EX-13.0
ANNUAL REPORT
Exhibit 13.0
FINANCIAL HIGHLIGHTS, Annual Report 2000
(Dollars in Thousands except per share amounts)
At Year End 2000 1999 % Change
- ----------- ---- ---- --------
Assets $225,170 $199,773 12.7%
Loans (Net) 147,678 130,432 13.2%
Deposits 200,018 177,702 12.6%
Stockholders' Equity
before SFAS 115 Adjustment 21,546 21,135 1.9%
after SFAS 115 Adjustment 21,287 19,706 8.0%
Book Value per share
before SFAS 115 Adjustment $ 18.54 $ 18.14 2.2%
after SFAS 115 Adjustment $ 18.32 $ 16.91 8.3%
Averages for the Year
Assets $212,916 $198,668 7.2%
Loans (Net) 140,596 118,861 18.3%
Deposits 183,791 176,094 4.4%
Stockholders' Equity after SFAS 115 20,115 20,024 0.5%
For the Year
Interest Income $ 15,356 $ 13,937 10.2%
Interest Expense 8,303 6,533 27.1%
Net Interest Income 7,053 7,404 -4.7%
Net Income 1,613 2,175 -25.9%
per share $ 1.39 $ 1.86 -25.3%
Cash Dividends 997 910 9.5%
per share $ 0.86 $ 0.78 10.3%
Significant Ratios
Risk Based Capital:
Total Capital to Risk Weighted Assets 13.6% 15.5%
Tier 1 Capital to Risk Weighted Assets 12.7% 14.6%
Leverage Ratio 8.3% 9.7%
Return on Average Assets 0.8% 1.1%
Return on Average Equity 8.0% 10.9%
Loan Loss Reserve to Loans 0.9% 0.9%
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion is intended to assist readers in understanding and
evaluating the financial condition and results of operations of Bay Banks of
Virginia, Inc., (the "Company"). This discussion should be read in conjunction
with the financial statements and other financial information contained
elsewhere in this annual report.
Bay Banks of Virginia, Inc., is a bank holding company, organized under the laws
of Virginia on February 10, 1997. As of July 1, 1997, Bay Banks of Virginia,
Inc., assumed ownership of 100% of the stock of the Bank of Lancaster. Prior to
this date the Company operated as the Bank of Lancaster. In August of 1999, Bay
Banks of Virginia formed Bay Trust Company. This subsidiary of the Holding
Company was created to purchase the assets of the trust department of the Bank
of Lancaster. This sale and transfer of assets was completed on December 31,
1999. As of January 1, 2000, the bank no longer owned or managed the trust
function, and Bay Trust Company began operations as a subsidiary of Bay Banks of
Virginia.
SUMMARY FINANCIAL INFORMATION
2000 Compared to 1999
Bay Banks of Virginia, Inc. recorded earnings for 2000 of $1,612,620 or $1.39
per share as compared to 1999 earnings of $2,175,378 and $1.86 per share. This
is a decrease in net income of 25.9% over the prior period. Net interest income
for 2000 decreased to $7,052,957, down 4.7% as compared to $7,403,686 for 1999.
Non-interest income, before net securities gains, for 2000, increased to
$1,718,166 as compared to 1999 non-interest income, before net securities gains,
of $1,542,087. Other non-interest expenses increased to $6,387,875, up 11.8%
over 1999 non-interest expenses of $5,712,458.
1999 Compared to 1998
Earnings for the Bay Banks of Virginia, Inc., were $2,175,378 for 1999, up
12.7% as compared to 1998 earnings of $1,930,900. 1999 earnings per share were
$1.86 as compared to 1998 earnings per share of $1.67. Net interest income was
$7,403,686 for 1999 as compared to $6,498,657 for 1998. This represents an
increase of 13.9% over net interest income for 1998. Non-interest income,
before net securities gains, for 1999 was $1,542,087, up 4.1% over 1998 non-
interest income, before net securities gain, of $1,480,696. Non-interest
expenses for 1999 were $5,712,458, up 4.1% as compared to 1998 non-interest
expenses of $5,487,747.
FINANCIAL ANALYSIS
Net Interest Income
The principal source of earnings for the Company is net interest income.
Net interest income is the difference between interest and fees generated by
earning assets and interest expense paid on deposits and other sources of
funding. It is effected by variations in interest rates, the volume and mix of
earning assets and interest-bearing liabilities, and the levels of non-
performing assets.
Net interest income was $7.1 million in 2000, $7.4 million in 1999 and $6.5
million in 1998. This represents a decrease in net interest income of 4.7% for
2000 as compared to 1999 and an increase of 13.9% for 1999 over 1998.
