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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
Commission file no: 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, VIRGINIA 22482
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x
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. YES x NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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.x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer ¨ | Smaller Reporting Company x | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x
The aggregate market value of voting stock held by non-affiliates of the registrant at June 30, 2007, based on the closing sale price of the registrant’s common stock on June 30, 2007, was $34,350,747.
The number of shares outstanding of the registrant’s common stock as of March 25, 2008 was 2,363,917.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders to be held on May 19, 2008 are incorporated by reference into Part III of this Form 10-K.
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GENERAL
Bay Banks of Virginia, Inc. (the “Company”) is a bank holding company that conducts substantially all of its operations through its subsidiaries, Bank of Lancaster (the “Bank”) and Bay Trust Company (the “Trust Company”). 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, by providing a full range of banking and related financial services, including checking, savings, other depository services, commercial and industrial loans, residential and commercial mortgages, home equity loans, consumer installment loans, investment brokerage services, insurance, credit cards, and online banking.
The Bank has two offices located in Kilmarnock, Virginia, and one office each in White Stone, Warsaw, Montross, Heathsville, and Callao, Virginia. As of this writing, an eighth branch is under construction in Burgess, Virginia, and a ninth branch is being planned for Colonial Beach, 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 Deposit Insurance Fund of the Federal Deposit Insurance Corporation (the “FDIC”). The Bank 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 Company was created to purchase and manage the assets of the trust department of the Bank of Lancaster. The sale and transfer of assets from the Bank to the Trust Company was completed as of the close of business on December 31, 1999. As of January 1, 2000, the Bank of Lancaster no longer owned or managed the trust function, and thereby no longer receives an income stream from the trust department. Income generated by the Trust Company is consolidated with the Bank’s income and the Company’s income for the purposes of the Company’s consolidated financial statements. The Trust Company opened for business on January 1, 2000, in its permanent location on Main Street in Kilmarnock, Virginia.
The Company’s marketplace is situated on the “Northern Neck” peninsula of Virginia, plus Middlesex County. The “Northern Neck” includes the counties of Lancaster, Northumberland, Richmond, and Westmoreland. Smaller, retired households with relatively high per capita incomes dominate the Company’s primary trading area. Growth in households, employment, and retail sales is moderate but the local economic conditions are stable as growth has been positive for several years. Health care, tourism, and related services are the major employment sectors in the “Northern Neck.”
The Company had total assets of $326.3 million, deposits of $259.6 million, and shareholders equity of $27.1 million as of December 31, 2007.
Through the Bank of Lancaster and Bay Trust Company, Bay Banks of Virginia provides a wide range of services to its customers in its market area. These services are summarized as follows.
Real Estate Lending. The Bank’s real estate loan portfolio is the largest segment of the loan portfolio. The majority of the Bank’s real estate loans are adjustable rate mortgages on one-to-four family residential properties. These mortgages are underwritten and documented within the guidelines of the regulations of the Board of Governors of the Federal Reserve System (the “Federal Reserve”). The Bank underwrites mainly adjustable rate mortgages as the marketplace allows. Home equity lines of credit are also offered. Construction loans with a twelve-month term are another component of the Bank’s portfolio. Underwritten at 80% loan to value, and to qualified builders and individuals, these loans are disbursed as construction progresses and verified by Bank inspection. The Bank also offers commercial loans that are secured by real estate. These loans are typically written at a maximum of 80% loan to value and either vary with the prime rate of interest, or adjust in one, three, or five year terms.
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 either the Federal Home Loan Mortgage Corporation (“FHLMC”) or the Federal National Mortgage Corporation (“FNMA”). These loans are then sold into the secondary market or to FNMA on a loan-by-loan basis. The Bank earns origination fees through offering this service.
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Consumer Lending. In an effort to offer a full range of services, the Bank’s consumer lending includes automobile and boat financing, home improvement loans, and unsecured personal loans. These loans historically entail greater risk than loans secured by real estate, but also offer a higher return.
Commercial Lending. Commercial lending activities include small business loans, asset based loans, and other secured and unsecured loans and lines of credit. Commercial lending may entail greater risk than residential mortgage lending, and is therefore underwritten with strict risk management standards. Among the criteria for determining the borrower’s ability to repay is a cash flow analysis of the business and business collateral.
Business Development. The Bank offers several services to commercial customers. These services include analysis checking, cash management deposit accounts, wire services, direct deposit payroll service, online banking, telephone banking, remote deposit, and a full line of commercial lending options. The Bank also offers Small Business Administration loan products to include the 504 Program, which provides long term funding for commercial real estate and long-lived equipment. This allows commercial customers to apply for favorable rate loans for the development of business opportunities, while providing the Bank with a partial guarantee of the outstanding loan balance.
Bay Services Company, Inc. The Bank has one wholly owned subsidiary, Bay Services Company, Inc., a Virginia corporation organized in 1994 (“Bay Services”). Bay Services owns an interest in a land title insurance agency, Bankers Title of Fredericksburg, and an investment and insurance services company, Bankers Investment Group. Bankers Title of Fredericksburg sells title insurance to mortgage loan customers, including customers of the Bank of Lancaster and the other financial institutions that have an ownership interest in the agency. Bankers Investment Group provides the Bank’s non-deposit products department with insurance and investment products for marketing within the Bank’s primary marketing area. At the time of this report, Bankers Investment Group is merging with and into Infinex Investments, Inc., with the latter becoming the surviving entity. Management expects this transition to be transparent to the Company’s customers because the clearing agent will remain unchanged. Also, Bankers Title of Fredericksburg is merging into Bankers Title of Shenandoah, with the latter becoming the surviving entity. Management expects this merger will reap efficiencies and will likewise be transparent to the Company’s customers.
Bay Trust Company. The Trust Company offers a broad range of investment services as well as traditional trust and related fiduciary services. Included are estate planning and settlement, revocable and irrevocable living trusts, testamentary trusts, custodial accounts, investment management accounts, and managed, as well as self-directed rollover Individual Retirement Accounts.
COMPETITION
The Company’s marketplace is highly competitive. The Company is subject to competition from a variety of commercial banks and financial service companies, large national and regional financial institutions, large regional credit unions, mortgage companies, consumer finance companies, mutual funds and insurance companies. Competition for loans and deposits is affected by numerous factors, including interest rates and institutional reputation.
SUPERVISION AND REGULATION
Bank holding companies and banks are regulated under both federal and state law. The Company is subject to regulation by 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 company laws of Virginia, and as such is subject to regulation and supervision by the Virginia State Corporation Commission’s Bureau of Financial Institutions.
The following description summarizes the significant state and Federal laws to which the Company and the Bank are subject. To the extent statutory or regulatory provisions or proposals are set forth the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.
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The Bank is supervised and regularly examined by the Federal Reserve and the Virginia State Corporation Commission’s Bureau of Financial Institutions. 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 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 Federal Reserve regarding what dividends it can pay 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 (the “FDICIA”), 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 is required to file with the Federal Reserve an annual report and such additional information as it may require pursuant to the Bank Holding Company Act. The Federal Reserve may also conduct examinations of the Company and any or all of its subsidiaries.
CAPITAL REQUIREMENTS
The Federal Reserve, the Office of the Comptroller of the Currency and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to banking organizations. In addition, those regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels because of its financial condition or actual or anticipated growth. Under the risk-based capital requirements of these federal bank regulatory agencies, the Company and the Bank are required to maintain a minimum ratio of total capital to risk-weighted assets of 8%. At least half of the total capital is required to be “Tier 1 capital”, which consists principally of common and certain qualifying preferred shareholders’ equity, less certain intangibles and other adjustments. The remainder (“Tier 2 capital”) consists of a limited amount of subordinated and other qualifying debt (including certain hybrid capital instruments) and a limited amount of the general loan loss allowance. The Tier 1 and total capital to risk-weighted asset ratios of the Company as of December 31, 2007 were 9.8% and 10.8%, respectively.
In addition, each of the federal regulatory agencies has established a minimum leverage capital ratio (Tier 1 capital to average risk-weighted assets) (“Tier 1 leverage ratio”). These guidelines provide for a minimum Tier 1 leverage ratio of 4% for banks and bank holding companies that meet certain specified criteria, including that they have the highest regulatory examination rating and are not contemplating significant growth or expansion. The Tier 1 leverage ratio of the Company as of December 31, 2007, was 7.6%, which is well above the minimum requirement. The guidelines also provide that banking organizations that are experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.
DEPOSIT INSURANCE
The FDIC insures the deposits of the Bank up to the limits set forth under applicable law. On February 15, 2006, federal legislation to reform federal deposit insurance was enacted. The new law merged the old Bank Insurance Fund and Savings Association Insurance Fund into the single Deposit Insurance Fund (the “DIF”), increased deposit insurance coverage for IRAs to $250,000, provides for the further increase of deposit insurance on all accounts by indexing the coverage to the rate of inflation, authorizes the FDIC to set the reserve ratio of the DIF at a level between 1.15% and 1.50%, and permits the FDIC to establish assessments to be paid by insured banks to maintain the minimum ratios.
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On November 2, 2006, the FDIC adopted final regulations establishing a risk-based assessment system that is intended to more closely tie each bank’s deposit insurance assessments to the risk it poses to the DIF. Under the new risk-based assessment system, which became effective in the beginning of 2007, the FDIC will evaluate each bank’s risk based on three primary factors: (1) its supervisory rating, (2) its financial ratios, and (3) its long-term debt issuer rating, if any. The new rate for the Bank is 6.14 cents for every $100 of domestic deposits, per the assessment invoice dated March 15, 2008.
Applied to the Bank’s assessment base of approximately $260 million, these new regulations translate to an annual deposit premium of approximately $160 thousand. Most banks, including Bank of Lancaster, have not been required to pay any deposit insurance premiums since 1995. As part of the reform, Congress provided credits to institutions that paid high premiums in the past to bolster the FDIC’s insurance reserves. As a result, the Bank had assessments credits to initially offset all of its premiums in 2007. The assessment credit is being recognized on a go-forward basis to reduce future deposit premiums. These assessment credits will be exhausted in the fourth quarter of 2008, resulting in higher general and administrative expenses of approximately $40,000 in 2008. As the level of annual deposit premiums is dependent on the amount of the Bank’s deposit assessment base, and assuming the deposit base grows to approximately $273 million in 2009, the annual deposit premiums will result in higher general and administrative expenses of approximately $168 thousand in 2009.
SAFETY AND SOUNDNESS REGULATIONS
The FDIC has adopted guidelines that establish standards for safety and soundness of banks. They are designed to identify potential safety and soundness problems and ensure that banks address those concerns before they pose a risk to the deposit insurance fund. If the FDIC determines that an institution fails to meet any of these standards, the agency can require the institution to prepare and submit a plan to come into compliance. If the agency determines that the plan is unacceptable or is not implemented, the agency must, by order, require the institution to correct the deficiency. The federal banking agencies have broad powers under current federal law to make prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is considered “well capitalized,” “adequately capitalized,” “under capitalized,” “significantly under capitalized,” or “critically undercapitalized.” All such terms are defined under uniform regulation defining such capital levels issued by each of the federal banking agencies. The Bank is considered well capitalized.
The FDIC also has safety and soundness regulations and accompanying guidelines on asset quality and earnings standards. The guidelines provide six standards for establishing and maintaining a system to identify problem assets and prevent those assets from deteriorating. The guidelines also provide standards for evaluating and monitoring earnings and for ensuring that earnings are sufficient to maintain adequate capital and reserves. If an institution fails to comply with a safety and soundness standard, the agency may require the institution to submit and implement an acceptable compliance plan, or face enforcement action.
THE GRAMM-LEACH BLILEY ACT OF 1999
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. The provisions of GLBA that are believed to be of most significance to the Company are discussed below.
GLBA repealed sections 20 and 32 of the Glass-Steagall Act, which separated commercial banking from investment banking, and substantially amends the Bank Holding Company Act, which prior to GLBA limited the ability of bank holding companies to engage in the securities and insurance businesses. To achieve this purpose, GLBA created 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
| • | securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and |
| • | insurance underwriting, sales and brokerage activities. |
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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 CRA rating. While the Bank meets these criteria, the Company has not elected to be treated as a financial holding company.
GLBA established a system of functional regulation under which the federal banking agencies regulate the banking activities of financial holding companies and banks’ financial subsidiaries, the Securities and Exchange Commission (“SEC”) regulates their securities activities, and state insurance regulators will regulate their insurance activities.
GLBA and certain regulations issued by federal banking agencies also provide protection 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 privacy provisions 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.
Neither the provisions of GLBA nor the Act’s implementing regulations have had a material impact on the Company’s or the Bank’s regulatory capital ratios (as discussed above) or ability to continue to operate in a safe and sound manner.
USA PATRIOT ACT OF 2001
In October, 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Northern Virginia, which occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcements’ and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The continuing and potential impact of the USA Patriot Act and related regulations and policies on financial institutions of all kinds is significant and wide ranging. The USA Patriot Act contains sweeping anti-money laundering and financial transparency laws, and imposes various regulations, including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.
CHECK 21
On October 28, 2003, President Bush signed into law the Check Clearing for the 21st Century Act, also known as Check 21. Check 21 gives “substitute checks,” such as a digital image of a check, and copies made from that image, the same legal standing as the original paper check. Some of the major provisions of Check 21 include:
| • | allowing check truncation without making it mandatory; |
| • | demanding that every financial institution communicate to accountholders in writing a description of its substitute check processing program and their rights under the law; |
| • | legalizing substitutions for and replacements of paper checks without agreement from consumers; |
| • | retaining the previously mandated electronic collection and return of checks between financial institutions only when individual agreements are in place; |
| • | requiring that when accountholders request verification, financial institutions produce the original check (or a copy that accurately represents the original) and demonstrate that the account debit was accurate and valid; and |
| • | requiring reaccrediting of funds to an individual’s account on the next business day after a consumer proves that the financial institution has erred. |
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This legislation will likely affect bank capital spending as many financial institutions assess whether technological or operational changes are necessary to stay competitive and take advantage of the new opportunities presented by Check 21.
REPORTING OBLIGATIONS UNDER SECURITIES LAWS
The Company is subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including the filing of annual, quarterly and other reports with the SEC. As an Exchange Act reporting company, the Company is directly affected by the Sarbanes-Oxley Act of 2002 and regulations promulgated thereunder by the SEC, which are aimed at improving corporate governance and reporting procedures. The Company is complying with the rules and regulations implemented pursuant to the Sarbanes-Oxley Act and intends to comply with any applicable rules and regulations implemented in the future.
