UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED March 31, 2006
¨ | TRANSITION REPORT PURSUANT TO 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 OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) | | (I.R.S. EMPLOYER IDENTIFICATION NO.) |
100 SOUTH MAIN STREET, KILMARNOCK, VA 22482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(804) 435-1171
(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 x yes ¨ no
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ yes x no
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
2,366,843 shares of common stock on May 1, 2006.
FORM 10-Q
For the interim period ending March 31, 2006.
INDEX
PART I -FINANCIAL INFORMATION
2
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
| | | | | | | | |
Consolidated Balance Sheets | | | | | | | | |
| | |
| | March 31, 2006 | | | December 31, 2005 | |
| | (Unaudited) | | | | |
ASSETS | | | | | | | | |
Cash and due from banks | | $ | 7,173,349 | | | $ | 5,213,462 | |
Interest-bearing deposits | | | 119,653 | | | | 108,403 | |
Federal funds sold | | | 1,254,689 | | | | 4,138,806 | |
Securities available for sale, at fair value | | | 40,985,821 | | | | 45,728,286 | |
Securities held to maturity, at amortized cost (fair value $435,605 and $434,155) | | | 446,665 | | | | 443,243 | |
Loans, net of allowance for loan losses of $2,201,556 and $2,157,716 | | | 236,545,804 | | | | 229,655,864 | |
Premises and equipment, net | | | 9,917,424 | | | | 9,966,200 | |
Accrued interest receivable | | | 1,401,732 | | | | 1,320,101 | |
Other real estate owned | | | 561,745 | | | | 561,745 | |
Core deposit intangible | | | 2,807,842 | | | | 2,807,842 | |
Other assets | | | 1,712,067 | | | | 1,876,590 | |
| | | | | | | | |
Total assets | | $ | 302,926,791 | | | $ | 301,820,542 | |
| | | | | | | | |
LIABILITIES | | | | | | | | |
Non-interest bearing deposits | | $ | 44,351,642 | | | $ | 42,664,536 | |
Savings and interest-bearing demand deposits | | | 118,211,570 | | | | 123,557,342 | |
Time deposits | | | 97,140,920 | | | | 92,564,678 | |
| | | | | | | | |
Total deposits | | $ | 259,704,132 | | | $ | 258,786,556 | |
| | |
Securities sold under repurchase agreements | | | 5,100,223 | | | | 5,048,450 | |
Federal Home Loan Bank advance | | | 10,000,000 | | | | 10,000,000 | |
Other liabilities | | | 1,717,199 | | | | 1,372,563 | |
| | | | | | | | |
Total liabilities | | $ | 276,521,554 | | | $ | 275,207,569 | |
| | | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | | |
Common stock ($5 par value; Authorized - 5,000,000 shares; Outstanding - 2,369,843 and 2,385,966 shares) | | $ | 11,849,214 | | | $ | 11,929,830 | |
Additional paid-in capital | | | 4,691,273 | | | | 4,849,436 | |
Retained earnings | | | 10,157,450 | | | | 9,926,321 | |
Accumulated other comprehensive loss, net | | | (292,700 | ) | | | (92,614 | ) |
| | | | | | | | |
Total shareholders’ equity | | $ | 26,405,237 | | | $ | 26,612,973 | |
| | | | | | | | |
Total liabilities and shareholders’ equity | | $ | 302,926,791 | | | $ | 301,820,542 | |
| | | | | | | | |
See Notes to Consolidated Financial Statements.
3
Consolidated Statements of Income
(Unaudited)
Quarters ended
| | | | | | |
| | March 31, 2006 | | March 31, 2005 |
INTEREST INCOME | | | | | | |
Loans, including fees | | $ | 3,876,392 | | $ | 3,218,148 |
Securities: | | | | | | |
Taxable | | | 280,889 | | | 300,896 |
Tax-exempt | | | 191,250 | | | 186,500 |
Federal funds sold | | | 27,799 | | | 76,434 |
| | | | | | |
Total interest income | | | 4,376,330 | | | 3,781,978 |
| | | | | | |
INTEREST EXPENSE | | | | | | |
Deposits | | | 1,467,374 | | | 1,080,796 |
Securities sold to repurchase | | | 38,218 | | | 15,760 |
Fed funds purchased | | | 6,601 | | | — |
Federal Home Loan Bank advances | | | 100,362 | | | 36,925 |
| | | | | | |
Total interest expense | | | 1,612,555 | | | 1,133,481 |
| | | | | | |
Net interest income | | | 2,763,775 | | | 2,648,497 |
Provision for loan losses | | | 75,000 | | | 137,500 |
| | | | | | |
Net interest income after provision for loan losses | | | 2,688,775 | | | 2,510,997 |
| | | | | | |
NON-INTEREST INCOME | | | | | | |
Income from fiduciary activities | | | 173,333 | | | 174,457 |
Service charges and fees on deposit accounts | | | 157,991 | | | 172,532 |
Other service charges and fees | | | 265,578 | | | 208,380 |
Secondary market lending fees | | | 41,124 | | | 15,165 |
Other real estate gains | | | — | | | 58 |
Securities gains | | | — | | | 190 |
Other income | | | 23,059 | | | 36,087 |
| | | | | | |
Total non-interest income | | | 661,085 | | | 606,621 |
| | |
NON-INTEREST EXPENSES | | | | | | |
Salaries and employee benefits | | | 1,378,718 | | | 1,234,748 |
Occupancy expense | | | 430,294 | | | 369,323 |
Bank franchise tax | | | 46,684 | | | 56,206 |
Visa expense | | | 104,900 | | | 97,062 |
Telephone expense | | | 47,543 | | | 43,285 |
Other expenses | | | 513,586 | | | 488,725 |
| | | | | | |
Total non-interest expenses | | | 2,521,725 | | | 2,289,349 |
| | | | | | |
Net income before income taxes | | | 828,135 | | | 828,269 |
| | |
Income tax expense | | | 217,571 | | | 224,496 |
| | | | | | |
Net income | | $ | 610,564 | | $ | 603,773 |
| | | | | | |
Basic Earnings Per Share | | | | | | |
Average basic shares outstanding | | | 2,374,377 | | | 2,354,218 |
Earnings per share, basic | | $ | 0.26 | | $ | 0.26 |
| | |
Diluted Earnings Per Share | | | | | | |
Average diluted shares outstanding | | | 2,381,118 | | | 2,370,912 |
Earnings per share, diluted | | $ | 0.26 | | $ | 0.25 |
See Notes to Consolidated Financial Statements.