There were three reasons for the decrease in net interest income during
2000. First, competition for deposits placed downward pressure on the Company's
net interest margin throughout most of 2000. Local competition during the
second through fourth quarters of 2000 resulted in rapid increases in
certificate of deposit rates in the Company's market. Second, and in addition
to increased competitive pressures during 2000, the prime rate of interest
increased 150 basis points during the first two quarters. The Bank of Lancaster
offers a savings account based on the prime rate with balances at year-end 2000
of $37.8 million. As prime increased, the cost of these funds also increased.
These economic conditions resulted in a diminishing net interest margin
throughout 2000. Third, strong loan growth throughout 2000 resulted in the
necessity for short-term alternative funding sources. During the third and
fourth quarter the Bank utilized short-term Federal Home Loan Bank advances to
fund loan growth. These advances proved expensive for the Bank as they were
priced against the short end of the yield curve, which reached record highs
during 2000.
In reviewing net interest income, the impact of these factors becomes
apparent by comparing interest expense in 2000, 1999 and 1998. Interest expense
was $8.3 million for 2000, $6.5 million for 1999, and $7.1 million for 1998.
This represents an increase in interest expense of $1.8 million or 27.1% between
2000 and 1999. Net interest yield on earning assets on a fully tax equivalent
basis was 3.8%, 4.2% and 3.9% for 2000, 1999 and 1998 respectively.
Non-Interest Income
Total non-interest income increased to $1.8 million for 2000 from $1.6
million in 1999 and $1.7 million in 1998. This represents an increase of 12.4%
for 2000 over 1999 and a decrease of 6.4% for 1999 over 1998.
Non-interest income is composed of income from fiduciary activities (Bay
Trust Company), service charges on deposit accounts, other service charges and
fees, gains on securities, and other miscellaneous income. Fiduciary income
improved by $141 thousand during 2000 for an increase of 26.7% as compared to
1999. Fiduciary income increased by $33 thousand or 6.8% between 1999 and 1998.
Service charges on deposits increased by $12 thousand, while other service
charges increased by $50 thousand during 2000 as compared to 1999. Other income
includes lease income, gains on the sale of foreclosed property, gains on the
sale of fixed assets, and other income. Other income decreased between 2000 and
1999 to $197 thousand from $225 thousand, a decrease of 12.5%. Other income for
1998 was $294 thousand.
While securities trading is not part of the core operating business of the
Company and is therefore not budgeted, the Company may sell a portion of it's
investment portfolio as a means to fund loan growth. Sales of securities during
2000 resulted in net gains of $54 thousand. Consistent loan growth throughout
2000 created the need to liquidate a portion of the investment portfolio. This
was accomplished in the fourth quarter with the sale of $3.2 million in bonds
for a net gain of $54 thousand.
Non-Interest Expense
During 2000, non-interest expense increased to $6.4 million from $5.7
million in 1999 and $5.5 million in 1998. This represents an increase of 11.8%
for 2000 over 1999 and 4.1% for 1999 over 1998. Non-interest expense is
composed of salaries and benefits, occupancy expense, FDIC assessments, and
other expense. Salary and benefit expense is the major component of non-
interest expense, and has increased 16.1% and 9.0% for 2000 and 1999,
respectively. Bank of Lancaster purchased two branches of a regional bank in
the fourth quarter of 2000. Staff increases related to this acquisition and
other additional staffing resulted in a portion of the increase in salaries and
benefits.
Occupancy expense for 2000 was $653 thousand as compared to $643 thousand
for 1999. This is an increase of 1.6% for 2000 over 1999. For the comparable
period, 1999 over 1998, occupancy expense also increased 1.6%. Other expense
for 2000 was $2.3 million as compared to $2.1 million for 1999. This was an
increase in other expense of 8.4% for 2000 over 1999.
During 2000, the Company absorbed approximately $124 thousand in non-
recurring expense. Approximately $23 thousand of this expense related to the
establishment of a new location for Bay Trust Company on Main Street in
Kilmarnock. The balance, approximately $101 thousand, was related to three Bank
events. The first was the Bank's purchase of two branches of a regional bank in
Northumberland County, resulting in expense for training and orientation of
staff for the new branches. The second event related to the Bank's purchase and
disposition of a third branch of the same regional bank located in Kilmarnock,
resulting in legal and administrative expense. The third event related to the
extensive renovation of the Bank's existing operations center, resulting in
expense to prepare for the renovation.
Assets
As of December 31, 2000, the Company had total assets of $225.2 million as
compared to 1999 balances of $199.8 million. Total assets increased by 12.7%
for 2000 as compared to 1999. Loan growth was strong throughout 2000 while
deposit growth was minimal throughout the majority of the year. Net deposits
increased during the fourth quarter as a result of the acquisition of two branch
locations in Northumberland County. At year-end 2000, deposits totaled $200.0
million as compared to $177.7 million at year-end 1999, an increase of 12.6%.