Not required.
ITEM 1B: UNRESOLVED STAFF COMMENTS
Not required.
The Company, through its subsidiaries, owns or leases buildings that are used in the normal course of business. The main office is located at 100 South Main Street, Kilmarnock, Virginia, in a building owned by the Company. The Company’s subsidiaries own various other offices in the counties or towns in which they operate.
Unless otherwise noted, the properties listed below are owned by the Company and its subsidiaries as of December 31, 2007.
| Corporate Headquarters: | 100 South Main Street, Kilmarnock, Virginia | |
| Bank of Lancaster: | 100 South Main Street, Kilmarnock, Virginia | |
| 708 Rappahannock Drive, White Stone, Virginia | ||
| 432 North Main Street, Kilmarnock, Virginia | ||
| 4935 Richmond Road, Warsaw, Virginia | ||
| 15648 Kings Highway, Montross, Virginia | ||
| 6941 Northumberland Highway, Heathsville, Virginia | ||
| 18 Sandy Street, Callao, Virginia | ||
| 23 West Church Street, Kilmarnock, Virginia | ||
| 15104 Northumberland Highway, Burgess, Virginia (construction in progress) | ||
| Bay Trust Company: | 1 North Main Street, Kilmarnock, Virginia | |
| 15648 Kings Highway, Montross, Virginia | ||
In the ordinary course of its operations, the Company is a party to various legal proceedings. Based upon information currently available, management believes that such legal proceedings, in the aggregate, will not have a material adverse effect on the business, financial condition, or results of operations of the Company.
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ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth quarter of the year-ended December 31, 2007.
ITEM 5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company’s common stock trades on the OTC Bulletin Board under the symbol “BAYK” and transactions generally involve a small number of shares. There were 2,363,917 shares of the Company’s stock outstanding at the close of business on December 31, 2007, which were held by 701 shareholders of record.
The following table summarizes the high and low closing sales prices and dividends declared for the two years ended December 31, 2007.
| Market Values | ||||||||||||||||||
| 2007 | 2006 | Declared Dividends | ||||||||||||||||
| High | Low | High | Low | 2007 | 2006 | |||||||||||||
First Quarter | $ | 14.99 | $ | 14.25 | $ | 15.00 | $ | 13.35 | $ | 0.165 | $ | 0.16 | ||||||
Second Quarter | 15.25 | 13.90 | 15.40 | 13.40 | 0.165 | 0.16 | ||||||||||||
Third Quarter | 14.75 | 13.00 | 14.75 | 13.60 | 0.165 | 0.16 | ||||||||||||
Fourth Quarter | 14.00 | 12.15 | 15.23 | 14.00 | 0.17 | 0.165 | ||||||||||||
A discussion of certain restrictions and limitations on the ability of the Bank to pay dividends to the Company and the ability of the Company to pay dividends on its common stock, is set forth in Part I, Business, of this Form 10-K under the heading “Supervision and Regulation.”
The dividend amount on the Company’s common stock is established by the Board of Directors on a quarterly basis with dividends paid on a quarterly basis. In making its decision on the payment of dividends on the Company’s common stock, the Board considers operating results, financial condition, capital adequacy, regulatory requirements, shareholder return, and other factors.
Stock Performance Graph
The graph and table below compares the cumulative total shareholder return on the Company’s common stock with the cumulative total return on the NASDAQ Stock Market Composite Index and two peer group indices, the “Mid-Atlantic Peer Group Index” and the “VA/MD/NC Peer Group Index.” The Mid-Atlantic Peer Group Index includes banks from the SNL Securities Mid-Atlantic Bank Index (the “SNL Index”) with less than $500 million in total assets. The SNL Index is a published industry index of financial institutions located in the Mid-Atlantic states of Delaware, Maryland, New Jersey, New York, Pennsylvania, and Washington D.C. The Mid-Atlantic Peer Group Index is a subset of the SNL Index, and includes only those financial institutions with less than $500 million in total assets. The VA/MD/NC Peer Group Index includes publicly traded banks in the states of Virginia, Maryland, and North Carolina, with less than $500 million in total assets. Each index shown provides a market capitalization weighted measure of total return for the five year period ended December 31, 2007, assuming that an investment of $100 was made on December 31, 2002 and dividends were reinvested. The comparisons in the graph below are based upon historical data and are not indicative of, nor intended to forecast, future performance of the Company’s stock.
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Total Return Performance
Bay Banks of Virginia, Inc.
| Period Ending | ||||||||||||
Index | 12/31/02 | 12/31/03 | 12/31/04 | 12/31/05 | 12/31/06 | 12/31/07 | ||||||
Bay Banks of Virginia, Inc. | 100.00 | 105.34 | 103.03 | 107.03 | 113.81 | 101.80 | ||||||
NASDAQ Composite | 100.00 | 150.01 | 162.89 | 165.13 | 180.85 | 198.60 | ||||||
Mid-Atlantic Peer Group* | 100.00 | 161.22 | 187.84 | 193.33 | 196.83 | 180.93 | ||||||
VA/MD/NC Peer Group** | 100.00 | 128.25 | 151.96 | 162.26 | 184.79 | 162.86 | ||||||
| * | Mid-Atlantic Peer Group consists of 104 Mid-Atlantic Banks with Assets <$500 million. |
| ** | VA/MD/NC Peer Group consists of 93 publicly traded banks in Virginia (VA), Maryland (MD), and North Carolina (NC), with $500 million or less in total assets. |
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The Company began a share repurchase program in August of 1999 and has continued the program into 2007. The combined plans authorize the repurchase of 180,000 shares.
| 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 | ||||||
October, 2007 | 400 | $ | 14.25 | 400 | 85,928 | ||||
November, 2007 | — | — | — | 85,928 | |||||
December, 2007 | 1,700 | 13.57 | 1,700 | 84,228 | |||||
Total | 2,100 | $ | 13.70 | 2,100 | |||||
ITEM 6: SELECTED FINANCIAL DATA
Not required.
ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components of the results of operations and financial condition, liquidity and capital resources of Bay Banks of Virginia, Inc., and its subsidiaries. This discussion and analysis should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented in Item 8, Financial Statements and Supplementary Data, in this Form 10-K.
EXECUTIVE SUMMARY
Interest margins were management’s primary challenge in 2007. The yield curve had been flat to inverted for nearly two years before it started to show signs of a positive slope in the fourth quarter. A related consequence of the flat yield curve was increased competition for deposits, causing deposit rates to rise, and the Bank’s cost of funds to rise as a result. At the same time, market rates on loans remained essentially unchanged, causing compression on the Bank’s margin. So, although interest income grew as a result of increased loan balances, interest expense grew faster because of higher deposit rates. The consequence of these effects was that net interest income, the Company’s major source of revenue, ended up shrinking slightly.
Management did several things in 2007 to mitigate the effects of margin compression on the Company’s net earnings. Efforts were made to grow the types of loans that earn higher rates. Time deposits were taken on shorter maturities, so that when deposit competition returns to a more normal level and rates start to fall, the Bank would be able to renew these deposits at lower rates. This is actually happening as of the date of this report.
Below the net interest income line, management made efforts to improve non-interest income and control non-interest expense. The Score-to-Win program was launched to promote growth in checking accounts and use of the Bank’s more cost-efficient service channels, like Online Advantage and receipt of account statements electronically through eVue Advantage. Score-to-Win awards points for debit card usage which can be redeemed for merchandise. The program also awards bonus points for opening a checking account with a Check-N-Advantage debit card, and for adding Online Advantage, eVue Advantage, online bill-pay, and a savings account. Increased interchange income has been the result of the related increase in debit card usage.
Another new product introduction in 2007 was eDeposit. This allows customers who deposit large numbers of checks to make their deposits remotely via a secure internet connection.
In the non-interest expense area, management has controlled salaries and benefits expense by restructuring responsibilities among existing employees as attrition has occurred. Delays in capital expenditures, with their related depreciation expense, have been deferred for non-mission-critical projects.
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However, management remains focused on growth, and believes investments made in technology and related infrastructure over the last several years will allow this growth to reap benefits sooner than might otherwise be expected.
We have previously discussed the issue of subprime loans, which surfaced in early 2007, and their impact on lenders and homebuilders. Let us reiterate that we anticipate no direct impact to our Bank and minimal, if any, to homebuilders served by the Bank. We follow a formal set of guidelines and controls in our lending process, and both the Bank and area homebuilders serve a public steeped in a tradition of honoring its obligations. It has always been our philosophy to plan long term for our customers and investors, rather than allowing short to intermediate term influences alter our steady and measured growth policy.
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.
OVERVIEW
2007 Compared to 2006
Bay Banks of Virginia, Inc. recorded earnings for 2007 of $1,808,602, or $0.76 per basic and diluted share, as compared to 2006 earnings of $2,328,745 and $0.98 per basic and diluted share. This is a decrease in net income of 22.3% as compared to 2006. Net interest income for 2007 decreased 0.4% to $10,746,824, as compared to $10,788,049 for 2006. Non-interest income for 2007, before net securities gains, was $3,053,730 as compared to 2006 non-interest income, before net securities gains, of $3,087,580, a decrease of 1.1%. Non-interest expenses increased 4.5% to $11,053,209, as compared to 2006 non-interest expenses of $10,575,140.
Performance as measured by the Company’s return on average assets (“ROA”) was 0.6% for the year ended December 31, 2007 compared to 0.8% for 2006. Performance as measured by return on average equity (“ROE”) was 6.8% for the year ended December 31, 2007, compared to 8.8% for 2006.
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Return on Equity & Assets
Years Ended December 31, | 2007 | 2006 | ||||||
Net Income | $ | 1,808,602 | $ | 2,328,745 | ||||
Average Total Assets | $ | 318,611,401 | $ | 305,971,002 | ||||
Return on Assets | 0.6 | % | 0.8 | % | ||||
Average Equity | $ | 26,406,060 | $ | 26,531,452 | ||||
Return on Equity | 6.8 | % | 8.8 | % | ||||
Dividends declared per share | $ | 0.665 | $ | 0.645 | ||||
Average Shares Outstanding | 2,368,611 | 2,370,901 | ||||||
Average Diluted Shares Outstanding | 2,370,045 | 2,375,339 | ||||||
Net Income per Share | $ | 0.76 | $ | 0.98 | ||||
Net Income per Diluted Share | $ | 0.76 | $ | 0.98 | ||||
Dividend Payout Ratio | 87.1 | % | 65.7 | % | ||||
Average Equity to Assets Ratio | 8.3 | % | 8.7 | % | ||||
RESULTS OF OPERATIONS
Net Interest Income
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.
Net interest income, on a fully tax equivalent basis, which reflects the tax benefits of nontaxable interest income, was $11.1 million in 2007 and $11.2 million in 2006. This represents a negligible decrease in net interest income of 0.5% for 2007 as compared to 2006.
The Company’s net interest margin decreased to 3.73% for 2007 as compared to 3.90% for 2006. The yield on earning assets increased to 6.75% for 2007 as compared to 6.51% for 2006. The cost of interest-bearing liabilities increased to 3.61% for 2007 as compared to 3.16% for 2006. Average earning assets increased 4.2% to $298.5 million for 2007 as compared to $286.5 million for 2006. Average interest bearing liabilities increased to $249.5 million in 2007 as compared to $235.9 million in 2006.
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Average Balances, Income and Expenses, Yields and Rates
| (Fully taxable equivalent basis) | Average Balances, Income and Expense, Yields and Rates | |||||||||||||||||
| Years ended December 31, | 2007 | 2006 | ||||||||||||||||
| (Dollars in Thousands) | Average Balance | Income/ Expense | Yield/ Rate | Average Balance | Income/ Expense | Yield/ Rate | ||||||||||||
INTEREST EARNING ASSETS: | ||||||||||||||||||
Taxable Investments | $ | 21,042 | $ | 1,037 | 4.93 | % | $ | 22,029 | $ | 1,043 | 4.73 | % | ||||||
Tax-Exempt Investments (1) | 19,697 | 1,114 | 5.65 | % | 19,835 | 1,145 | 5.77 | % | ||||||||||
Total Investments | 40,739 | 2,151 | 5.28 | % | 41,864 | 2,188 | 5.23 | % | ||||||||||
Gross Loans (2) | 252,925 | 17,745 | 7.02 | % | 241,668 | 16,315 | 6.75 | % | ||||||||||
Interest-bearing Deposits | 260 | 15 | 5.77 | % | 154 | 10 | 6.18 | % | ||||||||||
Federal Funds Sold | 4,589 | 228 | 4.97 | % | 2,807 | 128 | 4.55 | % | ||||||||||
Total Interest Earning Assets | $ | 298,513 | $ | 20,139 | 6.75 | % | $ | 286,493 | $ | 18,641 | 6.51 | % | ||||||
INTEREST-BEARING LIABILITIES: | ||||||||||||||||||
Savings Deposits | $ | 54,374 | $ | 1,656 | 3.05 | % | $ | 58,324 | $ | 1,682 | 2.88 | % | ||||||
NOW Deposits | 37,105 | 394 | 1.06 | % | 40,531 | 325 | 0.80 | % | ||||||||||
Time Deposits => $100,000 | 41,213 | 1,966 | 4.77 | % | 32,835 | 1,413 | 4.30 | % | ||||||||||
Time Deposits < $100,000 | 65,044 | 2,904 | 4.46 | % | 65,706 | 2,634 | 4.01 | % | ||||||||||
Money Market Deposit Accounts | 17,079 | 525 | 3.07 | % | 14,605 | 320 | 2.19 | % | ||||||||||
Total Deposits | $ | 214,815 | $ | 7,445 | 3.47 | % | $ | 212,001 | $ | 6,374 | 3.01 | % | ||||||
Federal Funds Purchased | $ | 642 | $ | 36 | 5.61 | % | $ | 1,251 | $ | 71 | 5.69 | % | ||||||
Securities Sold Under Repurchase Agreements | 5,982 | 228 | 3.81 | % | 5,778 | 232 | 4.02 | % | ||||||||||
FHLB Advances | 28,105 | 1,306 | 4.65 | % | 16,877 | 785 | 4.65 | % | ||||||||||
Total Interest-Bearing Liabilities | $ | 249,544 | $ | 9,015 | 3.61 | % | $ | 235,907 | $ | 7,462 | 3.16 | % | ||||||
Net Yield on Earning Assets | $ | 11,124 | 3.73 | % | $ | 11,179 | 3.90 | % | ||||||||||
Notes:
(1)-Income and yield is tax-equivalent assuming a federal tax rate of 34%
(2)-Includes Visa credit card program, nonaccrual loans, and fees.