4
Consolidated Statements of Changes in Shareholders’ Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | | Additional Paid-in Capital | | | Retained Earnings | | | Accumulated Other Comprehensive Income/(Loss) | | | Total Shareholders’ Equity | |
Balance on January 1, 2005 | | $ | 11,770,937 | | | $ | 4,621,295 | | | $ | 8,860,506 | | | $ | 566,784 | | | $ | 25,819,522 | |
Comprehensive Income: | | | | | | | | | | | | | | | | | | | | |
Net Income | | | | | | | | | | | 603,773 | | | | | | | | 603,773 | |
Other comprehensive (loss): | | | | | | | | | | | | | | | | | | | | |
Changes in unrealized holding gains on securities arising during the period, net of taxes of ($237,193) | | | | | | | | | | | | | | | (460,434 | ) | | | (460,434 | ) |
Reclassification adjustment for securities gains included in net income, net of taxes of $64 | | | | | | | | | | | | | | | 126 | | | | 126 | |
| | | | | | | | | | | | | | | | | | | | |
Total Comprehensive Income | | | | | | | | | | | | | | | | | | | 143,465 | |
Cash dividends paid — $0.155/share | | | | | | | | | | | (364,940 | ) | | | | | | | (364,940 | ) |
Stock repurchases | | | (1,000 | ) | | | (2,010 | ) | | | — | | | | — | | | | (3,010 | ) |
Sale of common stock: | | | | | | | | | | | | | | | | | | | | |
Dividends Reinvested | | | 27,168 | | | | 58,410 | | | | — | | | | — | | | | 85,578 | |
Stock Options exercised | | | 7,300 | | | | 7,590 | | | | — | | | | — | | | | 14,890 | |
| | | | | | | | | | | | | | | | | | | | |
Balance on March 31, 2005 | | $ | 11,804,405 | | | $ | 4,685,285 | | | $ | 9,099,339 | | | $ | 106,476 | | | $ | 25,695,505 | |
| | | | | |
Balance on January 1, 2006 | | $ | 11,929,830 | | | $ | 4,849,436 | | | $ | 9,926,321 | | | $ | (92,614 | ) | | $ | 26,612,973 | |
| | | | | |
Comprehensive Income: | | | | | | | | | | | | | | | | | | | | |
Net Income | | | | | | | | | | | 610,564 | | | | | | | | 610,564 | |
Other comprehensive (loss): | | | | | | | | | | | | | | | | | | | | |
Changes in unrealized holding gains (losses) on securities arising during the period, net of taxes of ($103,075) | | | | | | | | | | | | | | | (200,086 | ) | | | (200,086 | ) |
Total Comprehensive Income | | | | | | | | | | | | | | | | | | | 410,478 | |
Cash dividends paid — $0.16/share | | | | | | | | | | | (379,435 | ) | | | | | | | (379,435 | ) |
Stock repurchases | | | (112,500 | ) | | | (211,727 | ) | | | — | | | | — | | | | (324,227 | ) |
Sale of common stock: | | | | | | | | | | | | | | | | | | | | |
Dividends Reinvested | | | 31,884 | | | | 53,564 | | | | — | | | | — | | | | 85,448 | |
Balance on March 31, 2006 | | $ | 11,849,214 | | | $ | 4,691,273 | | | $ | 10,157,450 | | | $ | (292,700 | ) | | $ | 26,405,237 | |
| | | | | | | | | | | | | | | | | | | | |
See Notes to Consolidated Financial Statements.
5
Consolidated Statements of Cash Flows
(unaudited)
| | | | | | | | |
| | March 31, 2006 | | | March 31, 2005 | |
Cash Flows From Operating Activities | | | | | | | | |
Net Income | | $ | 610,564 | | | $ | 603,773 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation | | | 227,680 | | | | 191,089 | |
Net amortization and accretion of securities | | | 5,528 | | | | 6,835 | |
Provision for loan losses | | | 75,000 | | | | 137,500 | |
Net securities (gains) | | | — | | | | (190 | ) |
Gain on sale of other real estate owned | | | — | | | | (58 | ) |
Decrease in accrued income and other assets | | | 81,435 | | | | 18,234 | |
Increase in other liabilities | | | 447,712 | | | | 229,594 | |
| | | | | | | | |
Net cash provided by operating activities | | | 1,447,919 | | | | 1,186,777 | |
| | | | | | | | |
Cash Flows From Investing Activities | | | | | | | | |
Proceeds from maturities of available-for-sale securities | | | 788,261 | | | | 1,062,750 | |
Proceeds from sales of available-for-sale securities | | | 4,133,900 | | | | 150,000 | |
Purchases of available-for-sale securities | | | (491,807 | ) | | | (1,425,855 | ) |
(Increase) in interest bearing deposits | | | (11,250 | ) | | | (2,783 | ) |
Decrease in federal funds sold | | | 2,884,117 | | | | 3,067,259 | |
Loan originations and principal collections, net | | | (6,964,940 | ) | | | (3,783,539 | ) |
Purchases of premises and equipment | | | (177,446 | ) | | | (849,298 | ) |
Net cash provided by (used in) investing activities | | | 160,835 | | | | (1,781,466 | ) |
| | | | | | | | |
Cash Flows From Financing Activities | | | | | | | | |
Net increase / (decrease) in demand, savings, and other interest-bearing deposits | | | (3,658,666 | ) | | | 521,022 | |
Net increase / (decrease) in time deposits | | | 4,576,241 | | | | (1,346,786 | ) |
Net increase / (decrease) in securities sold under repurchase agreements | | | 51,773 | | | | (760,999 | ) |
Proceeds from issuance of common stock | | | 85,447 | | | | 100,468 | |
Dividends paid | | | (379,435 | ) | | | (364,940 | ) |
Repurchase of common stock | | | (324,227 | ) | | | (3,010 | ) |
| | | | | | | | |
Net cash provided by (used in) financing activities | | | 351,133 | | | | (1,854,245 | ) |
| | | | | | | | |
Net increase / (decrease) in cash and due from banks | | | 1,959,887 | | | | (2,448,934 | ) |
| | |
Cash and due from banks at beginning of period | | | 5,213,462 | | | | 8,572,672 | |
| | | | | | | | |
Cash and due from banks at end of period | | $ | 7,173,349 | | | $ | 6,123,738 | |
| | | | | | | | |
Supplemental Disclosures: | | | | | | | | |
Interest paid | | $ | 1,591,051 | | | $ | 1,118,799 | |
| | | | | | | | |
Income taxes paid | | | — | | | | — | |
| | | | | | | | |
Unrealized loss on investment securities | | | (303,161 | ) | | | (697,436 | ) |
| | | | | | | | |
Loans transferred to other real estate owned | | | — | | | | 11,070 | |
| | | | | | | | |
See Notes to Consolidated Financial Statements.