Loans
Loan demand was heavy throughout 2000 as balances increased by $17.3
million or 13.2%. Year-end 2000 net loan balances were $147.7 million as
compared to $130.4 million at year-end 1999. The loan portfolio is mainly
composed of residential first mortgages. Real estate mortgage and construction
loans in aggregate increased to $116.5 million during 2000, from a total of
$101.4 million at year-end 1999. Commercial loan balances increased to $11.3
million from $11.1 million, and consumer installment loans increased to $20.6
million from $18.7 million for 2000 over 1999, respectively. At year-end 2000,
residential mortgages comprised 78.6% of total loans, commercial loans were 7.6%
and consumer installment loans were 13.8%.
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 2000
provision was $250 thousand as compared to $335 thousand for 1999. Loans
charged off during 2000 totaled $94 thousand versus $165 thousand for 1999.
Recoveries were $16 thousand and $15 thousand for 2000 and 1999, respectively.
The allowance for loan losses, as a percentage of year-end loans, was 0.9% for
both 2000 and 1999.
As of December 31, 2000, loans upon which the accrual of interest had been
discontinued were $25 thousand. There were no loans upon which the accrual of
interest had been discontinued at year-end 1999. Other real estate owned,
including foreclosed property, at year-end 2000 was $805 thousand as compared to
$925 thousand for 1999. The Company maintains properties in other real estate
owned at fair value and expects no losses.
Loans still accruing interest but delinquent ninety days or more were $758
thousand, or 0.5%, of total loans at December 31, 2000. These balances were
$835 thousand, or 0.6%, for the comparable period in 1999.
The allowance for loan losses is analyzed for adequacy on a quarterly basis
to determine the required amount of provision. A loan-by-loan review is
conducted on all 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, 2000, management considers the
allowance for loan losses to be a reasonable estimate of potential loss exposure
inherent in the loan portfolio.
Deposits
As of December 31, 2000, the Company maintained total deposits of $200.0
million. This compares to $177.7 million for 1999. Deposits increased by 12.5%
for 2000 as compared to 1999. Demand deposits increased to $23.7 million during
2000 from $20.9 million at year-end 1999. Savings and NOW account balances
increased to $100.5 million during 2000 from $96.8 million at year-end 1999.
Other time deposits grew to $75.9 million from $60.0 million at year-end 1999.
Securities
As of December 31, 2000, total investment securities were $52.6 million.
Year-end balances for 1999 were $53.2 million. The Company decreased investment
balances during 2000 partly due to funding needs associated with increasing loan
demand. All of the Company's securities are classified as available for sale.
Available for sale securities are eligible for sale for general liquidity needs,
should loan demand require funding, or if prepayment risk requires action.
Available for sale securities are carried at fair market value. Throughout
2000, the Company received $6.2 million in sales and maturities from the
investment portfolio, and purchased $3.8 million.
Liquidity, Interest Rate Sensitivity and Inflation
Sources of liquidity include core deposits, the investment portfolio and
balances held as Federal Funds sold. Cash flows are managed to ensure
availability of liquidity to fund loan growth or unanticipated declines in
deposit balances. As of December 31, 2000, approximately 9.6% of the investment
portfolio will mature within one year or less. This compares to a 3.6% maturity
ratio for 1999. At year-end 2000, the Company had approximately $5.0 million in
securities with maturities of one year or less and $4.8 million in Federal Funds
sold balances. Additional liquidity sources include overnight lines of credit
with corresponding banks equaling $15.9 million and available credit at the
Federal Home Loan Bank of Atlanta in the amount of $20.0 million.
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 an advanced simulation model that estimates
interest income volatility and interest rate risk, and regularly investigates
potential external influences. In addition, the Company utilizes an Asset
Liability Committee composed of appointed members from management and the Board
of Directors. The end result is significant managerial attention to interest
income volatility that may result from changes in the level of interest rates,
basic interest rate spreads, the shape of the yield curve and changing product
patterns.
The financial statements and related financial data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money, over time, due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than do general levels of inflation. Interest rates do not
necessarily move in the same magnitude as the prices of goods and services.
Another impact of inflation is on non-interest expenses, which tend to rise
during periods of general inflation. The values of real estate held as
collateral by the Company for loans and foreclosed property could be affected by
inflation or changing prices due to market conditions.
Rising interest rates in 2000 resulted in a narrowing spread in net
interest margins within the Bank. Net interest yield on average earning assets
was 3.8% in 2000, down from 4.2% in 1999. Coupled with the Bank's short term
liability sensitivity, this caused net interest income to decline from $7.4
million in 1999 to $7.1 million in 2000.
Management believes the most significant impact on financial results is the
Company's ability to react to changes in interest rates. As discussed
previously, management attempts to maintain a favorable position between
interest sensitive assets and liabilities in order to protect against wide
interest rate fluctuations.
Capital Resources
Equity growth in the Company is supported by three methods; retained
earnings, dividend reinvestment and the exercise of stock options granted to
officers.The primary method of supporting growth is achieved through retained
earnings.During 2000, 61.8% of net income was paid to stockholders as
dividends. This pay out ratio was 41.8% in 1999 and 41.9% in 1998. A portion
of the Company's stock repurchases also reduces retained earnings. After
accounting for dividends and stock repurchases, the Company retained between
17.1% and 53.2% of net income in the prior three years.