From year-end 2006 to year-end 2007, loan balances grew 6.1% and deposit balances increased 3.2%. Loan growth was primarily composed of single-family residential adjustable-rate mortgages and construction loans secured by real estate. Increases in deposits were due mainly due to time deposits, even though savings and demand deposit balances declined. The balance sheet is liability sensitive, which management believes is favorable in the current rate environment.
The marketplace experienced significant competition for deposits in 2007, creating a need to increase deposit rates, mainly for time deposits, and causing the average cost of interest-bearing deposits to increase. The Company has also experienced a shift in the mix of deposits from lower-rate savings and demand deposits to higher-rate time deposits, which has also contributed to the increased cost of interest-bearing liabilities.
On the asset side, adjustable-rate mortgages (ARM) continue to reprice upward, providing increases in interest income and the corresponding average yield on loans, which is up to 7.02% in 2007 from 6.75% in 2006.
Overall, the increase in the average yield on earning assets has not been sufficient to offset the increase in the average cost of interest-bearing liabilities, causing the net interest margin to decrease to 3.73% in 2007 from 3.90% in 2006. Management expects the current falling rate environment to provide relief to the cost of interest-bearing liabilities in 2008, and therefore to improve the net interest margin.
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Volume and Rate Analysis of Changes in Net Interest Income
Years Ended December 31,
| 2007 vs. 2006 Increase (Decrease) Due to Changes in: | |||||||||||
| (Dollars in Thousands) | Volume (1) | Rate (1) | Total | |||||||||
Earning Assets: | ||||||||||||
Taxable investments | $ | (49 | ) | $ | 43 | $ | (6 | ) | ||||
Tax-exempt investments (2) | (7 | ) | (24 | ) | (31 | ) | ||||||
Gross Loans | 736 | 694 | 1,430 | |||||||||
Interest-bearing deposits | 4 | 1 | 5 | |||||||||
Federal funds sold | 87 | 13 | 100 | |||||||||
Total earning assets | $ | 771 | $ | 727 | $ | 1498 | ||||||
Interest-Bearing Liabilities: | ||||||||||||
NOW checking | $ | (31 | ) | $ | 100 | $ | 69 | |||||
Savings deposits | (126 | ) | 100 | (26 | ) | |||||||
Money market accounts | 57 | 148 | 205 | |||||||||
Certificates of deposit < $100,000 | (40 | ) | 310 | 270 | ||||||||
Certificates of deposit >= $100,000 | 387 | 166 | 553 | |||||||||
Federal funds purchased | (33 | ) | (2 | ) | (35 | ) | ||||||
Securities sold under repurchase agreements | 8 | (12 | ) | (4 | ) | |||||||
FHLB advances | 523 | (2 | ) | 521 | ||||||||
Total interest-bearing liabilities | $ | 745 | $ | 808 | $ | 1553 | ||||||
Change in net interest income | $ | 26 | $ | (81 | ) | $ | (55 | ) | ||||
Notes:
| (1) | Changes caused by the combination of rate and volume are allocated based on the percentage caused by each. |
| (2) | Income and yields are reported on a tax-equivalent basis, assuming a federal tax rate of 34%. |
Interest Sensitivity
Earnings performance and the maintenance of sufficient liquidity depend on careful management of the interest sensitivity gap. The interest sensitivity gap is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. The interest sensitivity gap can be managed by repricing variable-rate assets or liabilities, by replacing an asset or liability at maturity or by adjusting the interest rate during the life of the asset or liability. By managing the volume of assets and liabilities that mature or reprice in various time intervals, the Company can manage interest rate risk and minimize the impact of rising or falling rates.
The Company employs a variety of measurement techniques to identify and manage its exposure to changing interest rates and subsequent changes in liquidity. The Company utilizes a simulation model that estimates interest income volatility and interest rate risk. In addition, the Company utilizes an Asset Liability Committee (the “ALCO”) composed of appointed members from management and the Board of Directors. Through the use of simulation, the ALCO reviews the overall magnitude of interest rate risk and then formulates policy with which to manage asset growth and pricing, funding sources and pricing, and off-balance sheet commitments. These decisions are based on management’s expectations regarding future interest rate movements, economic conditions both locally and nationally, and other business and risk factors.
Non-Interest Income
Total non-interest income decreased by $59 thousand, or 1.9%, in 2007 as compared to 2006. Of that $59 thousand total decrease, secondary market lending fees decreased $38 thousand. Securities gains decreased by $25 thousand.
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However, other service charges and fees increased by $75 thousand, or 5.7%. This is comprised of the VISA program, which contributed $77 thousand to this increase, ATM interchange income, which contributed $46 thousand to this increase, and the Investment Advantage program, which reduced the increase by $58 thousand. The increase in ATM interchange income is related to increased debit card usage by the Bank’s customers, which is attributable to the Score-to-Win program. This program awards points for debit card usage, which can be redeemed for various merchandise. Secondary market lending fees decreased 17.2% to $183 thousand in 2007 from $221 thousand in 2006. These fees are generated when a loan is sold into the secondary market. When the Bank is evaluating a potential loan, many factors influence the determination of whether that loan will be sold or held in the Bank’s own portfolio, including the size of the desired loan, the term, the rate, the structure and management’s intention to grow the Bank’s loan portfolio or not. The Bank originates both secondary market and portfolio loans. Loans are sold into the secondary market both with servicing retained and released.
Non-Interest Expense
During 2007, total non-interest expenses increased 4.5%, to $11.1 million from $10.6 million in 2006. Non-interest expenses are comprised of salaries and benefits, occupancy expense, state bank franchise tax, Visa program expense, telephone expense and other operating expenses.
Salaries and benefits expense continues to be the major component of non-interest expenses. Salaries and benefits expense increased 4.4% to $6.0 million in 2007, as compared to $5.7 million in 2006. This increase is the result of additional personnel hired in preparation for the planned branch expansions into Burgess and Colonial Beach, plus planned growth in commercial lending, Investment Advantage, and Bay Trust Company. As attrition has occurred, management has restructured responsibilities wherever possible to avoid unnecessary hiring.
Occupancy expense increased 2.1% to $1.8 million in 2007, as compared to $1.7 million in 2006. Bank franchise tax expense increased 10.4% to $196 thousand in 2007 as compared to $177 thousand for 2006. Expenses related to the VISA program increased by 11.9% to $608 thousand in 2007 as compared to $543 thousand for 2006. However, when considering the non-interest income generated by the VISA program, its net positive contribution to the Company was $136 thousand in 2007, up $30 thousand from 2006. Telephone expense increased 0.8% to $192 thousand in 2007 as compared to $190 thousand for 2006. Other expense increased by 4.8%, to $2.3 million, as compared to 2006. Management continues its program of identifying variable expenses that can be reduced or eliminated, especially in light of expected increases in fixed costs related to branch expansion in 2008.
Income Taxes
Income tax expense in 2007 was $640 thousand and $872 thousand in 2006. Income tax expense corresponds to an effective rate of 26.2% and 27.4% for the two years ended December 31, 2007 and 2006, respectively. Note 13 to the Consolidated Financial Statements provides reconciliation between the amounts of income tax expense computed using the federal statutory income tax rate and actual income tax expense. Also included in Note 13 to the Consolidated Financial Statements is information regarding deferred taxes for 2007 and 2006.
Loans
Per the following table, loan production remained positive during 2007, with balances growing by 6.1% to $259.8 million as of December 31, 2007, compared to December 31, 2006 balances of $244.8 million. Loans secured by real estate represent the largest category, comprising 89.1% of the loan portfolio at December 31, 2007. Of these balances, 1-4 family residential loans grew by $9.0 million, or 6.6%, other real estate loans grew by $8.3 million, or 25.5%, but construction loans decreased by $2.3 million, or 4.8%. Although commercial loan balances increased by $176 thousand, or 1.0%, they were 7.0% of total loans at year-end 2007 as compared to 7.4% at year-end 2006. Consumer installment and other loans increased by $408 thousand, or 4.3% in 2007.
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Types of Loans
Years ended December 31, | 2007 | 2006 | ||||||||||
(Dollars in thousands) | ||||||||||||
Commercial | $ | 18,254 | 7.0 | % | $ | 18,078 | 7.4 | % | ||||
Real Estate – Construction | 45,698 | 17.6 | % | 47,977 | 19.6 | % | ||||||
Real Estate – Mortgage | 185,883 | 71.6 | % | 169,194 | 69.1 | % | ||||||
Installment and Other (includes Visa program) | 9,922 | 3.8 | % | 9,514 | 3.9 | % | ||||||
Total | $ | 259,757 | 100.0 | % | $ | 244,763 | 100.0 | % | ||||
Notes: | ||||||||||||
Deferred loan costs and fees not included. | ||||||||||||
Allowance for loan losses not included. | ||||||||||||
Loan Maturity Schedule of Selected Loans
as of December 31, 2007
| One Year or Less | One to Five Years | Over Five Years | ||||||||||||||||
| (Dollars in Thousands) | Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | Fixed Rate | Variable Rate | ||||||||||||
Commercial | $ | 2,096 | $ | 10,554 | $ | 3,717 | $ | 620 | $ | 1,267 | $ | — | ||||||
Real Estate – Construction | 3,084 | 8,305 | 23,522 | — | 10,787 | — | ||||||||||||
Real Estate – Mortgage | 3,103 | 77,634 | 11,424 | 80,256 | 13,389 | 77 | ||||||||||||
Installment and Other | 2,592 | 1,093 | 6,055 | — | 181 | — | ||||||||||||
Totals | $ | 10,875 | $ | 97,586 | $ | 44,718 | $ | 80,876 | $ | 25,624 | $ | 77 | ||||||
Notes:
Loans with immediate repricing are shown in the ‘One Year or Less’ category.
Variable rate loans are categorized based on their next repricing date.
Deferred loan costs and fees are not included
Asset Quality-Provision and Allowance for Loan Losses
The provision for loan losses is a charge against earnings that is necessary to maintain the allowance for loan losses at a level consistent with management’s evaluation of the loan portfolio’s inherent risk. 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 conducted on all adversely classified loans. Inherent losses on these individual loans are determined and these losses are compared to historical loss data for each loan type. Management then reviews the various analyses and determines the appropriate allowance. As of December 31, 2007, management considered the allowance for loan losses to be a reasonable estimate of potential loss exposure inherent in the loan portfolio.
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Allowance for Loan Losses
Years Ended December 31, | 2007 | 2006 | ||||||
(Dollars in Thousands) | ||||||||
Balance, beginning of period | $ | 2,235 | $ | 2,157 | ||||
Loans charged off: | ||||||||
Commercial | $ | — | $ | — | ||||
Real estate - construction | — | — | ||||||
Real estate - mortgage | (106 | ) | (19 | ) | ||||
Installment & Other (including Visa program) | (104 | ) | (66 | ) | ||||
Total loans charged off | $ | (210 | ) | $ | (85 | ) | ||
Recoveries of loans previously charged off: | ||||||||
Commercial | $ | — | $ | — | ||||
Real estate - construction | — | — | ||||||
Real estate - mortgage | — | — | ||||||
Installment & Other (including Visa program) | 24 | 38 | ||||||
Total recoveries | $ | 24 | $ | 38 | ||||
Net charge offs | $ | (186 | ) | $ | (47 | ) | ||
Provision for loan losses | 298 | 125 | ||||||
Balance, end of period | $ | 2,347 | $ | 2,235 | ||||
Average loans outstanding during the period | $ | 252,925 | $ | 241,668 | ||||
Ratio of net charge-offs during the period to average loans outstanding during the period | 0.07 | % | 0.02 | % | ||||
Management maintains a list of loans that have potential weakness that may need special attention. Such loans are monitored and used in the determination of the sufficiency of the Company’s allowance for loan losses. As of December 31, 2007, the allowance for loan losses was $2.3 million or 0.9% of total loans as compared to $2.2 million or 0.9% as of December 31, 2006.
Allocation of the Allowance for Loan Losses
| Years Ended December 31, | 2007 | 2006 | ||||||||||
| (Dollars in Thousands) | Allocation of Allowance | Allocation of Allowance | ||||||||||
Commercial | $ | 434 | 18.5 | % | $ | 553 | 24.8 | % | ||||
Real estate - construction | 251 | 10.7 | % | 279 | 12.5 | % | ||||||
Real estate - mortgage | 1,006 | 42.8 | % | 990 | 44.3 | % | ||||||
Installment & Other | 216 | 9.2 | % | 276 | 12.3 | % | ||||||
Unallocated | 440 | 18.7 | % | 137 | 6.1 | % | ||||||
Total | $ | 2,347 | 100.0 | % | $ | 2,235 | 100.0 | % | ||||
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Nonperforming Assets
As of December 31, 2007, nonperforming assets as a percentage of total loans and other real estate owned (“OREO”) was 0.8%, up from year-end 2006, but still low compared to industry averages. Other real estate owned, including foreclosed property, at year-end 2007 increased to $795 thousand from $562 thousand at year-end 2006. This figure represents two properties, one commercial real estate and one residential real estate. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying amount or fair value less cost to sell. Management expects a net gain on the combined sales of these properties. The increase in non-accrual loans represents a conservative approach to the application of related accounting standards taken in the fourth quarter. Since December 31, 2007, $776 thousand of the $1.3 million shown in the following table has been cleared.
Non-Performing Assets
(Dollars in Thousands) Years ended December 31, | 2007 | 2006 | ||||||
Non-accrual Loans | $ | 1,295 | $ | 239 | ||||
Restructured Loans | — | — | ||||||
Foreclosed Properties | 795 | 562 | ||||||
Total Non-performing Assets | $ | 2,090 | $ | 801 | ||||
Loans past due 90+ days as to principal or interest payments & accruing interest | $ | 1,052 | $ | 1,069 | ||||
Allowance for Loan Losses | $ | 2,347 | $ | 2,235 | ||||
Non-Performing Assets to Total Loans and OREO | 0.8 | % | 0.3 | % | ||||
Allowance to Total Loans and OREO | 0.9 | % | 0.9 | % | ||||
Allowance to Non-Performing Assets | 1.12 | 2.79 | ||||||
Securities
As of December 31, 2007, investment securities totaled $44.1 million, an increase of 13.5% as compared to 2006 year-end balances of $38.8 million. As an alternative to Federal Funds Sold, the Company held $8.0 million in auction rate securities at December 31, 2007. The increase in the investment portfolio balance was due mainly to the increase in auction rate securities.