6
Notes to Consolidated Financial Statements
Note 1:
Bay Banks of Virginia, Inc. (the “Company”) owns 100% of the Bank of Lancaster (the “Bank”) and 100% of Bay Trust Company, Inc. (the “Trust Company”). The Consolidated Financial Statements include the accounts of the Bank, the Trust Company, and Bay Banks of Virginia, Inc.
The accounting and reporting policies of the registrant conform to accounting principles generally accepted in the United States of America and to the general practices within the banking industry. However, in management’s opinion, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the consolidated financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year.
Certain amounts in the consolidated financial statements have been reclassified to conform to current year presentations.
These consolidated financial statements should be read in conjunction with the financial statements and notes to financial statements included in the registrant’s 2005 Annual Report to Shareholders.
In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 156, “Accounting for Servicing of Financial Assets an amendment of FASB Statement 140” (Statement 156). Statement 156 amends Statement 140 with respect to separately recognized servicing assets and liabilities. Statement 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract and requires all servicing assets and liabilities to be initially measured at fair value, if practicable. Statement 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization method or fair value measurement method. Under the amortization method, servicing assets and liabilities are amortized in proportion to and over the estimated period of servicing. Under the fair value measurement method, servicing assets are measured at fair value at each reporting date and changes in fair value are reported in net income for the period the change occurs.
Adoption of Statement 156 is required as of the beginning of fiscal years beginning subsequesnt to September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements.
The Company does not expect the adoption of Statement 156 at the beginning of 2007 to have a material impact.
Note 2: Securities
The carrying amounts of debt and other securities and their approximate fair values at March 31, 2006, and December 31, 2005, follow:
| | | | | | | | | | | | | |
Available-for-sale securities March 31, 2006 (unaudited) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | | Fair Value |
U.S. Government agencies | | $ | 11,741,546 | | $ | 2,749 | | $ | (285,478 | ) | | $ | 11,458,817 |
State and municipal obligations | | | 26,782,027 | | | 178,547 | | | (389,313 | ) | | | 26,571,261 |
Corporate bonds | | | 1,536,933 | | | 50,010 | | | — | | | | 1,586,943 |
Restricted securities | | | 1,368,800 | | | — | | | — | | | | 1,368,800 |
| | | | | | | | | | | | | |
| | $ | 41,429,306 | | $ | 231,306 | | $ | (674,791 | ) | | $ | 40,985,821 |
| | | | | | | | | | | | | |
7
| | | | | | | | | | | | | |
Available-for-sale securities December 31, 2005 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | | Fair Value |
U.S. Government agencies | | $ | 12,270,642 | | $ | 4,336 | | $ | (251,563 | ) | | $ | 12,023,415 |
State and municipal obligations | | | 30,687,331 | | | 279,400 | | | (236,528 | ) | | | 30,730,203 |
Corporate bonds | | | 1,537,938 | | | 64,030 | | | — | | | | 1,601,968 |
Restricted securities | | | 1,372,700 | | | — | | | — | | | | 1,372,700 |
| | | | | | | | | | | | | |
| | $ | 45,868,611 | | $ | 347,766 | | $ | (488,091 | ) | | $ | 45,728,286 |
| | | | | | | | | | | | | |
| | | | |
Held-to-maturity securities March 31, 2006 (unaudited) | | Amortized Cost | | Unrealized Gains | | Unrealized (Losses) | | | Fair Value |
State and municipal obligations | | $ | 446,665 | | $ | — | | $ | (11,060 | ) | | $ | 435,605 |
| | | | | | | | | | | | | |
| | | | |
Held-to-maturity securities December 31, 2005 | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | | Fair Value |
State and municipal obligations | | $ | 443,243 | | $ | — | | $ | (9,088 | ) | | $ | 434,155 |
| | | | | | | | | | | | | |
Securities with a market value of $11.1 million were pledged as collateral for public deposits, repurchase agreements and for other purposes as required by law as of March 31, 2006. The market value of pledged securities at year-end 2005 was $11.6 million.
Securities in an unrealized loss position at March 31, 2006, and December 31, 2005, by duration of the unrealized loss, are shown below. The unrealized loss positions were directly related to interest rate movements as there is minimal credit risk exposure in these investments. All securities are investment grade or better and all losses are temporary. Bonds with unrealized loss positions at March 31, 2006, included 25 federal agencies and 49 municipal bonds, as shown below.
| | | | | | | | | | | | | | | | | | |
| | Less than 12 months | | 12 months or more | | Total |
March 31, 2006 (unaudited) | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
U.S. Government agencies | | $ | 3,909,984 | | $ | 81,430 | | $ | 7,368,718 | | $ | 204,048 | | $ | 11,278,702 | | $ | 285,478 |
States and municipal obligations | | | 5,843,671 | | | 124,148 | | | 7,606,971 | | | 276,225 | | | 13,450,642 | | | 400,373 |
| | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | | $ | 9,753,655 | | $ | 205,578 | | $ | 14,975,689 | | $ | 480,273 | | $ | 24,729,344 | | $ | 685,851 |
| | | | | | | | | | | | | | | | | | |
| | | |
| | Less than 12 months | | 12 months or more | | Total |
December 31, 2005 | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
U.S. Government agencies | | $ | 3,432,253 | | $ | 58,478 | | $ | 7,887,867 | | $ | 193,085 | | $ | 11,320,120 | | $ | 251,563 |
States and municipal obligations | | | 8,847,041 | | | 144,698 | | | 3,025,121 | | | 100,918 | | | 11,872,162 | | | 245,616 |
| | | | | | | | | | | | | | | | | | |
Total temporarily impaired securities | | $ | 12,279,294 | | $ | 203,176 | | $ | 10,912,988 | | $ | 294,003 | | $ | 23,192,282 | | $ | 497,179 |
| | | | | | | | | | | | | | | | | | |
No impairment has been recognized on any of the securities in a loss position because of management’s intent and demonstrated ability to hold securities to scheduled maturity or call dates.