In addition, the Company employs a dividend reinvestment plan in which each
stockholder has the option to participate. The plan provides the Company's
stockholders an opportunity to use dividends received to purchase authorized but
unissued shares at the current market price and with no commission.
Total capital, or shareholders' equity, as of December 31, 2000 was $21.5
million before unrealized gains or losses on investments. This is an increase
of 1.9% over the 1999 capital position of $21.1 million.
The Company accounts for unrealized gains or losses in the investment
portfolio by adjusting capital for any after tax effect of that gain or loss at
the end of a given accounting period. Net unrealized losses were $260 thousand
at December 31, 2000, as compared to unrealized losses of $1.4 million at year-
end 1999.
The Company is required to maintain minimum amounts of capital to total
"risk weighted" assets as defined by Federal Reserve Capital Guidelines.
According to "Capital Guidelines for Bank Holding Companies," the Company is
required to maintain a minimum Total Capital to Risk Weighted Asset ratio of
10.0%, a Tier 1 Capital to Risk Weighted Asset ratio of 6.0% and a Tier 1
Capital to Adjusted Average Asset ratio of 5.0%. As of December 31, 2000, the
Company maintained these ratios at 13.6%, 12.7%, and 8.3%, respectively.
Book value per share of common stock was $18.32 on December 31, 2000,
$16.91 on December 31, 1999, and $17.61 on December 31, 1998. Cash dividends
paid during 2000 were $997 thousand or $0.86 per share. In 1999 and 1998, cash
dividends paid were $910 thousand and $810 thousand, respectively. Total shares
outstanding on December 31, 2000 and 1999 were 1,161,968 and 1,165,323,
respectively.
Forward-Looking Statements
In addition to the historical information contained herein, this discussion
contains forward-looking statements that involve risks and uncertainties.
Economic circumstances, the operations of the Bank, and the Holding Company's
actual results could differ significantly from those discussed in the forward
looking statements. Some of the factors that could cause or contribute to such
differences are discussed herein, but also include changes in economic
conditions in the Company's (or Bank's) market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market, and competition. Any of these factors could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected.
BAY BANKS OF VIRGINIA, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
2000 1999
------------ ------------
ASSETS
Cash and due from banks $ 6,538,567 $ 5,260,620
Interest-bearing deposits 100,000 100,000
Federal funds sold 4,757,000 -
Investment securities available-for-sale 52,582,952 53,169,880
Loans receivable, net 147,677,876 130,431,636
Premises and equipment, net 6,778,080 4,953,723
Accrued interest receivable 1,778,791 1,598,605
Other real estate owned 804,507 925,044
Other assets 4,151,837 3,333,170
------------ ------------
Total assets $225,169,610 $199,772,678
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 23,657,690 $ 20,888,591
Savings and NOW deposits 100,481,431 96,848,391
Other time deposits 75,878,971 59,964,985
------------ ------------
Total deposits 200,018,092 177,701,967
------------ ------------
OTHER LIABILITIES
Securities sold under repurchase agreements 2,805,091 1,283,324
Other liabilities 1,059,635 1,081,526
------------ ------------
Total other liabilities 3,864,726 2,364,850
------------ ------------
Total liabilities 203,882,818 180,066,817
------------ ------------
SHAREHOLDERS' EQUITY
Common stock - $5 par value
Authorized - 5,000,000 shares;
Outstanding - 1,161,968 and 1,165,323 shares 5,809,841 5,826,617
Additional paid-in capital 3,887,823 3,735,576
Retained earnings 11,848,640 11,572,592
Accumulated other comprehensive loss (259,512) (1,428,924)
------------ ------------
Total shareholders' equity 21,286,792 19,705,861
------------ ------------
Total liabilities and shareholders' equity $225,169,610 $199,772,678
============ ============
See Notes to Consolidated Financial Statements.
