,701,967 in total deposits as of December 31, 1999. Net earnings for the year ended December 31, 1999, were $2,175,378. Loan demand was strong as balances increased to $131,961,821. The loan portfolio is composed of mainly residential first mortgages. Lending Activities. The Company provides a wide range of real estate, consumer, and commercial lending services to the customers in its market area. Real Estate Lending. The Company's real estate loan portfolio is the largest segment of the loan portfolio. Real estate mortgage loans in aggregate increased to $101,874,691 during 1999. This balance is 77.4% of the total loan portfolio. The Bank offers fixed and adjustable rate loans on one-to-four family residential properties. These mortgages are underwritten and documented within the guidelines of the Regulations of the Federal Reserve Board of Governors. The Bank underwrites mainly adjustable rate mortgages as the market place allows. Construction loans with a twelve-month term are also a major component of the Bank's portfolio. Underwritten at 80% loan to value, and to qualified builders and individuals, the loans are disbursed as construction progresses and verified by Bank inspection. The Company also offers secondary market loan origination. Through the Bank, customers may apply for a home mortgage that will be underwritten in accordance with the guidelines of the Federal Home Loan Mortgage Corporation. These loans are then sold in the secondary market. The Bank earns origination fees through offering this service. Customers, upon approval, receive a fixed rate of interest with terms that vary from 10 through 30 years. Since these loans are sold into the secondary market, there is no impact on future interest income or the loan repricing structure of the Bank. Consumer Lending. Consumer loans totaled $18,673,299 as of December 31, 1999. This is 14.2% of the total loan portfolio. In an effort to offer a full range of services, consumer lending includes automobile and boat financing, home improvement loans, and unsecured personal loans. These loans historically entail greater risk than residential real estate loans, but also offer a higher return for the Bank. Commercial Lending. Commercial lending activities include small business loans, asset based loans, and other secured and unsecured loans and lines of credit. Commercial loan balances were $11,081,489 at year end and 8.4% of the total portfolio. Commercial lending also entails greater risk than residential mortgage lending, and therefore offers a greater yield. The borrower's ability to make repayment from cash flows of the business, as well as some form of business collateral is the basis for establishing such an account. Business Development. The Bank offers several services to commercial customers. These services include Analysis Checking, Cash Management Deposit Accounts, Wire Services, and a full line of Commercial Lending options. The Bank also offers Small Business Administration "Low Document" Loan products. This allows commercial customers to apply for favorable rate loans for the development of business opportunities. Bay Services Company, Inc. The Bank has one wholly owned subsidiary, Bay Service Company, Inc., a Virginia corporation organized in 1994. Bay Services owns an equity interest in a land title insurance agency, Bankers Title of Fredricksburg, which generally sells title insurance to mortgage loan customers, including customers of the Bank and the other financial institutions that have an equity interest in the agency. As of December 31, 1999, the Company and its subsidiaries had 79 full time equivalent employees. Competition. The Bank's trade area includes the counties of Lancaster, Northumberland, Middlesex, Richmond and Westmoreland. Being rural in nature, the Bank's marketplace is highly competitive. The Bank is subject to competition from a variety of commercial banks and financial service companies. For deposits, the Bank competes with statewide banking institutions, local community banks, major investment brokerage houses and issuers of money markets and mutual fund products. For loans, the Bank competes with other commercial banks, savings and loans, credit unions, and consumer finance companies. As the marketplace continues to develop, the Bank expects competition to increase. Supervision and Regulation. Bank holding companies and banks are regulated under both federal and state law. The Company is subject to regulation by the Board of Governors of the Federal Reserve. Under the Bank Holding Company Act of 1956, the Federal Reserve exercises supervisory responsibility for any non- bank acquisition, merger or consolidation. In addition, the Bank Holding Company Act limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is closely related to banking. In addition, the Company is registered under the bank holding laws of Virginia, and as such is subject to regulation and supervision by the State Corporation Commission Bureau of Financial Institutions. The Bank is supervised and regularly examined by the Federal Reserve Board and the State Corporation Commission. These on-site examinations verify compliance with regulations governing corporate practices, capitalization, and safety and soundness. Further, the Bank is subject to the requirements of the Community Reinvestment Act, (the "CRA"). The CRA requires financial institutions to meet the credit needs of the local community, including low to moderate-income needs. Compliance with the CRA is monitored through regular examination by the Federal Reserve. Federal Reserve Board regulations permit bank holding companies to engage in non-banking activities closely related to banking or to managing or controlling banks. These activities include the making or servicing of loans, performing certain data processing services, and certain leasing and insurance agency activities. The Company owns 100% of the stock of the Bank of Lancaster. The Bank is prohibited by The Federal Reserve from holding or purchasing its own shares except in limited circumstances. Further, the Bank is subject to certain requirements as imposed by state banking statutes and regulations. The Bank is limited by the Board of Governors of the Federal Reserve System in what dividends it can pay to the Company. Any dividend in excess of the total of the Bank's net profit for that year plus retained earnings from the prior two years must be approved by the proper regulatory agencies. Further, under the Federal Deposit Insurance Corporation Improvement Act of 1991, insured depository institutions are prohibited from making capital distributions, if after making such distributions, the institution would become "undercapitalized" as defined by regulation. Based upon the Bank's current financial position, it is not anticipated that this statute will impact the continued operation of the Bank. As a bank holding company, Bay Banks of Virginia, Inc., is required to file with the Federal Reserve Board an annual report and such additional information as it may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may also conduct examinations of Bay Banks of Virginia, Inc., and any or all of its subsidiaries. Financial Modernization Legislation. The Gramm-Leach-Bliley Act of 1999 ("GLBA") was signed into law on November 12, 1999. The main purpose of GLBA is to permit greater affiliations within the financial services industry, primarily banking, securities and insurance. While certain portions of GLBA became effective upon enactment and on March 11, 2000, many other provisions do not become effective until May 2001 and most of the regulations implementing the law have not yet been issued. As a result, the overall impact of GLBA on the Company cannot be predicted at this time. The provisions of GLBA that are believed to be of most significance to the Company are discussed below. GLBA repeals sections 20 and 32 of the Glass-Steagall Act, which separated commercial banking from investment banking, and substantially amends the BHCA, which limited the ability of bank holding companies to engage in the securities and insurance businesses. To achieve this purpose, GLBA creates a new type of company, the "financial holding company." A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including o securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and o insurance underwriting, sales and brokerage activities. A bank holding company may elect to become a financial holding company only if all of its depository institution subsidiaries are well-capitalized, well- managed and have at least a satisfactory Community Reinvestment Act rating. GLBA establishes a system of functional regulation under which the federal banking agencies will regulate the banking activities of financial holding companies and banks' financial subsidiaries, the Securities and Exchange Commission ("SEC") will regulate their securities activities and state insurance regulators will regulate their insurance activities. With regard to Federal securities laws, GLBA removes the blanket exemption for banks from being considered brokers or dealers under the Securities Exchange Act of 1934, and sets out a number of limited activities, including trust and fiduciary activities, in which a bank may engage without being considered a broker, and a set of activities in which a bank may engage without being considered a dealer. The Investment Advisers Act of 1940 also will be amended to eliminate certain provisions exempting banks from the registration requirements of that statute, and the Investment Company Act of 1940 will be amended to provide the SEC with regulatory authority over various bank mutual fund activities. GLBA also provides new protections against the transfer and use by financial institutions of consumers nonpublic personal information. A financial institution must provide to its customers, at the beginning of the customer relationship and annually thereafter, the institution's policies and procedures regarding the handling of customers' nonpublic personal financial information. The new privacy provisions will generally prohibit a financial institution from providing a customer's personal financial information to unaffiliated third parties unless the institution discloses to the customer that the information may be so provided and the customer is given the opportunity to opt out of such disclosure. At this time, the Company is unable to predict the impact GLBA may have upon its or its subsidiaries' financial condition or results of operations. The Company is currently reviewing the new law and at this time has not elected to be treated as a financial holding company under GLBA. Index of Statistical Tables - -------------------------------------------------------------------------------- Table Description - -------------------------------------------------------------------------------- Table I Average Balances, Income & Expense, Yields, and Rates Table II Volume & Rate Analysis of Changes in Net Interest Income Table III Investment Maturities & Average Yields Table IV Types of Loans Table V Loan Maturity Schedule of Selected Loans Table VI Risk Elements Table VII Summary of Allowance for Loan Losses Table VIII Allocation of the Allowance for Loan Losses Table IX Average Deposits & Rates Table X Maturity Schedule of Time Deposits of $100,000 or more Table XI Return on Equity & Assets Table XII Interest Rate Sensitivity Analysis Table I Average Balances, Income & Expense, Yields, and Rates
------------------------------------------------------------------------------------ 1999 1998 ------------------------------------------------------------------------------------ Annual Annual Average Income/ Yield/ Average Income/ Yield/ (Thousands) Balance Expense Rate Balance (3) Expense Rate - ------------------------------------------------------------------------------------------------------------------------------------ ASSETS: Investments (Book Value): - ------------------------ Taxable Investments $43,962 $2,747 6.25% $35,265 $2,131 6.04% Tax-Exempt Investments (1) $18,210 $843 7.01% $22,421 $1,045 7.06% ------------------------------------------------------------------------------------ Total Investments $62,172 $3,589 6.47% $57,686 $3,176 6.44% Loans (2) $120,004 $10,153 8.46% $108,221 $9,591 8.86% Interest-bearing Deposits $8 $0 0.00% $0 $0 0.00% Fed Funds Sold $3,955 $194 4.91% $14,608 $796 5.45% ------------------------------------------------------------------------------------ Total Interest Earning Assets $186,139 $13,937 7.72% $180,515 $13,564 7.81% Allowance for Loan Losses ($1,143) ($958) Unrealized Gains & Losses on Investments ($1,072) $688 Total Non-Earning Assets $14,744 $16,560 =============== ============== TOTAL ASSETS $198,668 $196,805 - ------------------------------------------------------------------------------------------------------------------------------------ LIABILITIES & SHAREHOLDERS' EQUITY: Interest-bearing Deposits: - -------------------------- Savings Deposits $68,334 $2,880 4.22% $67,981 $3,102 4.56% NOW Deposits $26,188 $743 2.84% $21,485 $663 3.08% CD's (greater than or equal to) $100,000 $11,169 $549 4.92% $11,698 $616 5.27% CD's (less than) $100,000 $39,422 $1,921 4.87% $42,319 $2,321 5.48% Money Market Deposit Accounts $10,864 $336 3.09% $11,205 $352 3.15% ------------------------------------------------------------------------------------ Total Interest-bearing Deposits $155,977 $6,430 4.12% $154,688 $7,054 4.56% Fed Funds Purchased $1,004 $55 5.48% $0 $0 0.00% Securities Sold to Repurchase $1,181 $48 4.09% $293 $11 3.82% ------------------------------------------------------------------------------------ Total Interest-Bearing Liabilities $157,680 $6,533 4.14% $154,981 $7,065 4.56% Non-Interest-Bearing Liabilities: - -------------------------------- Demand Deposits $20,117 $18,680 Other Liabilities $846 $3,486 --------------- -------------- TOTAL LIABILITIES $178,643 $177,147 SHAREHOLDER'S EQUITY $20,024 $19,658 =============== ============== TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $198,668 $196,805 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income/Yield $7,404 4.21% $6,499 3.90% ====================================================================================================================================