The Company classifies the majority of the investment portfolio as available-for-sale in order that it may be considered a source of liquidity, if necessary. Securities available for sale are carried at fair market value, with after-tax market value gains or losses disclosed as an “unrealized” component of shareholder’s equity entitled “Accumulated other comprehensive income (loss).” As a result, other comprehensive income is impacted by rising or falling interest rates. As the market value of a fixed income investment will increase as interest rates fall, it will also decline as interest rates rise. The after tax unrealized gains or losses are recorded as a portion of other comprehensive income (loss) in the equity of the Company, but have no impact on earnings until such time as the investment is sold, or “realized.” As of December 31, 2007, the Company had accumulated other comprehensive gains net of deferred tax related to securities available-for-sale of $39 thousand as compared to losses of $175 thousand at year-end 2006.
The investment portfolio shows a net unrealized gain of $59 thousand on December 31, 2007, compared to a net unrealized loss of $265 thousand on December 31, 2006. This is due to the market forces in the fourth quarter of 2007, which drove up the prices of high quality debt securities. The unfortunate consequence of this market is that it makes the acquisition of additional securities unattractive, as their interest rates are now relatively lower.
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The Company seeks to diversify its securities portfolio to minimize risk and to maintain a majority of its portfolio in securities issued by states and political subdivisions due to the tax benefits such securities provide. The Company owns no derivatives, and participates in no hedging activities.
For more information on the Company’s investment portfolio, please refer to Note 3 of the Consolidated Financial Statements, included in Item 8 of this Form 10-K.
| (Dollars in Thousands) | One Year or Less or No Maturity | One to Five Years | Five to Ten Years | Over Ten Years | Total | |||||||||||||||
U.S. Government and Agencies: | ||||||||||||||||||||
Book Value | $ | 2,004 | $ | 5,697 | $ | 71 | $ | — | $ | 7,772 | ||||||||||
Market Value | $ | 1,999 | $ | 5,723 | $ | 67 | $ | — | $ | 7,789 | ||||||||||
Weighted average yield | 3.98 | % | 4.50 | % | 4.01 | % | 0.00 | % | 4.36 | % | ||||||||||
States and Municipal Obligations: | ||||||||||||||||||||
Book Value | $ | 11,221 | $ | 17,558 | $ | 4,078 | $ | 1,179 | $ | 34,036 | ||||||||||
Market Value | $ | 11,212 | $ | 17,638 | $ | 4,050 | $ | 1,172 | $ | 34,072 | ||||||||||
Weighted average yield | 5.26 | % | 5.30 | % | 5.29 | % | 5.58 | % | 5.30 | % | ||||||||||
Corporate Bonds: | ||||||||||||||||||||
Book Value | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Market Value | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||
Weighted average yield | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | 0.00 | % | ||||||||||
Other Securities: | ||||||||||||||||||||
Book Value | $ | — | $ | — | $ | — | $ | 2,223 | $ | 2,223 | ||||||||||
Market Value | $ | — | $ | — | $ | — | $ | 2,223 | $ | 2,223 | ||||||||||
Weighted average yield | 0.00 | % | 0.00 | % | 0.00 | % | 5.89 | % | 5.89 | % | ||||||||||
Total Securities: | ||||||||||||||||||||
Book Value | $ | 13,225 | $ | 23,255 | $ | 4,149 | $ | 3,402 | $ | 44,031 | ||||||||||
Market Value | $ | 13,211 | $ | 23,361 | $ | 4,117 | $ | 3,395 | $ | 44,084 | ||||||||||
Weighted average yield | 5.06 | % | 5.11 | % | 5.27 | % | 5.78 | % | 5.16 | % | ||||||||||
Notes: | ||||||||||||||||||||
Yields on tax-exempt securities have been computed on a tax-equivalent basis. |
| |||||||||||||||||||
Average yields on securities held for sale are based on amortized cost. |
| |||||||||||||||||||
Deposits
As of December 31, 2007, total deposits increased 3.1% to $259.6 million as compared to year-end 2006 deposits of $251.6 million. Non-interest bearing demand deposits decreased 13.0%, while time deposits increased 15.0%, demonstrating a mix shift to more costly deposits. This is a trend that has continued from 2006 and intensified in 2007 due to the highly competitive market for deposits.
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Average Deposits & Rates
Years Ended December 31, (Thousands) | 2007 | 2006 | ||||||||||
| Average Balance | Yield/ Rate | Average Balance | Yield/ Rate | |||||||||
Non-interest bearing Demand Deposits | $ | 40,827 | 0.00 | % | $ | 41,853 | 0.00 | % | ||||
Interest bearing Deposits: | ||||||||||||
NOW Accounts | $ | 37,105 | 1.06 | % | $ | 40,531 | 0.80 | % | ||||
Regular Savings | 54,374 | 3.05 | % | 58,324 | 2.88 | % | ||||||
Money Market Deposit Accounts | 17,079 | 3.07 | % | 14,605 | 2.19 | % | ||||||
Time Deposits: | ||||||||||||
CD’s $100,000 or more | 41,213 | 4.77 | % | 32,835 | 4.30 | % | ||||||
CD’s less than $100,000 | 65,045 | 4.47 | % | 65,706 | 4.01 | % | ||||||
Total Interest bearing Deposits | $ | 214,816 | 3.47 | % | $ | 212,001 | 3.01 | % | ||||
Total Average Deposits | $ | 255,643 | 2.91 | % | $ | 253,854 | 2.51 | % | ||||
Maturity Schedule of Time Deposits of $100,000 and over
As of December 31, 2007
(Thousands) | |||
3 months or less | $ | 16,229 | |
3-6 months | 8,404 | ||
6-12 months | 12,891 | ||
Over 12 months | 9,825 | ||
Totals | $ | 47,349 | |
CAPITAL RESOURCES
Capital resources represent funds, earned or obtained, over which a financial institution can exercise greater long-term control in comparison with deposits and borrowed funds. The adequacy of the Company’s capital is reviewed by management on an ongoing basis with reference to size, composition, and quality of the Company’s resources and consistency with regulatory requirements and industry standards. Management seeks to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and to absorb potential losses, yet allow management to effectively leverage its capital to maximize return to shareholders.
The Company is required to maintain minimum amounts of capital to total “risk weighted” assets, as defined by Federal Reserve Capital Guidelines. According toCapital Guidelines for Bank Holding Companies, the Company is required to maintain a minimum Total Capital to Risk Weighted Assets ratio of 8.0%, a Tier 1 Capital to Risk Weighted Assets ratio of 4.0% and a Tier 1 Capital to Adjusted Average Assets ratio (Leverage ratio) of 4.0%. As of December 31, 2007, the Company maintained these ratios at 10.8%, 9.8%, and 7.6%, respectively. At year-end 2006, these ratios were 11.4%, 10.5%, and 8.1%, respectively.
Total capital, before accumulated other comprehensive loss, increased 2.7% to $27.1 million as of year-end 2007 as compared to $26.4 million at year-end 2006. Accumulated other comprehensive loss was $350 thousand at year-end 2007, down 63.3% from a loss of $954 thousand at year-end 2006, mainly due to the effect of SFAS No. 158, Defined Benefit Pension and Other Postretirement Plans. The Company accounts for other comprehensive income in the investment portfolio by adjusting capital for any after tax effect of unrealized gains and losses on securities at the end of a given accounting period.
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LIQUIDITY
Liquidity represents an institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest-bearing deposits with other banks, Federal Funds Sold and investments and loans maturing within one year. The Company’s ability to obtain deposits and purchase funds at favorable rates determines its liquidity. Management believes that the Company maintains overall liquidity that is sufficient to satisfy its depositors’ requirements and to meet its customers’ credit needs.
At December 31, 2007, liquid assets totaled $37.0 million or 11.3% of total assets. Additional sources of liquidity available to the Company include its capacity to borrow additional funds when necessary. The Bank maintains Federal Funds lines with regional banks totaling approximately $19.0 million. In addition, the subsidiary Bank has a line of credit with the Federal Home Loan Bank of Atlanta totaling approximately $65.0 million, with $35.0 million available.
The impact of contractual obligations is limited to three FHLB advances, one for $10 million, which matures in May of 2011, one for $15 million, which matures in September of 2016 and one for $5 million, which matures in May of 2011. For details on theses advances, please refer to Note 11 of the Consolidated Financial Statements in Item 8 of this Form 10-K.
OFF BALANCE SHEET COMMITMENTS
In the normal course of business, the Company offers various financial products to its customers to meet their credit and liquidity needs. These instruments frequently involve elements of liquidity, credit and interest rate risk in excess of the amount recognized in the Consolidated Balance Sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby-letters of credit is represented by the contractual amount of these instruments. Subject to its normal credit standards and risk monitoring procedures, the Company makes contractual commitments to extend credit. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Conditional commitments are issued by the Company in the form of performance stand-by letters of credit, which guarantee the performance of a customer to a third-party. The credit risk of issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Off Balance Sheet Arrangements
December 31, | 2007 | 2006 | ||||
(Dollars in Thousands) | ||||||
Total Loan Commitments Outstanding | $ | 41,085 | $ | 41,289 | ||
Standby-by Letters of Credit | 550 | 860 | ||||
The Company maintains liquidity and credit facilities with non-affiliated banks in excess of the total loan commitments and stand-by letters of credit. As these commitments are earning assets only upon takedown of the instrument by the customer, thereby increasing loan balances, management expects the revenue of the Company to be enhanced as these credit facilities are utilized.
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements concerning the Company’s expectations, plans, objectives, future financial performance and other statements that are not historical facts. These statements may constitute “forward-looking statements” as defined by federal securities laws. These statements may address issues that involve estimates and assumptions made by management, risks and uncertainties, and actual results could differ materially from historical results or those anticipated by such statements. Factors that could have a material adverse effect on the operations and future prospects of the Company include, but are not limited to, changes in: interest rates, general economic
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conditions, the legislative/regulatory climate, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein, and readers are cautioned not to place undue reliance on such statements, which speak only as of the date they are made.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
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ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS
December 31, 2007 and 2006
| 2007 | 2006 | |||||||
ASSETS | ||||||||
Cash and due from banks | $ | 5,015,762 | $ | 6,320,951 | ||||
Interest-bearing deposits | 375,008 | 148,436 | ||||||
Federal funds sold | 1,392,554 | 4,636,278 | ||||||
Securities available for sale, at fair value | 43,618,174 | 38,393,648 | ||||||
Securities held to maturity at amortized cost (fair value, $465,896 and $430,594) | 471,371 | 457,091 | ||||||
Loans, net of allowance for loan losses of $2,347,244 and $2,235,544 | 258,164,836 | 243,372,412 | ||||||
Premises and equipment, net | 10,783,844 | 10,317,498 | ||||||
Accrued interest receivable | 1,478,442 | 1,418,214 | ||||||
Other real estate owned | 795,054 | 561,745 | ||||||
Goodwill | 2,807,842 | 2,807,842 | ||||||
Other assets | 1,360,963 | 1,258,970 | ||||||
Total assets | $ | 326,263,850 | $ | 309,693,085 | ||||
LIABILITIES | ||||||||
Noninterest-bearing deposits | $ | 38,476,633 | $ | 44,246,563 | ||||
Savings and interest-bearing demand deposits | 106,727,807 | 107,915,874 | ||||||
Time deposits | 114,363,000 | 99,485,144 | ||||||
Total deposits | $ | 259,567,440 | $ | 251,647,581 | ||||
Federal Funds purchased and securities sold under repurchase agreements | $ | 8,365,313 | $ | 5,248,876 | ||||
Federal Home Loan Bank advances | 30,000,000 | 25,000,000 | ||||||
Other liabilities | 1,258,234 | 1,428,744 | ||||||
Commitments and contingencies | — | — | ||||||
Total liabilities | $ | 299,190,987 | $ | 283,325,201 | ||||
SHAREHOLDERS’ EQUITY | ||||||||
Common stock ($5 par value; authorized - 5,000,000 shares; outstanding - 2,363,917 and 2,374,727 shares, respectively) | $ | 11,819,583 | $ | 11,873,633 | ||||
Additional paid-in capital | 4,643,827 | 4,722,592 | ||||||
Retained Earnings | 10,959,793 | 10,726,121 | ||||||
Accumulated other comprehensive (loss), net | (350,340 | ) | (954,462 | ) | ||||
Total shareholders’ equity | $ | 27,072,863 | $ | 26,367,884 | ||||
Total liabilities and shareholders’ equity | $ | 326,263,850 | $ | 309,693,085 | ||||
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF INCOME | ||||||
| Years Ended December 31, | 2007 | 2006 | ||||
Interest Income | ||||||
Loans, including fees | $ | 17,745,278 | $ | 16,314,713 | ||
Securities: | ||||||
Taxable | 1,052,243 | 1,052,493 | ||||
Tax-exempt | 734,853 | 755,463 | ||||
Federal funds sold | 228,461 | 127,704 | ||||
Total interest income | $ | 19,760,835 | $ | 18,250,373 | ||
Interest Expense | ||||||
Deposits | $ | 7,444,739 | $ | 6,373,352 | ||
Federal funds purchased | 35,821 | 71,175 | ||||
Securities sold under repurchase agreements | 227,851 | 232,494 | ||||
FHLB advances | 1,305,600 | 785,303 | ||||
Total interest expense | $ | 9,014,011 | $ | 7,462,324 | ||
Net Interest Income | $ | 10,746,824 | $ | 10,788,049 | ||
Provision for loan losses | 298,299 | 125,000 | ||||
Net interest income after provision for loan losses | $ | 10,448,525 | $ | 10,663,049 | ||
Non-interest Income | ||||||
Income from fiduciary activities | $ | 711,965 | $ | 707,129 | ||
Service charges and fees on deposit accounts | 734,363 | 733,180 | ||||
Other service charges and fees | 1,394,548 | 1,319,146 | ||||
Secondary market lending fees | 183,097 | 221,006 | ||||
Securities gains | — | 25,163 | ||||
Other real estate gains | 3,774 | — | ||||
Other income | 25,983 | 107,119 | ||||
Total non-interest income | $ | 3,053,730 | $ | 3,112,743 | ||
Non-interest Expense | ||||||
Salaries and employee benefits | $ | 5,976,588 | $ | 5,724,078 | ||
Occupancy expense | 1,773,944 | 1,738,189 | ||||
Bank franchise tax | 195,675 | 177,184 | ||||
Visa expense | 607,687 | 543,087 | ||||
Telephone expense | 191,772 | 190,159 | ||||
Other expense | 2,307,543 | 2,202,443 | ||||
Total non-interest expense | $ | 11,053,209 | $ | 10,575,140 | ||
Net income before income taxes | $ | 2,449,046 | $ | 3,200,652 | ||
Income tax expense | 640,444 | 871,907 | ||||
Net Income | $ | 1,808,602 | $ | 2,328,745 | ||
Basic Earnings Per Share | ||||||
Average basic shares outstanding | 2,368,611 | 2,370,901 | ||||
Earnings per share, basic | $ | 0.76 | $ | 0.98 | ||
Diluted Earnings Per Share | ||||||
Average diluted shares outstanding | 2,370,045 | 2,375,339 | ||||
Earnings per share, diluted | $ | 0.76 | $ | 0.98 | ||
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended December 31, 2007, and 2006
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||||||
Balance at December 31, 2005 | $ | 11,929,830 | $ | 4,849,436 | $ | 9,926,321 | $ | (92,614 | ) | $ | 26,612,973 | |||||||||
Comprehensive Income: | ||||||||||||||||||||
Net Income | — | — | 2,328,745 | — | 2,328,745 | |||||||||||||||
Changes in unrealized holding (losses) on securities arising during the period, net of taxes of ($33,916) | (65,836 | ) | (65,836 | ) | ||||||||||||||||
Reclassification adjustment for securities gains included in net income, net of taxes of $8,555 | (16,608 | ) | (16,608 | ) | ||||||||||||||||
Total comprehensive income | 2,246,301 | |||||||||||||||||||
Adjustment to initially apply FASB | ||||||||||||||||||||
Statement No. 158 net of taxes of ($401,511) in regard to postretirement pension and benefits | (779,404 | ) | (779,404 | ) | ||||||||||||||||