BAY BANKS OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
INTEREST INCOME
Loans receivable $11,996,298 $10,153,373 $ 9,591,360
Investment securities:
Taxable 2,589,620 2,746,521 2,131,291
Tax-exempt 623,527 842,585 1,044,986
Federal funds sold 146,178 194,382 796,291
----------- ----------- -----------
Total interest income 15,355,623 13,936,861 13,563,928
----------- ----------- -----------
INTEREST EXPENSE
Deposits 7,740,488 6,429,810 7,054,088
Federal Home Loan Bank borrowings 377,484 - -
Federal funds purchased and securities sold
under repurchase agreements 184,694 103,365 11,183
----------- ----------- -----------
Total interest expense 8,302,666 6,533,175 7,065,271
----------- ----------- -----------
NET INTEREST INCOME 7,052,957 7,403,686 6,498,657
Provision for loan losses 250,000 335,000 208,367
----------- ----------- -----------
Net interest income after provision
for loan losses 6,802,957 7,068,686 6,290,290
----------- ----------- -----------
NON-INTEREST INCOME
Income from fiduciary activities 669,892 528,885 495,398
Service charges on deposit accounts 364,837 352,644 321,100
Other service charges and fees 486,722 435,847 369,755
Net securities gains 53,793 34,751 204,853
Other income 196,714 224,711 294,443
----------- ----------- -----------
Total non-interest income 1,771,958 1,576,838 1,685,549
----------- ----------- -----------
NON-INTEREST EXPENSES
Salaries and employee benefits 3,428,215 2,953,011 2,708,184
Occupancy expense 653,389 643,069 632,697
Deposit insurance premium 35,933 22,096 20,765
Other expense 2,270,338 2,094,282 2,126,101
----------- ----------- -----------
Total non-interest expenses 6,387,875 5,712,458 5,487,747
----------- ----------- -----------
Income before income taxes 2,187,040 2,933,066 2,488,092
Income tax expense 574,420 757,688 557,192
----------- ----------- -----------
NET INCOME $ 1,612,620 $ 2,175,378 $ 1,930,900
=========== =========== ===========
BASIC EARNINGS PER SHARE
Average shares outstanding 1,159,349 1,167,467 1,156,634
Net income per share of common stock $1.39 $1.86 $1.67
DILUTED EARNINGS PER SHARE
Average shares outstanding 1,181,202 1,187,295 1,176,462
Net income per share of common stock $1.37 $1.83 $1.64
See Notes to Consolidated Financial Statements.
BAY BANKS OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998
Accumulated
Additional Other Total
Common Paid-in Retained Comprehensive Shareholders'
Stock Capital Earnings Income (Loss) Equity
----------- ----------- ------------ -------------- --------------
Balance at January 1, 1998 $5,754,130 $3,164,510 $ 9,502,341 $ 271,137 $18,692,118
---------- ---------- ----------- ------------- -----------
Comprehensive income:
Net income - - 1,930,900 - 1,930,900
Net changes in unrealized
appreciation on available-
for-sale securities, net
of taxes of $176,746 - - - 355,363 355,363
---------- ---------- ----------- ------------- -----------
Total comprehensive
income - - 1,930,900 355,363 2,286,263
Cash dividends paid -
$0.70 per share - - (809,825) - (809,825)
Sale of common stock--
Dividend reinvestment plan 59,420 280,124 - - 339,544
Stock options exercised 10,090 84,660 (94,710) - 40
---------- ---------- ----------- ------------- -----------
Balance at December 31, 1998 5,823,640 3,529,294 10,528,706 626,500 20,508,140
---------- ---------- ----------- ------------- -----------
Comprehensive income:
Net income - - 2,175,378 - 2,175,378
Net changes in unrealized
appreciation on available-
for-sale securities, net
of taxes of $1,058,856 - - - (2,055,424) (2,055,424)
---------- ---------- ----------- ------------- -----------
Total comprehensive
income (loss) 2,175,378 (2,055,424) 119,954
Cash dividends paid -
$0.78 per share (910,279) (910,279)
Stock repurchase (58,385) (122,510) (214,349) (395,244)
Sale of common stock--
Dividend reinvestment plan 56,152 310,127 366,279
Stock options exercised 5,210 18,665 (6,864) - 17,011
---------- ---------- ----------- ------------- -----------
Balance at December 31, 1999 5,826,617 3,735,576 11,572,592 (1,428,924) 19,705,861
---------- ---------- ----------- ------------- -----------
Comprehensive income:
Net income - - 1,612,620 - 1,612,620
Net changes in unrealized
appreciation on available-
for-sale securities, net
of taxes of $602,425 - - - 1,169,412 1,169,412
---------- ---------- ----------- ------------- -----------
Total comprehensive
income - - 1,612,620 1,169,412 2,782,032
Cash dividends paid -
$0.86 per share - - (996,885) - (996,885)
Stock repurchase (84,515) (177,340) (339,687) - (601,542)
Sale of common stock--
Dividend reinvestment plan 47,739 291,562 - - 339,301
Stock options exercised 20,000 38,025 - - 58,025
---------- ---------- ----------- ------------- -----------
Balance at December 31, 2000 $5,809,841 $3,887,823 $11,848,640 $ (259,512) $21,286,792
========== ========== =========== ============= ===========
See Notes to Consolidated Financial Statements.