Notes: (1)-Yield assumes a marginal federal tax rate of 34% (2)-Includes Visa Program & nonaccrual loans. (3)-Revised since 1998 10KSB-A Table I (continued) Average Balances, Income & Expense, Yields, and Rates
--------------------------------- 1997 --------------------------------- Annual Average Income/ Yield/ (Thousands) Balance Expense Rate - --------------------------------------------------------------------------------------------- ASSETS: Investments (Book Value): - ------------------------- Taxable Investments $28,565 $1,644 5.76% Tax-Exempt Investments (1) $15,923 $741 7.05% --------------------------------- Total Investments $44,488 $2,386 6.22% Loans (2) $103,398 $9,391 9.08% Interest-bearing Deposits $0 $0 0.00% Fed Funds Sold $8,047 $390 4.85% --------------------------------- Total Interest Earning Assets $155,932 $12,166 8.05% Allowance for Loan Losses ($940) Unrealized Gains & Losses on Investments $170 Total Non-Earning Assets $8,868 ========== TOTAL ASSET $164,029 - --------------------------------------------------------------------------------------------- LIABILITIES & SHAREHOLDERS' EQUITY: Interest-bearing Deposits: - -------------------------- Savings Deposits $68,943 $3,303 4.79% NOW Deposits $16,642 $493 2.96% CD's (greater than or equal to) $100,000 $8,634 $403 4.67% CD's (less than) $100,000 $30,822 $1,705 5.53% Money Market Deposit Accounts $9,120 $300 3.28% ---------------------------------- Total Interest-bearing Deposits $134,161 $6,203 4.62% Fed Funds Purchased $0 $0 0.00% Securities Sold to Repurchase $348 $22 6.24% ---------------------------------- Total Interest-Bearing Liabilities $134,509 $6,225 4.63% Non-Interest-Bearing Liabilities: - --------------------------------- Demand Deposits $11,696 Other Liabilities $434 ----------- TOTAL LIABILITIES $146,639 SHAREHOLDER'S EQUITY $17,738 ========== TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $164,377 - ---------------------------------------------------------------------------------------------- Net Interest Income/Yield $5,942 4.06% ==============================================================================================
Notes: (1)-Yield assumes a marginal federal tax rate of 34% (2)-Includes Visa Program & nonaccrual loans. (3)-Revised since 1998 10KSB-A Table II Volume & Rate Analysis of Changes in Net Interest Income
------------------------------------------------------------------ (Thousands) 1999 vs 1998 1998 vs 1997 ------------------------------------------------------------------ Change Change Change Change due to due to Total due to due to Total Volume Rate Change Volume Rate Change ------------------------------------------------------------------ Investments: - ------------ Taxable Investments $541 $74 $615 $402 $85 $487 Tax-Exempt Investments ($194) ($7) ($202) $303 $1 $304 ------------------------------------------------------------------ Total Investments $346 $68 $413 $706 $85 $791 Loans $963 ($401) $562 $416 ($215) $201 Interest-bearing Deposits $0 $0 $0 $0 $0 $0 Fed Funds Sold ($530) ($72) ($602) $352 $54 $406 ================================================================== Total Interest Earning Assets $861 ($488) $373 $1,497 ($99) $1,397 Interest-bearing Deposits: - ------------------------- Savings Deposits $16 ($238) ($222) ($46) ($155) ($200) NOW Deposits $127 ($46) $80 $149 $21 $169 CD's (greater than or equal to) $100,000 ($27) ($40) ($67) $157 $56 $213 CD's (less than) $100,000 ($152) ($247) ($399) $630 ($14) $616 Money Market Deposit Accounts ($11) ($6) ($17) $65 ($12) $53 ------------------------------------------------------------------ Total Interest-bearing Deposits $59 ($684) ($624) $935 ($84) $851 Fed Funds Purchased $55 $0 $55 $0 $0 $0 Securities Sold to Repurchase $36 $1 $37 ($3) ($7) ($11) ================================================================== Total Interest-Bearing Liabilities $126 ($658) ($532) $932 ($91) $840 Change in Net Interest Income $736 $170 $905 $565 ($8) $557
Notes: - ------ Changes due to a combination of volume and rates are allocated proportionately to `Due to Volume' and `Due to Rates'. Table III Investment Maturities & Average Yields as of 12/31/99
------------------------------------------------------------------------- One Year or Less or No One to Five Five to Ten Over Ten (Thousands) Maturity Years Years Years Total - --------------------------------------------------------------------------------------------------------------------------- U.S. Treasury & Agency Securities Book Value $500 $6,643 $4,036 $0 $11,179 Market Value $498 $6,464 $3,860 $0 $10,823 Weighted average yield 6.09% 5.73% 6.60% 0.00% 6.06% - --------------------------------------------------------------------------------------------------------------------------- States & Political Subdivisions Securities Book Value $250 $6,221 $14,263 $924 $21,658 Market Value $251 $6,172 $13,700 $855 $20,978 Weighted average yield 7.53% 6.79% 6.73% 6.44% 6.75% - --------------------------------------------------------------------------------------------------------------------------- Other Securities: Book Value $491 $6,263 $11,755 $3,989 $22,498 Market Value $483 $6,067 $10,973 $3,847 $21,370 Weighted average yield 4.47% 6.10% 6.16% 5.93% 6.07% - --------------------------------------------------------------------------------------------------------------------------- Total Securities: Book Value $1,241 $19,127 $30,054 $4,913 $55,336 Market Value $1,233 $18,702 $28,533 $4,702 $53,170 Weighted average yield 5.74% 6.20% 6.49% 6.03% 6.33% - --------------------------------------------------------------------------------------------------------------------------- Notes: Yields on tax-exempt securities have been computed on a tax-equivalent basis using a 34% marginal rate.
Table IV Types of Loans
------------------------------------------------------------- (Thousands) 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 - ---------------------------------------------------------------------------------------------------------------------- Commercial $11,081 $11,679 $9,649 $10,744 $10,113 - ---------------------------------------------------------------------------------------------------------------------- Real Estate - Construction $5,438 $1,130 $2,385 $1,859 $970 - ---------------------------------------------------------------------------------------------------------------------- Real Estate - Mortgage $95,912 $82,739 $76,541 $73,147 $68,254 - ---------------------------------------------------------------------------------------------------------------------- Installment and Other (includes Visa program) $18,673 $18,697 $16,222 $15,769 $14,722 ====================================================================================================================== Total $131,105 $114,245 $104,796 $101,519 $94,059
Notes: Deferred loan costs & fees not included. Allowance for loan losses not included. Table V Loan Maturity Schedule of Selected Loans as of December 31, 1999
---------------------------------------------------------------------- One Year or Less One to Five Years Over Five Years ---------------------------------------------------------------------- Fixed Variable Fixed Variable Fixed Variable (Thousands) Rate Rate Rate Rate Rate Rate - ---------------------------------------------------------------------------------------------------------------------------- Commercial $3,600 $5,307 $1,958 $0 $141 $0 - ---------------------------------------------------------------------------------------------------------------------------- Real Estate - Construction $5,438 $0 $0 $0 $0 $0 - ---------------------------------------------------------------------------------------------------------------------------- Real Estate - Mortgage $909 $14,191 $11,815 $43,052 $25,686 $208 - ---------------------------------------------------------------------------------------------------------------------------- Installment and Other (includes Visa program) $1,173 $9,219 $6,491 $0 $1,991 $0 ============================================================================================================================ Totals $11,120 $28,717 $20,264 $43,052 $27,819 $208
Notes: Loans with immediate repricing are shown in the 'One Year or Less' category. Table VI Risk Elements
----------------------------------------------------------- (Thousands) 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 - ------------------------------------------------------------------------------------------------------------------------------- Non-accrual Loans $0 $79 $126 $17 $77 - ------------------------------------------------------------------------------------------------------------------------------- Restructured Loans $0 $0 $0 $0 $0 - ------------------------------------------------------------------------------------------------------------------------------- Foreclosed Properties $925 $1,494 $1,379 $629 $1,128 - --------------------------------------------------------------------=========================================================== Total Non-performing Assets $925 $1,572 $1,505 $646 $1,204 - ------------------------------------------------------------------------------------------------------------------------------- Loans past due 90+ days as to principal or interest payments & accruing interest $793 $ 232 $ 594 $607 $ 50 - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- For non-accrual & restructured loans, Gross interest income which would have been recorded under original loan terms for the year ended $ 2 $ 4 $ 17 $ 1 n/a - ------------------------------------------------------------------------------------------------------------------------------- For non-accrual & restructured loans, Gross interest income recorded for the year ended $ 2 $ 4 $ 17 $ 1 n/a - ------------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------------- Potential problem loans as of 12/31/99 not reported above: $213 $ 236 $ 74 $106 $67 - ------------------------------------------------------------------------------------------------------------------------------- Notes: Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or specific valuation accounts and net of any unearned discount and fees and costs on originating loans. Loan origination fees and certain direct origination costs for real estate mortgage loans are capitalized and recognized as an adjustment of the yield of the related loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions.
Table VII s Summary of Allowance for Loan Losses
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 ======================================================================== Balance, beginning of period $1,012 $861 $1,020 $925 $962 Loans charged off: Commercial & other $ 0 ($ 20) ($ 15) ($ 5) ($ 7) Real estate - construction $ 0 $ 0 $ 0 $ 0 $ 0 Real estate - mortgage ($ 59) ($ 30) ($ 228) ($201) ($ 10) Installment & Other (including Visa program) ($ 105) ($ 27) ($ 125) ($ 28) ($ 89 ----------------------------------------------------------------------- Total loans charged off ($ 165) ($ 77) ($ 368) ($233) ($106) Recoveries of loans previously charged off: Commercial & other $ 0 $ 6 $ 0 $ 8 $ 1 Real estate - construction $ 0 $ 0 $ 0 $ 0 $ 0 Real estate - mortgage $ 0 $ 1 $ 0 $ 0 $ 6 Installment & Other (including Visa program) $ 15 $ 12 $ 6 $ 15 $ 4 ------------------------------------------------------------------------ Total recoveries $ 15 $ 20 $ 6 $ 23 $ 11 ------------------------------------------------------------------------ Net charge offs ($ 149) ($ 57) ($ 362) ($210) ($ 95) Provision for loan losses $ 335 $208 $ 203 $305 $ 58 ======================================================================== Balance, end of period $1,198 $1,012 $ 861 $1,020 $925 Average loans outstanding during the period $120,004 $108,221 $103,398 $97,935 $90,046 Ratio of net charge-offs during the period to average loans outstanding during the period 0.12% 0.05% 0.35% 0.21% 0.11% See Note 1 to Financial Statements, Loans receivable paragraph, for a description of the factors which influenced management's determination of the provision charged to operating expense.