Cash dividends paid —$0.645 per share | — | — | (1,528,945 | ) | — | (1,528,945 | ) | |||||||||||||
Stock repurchases (39,700 shares) | (198,500 | ) | (374,257 | ) | — | — | (572,757 | ) | ||||||||||||
Stock-based compensation | — | 45,301 | — | — | 45,301 | |||||||||||||||
Sale of common stock: | ||||||||||||||||||||
Dividends Reinvested (24,515 shares) | 122,573 | 221,802 | — | — | 344,375 | |||||||||||||||
Stock Options exercised (3,946 shares, net) | 19,730 | (19,690 | ) | — | — | 40 | ||||||||||||||
Balance at December 31, 2006 | $ | 11,873,633 | $ | 4,722,592 | $ | 10,726,121 | $ | (954,462 | ) | $ | 26,367,884 | |||||||||
Comprehensive Income: | ||||||||||||||||||||
Net Income | — | — | 1,808,602 | — | 1,808,602 | |||||||||||||||
Changes in unrealized holding gains on securities arising during the period, net of taxes of $110,181 | 213,880 | 213,880 | ||||||||||||||||||
Changes in fair value of pension and post-retirement benefit plans, net of taxes of $201,034 | 390,242 | 390,242 | ||||||||||||||||||
Total comprehensive income | 2,412,724 | |||||||||||||||||||
Cash dividends paid —$0.665 per share | — | — | (1,574,930 | ) | — | (1,574,930 | ) | |||||||||||||
Stock repurchases (12,700 shares) | (63,500 | ) | (119,071 | ) | — | — | (182,571 | ) | ||||||||||||
Stock-based compensation | — | 42,356 | — | — | 42,356 | |||||||||||||||
Sale of common stock: | ||||||||||||||||||||
Stock Options exercised (1,890 shares, net) | 9,450 | (2,050 | ) | — | — | 7,400 | ||||||||||||||
Balance at December 31, 2007 | $ | 11,819,583 | $ | 4,643,827 | $ | 10,959,793 | $ | (350,340 | ) | $ | 27,072,863 | |||||||||
See Notes to Consolidated Financial Statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
| Years Ended December 31, | 2007 | 2006 | ||||||
Cash Flows From Operating Activities | ||||||||
Net Income | $ | 1,808,602 | $ | 2,328,745 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation | 986,310 | 944,506 | ||||||
Net amortization and accretion of securities | 12,598 | 16,227 | ||||||
Loss on sale of fixed assets | 19,781 | — | ||||||
Gain on sale of other real estate | (3,774 | ) | — | |||||
Provision for loan losses | 298,299 | 125,000 | ||||||
Stock-based compensation | 42,356 | 45,301 | ||||||
Deferred income tax benefit | (19,194 | ) | (54,223 | ) | ||||
Net securities gains | — | (25,163 | ) | |||||
(Increase)/decrease in accrued income and other assets | 228,023 | (260,065 | ) | |||||
Increase/(decrease) in other liabilities | (261,496 | ) | 156,667 | |||||
Net cash provided by operating activities | $ | 3,111,505 | $ | 3,276,995 | ||||
Cash Flows From Investing Activities | ||||||||
Proceeds from maturities of available-for-sale securities | $ | 3,912,447 | $ | 2,394,531 | ||||
Proceeds from sales of available-for-sale securities | 1,825,400 | 6,427,087 | ||||||
Purchases of available-for-sale securities | (10,665,190 | ) | (1,616,807 | ) | ||||
Increase in interest bearing deposits in other banks | (226,572 | ) | (40,033 | ) | ||||
(Increase)/decrease in federal funds sold | 3,243,724 | (497,472 | ) | |||||
Loan originations and principal collections, net | (15,340,780 | ) | (13,841,546 | ) | ||||
Proceeds from sale of other real estate owned | 20,519 | — | ||||||
Purchases of premises and equipment | (1,472,437 | ) | (1,299,430 | ) | ||||
Net cash (used in) investing activities | $ | (18,702,889 | ) | $ | (8,473,670 | ) | ||
Cash Flows From Financing Activities | ||||||||
Decrease in demand, savings, and other interest-bearing deposits | $ | (6,957,997 | ) | $ | (14,059,441 | ) | ||
Net increase in time deposits | 14,877,856 | 6,920,466 | ||||||
Net increase in securities sold under repurchase agreements and federal funds purchased | 3,116,437 | 200,426 | ||||||
Increase in FHLB advances | 5,000,000 | 15,000,000 | ||||||
Proceeds from issuance of common stock | 7,400 | 344,415 | ||||||
Dividends paid | (1,574,930 | ) | (1,528,945 | ) | ||||
Repurchase of common stock | (182,571 | ) | (572,757 | ) | ||||
Net cash provided by financing activities | $ | 14,286,195 | $ | 6,304,164 | ||||
Net increase / (decrease) in cash and due from banks | (1,305,189 | ) | 1,107,489 | |||||
Cash and due from banks at beginning of period | 6,320,951 | 5,213,462 | ||||||
Cash and due from banks at end of period | $ | 5,015,762 | $ | 6,320,951 | ||||
Supplemental Schedule of Noncash Investing and Financing Activities: | ||||||||
Interest paid | $ | 8,942,136 | $ | 7,287,804 | ||||
Income taxes paid | 531,917 | 1,019,917 | ||||||
Unrealized gain/(loss) on investment securities | 324,061 | (124,915 | ) | |||||
Change in fair value of pension and post-retirement obligation | 591,276 | (1,180,915 | ) | |||||
Loans transferred to other real estate owned | 250,054 | — | ||||||
See Notes to Consolidated Financial Statements.
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NOTES TO FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Principles of consolidation. The consolidated financial statements of Bay Banks of Virginia, Inc. (the “Company”), include the accounts of Bay Banks of Virginia, Inc. and its subsidiaries, Bank of Lancaster, and Bay Trust Company. 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 subsidiaries.
The 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 offices in the counties of Lancaster, Northumberland, Richmond, and Westmoreland, Virginia. 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.
Bay Trust Company (the “Trust Company”) offers a broad range of investment services, as well as traditional trust and related fiduciary services from its office on Main Street in Kilmarnock, Virginia. Included are estate planning and settlement, revocable and irrevocable living trusts, testamentary trusts, custodial accounts, investment management accounts and managed, as well as self-directed, rollover Individual Retirement Accounts.
Use of estimates. The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions. The amounts recorded in the consolidated financial statements may be affected by those estimates and assumptions. Actual results may vary from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred taxes.
Cash and Cash Equivalents. For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and securities purchased under agreements to resell, all of which mature within ninety days.
Interest-Bearing Deposits in Banks. Interest-bearing deposits in banks mature within one year and are carried at cost.
Securities.Debt securities that management has the positive intent and ability to hold to maturity are classified as “held to maturity” and recorded at amortized cost. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Declines in the fair value of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers the following: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
Securities sold under repurchase agreements.Securities sold under repurchase agreements, which are classified as secured borrowings, generally mature within one year from the transaction date. Securities sold under repurchase agreements are reflected at the amount of cash received in connection with the transaction. The Company is required to provide collateral based on the fair value of the underlying securities.
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Loans. The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans. The ability of the Company’s debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan originations fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield over the contractual term of the loan.
The accrual of interest on mortgage and commercial loans is generally discontinued at the time the loan is 90 days or more past due, or earlier, if collection is uncertain based on an evaluation of the net realizable value of the collateral and the financial strength of the borrower. Loans greater than 90 days past due may remain on accrual status if the credit is well secured and in process of collection. Credit Card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost recovery method until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for loan losses.The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.
The allowance consists of specific, general, and unallocated components. The specific component relates to loans that are classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are the subject of a restructuring agreement.
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Premises and equipment. Land is carried at cost. Premises and equipment are carried at cost less accumulated depreciation. Depreciation is computed principally by the straight-line method over the estimated useful lives of the premises and equipment. Estimated useful lives range from 10-40 years for buildings, and from 3-10 years for furniture, fixtures and equipment. Maintenance and repairs are charged to expense as incurred, and major improvements are capitalized.
Other real estate owned.Real estate properties acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at the lower of the carrying value or fair value on the date of foreclosure less estimated selling costs to establish a new cost basis. After foreclosure, management periodically performs valuations and the real estate is carried at the lower of carrying amount or fair value less cost to sell.
Income taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of income.
Pension benefits. The noncontributory defined benefit pension plan covers substantially 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 determined to be appropriate from time-to-time.
Post retirement benefits. The Company provides certain health care benefits for all retired employees that meet eligibility requirements.
Trust assets and income. Customer assets held by the Trust Company, other than cash on deposit, are not included in these financial statements, since such items are not assets of the Bank and Trust Company. Trust fees are recorded on the accrual basis.
Earnings per share. Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options.
Off-balance-sheet financial instruments. In the ordinary course of business the Company has entered into off-balance-sheet financial instruments such as home equity lines of credit, overdraft protection lines of credit, unsecured lines of credit, commitments under credit card arrangements, construction loan commitments 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.
Significant group concentration of credit risk. Most of the Company’s business activity is with customers located in the counties of Lancaster, Northumberland, Richmond and Westmoreland, Virginia. The Company makes residential, commercial and consumer loans and a significant amount of the loan portfolio is comprised 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.
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Advertising.Advertising costs are expensed as incurred, and totaled $170 thousand and $130 thousand for the years ended December 31, 2007 and 2006, respectively.
Reclassifications. Certain reclassifications have been made to prior period balances to conform to the current year presentation.
Stock-based compensation plans.In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards 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 $42 thousand during 2007. As of December 31, 2007, there was $7 thousand of unrecognized compensation expense related to non-vested stock options, which will be recognized over the remaining vesting period.
Recent Accounting Pronouncements. In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but rather, provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company does not expect the implementation of SFAS 157 to have a material impact on its financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS 158). This Statement requires that employers measure plan assets and obligations as of the balance sheet date. This requirement is effective for fiscal years ending after December 15, 2008. The other provisions of SFAS 158 were implemented by the Company as of December 31, 2006. The Company does not expect the implementation of the measurement date provisions of SFAS 158 to have a material impact on its financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective of this Statement is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, with early adoption available in certain circumstances. The Company does not expect the implementation of SFAS 159 to have a material impact on its financial statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) to have a material impact on its financial statements.
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In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment of ARB No. 51” (SFAS 160). The Standard will significantly change the financial accounting and reporting of noncontrolling (or minority) interests in consolidated financial statements. SFAS 160 is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2008, with early adoption prohibited. The Company does not expect the implementation of SFAS 160 to have a material impact on its financial statements.
In September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” This consensus concludes that for a split-dollar life insurance arrangement within the scope of this Issue, an employer should recognize a liability for future benefits in accordance with SFAS 106 (if, in substance, a postretirement benefit plan exists) or APB Opinion No. 12 (if the arrangement is, in substance, an individual deferred compensation contract) based on the substantive agreement with the employee. The consensus is effective for fiscal years beginning after December 15, 2007, with early application permitted. The Company does not expect the implementation of EITF 06-4 to have a material impact on its financial statements.
In November 2006, the EITF issued “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements” (EITF 06-10). In this Issue, a consensus was reached that an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either SFAS 106 or APB Opinion No. 12, as appropriate, if the employer has agreed to maintain a life insurance policy during the employee’s retirement or provide the employee with a death benefit based on the substantive agreement with the employee. A consensus also was reached that an employer should recognize and measure an asset based on the nature and substance of the collateral assignment split-dollar life insurance arrangement. The consensuses are effective for fiscal years beginning after December 15, 2007, including interim periods within those fiscal years, with early application permitted. The Company does not expect the implementation of EITF 06-10 to have a material impact on its financial statements.
In February 2007, the FASB issued FSP No. FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88 and No. 106 and to the Related Staff Implementation Guides.” This FSP provides conforming amendments to the illustrations in SFAS 87, 88, and 106 and to related staff implementation guides as a result of the issuance of SFAS 158. The conforming amendments made by this FSP are effective as of the effective dates of SFAS 158. The unaffected guidance that this FSP codifies into SFAS 87, 88, and 106 does not contain new requirements and therefore does not require a separate effective date or transition method. The Company does not expect the implementation of FSP No. FAS 158-1 to have a material impact on its financial statements.
In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company does not expect the implementation of SAB 109 to have a material impact on its financial statements.
In December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a Simplified Method in Developing Expected Term of Share Options” (SAB 110). SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simplified method discussed in SAB 107 for estimating the expected term of “plain vanilla” share options regardless of whether the company has sufficient information to make more refined estimates. The staff noted that it understands that detailed information about employee exercise patterns may not be widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simplified method beyond December 31, 2007. The Company does not expect the implementation of SAB 110 to have a material impact on its financial statements.