8
Note 3: Loans
The components of loans were as follows:
| | | | | | | | |
| | March 31, 2006 | | | December 31, 2005 | |
| | (unaudited) | | | | |
Mortgage loans on real estate: | | | | | | | | |
Construction | | $ | 46,811,794 | | | $ | 40,998,818 | |
Secured by farmland | | | 1,329,479 | | | | 1,329,479 | |
Secured by 1-4 family residential | | | 125,983,057 | | | | 123,573,952 | |
Other real estate loans | | | 31,438,739 | | | | 31,045,731 | |
Loans to farmers (except those secured by real estate) | | | 900,027 | | | | 27 | |
Commercial and industrial loans (not secured by real estate) | | | 20,608,794 | | | | 22,668,129 | |
Consumer installment loans | | | 10,121,707 | | | | 10,580,279 | |
All other loans | | | 575,891 | | | | 595,893 | |
Net deferred loan costs and fees | | | 977,872 | | | | 1,021,272 | |
| | | | | | | | |
Total loans | | $ | 238,747,360 | | | $ | 231,813,580 | |
Allowance for loan losses | | | (2,201,556 | ) | | | (2,157,716 | ) |
| | | | | | | | |
Loans, net | | $ | 236,545,804 | | | $ | 229,655,864 | |
| | | | | | | | |
Loans upon which the accrual of interest has been discontinued totaled $273 thousand as of March 31, 2006, and $253 thousand as of December 31, 2005.
Note 4: Allowance for Loan Losses
| | | | | | | | | | | | |
| | March 31, 2006 | | | December 31, 2005 | | | March 31, 2005 | |
| | (unaudited) | | | | | | (unaudited) | |
Balance, beginning of year | | $ | 2,157,716 | | | $ | 2,032,185 | | | $ | 2,032,185 | |
Provision for loan losses | | | 75,000 | | | | 559,068 | | | | 137,500 | |
Recoveries | | | 1,816 | | | | 83,367 | | | | 6,821 | |
Loans charged off | | | (32,976 | ) | | | (516,904 | ) | | | (13,105 | ) |
| | | | | | | | | | | | |
Balance, end of year | | $ | 2,201,556 | | | $ | 2,157,716 | | | $ | 2,163,401 | |
| | | | | | | | | | | | |
Information about impaired loans is as follows:
| | | | | | |
| | March 31, 2006 | | December 31, 2005 |
| | (unaudited) | | |
Impaired loans for which an allowance has been provided | | $ | 13,570 | | $ | 14,188 |
Impaired loans for which no allowance has been provided | | | — | | | — |
Total impaired loans | | $ | 13,570 | | $ | 14,188 |
| | | | | | |
Allowance provided for impaired loans, included in the allowance for loan losses | | $ | 13,570 | | $ | 14,188 |
| | | | | | |
Average balance impaired loans | | $ | 13,639 | | $ | 655,279 |
| | | | | | |
Interest income recognized | | $ | — | | $ | 19,388 |
| | | | | | |
9
Note 5: Earnings per share
The following table shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of dilutive potential common stock.
| | | | | | | | | | |
Three months ended (Unaudited) | | March 31, 2006 | | March 31, 2005 |
| Average Shares | | Per share Amount | | Average Shares | | Per share Amount |
Basic earnings per share | | 2,374,377 | | $ | 0.26 | | 2,354,218 | | $ | 0.26 |
Effect of dilutive securities: Stock options | | 6,741 | | | | | 16,694 | | | |
Diluted earnings per share | | 2,381,118 | | $ | 0.26 | | 2,370,912 | | $ | 0.25 |
As of March 31, 2006 and 2005, options on 156,039 shares and 89,694 shares, respectively, were not included in computing diluted earnings per share, because their effects were anti-dilutive.
Note 6: Stock-Based Compensation
In December, 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant and eliminates the choice to account for employee stock options under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). The Company adopted SFAS 123R effective January 1, 2006 using the modified prospective method and, as such, results for prior periods have not been restated. Prior to January 1, 2006, no compensation expense was recognized for stock option grants, as all such grants had an exercise price equal to the fair market value on the date of grant.
As a result of adopting SFAS 123R on January 1, 2006, incremental stock-based compensation expense recognized was $3,000 during the first quarter of 2006. As of March 31, 2006, there was $5,177 of unrecognized compensation expense related to nonvested stock options, which will be recognized over the remaining vesting period.
The following illustrates the effect on net income and earnings per share if the Company had applied the fair value method of SFAS No. 123, “Accounting for Stock-Based Compensation,” prior to January 1, 2006:
| | | | |
| | Quarter ended March 31, 2005 | |
Net income, as reported | | $ | 603,773 | |
Less: pro forma stock option compensation expense, net of tax | | | (9,814 | ) |
| | | | |
Pro forma net income | | $ | 593,959 | |
| |
Earnings per share: | | | | |
Basic – as reported | | $ | 0.26 | |
Basic – pro forma | | | 0.25 | |
Diluted – as reported | | | 0.25 | |
Diluted – pro forma | | | 0.25 | |
Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the vesting period of the award. No shares were granted in the first three months of 2006 or 2005.
10
Stock option plan activity for the three months ended March 31, 2006 is summarized below:
| | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (in years) | | Value of Unexercised In- The-Money Options |
Options outstanding, January 1 | | 176,939 | | $ | 15.01 | | 5.4 | | | |
| | | | |
Granted | | — | | | | | | | | |
Forfeited | | — | | | | | | | | |
Exercised | | — | | | | | | | | |
Options outstanding, March 31 | | 176,939 | | $ | 15.01 | | 5.4 | | $ | 201,058 |
| | | | |
Options exercisable, March 31 | | 152,339 | | $ | 14.95 | | 4.8 | | | |
Note 7: Unidentifiable Intangibles
The Company has unidentifiable intangibles recorded on the consolidated financial statements relating to the purchase of five branches. The balance of the intangibles at March 31, 2006, as reflected on the consolidated balance sheet, was $2,807,842. Management has determined that these purchases qualified as acquisitions of businesses, and therefore discontinued amortization, effective January 1, 2002. Based on management’s assessment, there is no impairment in value at March 31, 2006.