Table VIII Allocation of the Allowance for Loan Losses
---------------------------------------------------------------------------------------------------- (Thousands) 12/31/99 12/31/98 12/31/97 12/31/96 12/31/95 ---------------------------------------------------------------------------------------------------- Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent ==================================================================================================================================== Commercial $62 5.2% $90 8.9% $84 9.8% $137 13.4% $140 15.1% - ------------------------------------------------------------------------------------------------------------------------------------ Real estate - construction $23 1.9% $5 0.5% $9 1.0% $6 0.6% $3 0.3% - ------------------------------------------------------------------------------------------------------------------------------------ Real estate - mortgage $920 76.8% $758 74.9% $659 76.6% $808 79.2% $719 77.7% - ------------------------------------------------------------------------------------------------------------------------------------ Installment & Other (including Visa program) $193 16.1% $159 15.7% $108 12.6% $69 6.8% $64 6.9% ==================================================================================================================================== Total $1,198 100.0% $1,012 100.0% $861 100.0% $1,020 100.0% $925 100.0%
Table IX Average Deposits & Rates
---------------------------------------------------------------------- 1999 1998 1997 ---------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ (Thousands) Balance Rate Balance Rate Balance Rate - ---------------------------------------------------------------------------------------------------------------------- Non-interest bearing Demand Deposits $20,117 0.00% $18,680 0.00% $11,696 0.00% Interest bearing Deposits: NOW Accounts $26,188 2.84% $21,485 3.08% $16,642 2.96% Regular Savings $68,334 4.22% $67,981 4.56% $68,943 4.79% Money Market Deposit Accounts $10,864 3.09% $11,205 3.15% $9,120 3.28% Time Deposits: CD's $100,000 or more $11,169 4.92% $11,698 5.27% $8,634 4.67% CD's less than $100,000 $39,422 4.87% $42,319 5.48% $30,822 5.53% Total Interest bearing Deposits $155,977 4.14% $154,688 4.56% $134,161 4.62% - ---------------------------------------------------------------------------------------------------------------------- Total Average Deposits $176,094 3.65% $173,368 4.07% $145,857 4.25%
Table X Maturity Schedule of Time Deposits of $100,000 or more
(Thousands) 12/31/99 12/31/98 12/31/97 - ------------------------------------------------------------------------------------------------------------ 3 months or less $4,155 $2,280 $4,700 3-6 months $6,296 $5,338 $1,978 6-12 months $1,853 $2,775 $2,212 Over 12 months $2,199 $2,159 $2,142 ============================================================================================================ Totals $14,503 $12,552 $11,032
Table XI Return on Equity & Assets
---------------------------------------------------------------- 1999 1998 1997 ---------------------------------------------------------------- Net Income $2,175,378 $1,930,900 $1,959,832 Average Total Assets $198,668,000 $196,805,000 $161,831,000 - ----------------------------------------------------------------------------------------------------------------------------- Return on Assets 1.1% 1.0% 1.2% - ----------------------------------------------------------------------------------------------------------------------------- Average Equity $20,024,000 $19,658,000 $16,844,000 - ----------------------------------------------------------------------------------------------------------------------------- Return on Equity 10.9% 9.8% 11.6% - ----------------------------------------------------------------------------------------------------------------------------- Dividends declared per share $0.78 $0.70 $0.63 Average Shares Outstanding 1,167,467 1,156,634 1,146,438 Average Diluted Shares Outstanding 1,187,295 1,176,462 1,162,677 Net Income per Share $1.86 $1.67 $1.71 Net Income per Diluted Share $1.83 $1.64 $1.69 - ----------------------------------------------------------------------------------------------------------------------------- Dividend Payout Ratio 41.9% 41.9% 36.9% - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- Equity to Assets Ratio 10.1% 10.0% 10.4% - -----------------------------------------------------------------------------------------------------------------------------
Table XII Interest Rate Sensitivity Analysis as of 12/31/99
------------------------------------------------------------------------ (Thousands) Within 3 3-12 Over 5 months Months 1-5 Years Years Total ------------------------------------------------------------------------ Interest-Bearing Due From Banks $100 $0 $0 $0 $100 Fed Funds Sold $0 $0 $0 $0 $0 Investments (Market Value) $0 $1,233 $18,702 $33,236 $53,170 Loans $22,000 $12,656 $63,316 $33,133 $131,105 ================================================================================================================================== Total Earning Assets $22,100 $13,889 $82,018 $66,368 $184,375 NOW Accounts $10,345 $0 $14,548 $0 $24,893 MMDA's $7,187 $0 $3,280 $0 $10,467 Savings $27,670 $0 $33,818 $0 $61,488 CD's (less than) $100,000 $11,187 $26,789 $7,487 $15 $45,478 CD's (greater than or equal to) $100,000 $4,155 $8,149 $2,199 $0 $14,503 - ---------------------------------------------------------------------------------------------------------------------------------- Total Deposits $60,544 $34,938 $61,332 $15 $156,829 Fed Funds Purchased $0 $0 $0 $0 $0 Securities Sold to Repurchase $1,283 $0 $0 $0 $1,283 ================================================================================================================================== Total Interest Bearing Liabilities $61,827 $34,938 $61,332 $15 $158,113 Rate Sensitive Gap ($39,727) ($21,049) $20,686 $66,354 $26,263 Cumulative Gap ($39,727) ($60,777) ($40,091) $26,263
Note: Visa Receivables are classified as `Within 3 Month' Loans. ITEM 2: PROPERTIES The Company owns no property, however its subsidiary, the Bank of Lancaster owns the following properties, free of any encumbrances: Main Office Northside Branch White Stone Branch The Bank of Lancaster Lancaster Square Center Route 3 100 South Main Street Kilmarnock, Virginia White Stone, Virginia Kilmarnock, Virginia Operations Center Montross Branch Warsaw Branch West Church Street Route 3, Kings Highway West Richmond Road Kilmarnock, Virginia Montross, Virginia Warsaw, Virginia Bay Trust Company Main Street Kilmarnock, Virginia Through the normal course of business, the Bank maintains an inventory of foreclosed properties known as Other Real Estate Owned, or OREO. This inventory is held at fair value, therefore the Bank expects no losses on these properties. Balances in OREO as of December 31, 1999 were $925,044. Further information regarding Other Real Estate Owned can be found in Note 1 of the 1999 Annual Report to Shareholders and is hereby incorporated by reference. Further information regarding property of the Company is incorporated herein by reference from Note 5 of the Company's 1999 Annual Report to Shareholders. ITEM 3: LEGAL PROCEEDINGS The Company is currently not involved in any material legal proceeding other than the ordinary & routine litigation incidental to its business. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the quarter ended December 31, 1999. PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company currently has only one classification of Common Equity outstanding, that being Common Stock. No established public trading market currently exists for the Company's common stock. No brokerage firm regularly makes a market for the stock, and trades in the Company's stock occur infrequently on a local basis. Accordingly, the quotations set forth below do not necessarily reflect the price that would be paid in an active and liquid market. The Company from time to time, on an informal basis, attempts to match or pair persons who desire to buy and sell the Company's stock. As of December 31, 1999, there were 733 stockholders of record, 523 of which participate in the Company's Dividend Re- investment Plan. During 1999, the Company issued shares for the Dividend Re- investment Plan at 95% of market value at the date of acquisition. As of January 1, 2000, the Dividend Re-investment Plan will issue shares at 100% of market value at the date of acquisition. A limited number transfers have occurred since year-end in which the price per share was $35.50. Further market information is as follows:
COMMON EQUITY MARKET DATA SALES PRICE SALES PRICE 1999 HIGH LOW DIVIDEND 1998 HIGH LOW DIVIDEND QTR 1 $33.50 $32.50 0.19 QTR 1 $27.50 $26.50 0.17 QTR 2 $36.00 $33.00 0.19 QTR 2 $33.00 $27.50 0.17 QTR 3 $36.00 $33.00 0.19 QTR 3 $33.00 $31.50 0.17 QTR 4 $38.00 $33.00 0.21 QTR 4 $33.50 $31.50 0.19
At December 31, 1999, there were 1,165,323 shares of common stock outstanding held by 733 holders of record. For further information regarding Common Equity, refer to Note 10 of the Annual Report to Shareholders, incorporated herein by reference. ITEM 6: SELECTED FINANCIAL DATA
Table XIII Selected Financial Data Years Ended December 31, 1999 1998 1997 1996 1995 ======================================================================================================================= (Thousands) FINANCIAL CONDITION Total Assets $ 199,773 200,271 169,006 159,333 156,167 Total Loans, net of allowance 130,432 113,643 104,203 100,711 93,213 Total Deposits 177,702 178,269 149,605 142,110 140,289 Stockholders' Equity before FAS 115 21,135 19,882 18,421 16,833 15,250 after FAS 115 19,706 20,508 18,692 16,785 15,467 Average Assets 198,668 196,805 161,831 156,834 150,971 Average Loans, net of allowance 118,861 107,263 102,662 94,681 90,046 Average Deposits 176,094 173,368 144,257 140,755 136,430 Average Equity, after FAS 115 20,024 19,658 16,844 15,771 14,252 RESULTS OF OPERATIONS Interest Income $ 13,937 13,564 12,222 11,628 11,274 Interest Expense 6,533 7,065 6,225 6,105 6,540 Net Interest Income 7,404 6,499 5,997 5,523 4,734 Provision for Loan Losses 335 208 203 305 58 Net Interest Income after Provision 7,069 6,290 5,794 5,218 4,676 Gain/(Loss) on Sales of Investments 35 205 3 54 57 Noninterest Income 1,542 1,481 1,186 1,086 878 Noninterest Expense 5,712 5,488 4,375 3,985 3,727 Income before Taxes 2,933 2,488 2,608 2,374 1,885 Income Taxes 758 557 648 542 361 Net Income 2,175 1,931 1,960 1,832 1,524 RATIOS Total Capital to Risk Weighted Assets 15.5% 15.9% 17.1% 18.9% 19.3% Tier 1 Capital to Risk Weighted Assets 14.6% 15.1% 16.7% 17.8% 18.2% Leverage Ratio 9.7% 9.0% 10.7% 10.7% 10.5% Return on Average Assets 1.1% 1.0% 1.2% 1.2% 1.0% Return on Average Equity 10.9% 9.8% 10.5% 11.6% 10.7% Loan Loss Reserve to Loans 0.9% 0.9% 0.8% 1.1% 1.0% Dividends paid as a percent of Net Income 41.8% 41.9% 36.9% 35.1% 38.1% Average Equity as a percent of Average Assets 10.1% 10.0% 10.4% 10.1% 9.4% Average shares outstanding 1,167,467 1,156,634 1,146,438 1,116,396 1,097,764 Average Diluted shares outstanding 1,187,295 1,176,462 1,162,677 1,127,482 1,107,218 PER SHARE DATA Basic Earnings per share (EPS) $ 1.86 1.67 1.71 1.64 1.39* Diluted Earnings per share (EPS) 1.83 1.64 1.69 1.62 1.38* Cash Dividends per share 0.78 0.70 0.63 0.58 0.53* Book Value per share before FAS 115 18.14 17.07 16.01 14.86 13.77* after FAS 115 16.91 17.61 16.24 14.81 13.96* GROWTH RATES Year end Assets -0.2% 18.5% 6.1% 2.0% 3.7% Year end Loans 14.8% 9.1% 3.5% 8.0% 6.4% Year end Deposits -0.3% 19.2% 5.3% 1.3% 2.4% Year end Equity before FAS 115 6.3% 7.9% 9.4% 10.4% 8.6% after FAS 115 -3.9% 9.7% 11.4% 8.5% 16.3% Average Assets 0.9% 21.6% 3.2% 3.9% 2.6% Average Loans, net of allowance 10.8% 4.5% 8.4% 5.1% 10.0% Average Deposits 1.6% 20.2% 2.5% 3.2% 2.3% Average Equity 1.9% 16.7% 6.8% 10.7% 8.8% Net Income 12.7% -1.5% 7.0% 20.2% 10.6% Cash Dividends declared 11.4% 11.1% 8.6% 9.4% 8.2% Book Value before FAS 115 6.3% 6.6% 7.7% 7.9% 7.0% after FAS 115 -4.0% 8.4% 9.7% 6.1% 14.4% - -----------------------------------------------------------------------------------------------------------------------
* Note: Restated to reflect the effects of the 2-for-1 stock split of May, 1996. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference to the 1999 Annual Report to Shareholders. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements of the Company are incorporated herein by reference to the 1999 Annual Report to Shareholders. Certain other financial information is provided in the tables below. Bay Banks of Virginia, Inc. Parent Only Balance Sheet December 31, 1999 ASSETS 1999 1998 ------------------------------ Cash and due from banks $ 2,113,231 $ 2,470,587 Federal funds sold Investments (incl unreal G/L) -- -- Loans -- -- Allowance for loan losses -- -- Premises and equipment -- -- Other real estate owned -- -- Other assets -- -- - --------------------------------------------------------------------------- Investment In Subsidiary Bank of Lancaster 17,322,106 18,000,008 Investment in Subsidiary Bay Trust Company 238,479 -- Investment In Subsidiary Chesapeake Holdings 701 3,327 Organizational Expenses 32,254 41,049 Due From Subsidiary Chesapeake Holdings 17,060 - --------------------------------------------------------------------------- Total assets $19,706,771 $20,532,031 - --------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Total deposits $ -- $ -- Fed Funds Purchased -- -- Other liabilities 432 23,418 - --------------------------------------------------------------------------- Total liabilities $ 432 $ 23,418 - --------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Common stock - $5 par value Authorized - 5,000,000 shares; Outstanding-1,165,323 and 1,164,728 $ 5,826,617 $ 5,823,640 Additional paid-in capital 12,332,403 12,126,121 Retained Earnings 2,976,243 1,932,352 Net unrealized G/L on AFS Securities (1,428,924) 626,500 - -------------------------------------------------------------------------------- Total shareholders' equity 19,706,339 20,508,613 - -------------------------------------------------------------------------------- Total liabilities and shareholders' equity $19,706,771 $20,532,031 Bay Banks of Virginia, Inc. Parent Only Income Statement December 31, 1999