BAY BANKS OF VIRGINIA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,612,620 $ 2,175,378 $ 1,930,900
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation 455,993 436,631 457,260
Provision for loan losses 250,000 335,000 208,367
Net securities gains (53,793) (34,751) (204,853)
(Gain) loss on sale of foreclosed real estate 13,886 (25,372) (61,191)
Deferred income taxes (19,559) (159,719) 56,741
Gain on sale of equipment - - 4,180
Accrued income and other assets (1,581,718) 417,945 (2,471,768)
Other liabilities (21,891) 173,818 (34,926)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 655,538 3,318,930 (115,290)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities of available-for-sale securities 3,027,884 6,792,575 13,039,287
Proceeds from sale of available-for-sale securities 3,220,033 5,906,007 10,316,274
Purchases of available-for-sale securities (3,835,359) (9,940,107) (37,560,041)
Increase in interest bearing deposits - (92,415) (7,585)
Net change in Federal funds sold (4,757,000) 12,007,706 (451,706)
Net increase in loans (17,536,337) (17,124,026) (9,648,049)
Proceeds from sale of foreclosed real estate 151,703 711,733 599,196
Purchase of premises and equipment (2,280,350) (690,557) (2,321,097)
Additions to other real estate owned (4,956) (97,849) (672,766)
------------ ------------ ------------
Net cash used in investing activities (22,014,382) (2,526,933) (26,706,487)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in demand, savings and
NOW deposit accounts 6,402,139 (6,875,819) 22,589,897
Net increase in time deposits 15,913,986 6,308,935 6,660,376
Net increase in securities sold under
repurchase agreements 1,521,767 697,096 -
Proceeds from issuance of common stock 397,326 383,290 339,584
Dividends paid (996,885) (910,279) (809,825)
Repurchase of stock (601,542) (395,244) -
------------ ------------ ------------
Net cash provided by (used in)
financing activities 22,636,791 (792,021) 28,780,032
------------ ------------ ------------
Net increase (decrease) in cash and due from banks 1,277,947 (24) 1,958,255
Cash and due from banks at January 1 5,260,620 5,260,644 3,302,389
------------ ------------ ------------
Cash and due from banks at December 31 $ 6,538,567 $ 5,260,620 $ 5,260,644
============ ============ ============
SUPPLEMENTAL DISCLOSURES:
Interest paid $ 8,096,843 $ 6,490,883 $ 7,048,074
============ ============ ============
Income taxes paid $ 548,340 $ 420,618 $ 533,685
============ ============ ============
Unrealized gain (loss) on investment securities $ 1,771,837 $ (3,114,280) $ 532,109
============ ============ ============
Loans transferred to foreclosed real estate $ 40,097 $ 96,260 $ 640,381
============ ============ ============
See Notes to Consolidated Financial Statements.
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 1. Nature of Business and Significant Accounting Policies
Principles of consolidation. The consolidated financial statements of
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, Bank of Lancaster and Bay Trust Company.
The Bank of Lancaster 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 offers full service trust and estate planning from its
office on Main Street in Kilmarnock, Virginia. Bay Trust Company offers
testamentary trust, revocable and irrevocable personal, managed agency,
and custodial trusts, as well as discount brokerage services.
Use of estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions. The amounts recorded in the financial
statements may be affected by those estimates and assumptions. Actual
results may vary from those estimates.
Estimates are used primarily in developing the allowance for loan
losses, in estimating the economic life of loan fees and costs, in
determining the market value of investment securities, in computing
deferred tax assets, in determining the estimated useful lives of
premises and equipment, and in the valuation of other real estate owned.
Securities available-for-sale. Debt and equity securities are
classified as available-for-sale and carried at fair value, with
unrealized gains and losses, net of tax, excluded from income and
reported as a separate component of stockholders' equity until realized.
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 period to maturity.
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 Bank may be required
to provide additional collateral based on the fair value of the
underlying securities.
Loans receivable. Loans receivable that management has the intent and
ability to hold for the foreseeable future or until maturity or payoff
are reported at their outstanding unpaid principal balances reduced by
any charge-offs or specific valuation accounts and net of any unearned
discount and fees and costs on originating loans.
Loan origination fees and certain direct origination costs for real
estate mortgage loans are capitalized and recognized as an adjustment of
the yield of the related loans.
(Continued)
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 1. Nature of Business and Significant Accounting Policies (Continued)
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as
they become due. When interest accrual is discontinued, all unpaid
accrued interest is reversed. Interest income is subsequently
recognized only to the extent cash payments are received.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on past loan loss
experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current economic
conditions.
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.
Other real estate owned. Real estate properties acquired through, or in
lieu of, loan foreclosure are to be sold and are initially recorded at
fair value on the date of foreclosure to establish a new cost basis.
After foreclosure, valuations are periodically performed by management
and the real estate is carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in other income.
Income taxes. Deferred tax assets and liabilities are reflected at
currently enacted income tax rates applicable to the period in which the
deferred tax assets or liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax
assets and liabilities are adjusted through the provision for income
taxes.
Pension benefits. The noncontributory defined benefit pension plan
covers 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.
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 trust company. Trust
fees are recorded on the accrual basis.