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Note 2. Goodwill
The Company has goodwill recorded on the consolidated financial statements relating to the purchase of five branches during the years 1994 through 2000. The balance of the goodwill at December 31, 2007 and 2006, as reflected on the consolidated balance sheets was $2,807,842. In accordance with Statement of Financial Accounting Standards 141 and 142, management determined that these purchases qualified as acquisitions of businesses and that the related unidentifiable intangibles were goodwill. Therefore, amortization was discontinued effective January 1, 2002. The goodwill balance is tested for impairment at least annually. Based on the testing, there were no impairment charges in 2007 or 2006.
Note 3. Investment Securities
The aggregate amortized cost and fair values of the available for sale securities portfolio are as follows:
Available-for-sale securities December 31, 2007 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||
U.S. Government agencies | $ | 7,771,753 | $ | 30,048 | $ | (13,066 | ) | $ | 7,788,735 | ||||
State and municipal obligations | 33,564,201 | 201,435 | (159,597 | ) | 33,606,039 | ||||||||
Restricted securities | 2,223,400 | — | — | 2,223,400 | |||||||||
| $ | 43,559,354 | $ | 231,483 | $ | (172,663 | ) | $ | 43,618,174 | |||||
Available-for-sale securities December 31, 2006 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||
U.S. Government agencies | $ | 10,393,363 | $ | 2,231 | $ | (165,614 | ) | $ | 10,229,980 | ||||
State and municipal obligations | 25,945,581 | 133,172 | (236,277 | ) | 25,842,476 | ||||||||
Corporate bonds | 276,144 | 1,248 | — | 277,392 | |||||||||
Restricted securities | 2,043,800 | — | — | 2,043,800 | |||||||||
| $ | 38,658,888 | $ | 136,651 | $ | (401,891 | ) | $ | 38,393,648 | |||||
| The aggregate amortized cost and fair values of the held to maturity securities portfolio are as follows: | |||||||||||||
Held-to-maturity securities December 31, 2007 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||
State and municipal obligations | $ | 471,371 | $ | — | $ | (5,475 | ) | $ | 465,896 | ||||
Held-to-maturity securities December 31, 2006 | Amortized Cost | Gross Unrealized Gains | Gross Unrealized (Losses) | Fair Value | |||||||||
State and municipal obligations | $ | 457,091 | $ | — | $ | (26,497 | ) | $ | 430,594 | ||||
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Gross realized gains and losses on sales of securities were as follows:
| Years Ended December 31, | 2007 | 2006 | ||||
Gross realized gains | $ | — | $ | 25,163 | ||
Gross realized losses | — | — | ||||
Net realized gains/(losses) | $ | — | $ | 25,163 | ||
The aggregate amortized cost and market values of the investment securities portfolio by contractual maturity at December 31, 2007 are shown below:
| Amortized Cost | Fair Value | |||||
Due in one year or less | $ | 13,225,225 | $ | 13,211,167 | ||
Due after one year through five years | 23,254,249 | 23,360,262 | ||||
Due after five through ten years | 4,149,271 | 4,116,948 | ||||
Due after ten years | 1,178,580 | 1,172,293 | ||||
Restricted securities | 2,223,400 | 2,223,400 | ||||
| $ | 44,030,725 | $ | 44,084,070 | |||
Securities with a market value of $13,280,182 and $11,514,550 at December 31, 2007 and 2006, respectively, were pledged as collateral for public deposits, repurchase agreements and for other purposes as required by law.
Securities in an unrealized loss position at December 31, 2007 and 2006, by duration of the unrealized loss, are shown as follows. The unrealized loss positions at December 31, 2007 and 2006 were directly related to interest rate movements, as there is minimal credit risk exposure in these investments. 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. All securities are investment grade or better. Bonds with unrealized loss positions at December 31, 2007 included seven federal agencies and 41 municipal bonds, as shown below.
| Less than 12 months | 12 months or more | Total | ||||||||||||||||
December 31, 2007 | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
U.S. Government agencies | $ | — | $ | — | $ | 2,557,235 | $ | 13,066 | $ | 2,557,235 | $ | 13,066 | ||||||
States and municipal obligations | 3,255,691 | 39,393 | 8,627,762 | 125,679 | 11,883,453 | 165,072 | ||||||||||||
Total temporarily impaired securities | $ | 3,255,691 | $ | 39,393 | $ | 11,184,997 | $ | 138,745 | $ | 14,440,688 | $ | 178,138 | ||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||
December 31, 2006 | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | ||||||||||||
U.S. Government agencies | $ | — | $ | — | $ | 10,095,893 | $ | 165,614 | $ | 10,095,893 | $ | 165,614 | ||||||
States and municipal obligations | 1,855,328 | 6,840 | 11,645,440 | 255,934 | 13,500,768 | 262,774 | ||||||||||||
Total temporarily impaired securities | $ | 1,855,328 | $ | 6,840 | $ | 21,741,333 | $ | 421,548 | $ | 23,596,661 | $ | 428,388 | ||||||
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Note 4. Loans
The following is a summary of the balances of loans:
December 31, | 2007 | 2006 | ||||||
Mortgage loans on real estate: | ||||||||
Construction | $ | 45,697,838 | $ | 47,977,209 | ||||
Secured by farmland | 87,206 | 678,745 | ||||||
Secured by 1-4 family residential | 144,820,937 | 135,854,227 | ||||||
Other real estate loans | 40,975,279 | 32,660,442 | ||||||
Commercial and industrial loans (not secured by real estate) | 18,253,801 | 18,077,943 | ||||||
Consumer installment loans | 9,423,071 | 8,517,900 | ||||||
All other loans | 498,617 | 996,258 | ||||||
Net deferred loan costs and fees | 755,331 | 845,232 | ||||||
Total loans | $ | 260,512,080 | $ | 245,607,956 | ||||
Allowance for loan losses | (2,347,244 | ) | (2,235,544 | ) | ||||
Loans, net | $ | 258,164,836 | $ | 243,372,412 | ||||
Note 5. Allowance for Loan Losses
An analysis of the change in the allowance for loan losses follows:
| 2007 | 2006 | |||||||
Balance, beginning of year | $ | 2,235,544 | $ | 2,157,716 | ||||
Provision for loan losses | 298,299 | 125,000 | ||||||
Recoveries | 23,993 | 37,545 | ||||||
Loans charged off | (210,592 | ) | (84,717 | ) | ||||
Balance, end of year | $ | 2,347,244 | $ | 2,235,544 | ||||
Information about impaired loans is as follows:
| for the twelve months ended: | December 31, 2007 | December 31, 2006 | ||||
Impaired loans for which an allowance has been provided | $ | 2,185,721 | $ | 2,857,269 | ||
Impaired loans for which no allowance has been provided | — | — | ||||
Total impaired loans | $ | 2,185,721 | $ | 2,857,269 | ||
Allowance provided for impaired loans, included in the allowance for loan losses | $ | 1,028,892 | $ | 991,769 | ||
Average balance impaired loans | $ | 3,115,848 | $ | 3,168,724 | ||
Interest income recognized (collected $113,255 and $269,521 in 2007 and 2006, respectively) | $ | 112,912 | $ | 275,412 | ||
At December 31, 2007 and 2006, non-accrual loans excluded from impaired loan disclosure under SFAS No. 114 totaled $1,190,020 and $207,864, respectively. If interest on these non-accrual loans had been accrued, such income would have approximated $20,470 in 2007 and $28,703 in 2006.
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Note 6. Premises and Equipment, net
Components of premises and equipment included in the consolidated balance sheets at December 31, 2007 and 2006, were as follows:
| December 31, 2007 | December 31, 2006 | |||||||
Construction in Progress | $ | 552,626 | $ | 716,397 | ||||
Land and improvements | 1,251,587 | 1,022,069 | ||||||
Buildings and improvements | 9,410,823 | 8,499,170 | ||||||
Furniture and equipment | 7,520,952 | 7,990,182 | ||||||
Total cost | $ | 18,735,988 | $ | 18,227,818 | ||||
Less accumulated amortization and depreciation | (7,952,144 | ) | (7,910,320 | ) | ||||
Premises and equipment, net | $ | 10,783,844 | $ | 10,317,498 | ||||
Amortization and depreciation expense for the years ended December 31, 2007 and 2006 totaled $986,310 and $944,506, respectively. Commitments for expenditures as of December 31, 2007 totaled $1,045,467.
Note 7. Deposits
The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2007 and 2006 was $47,348,255 and $35,883,743 respectively.
At December 31, 2007, the scheduled maturities of time deposits are as follows:
2008 | $ | 82,258,295 | |
2009 | 3,192,275 | ||
2010 | 11,736,263 | ||
2011 | 12,994,794 | ||
2012 | 4,174,404 | ||
Thereafter | 6,969 | ||
| $ | 114,363,000 | ||
At December 31, 2007 and 2006, overdraft demand deposits reclassified to loans totaled $34,711 and $103,998 respectively.
Note 8. Employee Benefit Plans
The Company sponsors a funded noncontributory, defined benefit pension plan covering full-time employees over 21 years of age upon completion of one year of service. Benefits are based on average compensation for the five consecutive full calendar years of service, which produces the highest average.
The Company sponsors a postretirement benefit plan covering current and future retirees who acquire age 55 and 10 years of service or age 65 and 5 years of service. The postretirement benefit plan provides coverage toward a retiree’s eligible medical and life insurance benefits expenses.
The Company adopted the recognition provisions of SFAS No. 158 in its December 31, 2006 financial statements.
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The following tables provide the reconciliation of changes in the benefit obligations and fair value of assets and a statement of funded status for the pension plan and postretirement plan of the Company.
| Pension Benefits | Postretirement Benefits | |||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
Change in benefit obligation | ||||||||||||||||
Benefit obligation, beginning of year | $ | 3,812,796 | $ | 3,539,913 | $ | 516,728 | $ | 559,897 | ||||||||
Service cost | 310,249 | 292,129 | 18,483 | 20,058 | ||||||||||||
Interest cost | 228,163 | 203,484 | 30,352 | 31,446 | ||||||||||||
Actuarial (gain) / loss | (300,172 | ) | (154,449 | ) | (84,717 | ) | (73,793 | ) | ||||||||
Benefit payments | (61,231 | ) | (68,281 | ) | (16,716 | ) | (20,880 | ) | ||||||||
Benefit obligation, end of year | $ | 3,989,805 | $ | 3,812,796 | $ | 464,130 | $ | 516,728 | ||||||||
Change in plan assets | ||||||||||||||||
Fair value of plan assets, beginning of year | $ | 3,568,754 | $ | 2,909,544 | $ | — | $ | — | ||||||||
Actual return on plan assets | 404,089 | 227,491 | — | — | ||||||||||||
Employer contributions | 500,000 | 500,000 | 16,716 | 20,880 | ||||||||||||
Benefits payments | (61,231 | ) | (68,281 | ) | (16,716 | ) | (20,880 | ) | ||||||||
Fair value of plan assets, end of year | $ | 4,411,612 | $ | 3,568,754 | $ | — | $ | — | ||||||||
Funded Status at the End of the Year | $ | 421,807 | $ | (244,042 | ) | $ | (464,130 | ) | $ | (516,728 | ) | |||||
Amounts Recognized in the Consolidated Balance Sheets | ||||||||||||||||
Other assets | $ | 421,807 | $ | — | $ | — | $ | — | ||||||||
Other liabilities | — | (244,042 | ) | (464,130 | ) | (516,728 | ) | |||||||||
Amount recognized | $ | 421,807 | $ | (244,042 | ) | $ | (464,130 | ) | $ | (516,728 | ) | |||||
Amounts Recognized in Accumulated Other Comprehensive Income/(loss) |
| |||||||||||||||
Net loss | $ | 498,896 | $ | 980,627 | $ | 48,132 | $ | 138,395 | ||||||||
Prior service cost | 25,130 | 41,502 | — | — | ||||||||||||
Net obligation at transition | — | — | 17,478 | 20,391 | ||||||||||||
Amount recognized | $ | 524,026 | $ | 1,022,129 | $ | 65,610 | $ | 158,786 | ||||||||
Components of Net Periodic Benefit Cost | ||||||||||||||||
Service cost | $ | 310,249 | $ | 292,129 | $ | 18,483 | $ | 20,058 | ||||||||
Interest cost | 228,163 | 203,484 | 30,352 | 31,446 | ||||||||||||
Expected return on plan assets | (259,992 | ) | (234,563 | ) | — | — | ||||||||||
Amortization of prior service cost | 16,372 | 16,372 | — | — | ||||||||||||
Amortization of net obligation at transition | — | — | 2,913 | 2,913 | ||||||||||||
Recognized net acturial (gain)/loss | 37,459 | 51,601 | 5,545 | 10,743 | ||||||||||||
Net periodic benefit cost | $ | 332,251 | $ | 329,023 | $ | 57,293 | $ | 65,160 | ||||||||
Other Changes in Plan Assets and Benefit Obligations Recognized in Accumulated Other Comprehensive Income/(loss) |
| |||||||||||||||
Net (gain) loss | $ | (481,729 | ) | $ | 980,627 | $ | (90,262 | ) | $ | 138,395 | ||||||
Prior service cost | — | 41,502 | — | — | ||||||||||||
Amortization of prior service cost | (16,372 | ) | — | — | — | |||||||||||
Net obligation at transition | — | — | — | 20,391 | ||||||||||||
Amortization of net obligation at transition | — | — | (2,913 | ) | — | |||||||||||
Total recognized in other comprehensive income/(loss) | $ | (498,101 | ) | $ | 1,022,129 | $ | (93,175 | ) | $ | 158,786 | ||||||
Total Recognized in Net Periodic Benefit Cost and Accumulated Other Comprehensive Income/(loss) | $ | (165,850 | ) | $ | 1,351,152 | $ | (35,882 | ) | $ | 223,946 | ||||||
The accumulated benefit obligation for the defined benefit pension plan was $2,634,982 and, $2,360,573 at December 31, 2007 and 2006, respectively.
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The estimated net loss and prior service cost for the defined benefit pension plan and postretirement plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year approximates $3,971 and $16,372, respectively. The estimated unrecognized transition liability for the postretirement plan that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is $2,913.
| Pension Benefits | Postretirement Benefits | |||||||||||
| Weighted-average assumptions as of December 31, | 2007 | 2006 | 2007 | 2006 | ||||||||
Discount rate used for Net Periodic Pension Cost | 6.00 | % | 5.75 | % | 6.00 | % | 5.75 | % | ||||
Discount Rate used for Disclosure | 6.25 | % | 6.00 | % | 6.00 | % | 6.00 | % | ||||
Expected return on plan assets | 8.50 | % | 8.50 | % | N/A | N/A | ||||||
Rate of compensation increase | 5.00 | % | 5.00 | % | 5.00 | % | 5.00 | % | ||||
Long-term rate of return.The plan sponsor selects the assumption for the expected long-term rate of return on assets in consultation with their investment advisors and actuary. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested or to be invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue over the measurement period, with higher significance placed on current forecasts of future long-term economic conditions.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Further, solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated within periodic cost).