1999 1998 1997 ---- ---- ---- INTEREST INCOME Loans receivable (incl fees) $ -- $ -- $ -- Securities -- -- -- Federal funds sold -- -- -- - -------------------------------------------------------------------------------- Total interest income -- -- -- - -------------------------------------------------------------------------------- INTEREST EXPENSE Deposits -- -- -- - -------------------------------------------------------------------------------- Total interest expense -- -- -- - -------------------------------------------------------------------------------- NET INTEREST INCOME -- -- -- Provision for loan losses -- -- -- - -------------------------------------------------------------------------------- Net interest income after provision for loan losses -- -- -- - -------------------------------------------------------------------------------- NONINTEREST INCOME Income from fiduciary activities -- -- Other service charges and fees -- -- Net securities gains -- -- Other income -- -- Dividend Income from Subsidiary 850,000 1,352,000 1,371,000 Undistributed Earnings of BOL 1,377,522 607,601 588,835 Undistributed Earnings of Bay Trust (1,521) -- Undistributed Earnings of CHC (19,686) (16,773) - -------------------------------------------------------------------------------- Total noninterest income $2,206,315 $1,942,828 $1,959,835 - -------------------------------------------------------------------------------- NONINTEREST EXPENSES Salaries and employee benefits $ -- -- Occupancy expense -- -- Deposit insurance premium -- -- Other expense 30,937 11,928 2 - -------------------------------------------------------------------------------- Total noninterest expenses 30,937 11,928 2 - -------------------------------------------------------------------------------- Income before income taxes 2,175,378 1,930,900 1,959,833 Income tax expense -- -- -- - -------------------------------------------------------------------------------- NET INCOME $2,175,378 1,930,900 $1,959,833
Bay Banks of Virginia, Inc. Parent Only Statement of Cash Flows
- ---------------------------------------------------------------------------------------------------------------- For the year ended December 31, 1999 1998 1997 ================================================================================================================ (Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Income $2,175 $1,931 $1,290 Adjustments to reconcile Net Income to Net Cash Provided by Operating Activities: Equity in undistributed (earnings) losses of subsidiaries ($1,356) ($591) ($1,290) Increase (decrease) in other assets $1,421 ($170) Increase (decrease) in other liabilities $23 Other ($44) - ---------------------------------------------------------------------------------------------------------------- Net Cash Provided (used) by Operating Activities $2,240 $1,193 ($44) - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Payments for investments in and advances to subsidiaries ($240) ($20) Sale or repayment of investments in and advances to subsidiaries Other $1,371 - ---------------------------------------------------------------------------------------------------------------- Net Cash Provided (used) by Investing Activities ($240) ($20) $1,371 - ---------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from advances from subsidiaries $17 Repayment of advances from subsidiaries ($23) Proceeds from issuance of common stock $390 $434 $15 Payments to repurchase common stock ($181) Dividends paid ($910) ($810) ($199) Other ($1,651) $531 - ---------------------------------------------------------------------------------------------------------------- Net Cash Provided (used) by Financing Activities ($2,358) $155 ($184) - ---------------------------------------------------------------------------------------------------------------- Net increase (decrease) in Cash & Cash Equivalents ($358) $1,328 $1,143 Cash & Cash Equivalents at beginning of year $2,471 $1,143 $0 ================================================================================================================ Cash & Cash Equivalents at end of year $2,113 $2,471 $1,143
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no disagreements between the Company and its independent auitors in the last two fiscal years. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The only Non-Director Executive Officer of the Company is listed below. All other required information on the Executive Officers and Directors of the Company is detailed in the Definitive Proxy Statement and is incorporated herein by reference. NON-DIRECTOR EXECUTIVE OFFICERS Term Principal Executive Age Position Years Occupation - ----------------------- --- --------- ----- --------------------------- Paul T. Sciacchitano 49 Treasurer 6 E.V.P. of Bank of Lancaster and President of Bay Trust Company ITEM 11: EXECUTIVE COMPENSATION Executive compensation is listed in the Definitive Proxy Statement to Shareholders and is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security ownership of certain beneficial owners and management is detailed in the Definitive Proxy Statement to Shareholders, and is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Certain relationships and related transactions are detailed in the Definitive Proxy Statement to Shareholders and are incorporated herein by reference. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)1. Financial Statements included in Exhibit 13.0, 1999 Annual Report to Shareholders: Consolidated Balance Sheets - December 31, 1999 and 1998 Consolidated Statements of Income - Years ended 1999, 1998, and 1997 Consolidated Statements of Changes in Shareholders' Equity - Years ended December 31, 1999, 1998, and 1997 Consolidated Statements of Cash Flows - Years ended December 31, 1999, 1998, and 1997
(a)2. Financial Statement Schedules Schedule Location Average Balances, Income & Expense, Yields, and Rates Part I, Item 1 Volume & Rate Analysis of Changes in Net Interest Income Part I, Item 1 Investment Maturities & Average Yields Part I, Item 1 Types of Loans Part I, Item 1 Loan Maturity Schedule of Selected Loans Part I, Item 1 Risk Elements Part I, Item 1 Summary of Allowance for Loan Losses Part I, Item 1 Average Deposits & Rates Part I, Item 1 Maturity Schedule of Time Deposits of $100,000 or more Part I, Item 1 Return on Equity & Assets Part I, Item 1 Interest Rate Sensitivity Analysis Part I, Item 1 Common Equity Market Data Part II, Item 5
Selected Financial Data Part II, Item 6 Non-Director Executive Officers Part III, Item 10 (a)3. Exhibits: No. Description - --------- ----------- 3.0 Articles of Incorporation and Bylaws of Bay Banks of Virginia, Inc. (Incorporated by reference to Appendix I to Exhibit A of previously filed Form 424B3, Commission File number 333-2259 dated March 23, 1997.) 10.1 Incentive Stock option plan (Incorporated by reference to the previously filed Form S-4EF, Commission File number 333-22579 dated February 28,1997.) 10.2 Non employee directors stock option plan. 11.0 Statement re: Computation of per share earnings. (Incorporated by reference to Note 1 in the 1999 Annual Report to Shareholders.) 13.0 1999 Annual Report to Shareholders for the year ended December 31, 1999. 21.0 Subsidiaries of the Company are filed herewith. 23.0 Consent of Auditors is filed herewith. 27.0 Financial Data Schedule is filed herewith. (b) Reports filed on Form 8K. (not an Exhibit) There was one filing on Form 8K during the fourth quarter of 1999. Item 5. Other Events On December 17, 1999, the Registrant announced that its Board of Directors approved on November 30, 1999 a share repurchase program for its common stock. The Board of Directors approved the repurchase of up to 25,000 shares of common stock from time to time, based on, among other things, market price and availability. No financial statements were filed with the report. SIGNATURES In accordance with the requirements of Section 13 (or 15d) of the Exchange Act, of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 30th day of March 2000. Bay Banks of Virginia, Inc. /s/ Austin L. Roberts, III ----------------------------- Austin L. Roberts, III, President and Chief Executive Officer In accordance with the requirements of the Exchange Act, this report has been signed below by the following persons on behalf of the registrant, in the capacities indicated on the 30th day of March 2000. /s/ Ammon G. Dunton, Jr. ------------------------ Ammon G. Dunton, Jr. Chairman, Board of Directors /s/ Austin L. Roberts, III -------------------------- Austin L. Roberts, III President and CEO /s/ Weston F. Conley, Jr. ------------------------- Weston F. Conley, Jr. Director /s/ William A. Creager ---------------------- William A. Creager Director /s/ Thomas A. Gosse ------------------- Thomas A. Gosse Director /s/ W. Bruce Sanders -------------------- W. Bruce Sanders Director /s/ Paul T. Sciacchitano ------------------------ Paul T. Sciacchitano Treasurer Supplemental Information The company's Definitive Proxy Statement will be sent to security holders subsequent to the filing of this Form 10-K. EX-10 2 EXHIBIT 10.2 STOCK OPTION PLAN Exhibit 10.2 1999 Non Employee Directors Stock Option Plan. Purpose. The Plan will benefit the Company by promoting a greater identity of interest between non-employee directors of the Company and its subsidiaries (each referred to as a "Participant") and its stockholders by increasing each participants proprietary interest in the Company through the awareness of options to purchase Company common stock (each referred to as an "Option"). Eligibility. Each non-employee director of the Company and any of its subsidiaries is eligible to participate in the Plan. The Company and Bank currently have twelve non-employee directors. Each Participant will receive an Option for 250 shares of Company common stock on May 18, 2000 and on each succeeding anniversary (the "Grant Date") during the term of the Plan. If an individual serves as a director of both the Company and the Bank or any other subsidiary, that individual will be eligible only for a single grant under the Plan in any one-year. Administration. The Plan will be administered by the Board of Directors. The Board has no discretion in determining who will receive an Option or the number of shares allocated to a Participant or the terms of any Option. The terms are set forth in the Plan and are summarized below. Options. A total of 25,000 shares of Company common stock may be issued upon the exercise of Options granted under the Plan. The maximum number of shares that may be issued under the Plan, and the terms of outstanding Options, will be proportionately adjusted to reflect an future stock dividend, stock split, or similar changes in the capitalization of the Company. Terms of the Options. The exercise price per share of an Option will be the fair market value of the common stock on the Grant Date. The price may be paid in cash or by surrendering shares of Company common stock to the Company. Options will first become exercisable six months after the grant date and will have a term of ten years. Options are nontransferable except by will or the laws of descent and distribution. During the Participant's lifetime, the Participant's Options may be exercised only by the Participant. A Participant will not have any rights as a shareholder with respect to shares covered by Options until the Option is exercised. Federal Income Tax Consequences. No income is recognized by a Participant on account of the grant of an Option. Income is recognized on the date that an Option is exercised. The amount of income recognized by the Participant is equal to the difference between the fair market value of the shares received upon such exercise and the Options price. Any gain or loss that is recognized on a subsequent disposition of the shares is taxed as a long or short term capital gain or loss. The Company is entitled to claim a federal income tax deduction upon the exercise of an Option. The amount of the Company's deduction is equal to the amount of income recognized by the Participant. Amendments. The Board of Directors may amend or discontinue the Plan at any time, provided that no amendment may impair the rights of any Option holder without his or her consent, and further provided that any amendment shall be subject to approval of stockholder if such approval is necessary to comply with any tax or regulatory requirement. EX-13 3 ANNUAL REPORT Exhibit 13.0 FINANCIAL HIGHLIGHTS Annual Report 1999 (Dollars in Thousands except per share amounts)