Note 8: Employee Benefit Plans
Components of Net Periodic Benefit Cost
(unaudited)
| | | | | | | | | | | | | | |
| | Pension Benefits | | | Post Retirement Benefits |
Three months ended March 31, | | 2006 | | | 2005 | | | 2006 | | 2005 |
Service cost | | $ | 73,032 | | | $ | 76,347 | | | $ | 5,015 | | $ | 4,254 |
Interest cost | | | 50,871 | | | | 49,447 | | | | 7,861 | | | 8,343 |
Expected return on plan assets | | | (58,641 | ) | | | (49,529 | ) | | | — | | | — |
Amortization of unrecognized prior service cost | | | 4,093 | | | | 4,093 | | | | — | | | — |
Amortization of unrecognized net loss | | | 12,900 | | | | 15,887 | | | | 2,686 | | | 3,289 |
Amortization of transition obligation | | | — | | | | — | | | | 728 | | | 728 |
| | | | | | | | | | | | | | |
Net periodic benefit cost | | $ | 82,255 | | | $ | 96,245 | | | $ | 16,289 | | $ | 16,614 |
| | | | | | | | | | | | | | |
Employer Contributions
The Company disclosed in its Annual Report on Form 10-K for the year ended December 31, 2005, that it expected to contribute $148,927 to its pension plan and $26,381 to its post-retirement benefit plan in 2006. The Company has made these contributions and presently anticipates no further contributions during the remainder of 2006.
11
Note 9: FHLB Advance
On March 31, 2006, the Company had Federal Home Loan Bank of Atlanta (“FHLB”) debt consisting of one advance for $10.0 million. The interest rate is variable at the one-month London Interbank Offering Rate (“LIBOR”) minus 50 basis points until May 19, 2006, after which it is fixed at 3.83%, maturing on May 19, 2010. At March 31, 2006, the actual rate was 4.28%. Interest is payable monthly. This instrument has an early conversion option which gives the FHLB the option to convert, in whole only, into a one-month LIBOR-based floating rate advance, effective May 19, 2006. If the FHLB elects to convert, the Company may elect to terminate, in whole or in part, without a prepayment fee.
Advances on the FHLB line are secured by a blanket lien on qualified 1 to 4 family residential real estate loans. Immediate available credit, as of March 31, 2006, was $20.3 million.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in understanding the results of operations and the financial condition of the Company, a bank holding company. This discussion should be read in conjunction with the above consolidated financial statements and the notes thereto.
CRITICAL ACCOUNTING POLICIES
GENERAL. The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. We use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (1) Statement of Financial Accounting Standards (“SFAS”) No. 5,Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (2) SFAS No. 114,Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates.
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.
EARNINGS SUMMATION
For the three months ended March 31, 2006, net income was $611 thousand as compared to $604 thousand for the comparable period in 2005, an increase of 1.1%. Diluted earnings per average share for the three months ended March 31, 2006 were $0.26 as compared to $0.25 for the three months ended March 31, 2005. Annualized return on average assets was 0.8% for the three months ended March 31, 2006, unchanged from the similar period in 2005. Annualized return on average equity was 9.4% for the three months ended March 31, 2006, also unchanged from the similar period ended March 31, 2005.
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The principal source of earnings for the Company is net interest income. Net interest income is the amount by which interest income exceeds interest expense. The net interest margin is net interest income expressed as a percentage of interest earning assets. Changes in the volume and mix of interest earning assets and interest-bearing liabilities, the associated yields and rates, and the volume of non-performing assets have a significant impact on net interest income, the net interest margin, and net income. The annualized net interest margin was 4.05% for the three months ended March 31, 2006, compared to 3.90% for the same period in 2005.
Net interest income before provision for loan losses for the three months ended March 31, 2006 was $2.8 million, compared to $2.6 million for the three months ended March 31, 2005, an increase of 4.4%. Increases in net interest income were driven mainly by increases in loan rates during the three months ended March 31, 2006, compared to the same period in 2005. Average interest-earning assets totaled $282.6 million for the three months ended March 31, 2006 as compared to $281.4 million for the three months ended March 31, 2005, an increase of 0.4%. Average interest-earning assets as a percent of total average assets was 93.5% for the three months ended March 31, 2006 as compared to 93.1% for the comparable period of 2005. The annualized yield on average interest-earning assets for the three months ended March 31, 2006 was 6.34% as compared to 5.51% for the three months ended March 31, 2005.
As loan volume continues to increase and loan rates adjust upward, the Company should realize increasing interest income. However, for approximately the last year, short term rates, exemplified by the Federal Funds target rate, have been rising faster than long term rates, such as mortgage rates, causing most financial institutions to experience faster increases in cost of funds than in yields on earning assets. This rate environment could effect the Company’s net interest margin negatively. Management expects loan growth and positive loan rate adjustments to continue through 2006, in which case interest income should continue to improve. Management is also managing the Company’s cost of funds diligently during this rate environment, and expects to minimize any detrimental effects on the net interest margin. Based on the Company’s assumptions, the balance sheet has been asset sensitive, and therefore, should be well-positioned to take advantage of this rising rate environment.
Average interest-bearing liabilities totaled $232.2 million for the three months ended March 31, 2006, as compared to $236.1 million for the three months ended March 31, 2005, a decrease of 1.6%. The annualized cost of interest-bearing liabilities for the three months ended March 31, 2006, was 2.78% as compared to 1.93% for the three months ended March 31, 2005.
The net interest spread, which is the difference between the annualized yield on earning assets and the annualized cost of interest-bearing liabilities was 3.56% for the three months ended March 31, 2006 and 3.59% for the same period in 2005.
Average total assets for the three months ended March 31, 2006 were $302.3 million as compared to $302.1 million for the three months ended March 31, 2005.
13
Bay Banks of Virginia, Inc.