Earnings per share. Earnings per share is calculated by dividing net
income for the period by the weighted average number of shares of common
stock outstanding during the period. The assumed exercise of stock
options is included in the calculation of diluted earnings per share.
Restrictions on retained earnings. Federal regulations limit the
payment of dividends in any calendar year to the net profits for the
year combined with the retained net profits of the preceding two
calendar years, without prior approval of the regulators.
Off-balance-sheet financial instruments. In the ordinary course of
business the Bank has entered into off-balance-sheet financial
instruments such as home equity lines of credit, commitments under
credit card arrangements and standby letters of credit. Such financial
instruments are recorded in the financial statements when they are
funded or related fees are incurred or received.
(Continued)
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 1. Nature of Business and Significant Accounting Policies (Concluded)
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
approximately 79% 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.
Advertising. Advertising costs are expensed as incurred.
Reclassifications. Certain amounts in the financial statements have
been reclassified to conform with classifications adopted in 2000.
Note 2. Securities Available-for-Sale
The carrying amounts of debt and other securities and their approximate
fair values at December 31, 2000 and 1999, follow:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
December 31, 2000:
U.S. Treasury securities $ 499,608 $ 237 $ - $ 499,845
U.S. Government agencies 9,631,914 7,361 61,258 9,578,017
State and municipal
securities 20,926,351 155,756 169,409 20,912,698
Other securities 21,918,279 13,888 339,775 21,592,392
----------- -------- ---------- -----------
$52,976,152 $177,242 $ 570,442 $52,582,952
=========== ======== ========== ===========
December 31, 1999:
U.S. Treasury securities $ 1,538,159 $ - $ 33,869 $ 1,504,290
U.S. Government agencies 9,641,077 - 322,604 9,318,473
State and municipal
securities 21,651,413 112,289 792,536 20,971,166
Other securities 22,504,268 - 1,128,317 21,375,951
----------- -------- ---------- -----------
$55,334,917 $112,289 $2,277,326 $53,169,880
=========== ======== ========== ===========
Gross realized gains and gross realized losses on sales of securities
were as follows:
2000 1999 1998
---- ---- ----
Gross realized gains $ 58,242 $ 34,751 $ 204,853
Gross realized losses $ 4,449 $ - $ -
(Continued)
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 2. Securities Available-for-Sale (Concluded)
The scheduled maturities of securities available-for-sale at December
31, 2000, were as follows:
Available-for-Sale Securities
-----------------------------
Amortized Fair
Cost Value
--------- -----
Due in one year or less $ 5,038,737 $ 5,031,830
Due from one year to five years 25,969,547 25,830,465
Due from five to ten years 20,433,027 20,186,882
Due after ten years 1,534,841 1,533,775
----------- -----------
$52,976,152 $52,582,952
=========== ===========
Securities carried at $5,226,096 at December 31, 2000, and $4,122,998
at December 31, 1999, were pledged to secure public deposits as
required by law.
Note 3. Loans
The components of loans in the balance sheets were as follows:
2000 1999
---- ----
Real estate mortgage loans $111,956,111 $ 95,912,493
Real estate construction loans 4,591,495 5,437,685
Commercial loans 11,279,090 11,081,489
Installment loans 20,589,724 18,673,299
Net deferred loan costs and fees 631,298 524,513
------------ ------------
149,047,718 131,629,479
Allowance for loan losses (1,369,842) (1,197,843)
------------ ------------
$147,677,876 $130,431,636
============ ============
Loans upon which the accrual of interest has been discontinued totaled
$25,067 at December 31, 2000. There were no non-accrual loans at
December 31, 1999.
An analysis of the change in the allowance for loan losses follows:
2000 1999 1998
---------- ---------- ----------
Balance, beginning of year $1,197,843 $1,011,935 $ 860,709
Provision for loan losses 250,000 335,000 208,367
Recoveries 16,106 15,492 19,618
Loans charged off (94,107) (164,584) (76,759)
---------- ---------- ----------
Balance, end of year $1,369,842 $1,197,843 $1,011,935
========== ========== ==========
Loans having carrying values of $40,097 and $96,260 were transferred to
foreclosed real estate in 2000 and 1999, respectively.
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 4. Premises and Equipment
Components of premises and equipment included in the balance sheets at
December 31, 2000 and 1999, were as follows:
2000 1999
---- ----
Land $ 674,430 $ 583,430
Buildings and improvements 5,299,618 3,824,548
Furniture and equipment 4,523,101 3,886,789
----------- ----------
Total cost 10,497,149 8,294,767
Less accumulated depreciation 3,719,637 3,341,044
----------- ----------
Net book value $ 6,778,080 $4,953,723
=========== ==========
Note 5. Other Time Deposits
The aggregate amount of other time deposits, each with a minimum
denomination of $100,000, was $18,899,222 and $14,502,942 at December
31, 2000 and 1999, respectively.