Percent At Year End 1999 1998 Change Assets $199,773 $200,271 (0.2%) Loans (Net) 130,432 113,643 14.8% Deposits 177,702 178,269 (0.3%) Stockholders Equity Before SFAS 115 Adjustment 21,135 19,882 6.3% After SFAS 115 Adjustment 19,706 20,508 (3.9%) Book Value Per Share Before SFAS 115 Adjustment $ 18.14 $ 17.07 6.3% After SFAS 115 Adjustment $ 16.91 $ 17.61 (4.0%) Averages For The Year Assets $198,668 $196,805 .95% Loans (Net) 118,861 107,263 10.8% Deposits 176,094 173,368 1.6% Stockholders Equity after SFAS 115 20,024 19,658 1.9% For The Year Interest Income $ 13,937 $ 13,564 2.7% Interest Expense 6,533 7,065 (7.5%) Net Interest Income 7,404 6,499 13.9% Net Income 2,175 1,931 12.7% Per Share $ 1.86 $ 1.67 11.4% Cash Dividends 910 810 12.3% Per Share $ 0.78 $ 0.70 11.4% Significant Ratios Risk Based Capital Total Capital to Risk Weighted Assets 15.5% 16.9% Tier 1 Capital to Risk Weighted Assets 14.6% 15.1% Leverage Ratio 9.7% 9.0% Return on Average Assets 1.1% 1.0% Return on Average Equity 10.9% 9.8% Loan Loss Reserve to Gross Loans 0.9% 0.9%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is intended to assist readers in understanding and evaluating the financial condition and results of operations of Bay Banks of Virginia, Inc., (the "Company"). This discussion should be read in conjunction with the financial statements and other financial information contained else- where in this annual report. Bay Banks of Virginia, Inc. is a bank holding company, organized under the laws of Virginia on February 10, 1997. As of July 1, 1997, Bay Banks of Vir- ginia, Inc. assumed ownership of 100% of the stock of the Bank of Lancaster. Prior to this date the Company operated as the Bank of Lancaster. Summary Financial Information 1999 Compared to 1998 Bay Banks of Virginia, Inc. recorded earnings for 1999 of $2,175,378 or $1.86 per share as compared to 1998 earnings of $1,930,900 and $1.67 per share. This is an increase in net income of 12.7% over the prior period. Net interest income for 1999 increased to $7,403,686, up 13.9% as compared to $6,498,657 for 1998. Non-interest income, before net securities gains, for 1999 increased to $1,542,087 as compared to 1998 non-interest income, before net securities gains, of $1,480,696. Other non-interest expenses increased to $5,712,458, up 4.1% over 1998 non-interest expenses of $5,487,747. 1998 Compared to 1997 Earnings for the Bay Banks of Virginia, Inc., were $1,930,900 for 1998, down 1.5% as compared to 1997 earnings of $1,959,832. 1998 earnings per share were $1.67 as compared to 1997 earnings per share of $1.71. Net interest in- come was $6,498,657 for 1998 as compared to $5,996,744 for 1997. This repre- sents an increase of 8.4% over net interest income for 1997. Non-interest in- come, before net securities gains, for 1998 was $1,480,696, up 24.8% over 1997 non-interest income, before net securities gain, of $1,186,072. Non-interest expenses for 1998 were $5,487,747, up 25.4% as compared to 1997 non-interest expenses of $4,375,265. Financial Analysis Net Interest Income The principal source of earnings for the Company is net interest income. Net interest income is the difference between interest and fees generated by earning assets and interest expense paid on deposits and other sources of funding. It is affected by variations in interest rates, the volume and mix of earning assets and interest-bearing liabilities, and the levels of non-per- forming assets. Net interest income was $7.4 million in 1999, $6.5 million in 1998 and $6.0 million in 1997. This represents an increase in net interest income of 13.9% for 1999 over 1998 and 8.4% for 1998 over 1997. Competition for loans and de- posits placed downward pressure on the Company's net interest margin through- out most of 1999. The result has been a slower than anticipated growth in the margin. Net interest yield on a fully tax equivalent basis was 5.5%, 5.3% and 5.7% for 1999, 1998 and 1997 respectively. Management expects the trend to continue as short-term interest rates remain higher than long-term rates, cre- ating an inverted yield curve. Typically, this economic condition shrinks the net interest margin of community banks, as they pay rates of interest on de- posits based on the short-term yield curve, and charge rates of interest on loans based upon the long-term yield curve. 8 Annual Report 1999 Non-Interest Income Total non-interest income decreased slightly to $1.6 million for 1999 from $1.7 million in 1998 and increased from $1.2 million in 1997. This represents a decrease of 6.4% for 1999 over 1998 and an increase of 41.8% for 1998 over 1997. Non-interest income is composed of income from fiduciary activities (trust department), service charges on deposit accounts, other service charges and fees, gains on securities, and other miscellaneous income. Trust income im- proved by $33 thousand during 1999 for an increase of 6.8% as compared to 1998. Trust income decreased by $43 thousand or 7.9% between 1998 and 1997. Service charges on deposits increased by $32 thousand, while other service charges in- creased by $66 thousand during 1999. Other income includes lease income, gains on the sale of foreclosed property, gains on the sale of fixed assets and other income. Other income decreased between 1999 and 1998 to $225 thousand from $294 thousand for a decrease of 23.7%. Other income for 1997 was $102 thousand. While securities trading is not part of the core operating business of the Company and is therefore not budgeted, the Company may sell a portion of it's investment portfolio as a means to fund loan growth. Sales of securities during 1999 resulted in net gains of $35 thousand. Steady loan growth throughout the third and fourth quarters of 1999 created the need to liquidate a portion of the investment portfolio. This was accomplished in the fourth quarter, thereby resulting in the sale of $5.9 million in bonds for a net gain of $35 thousand. Non-Interest Expense During 1999, non-interest expense increased to $5.7 million from $5.5 mil- lion in 1998 and $4.4 million in 1997. This represents an increase of 4.1% for 1999 over 1998 and 25.4% for 1998 over 1997. Non-interest expense is composed of salaries and benefits, occupancy expense, FDIC assessments and other ex- pense. Salary and benefit expense is the major component of non-interest ex- pense, and has increased 9.0% and 22.6% for 1999 and 1998 respectively. Bay Banks of Virginia purchased two branches from another bank in February 1998. Of the 22.6% increase in salary and benefit expense during 1998, 10.6% was di- rectly attributable to staffing increases resulting from the purchased branch- es. Occupancy expense for 1999 was $643 thousand as compared to $633 thousand for 1998. This results in an increase of 1.6% for 1999 over 1998. For the com- parable period, 1998 over 1997, occupancy expenses increased 14.2%. Other ex- pense for 1999 was $2.1 million as compared to $2.1 million for 1998. There was a nominal decrease in other expenses of 1.5% during 1999 over 1998 and an in- crease of 33.3% during 1998 over 1997. Assets As of December 31, 1999, the Company had total assets of $199.8 million as compared to 1998 balances of $200.3 million. Total assets decreased by .2% for 1999 as compared to 1998. Loan growth was strong throughout 1999 while deposit growth was minimal throughout the majority of the year. Net deposits decreased during the fourth quarter as loan volume increased. The subsequent sale of in- vestments resulted in a re-distribution of assets, netting the .2% decrease in total assets. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Loans Loan demand was heavy as balances increased by $17.0 million or 14.8% dur- ing 1999. Year-end 1999 gross loan balances were $132.0 million as compared to $115.0 million at year-end 1998. The loan portfolio is mainly composed of res- idential first mortgages. Real estate mortgage and construction loans in ag- gregate increased to $101.4 million during 1999, from a total of $83.9 million for 1998. Commercial loan balances decreased to $11.1 million from $11.7 mil- lion, and consumer installment loans remained at $18.7 million for 1999 and 1998. Of total loans, residential mortgages compose 77.0%, commercial loans 8.4%, and consumer installment 14.2%. Provision and Allowance for Loan Losses The provision for loan losses is a charge against earnings that is neces- sary to maintain the allowance for loan losses at a level consistent with man- agement's evaluation of the loan portfolio's inherent risk. The 1999 provision was $335 thousand as compared to $208 thousand for 1998. Loans charged off during 1999 totaled $165 thousand and for 1998 $77 thousand. Recoveries were $15 thousand and $20 thousand for 1999 and 1998 respectively. Net loans charged off to year-end total loans were .13% for 1999 and .07% for 1998. The allowance for loan losses, as a percentage of year-end loans, was .9% for 1999 and 1998. As of December 31, 1999, there were no loans upon which the accrual of in- terest had been discontinued, compared to $79 thousand for year-end 1998. Other real estate owned, including foreclosed property, at year-end 1999 was $925 thousand as compared to $1.5 million for 1998. The Company maintains properties in Other real estate owned at fair value and expects no losses. Loans still accruing interest but delinquent ninety days or more were $793 thousand or .6% of total loans at December 31, 1999. These balances were $231 thousand and .2% for the comparable period in 1999. The allowance for loan losses is analyzed for adequacy on a quarterly basis to determine the required amount of provision. A loan-by-loan review is con- ducted on all classified loans. Inherent losses on these individual loans are determined and these losses are compared to historical loss data for that loan type. Management then reviews the various analyses and determines the appro- priate allowance. As of December 31,1999, management considers the allowance for loan losses to be a reasonable estimate of potential loss exposure inher- ent in the loan portfolio. Deposits As of December 31, 1999, the Company maintained total deposits of $177.7 million. This compares to $178.3 million for 1998. Deposits decreased by .3% for 1999 as compared to 1998. Demand deposits increased to $20.9 million dur- ing 1999 from $19.9 million at year-end 1998. Savings and NOW account balances decreased to $96.8 million during 1999 from $104.8 million at year-end 1998. Other time deposits grew to $60.0 million from $53.7 million at year-end 1998. 10 Annual Report 1999 Securities As of December 31, 1999, total investment securities were $53.2 million. Year-end balances for 1998 were $59.0 million. The Company decreased investment balances during 1999 as a result of funding needs associated with increasing loan demand. All of the Company's securities are classified as available for sale. Available for sale securities are eligible for sale for general liquidity needs, should loan demand require funding, or if prepayment risk requires ac- tion. Available for sale securities are carried at fair market value. Through- out 1999, the Company sold $5.9 million from the investment portfolio, received $6.8 million from maturities, and purchased $9.9 million. Liquidity, Interest Rate Sensitivity and Inflation Sources of liquidity include core deposits, the investment portfolio and balances held as Federal Funds sold. Cash flows are managed to ensure avail- ability of liquidity to fund loan growth or unanticipated declines in deposit balances. As of December 31, 1999, approximately 3.6% of the investment portfo- lio will mature within one year or less. This compares to a 9.3% maturity ratio for 1998. At year-end 1999, the Company had approximately $1.9 million in secu- rities with maturities of one year or less and no Federal Funds sold balances. Additional liquidity sources include overnight lines of credit with correspond- ing banks equaling $12 million and available credit at the Federal Home Loan Bank of Atlanta in the amount of $15.5 million. The Company employs a variety of measurement techniques to identify and man- age its exposure to changing interest rates and subsequent changes in liquidi- ty. The company utilizes an advanced simulation model that estimates interest income volatility and interest rate risk, and regularly investigates potential external influences. The Company has, in addition, utilized an Asset Liability Committee composed of appointed members of management and Board of Directors. The end result is significant managerial attention to interest income volatil- ity that may result from changes in the level of interest rates, basic interest rate spreads, the shape of the yield curve and changing product patterns. The financial statements and related financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative pur- chasing power of money, over time, due to inflation. Unlike most industrial companies, virtually all of the assets and liabili- ties of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than do general levels of inflation. Interest rates do not necessarily move in the same magnitude as the prices of goods and services. Another impact of in- flation is on non-interest expenses, which tend to rise during periods of gen- eral inflation. The values of real estate held as collateral by the Company for loans and foreclosed property could be affected by inflation or changing prices due to market conditions. Management believes the most significant impact on financial results is the Company's ability to react to changes in interest rates. As discussed previous- ly, management attempts to maintain a favorable position between interest sen- sitive assets and liabilities in order to protect against wide interest rate fluctuations. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Capital Resources Equity growth in the Company is supported by three methods; retained earn- ings, dividend reinvestment and the exercise of stock options granted to offi- cers. The primary method of supporting growth is achieved through retained earnings. During 1999, the Company paid dividends to stockholders totaling 41.8% of net income. This pay out ratio was 41.9% in 1998 and 36.9% in 1997. Based upon this ratio, earnings retained by the Company fall in the range of 58.2% to 63.1% for the three-year period. In addition, the Company employs a dividend reinvestment plan in which each stockholder has the option of participation. The plan provides the Company's stockholders an opportunity to use dividends received to purchase authorized but unissued shares at 95% of the current market price and with no commission. Total capital, or shareholders' equity, as of December 31, 1999 was $21.1 million before unrealized gains or losses on investments. This is an increase of 6.3% over the 1998 capital position of $19.9 million. The Company accounts for unrealized gains or losses in the investment port- folio by adjusting capital for any after tax effect of that gain or loss at the end of a given accounting period. Net unrealized losses were $1.4 million at December 31, 1999 as compared to unrealized gains of $627 thousand at year- end 1998. The Company is required to maintain minimum amounts of capital to total "risk weighted" assets as defined by Federal Reserve Capital Guidelines. Ac- cording to "Capital Guidelines for Bank Holding Companies," the Company is re- quired to maintain a minimum Total Capital to Risk Weighted Asset ratio of 10.0%, a Tier 1 Capital to Risk Weighted Asset ratio of 6.0% and a Tier 1 Cap- ital to Adjusted Average Asset ratio of 5.0%. As of December 31, 1999, the Company maintained these ratios at 15.5%, 14.6%, and 9.7% respectively. Book value per share of common stock was $16.91 at December 31, 1999, $17.61 in 1998, and $16.24 in 1997. Cash dividends paid during 1999 were $910 thousand or $.78 per share, and for 1998 and 1997 cash dividends were $810 thousand and $724 thousand respectively. Total shares outstanding at December 31, 1999 and 1998 were 1,165,323 and 1,164,728 respectively. Year 2000 Issues The Company established a Year 2000 Committee in 1997 in preparation for the expected technological needs as related to the century date change. The Company recognized the Year 2000 problem as a significant business issue and developed a plan and timeline to insure a smooth transition into the Year 2000. The Company experienced no hardware or software failures as a result of the century date change. 12 Annual Report 1999 Forward-Looking Statements In addition to the historical information contained herein, this discussion contains forward-looking statements that involve risks and uncertainties. Eco- nomic circumstances, the operations of the Bank, and the Holding Company's ac- tual results could differ significantly from those discussed in the forward- looking statements. Some of the factors that could cause or contribute to such differences are discussed herein, but also include changes in economic condi- tions in the Company's (or Bank's) market area, changes in policies by regula- tory agencies, fluctuations in interest rates, demand for loans in the Company's market, and competition. Any of these factors could cause actual re- sults to differ materially from historical earnings and those presently antici- pated or projected. 13 CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998