Asset allocation.The pension plan’s weighted average asset allocations for the plan years ended September 30, 2007 and 2006, by asset category, are as follows:
Asset category | 2007 | 2006 | ||||
Mutual funds – fixed income | 35 | % | 30 | % | ||
Mutual funds – equity | 60 | % | 56 | % | ||
Cash and cash equivalents | 5 | % | 14 | % | ||
Total | 100 | % | 100 | % | ||
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 40% fixed income and 60% equities. The Investment Manager selects investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the implementation of the Plan’s investment strategy. The Investment Manager will consider both actively and passively managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure.
It is the responsibility of the trustee to administer the investments of the trust within reasonable costs, being careful to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs chargeable to the trust.
The Company expects to contribute $314,109 to its pension plan for the 2008 plan year. Estimated future benefit payments are $22,528 for 2008, $32,062 for 2009, $77,985 for 2010, $97,607 for 2011, $178,817 for 2012 and $1,085,786 for 2013 through 2017.
Postretirement benefits plan.For measurement purposes, the assumed annual rate of increase in per capita health care costs of covered benefits was 10.0% in 2008 and 2009, 8.0% in 2010 and 2011, and 6.0% in 2012 and thereafter. If assumed health care cost trend rates were increased by 1 percentage point each year, the accumulated postretirement benefit obligation at December 31, 2007, would be increased by $2,620, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2007, would be increased by $382. If assumed health care cost trend rates were decreased by 1 percentage point each year, the accumulated postretirement benefit obligation at December 31, 2007, would be decreased by $2,416, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year ended December 31, 2007, would be decreased by $351.
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The Company expects to contribute $17,519 to its postretirement plan in 2008.
In addition, as of December 31, 2007 and 2006 the Company paid approximately $11,646 and $15,090, respectively, for employees who retired prior to adoption of SFAS No. 106,Employers’ Accounting for PostretirementBenefits Other Than Pensions.
401(k) retirement plan.The Company has a 401(k) retirement plan covering substantially all employees 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 employee’s contributions. Additional contributions can be made at the discretion of the Company’s Board of Directors. Contributions to this plan amounted to $83,402 and $71,078 for the years ended December 31, 2007 and 2006, respectively.
Note 9. Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company offers various financial products to its customers to meet their credit and liquidity needs. These instruments involve elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit written is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. The amount of collateral obtained, if deemed necessary by the Company, is based on credit evaluation of the customer.
Subject to its normal credit standards and risk monitoring procedures, the Company makes contractual commitments to extend credit. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. At December 31, 2007 and 2006, the Company had outstanding loan commitments approximating $41,084,932 and $41,289,172, respectively.
Conditional commitments are issued by the Company in the form of performance stand-by letters of credit, which guarantee the performance of a customer to a third party. At December 31, 2007 and 2006, commitments under outstanding performance stand-by letters of credit aggregated $550,162 and $860,195, respectively. The credit risk of issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The Company had unused lines of credit with nonaffiliated banks totaling $54,000,000 and $16,785,000 as of December 31, 2007 and 2006.
Note 10. Restrictions on Cash and Due From Banks
The Federal Reserve requires banks to maintain cash reserves against certain categories of deposit liabilities. At both December 31, 2007 and 2006, the aggregate amount of daily average required reserves for the final weekly reporting period was $25 thousand.
The Company has approximately $585,908 in deposits in financial institutions in excess of amounts insured by the Federal Deposit Insurance Corporation at December 31, 2007.
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Note 11. Short-Term Borrowings
Short-term borrowings include securities sold under agreements to repurchase, which are secured transactions with customers and generally mature the day following the day sold and federal funds purchased. There were no short-term advances from FHLB outstanding on December 31, 2007 or December 31, 2006.
The table below presents selected information on short-term borrowings:
(Dollars in Thousands) Years Ended December 31, | 2007 | 2006 | ||||||
Balance outstandings at year-end | $ | 8,365 | $ | 5,249 | ||||
Maximum balance at any month end during the year | 8,365 | 7,460 | ||||||
Average balance for the year | 5,982 | 5,782 | ||||||
Weighted average rate for the year | 3.81 | % | 4.02 | % | ||||
Weighted average rate on borrowings at year end | 2.97 | % | 4.06 | % | ||||
Estimated fair value at year end | $ | 8,365 | $ | 5,249 | ||||
Note 12. Long-Term Debt
On December 31, 2007, the Bank had Federal Home Loan Bank of Atlanta (“FHLB”) debt consisting of three advances, one for $15.0 million, which was acquired on May 18, 2006, one for $10.0 million, which was acquired on September 12, 2006, and one for $5.0 million, which was acquired on May 18, 2007. The interest rate on the $15 million advance is fixed at 4.81%, payable quarterly and matures on May 18, 2011. The interest rate on the $10 million advance is fixed at 4.23%, payable quarterly and matures on September 12, 2016. The interest rate on the $5 million advance is fixed at 4.485%, payable quarterly and matures on May 18, 2012. The FHLB holds an option to terminate the $15 million advance on any quarterly payment date. They also hold an option to terminate the $10 million advance on any quarterly payment date. Lastly, they hold an option to terminate the $5 million advance on May 19, 2008, or any subsequent quarterly payment date. The $15 million advance and the $10 million advance has an early conversion option which gives FHLB the option to convert, in whole only, into a one-month LIBOR-based floating rate advance, effective on any quarterly payment date. The $5 million advance has the same early conversion option, which the FHLB may exercise on May 19, 2008 or any subsequent quarterly payment date. 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 lines are secured by a blanket lien on qualified 1 to 4 family residential real estate loans valued at $101.7 million. Immediate available credit, as of December 31, 2007, was $35.0 million.
Note 13. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and the state of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2004.
The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007 with no impact on the financial statements.
The provision for income taxes consisted of the following for the years ended December 31:
| 2007 | 2006 | |||||||
Current | $ | 659,638 | $ | 926,130 | ||||
Deferred | (19,194 | ) | (54,223 | ) | ||||
| $ | 640,444 | $ | 871,907 | |||||
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The reasons for the differences between the statutory Federal income tax rates and the effective tax rates are summarized as follows:
| 2007 | 2006 | |||||
Statutory rates | 34.0 | % | 34.0 | % | ||
(Decrease) resulting from: | ||||||
Effect of tax-exempt income | (8.1 | ) | (6.8 | ) | ||
Other, net | 0.3 | — | ||||
| 26.2 | % | 27.2 | % | |||
The components of the net deferred tax assets and liabilities included in other liabilities are as follows:
December 31, | 2007 | 2006 | ||||||
Deferred tax assets | ||||||||
Allowance for loan losses | $ | 674,986 | $ | 637,008 | ||||
Interest on non-accrual loans | 12,125 | 14,203 | ||||||
Pension plan | — | 82,975 | ||||||
Post retirement benefits | 157,804 | 175,688 | ||||||
Deferred compensation | 129,575 | 120,355 | ||||||
Stock-based compensation | 7,458 | 3,793 | ||||||
Unrealized loss on available-for-sale securities | — | 90,181 | ||||||
Other | 12,539 | 9,717 | ||||||
Total deferred tax assets | $ | 994,487 | $ | 1,133,920 | ||||
Deferred tax liabilities | ||||||||
Unrealized gain on available-for-sale securities | $ | (19,999 | ) | $ | — | |||
Pension plan | (143,414 | ) | — | |||||
Depreciation | (276,347 | ) | (353,085 | ) | ||||
Amortization of intangible | (474,999 | ) | (395,833 | ) | ||||
Deferred loan fees and costs | (256,813 | ) | (287,379 | ) | ||||
Other | (143,225 | ) | (125,913 | ) | ||||
Total deferred tax liabilities | $ | (1,314,797 | ) | $ | (1,162,210 | ) | ||
Net deferred tax liabilities | $ | (320,310 | ) | $ | (28,290 | ) | ||
Note 14. Regulatory Requirements and Restrictions
The primary source of funds available to the Parent Company is the payment of dividends by the subsidiary Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of the Bank’s regulatory agency. As of December 31, 2007, the aggregate amount of unrestricted funds, which could be transferred from the banking subsidiary to the Parent Company, without prior regulatory approval, totaled $2,727,696 or 10.1% of consolidated net assets. The Company and Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).
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Management believes, that as of December 31, 2007 and 2006, the Company and the Bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2007, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category.
The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2007 and 2006, are presented in the tables below:
| (Dollars in Thousands) | Actual | Minimum Capital Requirement | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
As of December 31, 2007: | ||||||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||||
Consolidated | $ | 26,923 | 10.78 | % | $ | 19,987 | 8.00 | % | N/A | N/A | ||||||||
Bank of Lancaster | $ | 25,782 | 10.38 | % | $ | 19,874 | 8.00 | % | $ | 24,842 | 10.00 | % | ||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||
Consolidated | $ | 24,576 | 9.84 | % | $ | 9,994 | 4.00 | % | N/A | N/A | ||||||||
Bank of Lancaster | $ | 23,435 | 9.43 | % | $ | 9,937 | 4.00 | % | $ | 14,905 | 6.00 | % | ||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||||
Consolidated | $ | 24,576 | 7.58 | % | $ | 12,970 | 4.00 | % | N/A | N/A | ||||||||
Bank of Lancaster | $ | 23,435 | 7.26 | % | $ | 12,913 | 4.00 | % | $ | 16,142 | 5.00 | % | ||||||
| (Dollars in Thousands) | Actual | Minimum Capital Requirement | Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions | |||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
As of December 31, 2006: | ||||||||||||||||||
Total Capital (to Risk Weighted Assets) | ||||||||||||||||||
Consolidated | $ | 26,750 | 11.41 | % | $ | 18,756 | 8.00 | % | N/A | N/A | ||||||||
Bank of Lancaster | $ | 25,357 | 10.88 | % | $ | 18,652 | 8.00 | % | $ | 23,315 | 10.00 | % | ||||||
Tier 1 Capital (to Risk Weighted Assets) | ||||||||||||||||||
Consolidated | $ | 24,514 | 10.46 | % | $ | 9,378 | 4.00 | % | N/A | N/A | ||||||||
Bank of Lancaster | $ | 23,121 | 9.92 | % | $ | 9,326 | 4.00 | % | $ | 13,989 | 6.00 | % | ||||||
Tier 1 Capital (to Average Assets) | ||||||||||||||||||
Consolidated | $ | 24,514 | 8.09 | % | $ | 12,126 | 4.00 | % | N/A | N/A | ||||||||
Bank of Lancaster | $ | 23,121 | 7.58 | % | $ | 12,205 | 4.00 | % | $ | 15,257 | 5.00 | % | ||||||
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Note 15. Employee Stock Ownership Plan
The Company has a noncontributory Employee Stock Ownership Plan (“ESOP”) for the benefit of all eligible employees who have completed twelve months of service and who have attained the age of 21 years. Contributions to the plan are at the discretion of the Company’s Board of Directors. Contributions are allocated in the ratio to which the covered compensation of each participant bears to the aggregate covered compensation of all participants for the plan year. Allocations are limited to 25% of eligible participant compensation. Participant accounts are 30% vested after three years, 40% vested after four years with vesting increasing 20% each year thereafter, until 100% vested. The plan had 140,795 allocated shares as of December 31, 2007. Contributions to the plan were $60,000 for 2007 and 2006, respectively. Dividends on the Company’s stock held by the ESOP were $93,182 and $85,492 in 2007 and 2006, respectively. Shares held by the ESOP are considered outstanding for purposes of computing earnings per share.
Note 16. Stock-Based Compensation Plans
The Company has three stock-based compensation plans. The 1994 Incentive Stock Option Plan expired and no additional shares may be granted under this plan. The 2003 Incentive Stock Option Plan makes 175,000 shares available for grant. Under this plan, 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 performance targets during a specified time period. If the targets are not met, the options are forfeited. The third plan is the 1998 Non-Employee Directors Stock Option Plan, which grants 500 shares to each non-employee director annually. This plan had 8,000 shares available for grant at December 31, 2007.
A summary of the status of the stock option plans as of December 31, 2007 and changes during the year ended is presented below:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (in years) | Aggregate Intrinsic Value (1) | ||||||||
Options outstanding, January 1 | 183,812 | $ | 15.15 | 5.9 | |||||||
Granted | 44,500 | 14.96 | |||||||||
Forfeited | (27,251 | ) | 13.97 | ||||||||
Exercised | (6,900 | ) | 11.96 | ||||||||
Expired | — | — | |||||||||
Options outstanding, December 31 | 194,161 | $ | 15.38 | 5.7 | $ | — | |||||
Options exercisable, December 31 | 158,161 | $ | 15.47 | 4.7 | $ | — | |||||
| (1) | The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2007. This amount changes based on changes in the market value of the Company’s stock. |
The fair value (present value of the estimated future benefit to the option holder) of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model.
The total intrinsic value of options exercised during 2007 was $20,650, a portion of which resulted in a tax benefit of $292.
The weighted average fair value of incentive stock options granted during 2007 and 2006, was $1.85 and $1.89, respectively. The weighted average fair value of non-employee director’s stock options granted during 2007 and 2006 was $1.55 and $1.72, respectively.
The fair value of each grant is estimated at the grant date using the Black-Scholes Option-Pricing Model with the following weighted average assumptions:
| Incentive Stock Option Plan | Non-qualified Directors Plan | |||||||||||
| December 31, | 2007 | 2006 | 2007 | 2006 | ||||||||
Dividend yield | 3.17 | % | 3.07 | % | 3.17 | % | 3.07 | % | ||||
Expected life | 7.3 years | 7.8 years | 5 years | 5 years | ||||||||
Expected volatility | 9.53 | % | 9.60 | % | 9.53 | % | 9.60 | % | ||||
Risk-free interest rate | 4.66 | % | 4.93 | % | 4.74 | % | 5.08 | % | ||||
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The expected volatility is based on historical volatility of the Company’s stock price. The risk-free interest rates for the periods within the contractual life of the awards are based on the U.S. Treasury yield curve in effect at the time of the grant. The expected life is based on historical exercise experience. The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.