Net Interest Income Analysis (unaudited)
| | | | | | | | | | | | | | | | | | |
(Fully taxable equivalent basis) (Thousands) | | Three months ended 3/31/2006 | | | Three months ended 3/31/2005 | |
| Average Balance | | Income/ Expense | | Annualized Yield/Rate | | | Average Balance | | Income/ Expense | | Annualized Yield/Rate | |
INTEREST-EARNING ASSETS: | | | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | | | |
Taxable investments | | $ | 24,197 | | $ | 280 | | 4.63 | % | | $ | 32,559 | | $ | 301 | | 3.70 | % |
Tax-exempt investments (1) | | | 20,174 | | | 290 | | 5.75 | % | | | 19,804 | | | 283 | | 5.72 | % |
| | | | | | | | | | | | | | | | | | |
Total investments | | | 44,371 | | | 570 | | 5.14 | % | | | 52,363 | | | 584 | | 4.46 | % |
| | | | | | |
Gross loans (2) | | | 235,619 | | | 3,876 | | 6.58 | % | | | 217,126 | | | 3,218 | | 5.93 | % |
Interest-bearing deposits | | | 139 | | | 2 | | 5.91 | % | | | 109 | | | 0 | | 1.17 | % |
Fed funds sold | | | 2,424 | | | 28 | | 4.59 | % | | | 11,824 | | | 76 | | 2.57 | % |
| | | | | | | | | | | | | | | | | | |
TOTAL INTEREST-EARNING ASSETS | | $ | 282,553 | | $ | 4,476 | | 6.34 | % | | $ | 281,422 | | $ | 3,879 | | 5.51 | % |
| | | | | | |
INTEREST-BEARING LIABILITIES: | | | | | | | | | | | | | | | | | | |
Deposits: | | | | | | | | | | | | | | | | | | |
Savings deposits | | $ | 61,509 | | $ | 406 | | 2.64 | % | | $ | 67,422 | | $ | 308 | | 1.83 | % |
NOW deposits | | | 43,774 | | | 73 | | 0.67 | % | | | 48,934 | | | 61 | | 0.51 | % |
CD’s >= $100,000 | | | 30,694 | | | 302 | | 3.94 | % | | | 30,300 | | | 247 | | 3.26 | % |
CD’s < $100,000 | | | 65,959 | | | 608 | | 3.69 | % | | | 58,693 | | | 449 | | 3.06 | % |
Money market deposit accounts | | | 15,348 | | | 78 | | 2.03 | % | | | 18,144 | | | 16 | | 0.37 | % |
| | | | | | | | | | | | | | | | | | |
Total interest bearing deposits | | $ | 217,285 | | $ | 1,467 | | 2.70 | % | | $ | 223,493 | | $ | 1,081 | | 1.94 | % |
| | | | | | |
Fed funds purchased | | | 540 | | | 7 | | 4.64 | % | | | — | | | 0 | | 0.00 | % |
Securities sold to repurchase | | | 4,385 | | | 38 | | 3.49 | % | | | 5,095 | | | 16 | | 1.26 | % |
FHLB advance | | | 10,000 | | | 100 | | 4.01 | % | | | 7,500 | | | 37 | | 1.97 | % |
| | | | | | | | | | | | | | | | | | |
TOTAL INTEREST-BEARING LIABILITIES | | $ | 232,210 | | $ | 1,612 | | 2.78 | % | | $ | 236,088 | | $ | 1,134 | | 1.92 | % |
| | | | | | |
Net interest income/yield on earning assets | | | | | $ | 2,864 | | 4.05 | % | | | | | $ | 2,744 | | 3.90 | % |
Net interest rate spread | | | | | | | | 3.56 | % | | | | | | | | 3.59 | % |
(1)-Yield and income assumes a federal tax rate of 34%
(2)-Includes Visa program and non-accrual loans
Through the three months ended March 31, 2006, average interest-earning assets were comprised of the loan portfolio with $235.6 million and the investment portfolio with $44.4 million. For the three month period ended March 31, 2006, compared to the same period in 2005, on a fully tax equivalent basis, tax-exempt investment yields increased to 5.75% from 5.72%, and taxable investment yields increased to 4.63% from 3.70%, resulting in a increase in total investment yield to 5.14% from 4.46%. The investment portfolio will provide liquidity as short investments mature during 2006 and 2007.
In the three months ended March 31, 2006, gross loans on average yielded 6.58% as compared to 5.93% for the same period in 2005. The Company has been successful in growing the loan portfolio with variable and adjustable rate loans since 2004. By keeping the re-pricing terms of the loan portfolio short, the Company is positioned well for this rising rate environment.
As short-term rates in the market increased during 2005 and 2006, the Company held its deposit rates wherever possible in order to control its cost of funds. As this rising rate trend continues in the market, increasing competitive pricing pressure, the Company has begun to raise its deposit rates. For the three months ended March 31, 2006 compared to 2005, the cost of total interest-bearing deposits has increased to 2.70% from 1.94%, with increases in each type of deposit category.
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LIQUIDITY
The Company maintains adequate short-term assets to meet its liquidity needs as anticipated by management. Federal funds sold and investments that mature in one year or less provide the major sources of funding for liquidity needs. On March 31, 2006, federal funds sold totaled $1.3 million and securities maturing in one year or less totaled $4.3 million, for a total pool of $5.6 million. The liquidity ratio as of March 31, 2006 was 14.0% as compared to 15.9% as of December 31, 2005. The Company determines this ratio by dividing the sum of cash and cash equivalents, unpledged investment securities and federal funds sold, by interest-bearing liabilities. Management, through historical analysis, has deemed 15% an adequate liquidity ratio. As cash balances can vary by as much as $4 million daily, it is not unexpected that this ratio may dip below 15% on any given day. In addition, as noted earlier, the Company has $20.3 million available on lines of credit with the Federal Home Loan Bank of Atlanta, plus federal fund lines with several correspondent banks.
OFF BALANCE SHEET ITEMS
There have been no material changes to the off balance sheet items disclosed in “Management’s Discussion and Analysis” in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2005.
CONTRACTUAL OBLIGATIONS
There have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2005.
CAPITAL RESOURCES
From December 31, 2005 to March 31, 2006, total shareholders’ equity decreased to $26.4 million from $26.6 million or 0.8%. The Company’s capital resources are impacted by net unrealized gains or losses on securities. The securities portfolio is marked to market monthly and unrealized gains or losses, net of taxes, are recognized as accumulated other comprehensive income or loss on the balance sheet and statement of changes in shareholders’ equity. Shareholders’ equity before accumulated other comprehensive income was $26.7 million on both March 31, 2006 and December 31, 2005. Accumulated other comprehensive loss was $293 thousand on March 31, 2006, and $92.6 thousand on December 31, 2005, causing total shareholders’ equity to decrease by $208 thousand during the three month period.