1999 1998 ------------ ------------ ASSETS Cash and due from banks............................ $ 5,260,620 $ 5,260,644 Interest-bearing deposits.......................... 100,000 7,585 Federal funds sold................................. -- 12,007,706 Investment securities available-for-sale........... 53,169,880 59,007,884 Loans receivable, net.............................. 130,431,636 113,642,610 Premises and equipment............................. 4,953,723 4,699,797 Accrued interest receivable........................ 1,598,605 1,541,591 Other real estate owned............................ 925,044 1,513,556 Other assets....................................... 3,333,170 2,589,554 ------------ ------------ Total assets....................................... $199,772,678 $200,270,927 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Demand deposits.................................... $ 20,888,591 $ 19,851,650 Savings and NOW deposits........................... 96,848,391 104,761,151 Other time deposits................................ 59,964,985 53,656,050 ------------ ------------ Total deposits..................................... 177,701,967 178,268,851 ------------ ------------ Other liabilities Securities sold under repurchase agreements........ 1,283,324 586,228 Other liabilities.................................. 1,081,526 907,708 ------------ ------------ Total other liabilities............................ 2,364,850 1,493,936 ------------ ------------ Total liabilities.................................. 180,066,817 179,762,787 ------------ ------------ Shareholders' Equity Common stock--$5 par value Authorized--5,000,000 shares; Outstanding--1,165,323 and 1,164,728 shares....... 5,826,617 5,823,640 Additional paid-in capital......................... 3,735,576 3,529,294 Retained earnings.................................. 11,572,592 10,528,706 Accumulated other comprehensive income (loss)...... (1,428,924) 626,500 ------------ ------------ Total shareholders' equity......................... 19,705,861 20,508,140 ------------ ------------ Total liabilities and shareholders' equity......... $199,772,678 $200,270,927 ============ ============
See Notes to Consolidated Financial Statements. 14 CONSOLIDATED STATEMENTS OF INCOME Annual Report 1999 Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ----------- ---------- ---------- Interest Income Loans receivable............................. $10,153,373 $9,591,360 $9,445,708 Investment securities........................ 3,589,106 3,176,277 2,385,736 Federal funds sold........................... 194,382 796,291 390,144 ----------- ---------- ---------- Total interest income........................ 13,936,861 13,563,928 12,221,588 ----------- ---------- ---------- Interest Expense Deposits..................................... 6,429,810 7,054,088 6,203,107 Federal funds purchased and securities sold under repurchase agreements................. 103,365 11,183 21,737 ----------- ---------- ---------- Total interest expense....................... 6,533,175 7,065,271 6,224,844 ----------- ---------- ---------- Net Interest Income.......................... 7,403,686 6,498,657 5,996,744 Provision for loan losses.................... 335,000 208,367 202,500 ----------- ---------- ---------- Net interest income after provision for loan losses...................................... 7,068,686 6,290,290 5,794,244 ----------- ---------- ---------- Non-Interest Income Income from fiduciary activities............. 528,885 495,398 538,089 Service charges on deposit accounts.......... 352,644 321,100 232,219 Other service charges and fees............... 435,847 369,755 314,040 Net securities gains......................... 34,751 204,853 2,806 Other income................................. 224,711 294,443 101,724 ----------- ---------- ---------- Total non-interest income.................... 1,576,838 1,685,549 1,188,878 ----------- ---------- ---------- Non-Interest Expenses Salaries and employee benefits............... 2,953,011 2,708,184 2,208,792 Occupancy expense............................ 643,069 632,697 554,192 Deposit insurance premium.................... 22,096 20,765 17,082 Other expense................................ 2,094,282 2,126,101 1,595,199 ----------- ---------- ---------- Total non-interest expenses.................. 5,712,458 5,487,747 4,375,265 ----------- ---------- ---------- Income before income taxes................... 2,933,066 2,488,092 2,607,857 Income tax expense........................... 757,688 557,192 648,025 ----------- ---------- ---------- Net Income................................... $ 2,175,378 $1,930,900 $1,959,832 =========== ========== ========== Basic Earnings Per Share Average shares outstanding.................. 1,167,467 1,156,634 1,146,438 Net income per share of common stock........ $ 1.86 $ 1.67 $ 1.71 Diluted Earnings Per Share Average shares outstanding.................. 1,187,295 1,176,462 1,162,677 Net income per share of common stock........ $ 1.83 $ 1.64 $ 1.69
See Notes to Consolidated Financial Statements. 15 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Years Ended December 31, 1999, 1998 and 1997
Accumulated Additional Other Total Common Paid-in Retained Comprehensive Shareholders' Stock Capital Earnings Income (Loss) Equity ---------- ---------- ----------- ------------- ------------- Balance at January 1, 1997................... $5,666,088 $2,887,618 $ 8,279,343 $ (48,182) $16,784,867 ---------- ---------- ----------- ----------- ----------- Comprehensive income: Net income............. -- -- 1,959,832 -- 1,959,832 Net changes in unrealized appreciation on available-for-sale securities, net of taxes of $164,498..... -- -- -- 319,319 319,319 ---------- ---------- ----------- ----------- ----------- Total comprehensive income............... -- -- 1,959,832 319,319 2,279,151 Cash dividends paid -- $0.63 per share........ -- -- (723,741) -- (723,741) Sale of common stock -- Dividend reinvestment plan.................. 70,847 265,852 -- -- 336,699 Stock options exercised............. 17,195 11,040 (13,093) -- 15,142 ---------- ---------- ----------- ----------- ----------- Balance at December 31, 1997................... 5,754,130 3,164,510 9,502,341 271,137 18,692,118 ---------- ---------- ----------- ----------- ----------- Comprehensive income: Net income............. -- -- 1,930,900 -- 1,930,900 Net changes in unrealized appreciation on available-for- sale securities, net of taxes of $176,746..... -- -- -- 355,363 355,363 ---------- ---------- ----------- ----------- ----------- Total comprehensive income............... -- -- 1,930,900 355,363 2,286,263 Cash dividends paid -- $0.70 per share........ -- -- (809,825) -- (809,825) Sale of common stock -- Dividend reinvestment plan.................. 59,420 280,124 -- -- 339,544 Stock options exercised............. 10,090 84,660 (94,710) -- 40 ---------- ---------- ----------- ----------- ----------- Balance at December 31, 1998................... 5,823,640 3,529,294 10,528,706 626,500 20,508,140 ---------- ---------- ----------- ----------- ----------- Comprehensive income: Net income............. -- -- 2,175,378 -- 2,175,378 Net changes in unrealized appreciation on available-for- sale securities, net of taxes of $1,058,856... -- -- -- (2,055,424) (2,055,424) ---------- ---------- ----------- ----------- ----------- Total comprehensive income (loss)........ 2,175,378 (2,055,424) 119,954 Cash dividends paid - $0.78 per share....... (910,279) (910,279) Stock repurchase....... (58,385) (122,510) (214,349) (395,244) Sale of common stock -- Dividend reinvestment plan.................. 56,152 310,127 366,279 Stock options exercised............. 5,210 18,665 (6,864) -- 17,011 ---------- ---------- ----------- ----------- ----------- Balance at December 31, 1999................... $5,826,617 $3,735,576 $11,572,592 $(1,428,924) $19,705,861 ========== ========== =========== =========== ===========
See Notes to Consolidated Financial Statements. 16 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997 ------------ ------------ ------------ CASH FLOWS fROM OPERATING ACTIVITIES Net income.......................... $ 2,175,378 $ 1,930,900 $ 1,959,832 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation....................... 436,631 457,260 419,181 Provision for loan losses.......... 335,000 208,367 202,500 Net securities gains............... (34,751) (204,853) (2,806) (Gain) loss on sale of foreclosed real estate....................... (25,372) (61,191) 6,633 Deferred income taxes.............. (159,719) 56,741 107,422 Loss on sale of equipment.......... -- 4,180 -- Accrued income and other assets.... 417,945 (2,471,768) (288,616) Other liabilities.................. 173,818 (34,926) (7,551) ------------ ------------ ------------ Net cash provided by (used in) operating activities............... 3,318,930 (115,290) 2,396,595 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturities of available-for-sale securities...... 6,792,575 13,039,287 5,486,179 Proceeds from sale of available-for- sale securities.................... 5,906,007 10,316,274 4,362,527 Purchases of available-for-sale securities......................... (9,940,107) (37,560,041) (8,172,549) Increase in interest bearing deposits........................... (92,415) (7,585) -- Net change in Federal funds sold.... 12,007,706 (451,706) (7,019,000) Net increase in loans............... (17,124,026) (9,648,049) (3,694,114) Proceeds from sale of foreclosed real estate........................ 711,733 599,196 107,127 Purchase of premises and equipment.. (690,557) (2,321,097) (418,901) Additions to other real estate owned.............................. (97,849) (672,766) (863,512) ------------ ------------ ------------ Net cash used in investing activities......................... (2,526,933) (26,706,487) (10,212,243) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Net change in demand, savings and NOW deposit accounts............... (6,875,819) 22,589,897 (7,583,222) Net increase in time deposits....... 6,308,935 6,660,376 15,078,142 Net increase in securities sold under repurchase agreements........ 697,096 -- -- Proceeds from issuance of common stock.............................. 383,290 339,584 351,841 Dividends paid...................... (910,279) (809,825) (723,741) Repurchase of stock................. (395,244) -- -- ------------ ------------ ------------ Net cash provided by (used in) financing activities............... (792,021) 28,780,032 7,123,020 ------------ ------------ ------------ Net increase (decrease) in cash and due from banks..................... (24) 1,958,255 (692,628) Cash and due from banks at January 1.................................. 5,260,644 3,302,389 3,995,017 ------------ ------------ ------------ Cash and due from banks at December 31................................. $ 5,260,620 $ 5,260,644 $ 3,302,389 ============ ============ ============ Supplemental Disclosures: Interest paid....................... $ 6,490,883 $ 7,048,074 $ 6,479,608 ============ ============ ============ Income taxes paid................... $ 420,618 $ 533,685 $ 428,000 ============ ============ ============ Loans transferred to foreclosed real estate............................. $ 96,260 $ 640,381 $ 846,078 ============ ============ ============