The status of the options outstanding at December 31, 2007 is as follows:
| Options Outstanding | Options Exercisable | ||||||||
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life(yrs) | Number Exercisable | Weighted Average Exercise Price | |||||
$ 8.50 - $13.75 | 23,915 | 5.08 | 23,915 | $ | 13.54 | ||||
$ 14.50 - $17.50 | 170,246 | 5.75 | 134,246 | 15.82 | |||||
| 194,161 | 5.67 | 158,161 | $ | 15.47 | |||||
Note 17. Earnings Per Share
The following shows the weighted average number of shares used in computing earnings per share and the effect on weighted average number of shares of diluted potential common stock.
Years Ended December 31, | 2007 | 2006 | ||||
Net Income available to common shareholders | $ | 1,808,602 | $ | 2,328,745 | ||
Average number of common shares outstanding | 2,368,611 | 2,370,901 | ||||
Effect of dilutive options | 1,434 | 4,438 | ||||
Average number of potential common shares | 2,370,045 | 2,375,339 | ||||
As of December 31, 2007 and 2006, options on 158,161 shares and 111,157 shares, respectively, were not included in computing diluted earnings per common share because their effects were antidilutive.
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Note 18. 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 $4,822,507 and $4,453,121 at December 31, 2007 and 2006, 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.
Balance, January 1, 2007 | $ | 4,453,121 | ||
New loans and extensions to existing loans | 1,008,693 | |||
Repayments and other reductions | (639,307 | ) | ||
Balance, December 31, 2007 | $ | 4,822,507 | ||
Commitments to extend credit to directors and their related interests were $1,108,291 and $988,037 at December 31, 2007 and 2006, respectively.
The Company also maintains deposit accounts with some of its executive officers, directors and their affiliated entities. The aggregate amount of these deposit accounts at December 31, 2007 and 2006 amounted to $1,214,585 and $930,532, respectively.
Note 19. Fair Value of Financial Instruments
The estimated fair values of financial instruments are shown in the following table. The carrying amounts in the table are included in the balance sheet under the applicable captions.
| December 31, 2007 | December 31, 2006 | |||||||||||
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
Financial Assets: | ||||||||||||
Cash and due from banks | $ | 5,015,762 | $ | 5,015,762 | $ | 6,320,951 | $ | 6,320,951 | ||||
Interest-bearing deposits | 375,008 | 375,008 | 148,436 | 148,436 | ||||||||
Federal funds sold | 1,392,554 | 1,392,554 | 4,636,278 | 4,636,278 | ||||||||
Securities available for sale | 43,618,174 | 43,618,174 | 38,393,648 | 38,393,648 | ||||||||
Securities held to maturity | 471,371 | 465,896 | 457,091 | 430,594 | ||||||||
Loans, net | 258,164,836 | 257,706,419 | 243,372,412 | 248,208,238 | ||||||||
Accrued interest receivable | 1,478,442 | 1,478,442 | 1,418,214 | 1,418,214 | ||||||||
Financial Liabilities: | ||||||||||||
Noninterest-bearing deposits | $ | 38,476,633 | $ | 38,476,633 | $ | 44,246,563 | $ | 44,246,563 | ||||
Savings and interest-bearing deposits | 106,727,807 | 106,727,807 | 107,915,874 | 107,915,874 | ||||||||
Time deposits | 114,363,000 | 114,605,388 | 99,485,144 | 99,441,067 | ||||||||
Federal Funds purchased and securities sold under repurchase agreements | 8,365,313 | 8,365,313 | 5,242,876 | 5,242,876 | ||||||||
Federal Home Loan Bank advances | 30,000,000 | 28,963,651 | 25,000,000 | 24,885,359 | ||||||||
Accrued interest payable | 485,428 | 485,428 | 413,553 | 413,553 | ||||||||
The above presentation of fair values is required by Statement on Financial Accounting Standards No. 107,Disclosures About Fair Value of Financial Instruments. 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 non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The carrying amounts of cash and due from banks, federal funds sold or purchased, non-interest-bearing deposits, savings, and securities sold under repurchase agreements, represent items which do not present significant market risks, are payable on demand, or are of such short duration that carrying value approximates market value.
Available-for-sale securities are carried at the quoted market prices for the individual securities held. Therefore carrying value equals market value. Held-to-maturity securities are carried at book value, and fair value for these securities is obtained from quoted market prices.
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The fair value of loans is estimated by discounting future cash flows using the interest rates at which similar loans would be made to borrowers.
Time deposits are presented at estimated fair value using interest rates offered for deposits of similar remaining maturities.
The fair value of the FHLB advance is estimated by discounting its future cash flows using the interest rate offered for similar advances.
The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counter parties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counter parties at the reporting date.
At December 31, 2007 and 2006, the fair value of loan commitments and standby letters of credit was immaterial. Therefore, they are not included in the table above.
The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair value of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.
Note 20. Condensed Financial Information of Parent Company
Financial information pertaining only to Bay Banks of Virginia, Inc. is as follows:
| Condensed Balance Sheets | 2007 | 2006 | ||||
Assets | ||||||
Cash and due from banks | $ | 54,349 | $ | 151,913 | ||
Investments in subsidiaries | 26,821,455 | 25,936,840 | ||||
Premises and equipment, net | 60,044 | 81,076 | ||||
Other assets | 410,846 | 441,336 | ||||
Total assets | $ | 27,346,694 | $ | 26,611,165 | ||
Liabilities and Shareholders’ Equity | ||||||
Liabilities | ||||||
Deferred directors’ compensation | $ | 362,716 | $ | 330,826 | ||
Other liabilities | 6,156 | 7,496 | ||||
Total liabilities | $ | 368,872 | $ | 338,322 | ||
Total shareholder’s equity | 26,977,822 | 26,272,843 | ||||
Total liabilities and shareholders’ equity | $ | 27,346,694 | $ | 26,611,165 | ||
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| Condensed Statements of Income | 2007 | 2006 | ||||||
Dividends from subsidiaries | $ | 1,900,000 | $ | 2,000,000 | ||||
Other income | 13,157 | 15,384 | ||||||
Total non-interest income | 1,913,157 | 2,015,384 | ||||||
Total non-interest expense | 515,027 | 510,273 | ||||||
Income before income taxes and equity in undistributed earnings of subsidiaries | 1,398,130 | 1,505,111 | ||||||
Income tax benefit | (129,980 | ) | (133,823 | ) | ||||
Income before equity in undistributed earnings of subsidiaries | 1,528,110 | 1,638,934 | ||||||
Equity in undistributed earnings of Subsidiaries | 280,492 | 689,811 | ||||||
Net income | $ | 1,808,602 | $ | 2,328,745 | ||||
| Condensed Statements of Cash Flows | 2007 | 2006 | ||||||
Cash Flows from Operating Activities: | ||||||||
Net income | $ | 1,808,602 | $ | 2,328,745 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 21,032 | 25,212 | ||||||
Stock-based compensation | 42,356 | 45,301 | ||||||
Equity in undistributed earnings of subsidiaries | (280,492 | ) | (689,811 | ) | ||||
(Increase) decrease in other assets | (76,031 | ) | 57,700 | |||||
Net change in deferred directors’ compensation | 31,890 | 16,109 | ||||||
Increase / (Decrease) in other liabilities | 105,180 | (83,486 | ) | |||||
Net cash provided by operating activities | $ | 1,652,537 | $ | 1,699,770 | ||||
Cash Flows from Financing Activities: | ||||||||
Proceeds from issuance of common stock | $ | 7,400 | $ | 344,415 | ||||
Dividends paid | (1,574,930 | ) | (1,528,945 | ) | ||||
Repurchase of stock | (182,571 | ) | (572,757 | ) | ||||
Net cash used in financing activities | $ | (1,750,101 | ) | $ | (1,757,287 | ) | ||
Net (decrease) in cash and due from banks | (97,564 | ) | (57,517 | ) | ||||
Cash and due from banks at January 1 | 151,913 | 209,430 | ||||||
Cash and due from banks at December 31 | $ | 54,349 | $ | 151,913 | ||||
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Note 21. Quarterly Condensed Statements of Income (unaudited)
2007 Quarter ended | March 31 | June 30 | September 30 | December 31 | ||||||||
(in thousands, except per share amounts) | ||||||||||||
Total interest income | $ | 4,718 | $ | 4,911 | $ | 5,105 | $ | 5,027 | ||||
Net interest income after provision for loan Losses | 2,574 | 2,652 | 2,641 | 2,582 | ||||||||
Other income | 708 | 751 | 836 | 759 | ||||||||
Other expenses | 2,785 | 2,813 | 2,731 | 2,724 | ||||||||
Income before income taxes | 497 | 590 | 746 | 617 | ||||||||
Net income | 379 | 442 | 541 | 447 | ||||||||
Earnings per common share-assuming dilution | $ | 0.16 | $ | 0.19 | $ | 0.23 | $ | 0.18 | ||||
Dividends per common share | $ | 0.165 | $ | 0.165 | $ | 0.165 | $ | 0.170 | ||||
2006 Quarter ended | March 31 | June 30 | September 30 | December 31 | ||||||||
(in thousands, except per share amounts) | ||||||||||||
Total interest income | $ | 4,376 | $ | 4,496 | $ | 4,647 | $ | 4,731 | ||||
Net interest income after provision for loan Losses | 2,689 | 2,608 | 2,592 | 2,774 | ||||||||
Other income | 661 | 739 | 900 | 813 | ||||||||
Other expenses | 2,522 | 2,617 | 2,673 | 2,763 | ||||||||
Income before income taxes | 828 | 730 | 819 | 824 | ||||||||
Net income | 611 | 527 | 602 | 589 | ||||||||
Earnings per common share-assuming dilution | $ | 0.26 | $ | 0.22 | $ | 0.25 | $ | 0.25 | ||||
Dividends per common share | $ | 0.160 | $ | 0.160 | $ | 0.160 | $ | 0.165 | ||||
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Report of Independent Registered Public Accounting Firm
To the Shareholders and 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 subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the two years in the period ended December 31, 2007 and 2006. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting 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 presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bay Banks of Virginia, Inc. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
We were not engaged to examine management’s assertion about the effectiveness of Bay Banks of Virginia, Inc. and subsidiaries’ internal controls over financial reporting as of December 31, 2007 included in the accompanying Report of Management’s Assessment of Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.
 |
| Winchester, Virginia |
| March 24, 2008 |
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ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period to which this report relates, the Company has carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act. In designing and evaluating its disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that objectives of the disclosure controls and procedures are met. The design of any disclosure controls and procedures is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions. Based upon their evaluation, the Company’s Chief Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures are effective 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 as of December 31, 2007.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) of the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control—Integrated Framework. Based on the assessment using those criteria, management concluded that the internal control over financial reporting was effective as of December 31, 2007.
This Annual Report on Form 10-K does not include an attestation report from the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
None.
ITEM 10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
All required information is detailed in the Company’s 2008 definitive proxy statement for the annual meeting of shareholders (“Definitive Proxy Statement”), which is expected to be filed with the SEC within the required time period, and is incorporated herein by reference.
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ITEM 11: EXECUTIVE COMPENSATION
Information on executive compensation is provided in the Definitive Proxy Statement and is incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information on security ownership of certain beneficial owners and management and related stockholder matters is provided in the Definitive Proxy Statement, and is incorporated herein by reference.
The following table summarizes information, as of December 31, 2007, relating to the Company’s stock incentive plans, pursuant to which grants of options to acquire shares of common stock may be granted from time to time.
At December 31, 2007 | Number of Shares To be Issued Upon Exercise Of Outstanding Options, Warrants and Rights (1) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plan | |||||
Equity compensation plans Approved by shareholders | 194,161 | (1) | $ | 15.38 | 111,911 | |||
Equity compensation plans not approved by shareholders | — | — | — | |||||
Total | 194,161 | $ | 15.38 | 111,911 | ||||
| (1) | Consists of options granted pursuant to the Company’s incentive stock option plans. |
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information on certain relationships and related transactions, and director independence, are detailed in the Definitive Proxy Statement and incorporated herein by reference.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
Information on principal accounting fees and services is provided in the Definitive Proxy Statement and is incorporated herein by reference.
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ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
| (a)1. | Financial Statements are included in Part II, Item 8, Financial Statements and Supplementary Data |
| (a)2. | All required tables are included in Part I, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations |
| (a)3. | Exhibits: |
No. | Description | |
| 3.1 | Articles of Incorporation, as amended, of Bay Banks of Virginia, Inc. (Incorporated by reference to previously filed Form 10-K for the year ended December 31, 2002). | |
| 3.2 | Bylaws, as amended, of Bay Banks of Virginia, Inc. (Incorporated by reference to previously filed Form 10-K for the year ended December 31, 2004). | |
| 10.1 | 1994 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 | 1998 Non-Employee Directors Stock Option Plan (Incorporated by reference to the previously filed Form 10-K for the year ended December 31, 1999). | |
| 10.3 | 2003 Incentive Stock Option Plan. (Incorporated by reference to Form S-8, Commission File Number 333-112947, previously filed on February 19, 2004). | |
| 11.0 | Statement re: Computation of per share earnings. (Incorporated herein by reference to Note 1 of the 2005 Annual Report to Shareholders). | |
| 21.0 | Subsidiaries of the Company (filed herewith). | |
| 23.1 | Consent of Yount, Hyde & Barbour, P.C. (filed herewith) | |
| 31.1 | Section 302 Certification (filed herewith). | |
| 31.2 | Section 302 Certification (filed herewith). | |
| 32.0 | Section 906 Certification (filed herewith). | |
| 99.1 | Code of Ethics (filed herewith). | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 27th day of March, 2008.
Bay Banks of Virginia, Inc. (registrant) | ||
| By: | /s/ Austin L. Roberts, III | |
| Austin L. Roberts, III, | ||
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant, and in the capacities indicated, on the 27th day of March 2008.
/s/ Allen C. Marple |
| Allen C. Marple |
| Chairman, Board of Directors |
| Director |
/s/ Austin L. Roberts, III |
| Austin L. Roberts, III |
| President and CEO |
| Director |
| (Principal Executive Officer) |
/s/ Robert C. Berry, Jr. |
| Robert C. Berry, Jr. |
| Vice President and Director |
/s/ Walter C. Ayers |
| Walter C. Ayers |
| Director |
/s/ Richard A. Farmar, III |
| Richard A. Farmar, III |
| Director |
/s/ Robert F. Hurliman |
| Robert F. Hurliman |
| Director |
/s/ Robert J. Wittman |
| Robert J. Wittman |
| Director |
/s/ Deborah M. Evans |
| Deborah M. Evans |
| Treasurer |
| (Principal Financial Officer) |
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