Book value per share, basic, on March 31, 2006, compared to March 31, 2005, increased to $11.14 from $10.88, or 2.4%. Book value per share, basic, before accumulated comprehensive income on March 31, 2006, compared to March 31, 2005, grew to $11.27 from $10.84, an increase of 4.0%. Cash dividends paid for the three months ended March 31, 2006, were $379 thousand, or $0.16 per share, compared to $365 thousand, or $0.155 per share, for the comparable period ended March 31, 2005 an increase of 4.0%. Average basic shares outstanding for the three months ended March 31, 2006, were 2,374,377 compared to 2,354,218 for the comparable period ended March 31, 2005. The Company began a share repurchase program in August of 1999 and has continued the program into 2006. The plan authorizes a total of 115,000 shares for repurchase. A total of 22,500 shares have been repurchased at an average price of $14.41 during the three-month period ending March 31, 2006.
The Company is subject to minimum regulatory capital ratios as defined by Federal Financial Institutions Examination Council guidelines. As of March 31, 2006, the Company maintained Tier 1 capital of $23.9 million, net risk weighted assets of $234.5 million, and Tier 2 capital of $2.2 million. On March 31, 2006, the Tier 1 capital to risk weighted assets ratio was 10.2%, the total capital ratio was 11.1%, and the Tier 1 leverage ratio was 8.0%. These ratios continue to be well in excess of regulatory minimums.
15
FINANCIAL CONDITION
Total assets increased by 0.4% during the three-month period ended March 31, 2006. Total assets were $302.9 million at March 31, 2006, as compared to $301.8 million at year-end 2005. Cash and cash equivalents, which produce no income, increased to $7.2 million on March 31, 2006, compared to $5.2 million at year-end 2005.
During the three months ended March 31, 2006, gross loans increased by $6.9 million or 3.0%, to $238.7 million from $231.8 million at year-end 2005. The major components of this increase were construction loans, with 14.2% growth to $46.8 million, and real estate mortgage loans secured by 1-4 family residential collateral, with 1.9% growth to $126.0 million.
For the three months ended March 31, 2006, the Company charged off loans totaling $33 thousand. For the comparable period in 2005, total loans charged off were $13 thousand. The Company maintained $562 thousand of other real estate owned (“OREO”) as of March 31, 2006, which is unchanged from year-end 2005. The Company actively markets all OREO properties, and expects no loss on any of these properties. All properties maintained as other real estate owned are carried at the lesser of book or market value.
The provision for loan losses amounted to $75 thousand through the three months ended March 31, 2006, and the allowance for loan losses as of March 31, 2006, was $2.2 million. The allowance for loan losses, as a percentage of total loans, was 0.92% at March 31, 2006. The allowance for loan losses is analyzed for adequacy on a quarterly basis to determine the necessary provision. A loan by loan review is conducted of all loan classes and inherent losses on these individual loans are determined. This valuation is then compared to historical data in an effort to determine the prevailing trends. A third component of the process is the analysis of a tabular presentation of loss allocation percentages by loan type. Through this process the Company assesses the appropriate provision for the coming quarter. As of March 31, 2006, management deemed the loan loss reserve reasonable for the loss risk identified in the loan portfolio.
As of March 31, 2006, $275 thousand of loans were on non-accrual status, of which $14 thousand are considered impaired. There were $251 thousand of loans on non-accrual status as of year-end 2005. On March 31, 2005, non-accrual loans totaled $1.8 million, of which $1.6 million were considered impaired. The large reduction in impaired loans is due to one loan which has been paid off and another which has been transferred into other real estate owned. Impaired loans are those non-accrual loans that are considered commercial or non-farm/non-residential in nature. Loans still accruing interest but delinquent for 90 days or more were $701 thousand on March 31, 2006, as compared to $319 thousand on March 31, 2005. Management has reviewed these credits and the underlying collateral and expects no additional loss above that which is specifically reserved in the allowance for loan losses.
As of March 31, 2006, securities available for sale at market value totaled $41.0 million as compared to $45.7 million on December 31, 2005. This represents a net decrease of $4.7 million or 10.3% for the three months. Securities held to maturity were $447 thousand as of March 31, 2006, compared to $443 at December 31, 2005. As of March 31, 2006, the investment portfolio represented 13.7% of total assets and 14.8% of earning assets. The greater portion of the Company’s investment portfolio is classified as available-for-sale and marked to market on a monthly basis. The resulting accumulated adjustment to book value as of March 31, 2006, was a net unrealized loss of $443 thousand. The corresponding accumulated loss adjustment to shareholders’ equity was $293 thousand. These gains or losses are booked monthly as an adjustment to book value based upon market conditions, and are not realized as an adjustment to earnings until the securities are actually sold.
As of March 31, 2006, total deposits were $259.7 million compared to $258.8 at year-end 2005. This represents an increase in balances of $918 thousand or 0.4% during the three months. Components of this increase include non-interest-bearing deposits, with a 4.0% increase to $44.4 million, and time deposits, with a 4.9% increase to $97.1 million. Savings and interest-bearing demand deposits decreased by 4.3% to $118.2 million.
16
RESULTS OF OPERATIONS
NON-INTEREST INCOME
Non-interest income for the three months ended March 31, 2006 and 2005 totaled $661 thousand and $607 thousand, respectively. Non-interest income includes income from fiduciary activities, service charges on deposit accounts, other miscellaneous fees, gains on the sale of securities, and other income. Of these categories, the major components are fiduciary activities which contributed $173 thousand compared to $174 thousand through three months of 2006 versus 2005, service charges on deposit accounts which contributed $158 thousand through three months of 2006 versus $173 thousand for the comparable period in 2005, and other service charges and fees, which contributed $266 thousand compared to $208 thousand through the three months of 2006 and 2005, respectively. The primary component of the increase in other service charges and fees is miscellaneous Visa® income. Secondary market lending fees increased to $41 thousand compared to $15 thousand through three months of 2006 versus 2005.
The Company’s fiduciary income is derived from the operations of its subsidiary, Bay Trust Company. The Trust Company offers a broad range of trust and related fiduciary services. Among these are estate settlement and testamentary trusts, revocable and irrevocable personal trusts, managed agency, custodial accounts, and rollover IRA’s both self-directed and managed. Fiduciary income is largely affected by changes in the performance of the stock and bond market, which directly impacts the market value of the accounts upon which fees are earned
Management continues to explore methods of increasing non-interest income. Continued expansion of fiduciary services, diversification of business lines, and expansion of fee-based services provided to bank customers are among the areas under regular review.