See Notes to Consolidated Financial Statements. 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, December 31, 1999, 1998 and 1997 Note 1. Nature of Business and Significant Accounting Policies Principles of consolidation. The consolidated financial statements of the Com- pany include the accounts of Bay Banks of Virginia, Inc. and its subsidiary, Bank of Lancaster. All significant intercompany balances and transactions have been eliminated in consolidation. Nature of business. Bay Banks of Virginia, Inc. is a bank holding company that conducts substantially all of its operations through its subsidiary, Bank of Lancaster. The Bank is state-chartered and a member of the Federal Reserve System and services individual and commercial customers, the majority of which are in the Northern Neck of Virginia. The Bank has five offices in Virginia; two located in Kilmarnock, one in White Stone, one in Warsaw and one in Montross. Each branch offers a full range of deposit and loan products to its retail and commercial customers. A substantial amount of the Bank's deposits are interest-bearing. The majority of the Bank's loan portfolio is secured by real estate. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The amounts recorded in the financial statements may be af- fected by those estimates and assumptions. Actual results may vary from those estimates. Estimates are used primarily in developing the allowance for loan losses, in estimating the economic life of loan fees and costs, in computing deferred tax assets, in determining the estimated useful lives of premises and equip- ment, and in the valuation of other real estate owned. Securities available-for-sale. Debt and equity securities are classified as available-for-sale and carried at fair value, with unrealized gains and loss- es, net of tax, excluded from income and reported as a separate component of stockholders' equity until realized. Gains and losses on the sale of avail- able-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the in- terest method over the period to maturity. Loans receivable. Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances reduced by any charge-offs or spe- cific valuation accounts and net of any unearned discount and fees and costs on originating loans. Loan origination fees and certain direct origination costs for real estate mortgage loans are capitalized and recognized as an adjustment of the yield of the related loans. The accrual of interest on impaired loans is discontinued when, in manage- ment's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is re- versed. Interest income is subsequently recognized only to the extent cash payments are received. The allowance for loan losses is increased by charges to income and de- creased by charge-offs (net of recoveries). Management's periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current economic conditions. Premises and equipment. Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed prin- cipally by the straight-line method over the estimated useful lives of the premises and equipment. 18 Annual Report 1999 Note 1. Nature of Business and Significant Accounting Policies -- (Concluded) Other real estate owned. Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value on the date of foreclosure to establish a new cost basis. After foreclosure, valu- ations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other income. Income taxes. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax as- sets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Pension benefits. The noncontributory defined benefit pension plan covers sub- stantially all full-time employees. The plan provides benefits that are based on employees' average compensation during the five consecutive years of highest compensation. The funding policy is to make the minimum annual contribution that is required by applicable regulations, plus such amounts as may be deter- mined to be appropriate from time-to-time. Trust assets and income. Assets held by the trust department, other than cash on deposit, are not included in these financial statements, since such items are not assets of the Bank. Trust fees are recorded on the accrual basis. Earnings per share. Earnings per share is calculated by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The assumed exercise of stock options is included in the calculation of diluted earnings per share. SFAS No. 128, Earnings Per Share, was adopted for 1997 with all prior-period earnings per share data restated. The statement requires dual presentation of earnings per share and diluted earnings per share on the Consolidated Statements of Income and other computa- tional changes. The adoption of SFAS No. 128 did not have a material effect on previously reported earnings per share. Off-balance-sheet financial instruments. In the ordinary course of business the Bank has entered into off-balance-sheet financial instruments such as home eq- uity lines of credit, commitments under credit card arrangements and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or related fees are incurred or received. For further information see Note 12. Reclassifications. Certain amounts in the financial statements have been re- classified to conform with classifications adopted in 1999. 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1999, 1998 and 1997 Note 2. Securities Available-for-Sale The carrying amount of debt and other securities and their approximate fair values at December 31, 1999 and 1998, follow:
Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- December 31, 1999: U.S. Treasury securities..... $ 1,538,159 $ -- $ 33,869 $ 1,504,290 U.S. Government agencies..... 9,641,077 -- 322,604 9,318,473 State and municipal securities.................. 21,651,413 112,289 792,536 20,971,166 Other securities............. 22,504,268 -- 1,128,317 21,375,951 ----------- ---------- ---------- ----------- $55,334,917 $ 112,289 $2,277,326 $53,169,880 =========== ========== ========== =========== December 31, 1998: U.S. Treasury securities..... $ 4,541,642 $ 25,251 $ 18 $ 4,566,875 U.S. Government agencies..... 17,123,791 123,513 48,610 17,198,694 State and municipal securities.................. 24,829,813 532,103 7,433 25,354,483 Other securities............. 11,563,395 325,722 1,285 11,887,832 ----------- ---------- ---------- ----------- $58,058,641 $1,006,589 $ 57,346 $59,007,884 =========== ========== ========== ===========
Gross realized gains and gross realized losses on sales of securities were as follows:
1999 1998 1997 ------- -------- ------- Gross realized gains................................ $34,751 $204,853 $21,370 Gross realized losses............................... $ -- $ -- $18,564
The scheduled maturities of securities available-for-sale at December 31, 1999, were as follows:
Available-for-Sale Securities ----------------------- Amortized Cost Fair Value ----------- ----------- Due in one year or less............................. $ 1,905,726 $ 1,899,730 Due from one year to five years..................... 25,589,423 24,838,699 Due from five to ten years.......................... 26,701,372 25,362,054 Due after ten years................................. 1,138,396 1,069,397 ----------- ----------- $55,334,917 $53,169,880 =========== ===========
Securities carried at $4,122,998 at December 31, 1999, and $3,542,047 at December 31, 1998, were pledged to secure public deposits as required by law. 20 Annual Report 1999 Note 3. Loans The components of loans in the balance sheets were as follows:
1999 1998 ------------ ------------ Real estate mortgage loans....................... $ 95,912,493 $ 82,738,989 Real estate construction loans................... 5,437,685 1,129,746 Commercial loans................................. 11,081,489 11,678,949 Installment loans, net........................... 18,673,299 18,696,840 Net deferred loan costs and fees................. 524,513 410,021 ------------ ------------ 131,629,479 114,654,545 Allowance for loan losses........................ (1,197,843) (1,011,935) ------------ ------------ $130,431,636 $113,642,610 ============ ============
Loans upon which the accrual of interest has been discontinued totaled $78,563 at December 31, 1998. There were no non-accrual loans at December 31, 1999. An analysis of the change in the allowance for loan losses follows:
1999 1998 1997 ---------- ---------- ---------- Balance, beginning of year............... $1,011,935 $ 860,709 $1,020,104 Provision for loan losses................ 335,000 208,367 202,500 Recoveries............................... 15,492 19,618 6,295 Loans charged off........................ (164,584) (76,759) (368,190) ---------- ---------- ---------- Balance, end of year..................... $1,197,843 $1,011,935 $ 860,709 ========== ========== ==========
Loans having carrying values of $96,260 and $640,381 were transferred to foreclosed real estate in 1999 and 1998, respectively. Note 4. Other Time Deposits The aggregate amount of other time deposits each with a minimum denomination of $100,000, was $14,502,942 and $12,551,614 at December 31, 1999 and 1998, re- spectively. Note 5. Premises and Equipment Components of premises and equipment included in the balance sheets at De- cember 31, 1999 and 1998, were as follows:
1999 1998 ---------- ---------- Land.................................................. $ 583,430 $ 538,686 Buildings and improvements............................ 3,824,548 3,358,727 Furniture and equipment............................... 3,886,789 3,706,689 ---------- ---------- Total cost............................................ 8,294,767 7,604,102 Less accumulated depreciation......................... 3,341,044 2,904,305 ---------- ---------- Net book value........................................ $4,953,723 $4,699,797 ========== ==========
21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1999, 1998 and 1997 Note 6. Income Taxes The provision for income taxes consisted of the following for the years ended December 31:
1999 1998 1997 -------- -------- -------- Currently payable................................ $597,969 $613,933 $540,603 Deferred......................................... 159,719 (56,741) 107,422 -------- -------- -------- $757,688 $557,192 $648,025 ======== ======== ========
The reasons for the differences between the statutory Federal income tax rates and the effective tax rates are summarized as follows:
1999 1998 1997 ----- ----- ----- Statutory rates......................................... 34.0% 34.0% 34.0% Increase (decrease) resulting from: Effect of tax-exempt income............................. (8.1) (12.1) (9.2) Other, net.............................................. (.1) .5 -- ----- ----- ----- 25.8% 22.4% 24.8% ===== ===== =====
The components of the net deferred tax assets and liabilities included in other assets (liabilities) are as follows at December 31:
1999 1998 1997 ---------- --------- --------- Deferred tax assets Allowance for loan losses................ $ 284,189 $ 220,981 $ 169,564 Net unrealized loss on available-for-sale securities.............................. 736,112 -- -- Deferred compensation.................... 123,156 121,543 110,672 Other, net............................... 40,614 26,978 27,296 ---------- --------- --------- 1,184,071 369,502 307,532 ---------- --------- --------- Deferred tax liabilities Net unrealized gain on available- for-sale securities..................... -- (322,743) (145,997) Pension plan............................. (93,718) (84,682) (75,371) Depreciation............................. (121,056) (49,121) (13,064) Deferred loan fees and costs............. (322,531) (159,713) (212,951) Other, net............................... (28,217) (33,830) (20,731) ---------- --------- --------- (565,522) (650,089) (468,114) ---------- --------- --------- Net deferred tax asset (liability)....... $ 618,549 $(280,587) $(160,582) ========== ========= =========
22 Annual Report 1999 Note 7. Pension Plan The following tables set forth the Pension Plan's changes in benefit obliga- tion, plan assets, funded status, assumptions and the components of net peri- odic benefit cost recognized in the Bank's financial statements at December 31:
1999 1998 ---------- ---------- Change in benefit obligation Benefit obligations at beginning of year............. $1,490,044 $1,263,114 Service cost......................................... 93,176 82,844 Interest cost........................................ 110,157 99,089 Actuarial gain....................................... 53,666 94,005 Benefits paid........................................ (515,737) (49,008) ---------- ---------- Benefit obligation at end of year.................... 1,231,306 1,490,044 ---------- ---------- Change in plan assets Fair value of plan assets at beginning of year....... 1,469,156 1,409,704 Actual return on plan assets......................... 72,667 17,432 Employer contributions............................... 108,578 91,028 Benefits paid........................................ (515,737) (49,008) ---------- ---------- Fair value of plan assets at end of year............. 1,134,664 1,469,156 ---------- ---------- Funded status........................................ (96,642) (20,888) Unrecognized prior service cost...................... 156,106 172,478 Unrecognized transition obligation................... (73,229) (91,535) Unrecognized actuarial gain (loss)................... 289,773 189,011 ---------- ---------- Prepaid benefit cost................................. $ 276,008 $ 249,066 ========== ========== Weighted-average assumptions as of December 31: Discount rate........................................ 7.5% 7.5% Expected return on plan assets....................... 9.0% 9.0% Rate of compensation increase........................ 5.0% 5.0%
1999 1998 1997 --------- --------- --------- Components of net periodic benefit cost Service cost................................ $ 93,176 $ 82,844 $ 65,953 Interest cost............................... 110,157 99,089 84,486 Expected return on plan assets.............. (122,116) (116,342) (105,948) Amortization of deferred actuarial gain..... 2,353 -- -- Amortization of prior service cost.......... 16,372 16,372 16,372 Amortization of transition obligation....... (18,306) (18,306) (18,306) --------- --------- --------- Net periodic benefit cost................... $ 81,636 $ 63,657 $ 42,557 ========= ========= =========
23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1999, 1998 and 1997 Note 8. Defined Contribution Retirement Plan The Company has a 401(k) retirement plan covering substantially all employ- ees who have completed six months of service. Employees may contribute up to 15% of their salaries and the Company matches 100% of the first 2% and 25% of the next 2% of employees' contributions. Additional contributions can be made at the discretion of the Board of Directors. Total contributions to the plan were $41,452, $36,321 and $31,663 in 1999, 1998 and 1997, respectively. Note 9. Employee Stock Ownership Plan The Company has a noncontributory Employee Stock Ownership Plan for the benefit of all eligible employees who have completed twelve months of service and who have attained the age of 21. Contributions to the plan are at the dis- cretion of the Board of Directors. Contributions to the plan were $80,000 in 1999, 1998 and 1997, respectively. Note 10. Shareholders' Equity The Company is authorized to issue 2,000,000 shares of preferred stock with a par value of $5 per share. No preferred stock had been issued. The rights and preferences of any preferred shares will be determined by the Board of Di- rectors upon issuance of the stock. The Company has a dividend reinvestment plan under which shareholders may choose to receive additional shares of common stock in lieu of cash dividends. Shares are issued at 95% of the market price on the dividend payment date. Be- ginning January 1, 2000, dividend reinvestment plan shares will be issued at 100% of market price. Shares totaling 11,231 and 11,884 were issued in 1999 and 1998, respectively. Note 11. Stock Option Plan The Company has two incentive stock option plans. The 1985 incentive stock option plan expired in 1995 and no additional shares may be granted under this plan. Under the incentive stock option plan adopted in 1994, the Company may grant options to certain key employees for up to 75,000 shares. At December 31, 1999, the 1994 plan had 49,808 shares available for grant. Under both plans, the exercise price of each option equals the market price of the Company's common stock on the date of grant and an option's maximum term is ten years. Options granted are exercisable only after meeting certain perfor- mance targets during a specified time period. If the targets are not met, the options lapse. 24 Annual Report 1999 Note 11. Stock Option Plan -- (Concluded) A summary of the status of the incentive stock option plans as of December 31, 1999, 1998 and 1997, and changes during the years ending on those dates is presented below:
Exercisable Stock Options ------------------------------------------ Outstanding Granted Exercised Outstanding Beginning During During At End of Year the Year the Year of Year ----------- -------- --------- ----------- 1999 Shares.................. 40,150 7,662 (1,250) 46,562 Weighted average exercise price......... $ 16.45 $ 27.50 $ 19.10 $ 18.79 1998 Shares.................. 39,550 5,900 (5,300) 40,150 Weighted average exercise price......... $ 15.62 $ 23.50 $ 18.07 $ 16.45 1997 Shares.................. 31,148 12,450 (4,048) 39,550 Weighted average exercise price......... $ 14.04 $ 17.00 $ 7.73 $ 15.62
At December 31, 1999, exercise prices on outstanding options ranged from $11.00 to $27.50 per share and the weighted average remaining contractual life was 6.29 years. The Company accounts for its stock option plans in accordance with APB Opin- ion No. 25, Accounting for Stock Issued to Employees, which does not allocate costs to stock options granted at current market values. The Company could, as an alternative, allocate costs to stock options using option pricing models, as provided in Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Because of the limited number of options granted and the limited amount of trading activity in the Company's stock, management be- lieves that the Company's stock options are best accounted for in accordance with APB Opinion No. 25. However, had the Company accounted for its stock options in accordance with SFAS No. 123, net earnings and earnings per share would have been as follows for each of the years ending December 31,
1999 1998 1997 -------- -------- -------- Pro-forma reduction in net income............. $(38,000) $(16,000) $(13,000) ======== ======== ======== Pro-forma earnings per share.................. $ 1.83 $ 1.66 $ 1.70 ======== ======== ========
Pro-forma amounts were computed using a 6% discount rate over the term of the options and dividend rates which approximate current payments. Note 12. Financial Instruments The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These finan- cial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the balance sheets. The contract or notional amounts of those instruments reflect the extent of the Company's involvement in particular classes of financial instruments. 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1999, 1998 and 1997 Note 12. Financial Instruments -- (Concluded) The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commit- ments and conditional obligations as it does for on-balance-sheet instruments. Unless noted otherwise, the Company does not require collateral or other security to support financial instruments with credit risk. Commitments to Extend Credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition estab- lished in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commit- ment amounts do not necessarily represent future cash requirements. The Com- pany evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable; in- ventory, property, plant, and equipment; and income-producing commercial prop- erties. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, in- cluding commercial paper, bond financing, and similar transactions. A summary of the notional amounts of financial instruments with off-bal- ance-sheet risk at December 31, 1999 and 1998, follows:
1999 1998 ----------- ----------- Home equity lines available......................... $ 5,395,650 $ 5,867,537 Credit card lines available......................... 2,691,680 2,515,440 Unused real estate loan commitments................. 6,525,165 4,084,702 Unused dealer floor plan commitments................ 1,961,720 379,070 Overdraft protection available...................... 712,270 597,213 Standby letters of credit........................... 171,600 232,150 ----------- ----------- Total commitments to extend credit.................. $17,458,085 $13,676,112 =========== ===========
Included above, commitments to extend credit to directors and their related interests were $1,508,863 and $1,029,632 in 1999 and 1998, respectively. Note 13. Significant Group Concentration of Credit Risk Most of the Company's business activity is with customers located in the counties of Lancaster and Northumberland, Virginia. The Company makes residen- tial, commercial and consumer loans and approximately 77% of the loan portfo- lio is composed of real estate mortgage loans, which primarily are for single- family residences. The adequacy of collateral on real estate mortgage loans is highly dependent on changes to real estate values. 26 Annual Report 1999 Note 14. Related Parties The Company has entered into transactions with its directors and principal officers of the Company, their immediate families and affiliated companies in which they are the principal stockholders (related parties). The aggregate amount of loans to such related parties was approximately $3,763,000 and $2,598,000 at December 31, 1999 and 1998, respectively. All such loans, in the opinion of the management, were made in the normal course of business on the same terms, including interest rate and collateral, as those prevailing at the time for comparable transactions. Note 15. Commitments and Contingencies In the ordinary course of business, the Company has various outstanding com- mitments and contingent liabilities that are not reflected in the accompanying financial statements. At December 31, 1999, the Company was not involved in any litigation. Note 16. Fair Value of Financial Instruments The estimated fair values of the financial instruments at December 31, 1999, are shown in the following table. The carrying amounts in the table are in- cluded in the balance sheet under the applicable captions.
Dollars in Thousands ----------------- Carrying Fair Amount Value -------- -------- Financial assets: Cash and due from banks.................................. $ 5,261 $ 5,261 Demand deposits.......................................... 100 100 Securities available-for-sale............................ 53,170 53,170 Loans, net of allowance for loan losses.................. 130,432 129,506 Financial liabilities: Non-interest bearing deposits............................ 20,889 22,623 Savings and NOW deposits................................. 96,848 96,848 Other time deposits...................................... 59,965 59,532 Off-balance-sheet liabilities: Commitments to extend credit............................. 17,458 17,458
The above presentation of fair values is required by Statement on Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instru- ments. The fair values shown do not necessarily represent the amounts which would be received on immediate settlement of the instruments. Statement No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts pre- sented do not represent the underlying value of the Company. 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1999, 1998 and 1997 Note 16. Fair Value of Financial Instruments -- (Concluded) The following methods and assumptions were used to estimate the fair value of each class of financial instrument. The carrying amounts of cash and due from banks, federal funds sold, demand and savings deposits, and commitments to extend credit represent items which do not present significant market risks, are payable on demand, or are of such short duration that market value approximates carrying value. Securities available-for-sale are valued at the quoted market prices for the individual securities held. The fair value of loans is estimated by discounting future cash flows using the current interest rates at which similar loans would be made to borrowers. Other time deposits are presented at estimated fair value using interest rates currently offered for deposits of similar remaining maturities. Fair values for off-balance-sheet lending commitments approximates the car- rying value. Note 17. Restrictions on Retained Earnings Federal regulations limits the payment of dividends in any calendar year to the net profits for the year combined with the retained net profits of the preceding two calendar years, without prior approval of the regulators. Note 18. Regulatory Matters The Company is subject to various regulatory capital requirements adminis- tered by the federal banking agencies. Failure to meet minimum capital re- quirements can initiate certain mandatory--and possibly additional discretion- ary--actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guide- lines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance-sheet items as cal- culated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to average assets (as defined). At December 31, 1999, the Company met all capital adequacy requirements to which it is subject. The Company is subject to the following capital requirements:
Actual Regulatory December Minimum 1999 ---------- -------- Total capital to risk weighted assets.................... 10.0 15.49 Tier 1 capital to risk weighted assets................... 6.0 14.58 Tier 1 capital to adjusted average assets................ 5.0 9.71
28 INDEPENDENT AUDITORS' REPORT [EGGLESTON SMITH P.C. LOGO Eggleston Smith, PC Certified Public Accountants and Consultants 603 Pilot House Drive Suite 400 Newport News, Virginia 23606] To the Board of Directors Bay Banks of Virginia, Inc. Kilmarnock, Virginia We have audited the accompanying consolidated balance sheets of Bay Banks of Virginia, Inc. and subsidiary as of December 31, 1999 and 1998, and the related consolidated statements of income, cash flows and changes in shareholders' eq- uity for each of the years in the three-year period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing stan- dards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of mate- rial misstatement. An audit includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement pre- sentation. We believe that our audits provide a reasonable basis for our opin- ion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bay Banks of Vir- ginia, Inc. and subsidiary as of December 31, 1999 and 1998, and the consoli- dated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally ac- cepted accounting principles. January 31, 2000 Newport News, Virginia /S/ EGGLESTON SMITH P.C. TEN YEAR COMPARISON OF EARNINGS AND DIVIDENDS Ten Year Comparison of Earnings and Divideds
Earnings Net Dividends Per Common Dividends Income Paid Share* Per Share ---------- --------- ---------- --------- 1990............................. $1,084,450 $358,845 1.09 0.36 1991............................. 1,143,747 397,891 1.12 0.39 1992............................. 1,302,311 437,638 1.25 0.42 1993............................. 1,510,011 476,530 1.42 0.45 1994............................. 1,378,185 529,060 1.28 0.49 1995............................. 1,523,831 581,172 1.39 0.53 1996............................. 1,831,616 642,102 1.64 0.58 1997............................. 1,959,832 723,741 1.71 0.63 1998............................. 1,930,900 809,825 1.67 0.70 1999............................. 2,175,378 910,279 1.86 0.78
Ten Year Comparison of Financial Condition
Securities Loans Total Assets Deposits ----------- ----------- ------------ ----------- 1990...................... $20,991,291 $62,549,697 $89,336,951 $78,097,670 1991...................... 23,695,961 72,517,658 105,437,755 94,529,157 1992...................... 26,623,125 80,126,043 119,380,580 107,399,662 1993...................... 44,668,423 80,178,153 140,445,645 127,024,243 1994...................... 52,293,024 87,642,815 150,646,340 136,950,209 1995...................... 46,000,953 93,212,634 156,167,460 140,289,333 1996...................... 45,249,656 100,711,314 159,333,211 142,109,886 1997...................... 44,066,442 104,202,928 169,006,071 149,604,806 1998...................... 59,007,884 113,642,610 200,270,927 178,268,851 1999...................... 53,169,880 130,431,636 199,772,678 177,701,967
* Per share data is adjusted for a 10% stock dividend in 1989, a 2 for 1 stock split in 1991, and a 2 for 1 stock split in 1996. 30 EX-21 4 EXHIBIT 21.1 SUBSIDIARIES Exhibit 21 List of Subsidiaries Bay Banks of Virginia, Inc., is organized as follows: Bay Banks of Virginia, Incorporated (Parent) Bank of Lancaster (Subsidiary of Bay Banks of Virginia) Bay Services Title Company(Subsidiary of Bank of Lancaster) Chesapeake Holdings, Inc. (Subsidiary of Bay Banks of Virginia) Bay Trust Company (Subsidiary of Bay Banks of Virginia as of January 1, 2000) 1 EX-23 5 EXHIBIT 23.1 AUDITORS CONSENT Exhibit 23 CONSENT OF INDEPENDENT AUDITORS Eggleston Smith, PC Certified Public Accountants and Consultants 603 Pilot House Drive Suite 400 Newport News, Virginia 23606 Board of Directors Bay Banks of Virginia, Inc. We consent to the incorporation by reference in this Annual Report on Form 10-K of our report dated January 31, 2000, relating to the consolidated financial statements of Bay Banks of Virginia, Inc. as of December 31, 1999, 1998, and for each of the years in the three-year period ended December 31, 1999. EGGLESTON SMITH P.C. Newport News, Virginia March 27, 2000 EX-27 6 FINANCIAL DATA SCHEDULES
9 YEAR DEC-31-1999 DEC-31-1999 5,260,620 156,813,367 0 0 55,334,917 55,334,917 53,169,880 131,629,479 1,197,843 199,772,678 177,701,967 1,283,324 1,081,526 0 0 0 5,826,617 15,308,168 199,772,678 10,153,373 3,589,106 194,832 13,936,861 6,429,810 6,533,175 7,403,686 335,000 34,751 5,712,458 2,933,066 2,933,066 0 0 2,175,378 1.86 1.83 7.72 0 793,000 0 0 1,011,935 164,584 15,492 1,197,843 1,197,843 0 0
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