NON-INTEREST EXPENSE
For the three months ended March 31, 2006, compared to March 31, 2005, non-interest expenses were $2.5 million compared to $2.3 million. The largest components of non-interest expense are salaries and benefits, and occupancy expense. Through the three months ended March 31, 2006, salary and benefit expense was $1.4 million, compared to $1.2 million for the same period of 2005. Occupancy expense was $430 thousand through the three months ended March 31, 2006 as compared to $369 thousand for the same period of 2005. The Company capitalized an addition to its main office building in May 2005, resulting in increased depreciation expense.
Other expenses include bank franchise taxes which totaled $47 thousand through three months of 2006 and $56 thousand for 2005, expenses related to the Visa® program which were $105 thousand through three months of 2006 and $97 thousand through three months of 2005, telephone expenses which were $48 thousand for the current period and $43 thousand through three months of 2005, and other operating expenses which totaled $514 thousand for the current period versus $489 thousand for the three months ended March 31, 2005. Telephone expenses include the cost of the Company’s Customer Care Center and data network communications.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no significant changes from the quantitative and qualitative disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
17
ITEM 4. CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Treasurer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Treasurer concluded that the Company’s disclosure controls and procedures are operating effectively in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. No significant changes in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
The Company’s financial performance and stock price can be subject to a variety of risks. Following are descriptions of some of the risks management has identified.
General and local economic conditions can have an effect on the Company’s profitability.
If an economic downturn has a negative impact on household or corporate income levels, it could lead to decreased demand for either loan or deposit products and could increase the possibility of some customers’ failure to pay interest or principal on their loans.
Various regulations and statutes affect the Company’s ability to take certain actions.
We operate in a highly regulated industry and are subject to examination, supervision, and comprehensive regulation by several regulatory agencies. Compliance with these regulations is costly and restricts activities such as payment of dividends, mergers and acquisitions, investments, loans, interest rates charged, interest rates paid, and locations of offices. We are also required to maintain adequate capital. The laws and regulations applicable to the banking industry can change at any time, and it is difficult to predict their effects on profitability.
Concentration of credit exposure to residential real estate can cause the Company’s profitability to be sensitive to changes in this market.
If the local residential real estate market were to experience a downturn, our ability to generate new loans could be effected. Also, if these borrowers become less able to perform the obligations of their mortgage agreements, our earnings could be negatively impacted.
Changes in the financial services industry can change the environment in which the Company competes.
In addition to the challenge of competing against other banks in attracting and retaining customers for traditional banking services, competitors also include companies who offer services that banks have not been able or allowed to offer their customers in the past. This environment is primarily a result of changes in regulation and consolidation among financial services providers.
Operational risk exposure is common to all companies.
This include reputational risk, legal and compliance risk, risk of fraud or theft by employees or outsiders, unauthorized transactions by employees, and operational errors, including clerical or record-keeping errors or those resulting from faulty or disabled computer or communications systems.
18
The Company may also be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (e.g. computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. There is also the risk that the Company’s (or its suppliers’) business continuity plans and data security systems prove inadequate.
Changes in interest rates can affect the Company’s income and cash flows.
The difference between the interest rates earned on such assets as loans and investments and the interest rates paid on such liabilities as deposits and borrowings determine, to a great extent, the Company’s levels of income and cash flow. These rates are sensitive to many factors that are beyond the Company’s control, including general economic conditions and the policies of various governmental and regulatory agencies (in particular, the Federal Reserve Bank). Changes in monetary policy, including changes in interest rates, will influence the origination of loans, the prepayment speeds of loans, the purchase of investments, the generation of deposits, the rates received on loans and investment securities, and the rates paid on deposits or other sources of funding. The impact of these changes can be magnified if the Company does not effectively manage the relative sensitivity of its assets and liabilities to changes in market interest rates.
Changes in accounting standards can impact reported earnings.
Accounting standard setters, including the Financial Accounting Standards Board (“FASB”), the Public Company Accounting and Oversight Board (“PCAOB”), the SEC, and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation of the Company’s financial statements. These changes can be difficult to predict and can materially effect how the Company records and reports its financial condition and results of operations.
The use of estimates is required in the preparation of the Company’s financial statements.
Accounting principles generally accepted in the United States of America require management to make significant estimates, the largest of which is the allowance for loan losses. The Company cannot provide complete assurance that these estimates will not significantly change or that losses will not occur if the provided allowance(s) is not adequate. See the Critical Accounting Policies section in Item 7.
The Company’s stock is traded ‘over the counter,’ which causes it to have less liquidity.
The trading volume of our stock is low relative to larger companies. We cannot predict the effect, if any, the availability of shares of our common stock in the market will have on its market price. We can give no assurance that sales of substantial amounts of our common stock in the market would not cause the price of our common stock to decline. The market price of our common stock may fluctuate, and this may be unrelated to our financial performance. General market price declines, overall market volatility, or financial services industry price declines could adversely effect the market price of our common stock.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The status of the Company’s stock repurchase plan is shown in the table below
Issuer Purchases of Equity Securities
| | | | | | | | | |
| | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs |
January, 2006 | | 7,500 | | $ | 14.95 | | 7,500 | | 29,128 |
February, 2006 | | 7,000 | | | 14.46 | | 7,000 | | 22,128 |
March, 2006 | | 8,000 | | | 13.86 | | 8,000 | | 14,128 |
| | | | | | | | | |
| | 22,500 | | $ | 14.41 | | 22,500 | | |
| | | | | | | | | |
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None to report.
ITEM 5. OTHER INFORMATION
None to report.
ITEM 6. EXHIBITS
| | |
31.1 | | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
31.2 | | Certification Pursuant to 18 U.S.C Section 1350 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| |
32.1 | | Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| | Bay Banks of Virginia, Inc. |
| | (Registrant) |
| | |
May 4, 2006 | | By: | | /s/ Austin L. Roberts, III |
| | | | Austin L. Roberts, III |
| | | | President and Chief Executive Officer |
| | | | (Principal Executive Officer) |
| | |
| | By: | | /s/ Deborah M. Evans |
| | | | Deborah M. Evans |
| | | | Treasurer |
| | | | (Principal Financial Officer) |
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