At December 31, 2000, the scheduled maturities of all time deposits are
as follows:
2001 $64,256,962
2002 6,001,350
2003 4,491,676
2004 512,856
2005 591,797
Thereafter 24,330
----------
$75,878,971
==========
Note 6. Income Taxes
The provision for income taxes consisted of the following for the years
ended December 31:
2000 1999 1998
---------- ----------- --------
Currently payable $ 554,861 $ 597,969 $613,933
Deferred 19,559 159,719 (56,741)
---------- ----------- --------
$ 574,420 $ 757,688 $557,192
--======== ========== ========
The reasons for the differences between the statutory Federal income
tax rates and the effective tax rates are summarized as follows:
2000 1999 1998
---- ---- ----
Statutory rates 34.0% 34.0% 34.0%
Increase (decrease) resulting from:
Effect of tax-exempt income (7.9) (8.1) (12.1)
Other, net - (.1) .5
----- ---- ----
26.1% 25.8% 22.4%
===== ==== ====
(Continued)
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 6. Income Taxes (Concluded)
The components of the net deferred tax assets and liabilities included
in other assets (liabilities) are as follows at December 31:
2000 1999
---- ----
Deferred tax assets
Allowance for loan losses $ 342,669 $ 284,189
Net unrealized loss on
available-for-sale securities 193,950 736,112
Deferred compensation 141,065 123,156
Other, net 49,080 40,614
--------- ----------
726,764 1,184,071
--------- ----------
Deferred tax liabilities
Net unrealized gain on available-
for-sale securities (60,262) -
Pension plan (95,264) (93,718)
Depreciation (166,326) (121,056)
Deferred loan fees and costs (377,100) (322,531)
Other, net (31,248) (28,217)
--------- ----------
(730,200) (565,522)
--------- ----------
Net deferred tax asset (liability) $ (3,434) $ 618,549
========= ==========
Note 7. Pension Plan
The following tables set forth the Pension Plan's changes in benefit
obligation, plan assets, funded status, assumptions and the components
of net periodic benefit cost recognized in the Bank's financial
statements at December 31:
2000 1999 1998
---- ---- ----
Change in benefit obligation
Benefit obligations at
beginning of year $1,231,306 $1,490,044 $1,263,114
Service cost 111,616 93,176 82,844
Interest cost 92,279 110,157 99,089
Actuarial gain 43,809 53,666 94,005
Benefits paid (21,839) (515,737) (49,008)
---------- ---------- ----------
Benefit obligation at end of year 1,457,171 1,231,306 1,490,044
---------- ---------- ----------
(Continued)
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 7. Pension Plan (Concluded)
2000 1999 1998
---- ---- ----
Change in plan assets
Fair value of plan assets at
beginning of year $1,134,664 $1,469,156 $1,409,704
Actual return on plan assets 124,762 72,667 17,432
Employer contributions 124,041 108,578 91,028
Benefits paid (21,839) (515,737) (49,008)
---------- ---------- ----------
Fair value of plan assets at
end of year 1,361,628 1,134,664 1,469,156
---------- ---------- ----------
Funded status (95,543) (96,642) (20,888)
Unrecognized prior service cost 139,734 156,106 172,478
Unrecognized transition obligation (54,923) (73,229) (91,535)
Unrecognized actuarial gain 291,283 289,773 189,011
---------- ---------- ----------
Prepaid benefit cost $ 280,551 $ 276,008 $ 249,066
========== ========== ==========
Weighted-average assumptions
as of December 31:
Discount rate 7.5% 7.5% 7.5%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of compensation increase 5.0% 5.0% 5.0%
Components of net periodic
benefit cost
Service cost $ 111,616 $ 93,176 $ 82,844
Interest cost 92,279 110,157 99,089
Expected return on plan assets (92,265) (122,116) (116,342)
Amortization of deferred
actuarial gain 9,802 2,353 -
Amortization of prior service cost 16,372 16,372 16,372
Amortization of transition obligation (18,306) (18,306) (18,306)
---------- ---------- ----------
Net periodic benefit cost $ 119,498 $ 81,636 $ 63,657
========== ========== ==========
Note 8. Defined Contribution 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 employees' contributions.
Additional contributions can be made at the discretion of the Board of
Directors. Total Company contributions to the plan were $43,062,
$41,452 and $36,321 in 2000, 1999 and 1998, respectively.
Note 9. Employee Stock Ownership Plan
The Company has a noncontributory Employee Stock Ownership Plan for the
benefit of all eligible employees who have completed twelve months of
service and who have attained the age of 21 years. Contributions to the
plan are at the discretion of the 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 62,913
allocated shares as of December 31, 2000. Contributions to the plan
were $80,000 in 2000, 1999 and 1998, respectively.
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 10. Shareholders' Equity
The Company is authorized to issue 2,000,000 shares of preferred stock
with a par value of $5 per share. No preferred stock has been issued.
The rights and preferences of any preferred shares will be determined
by the Board of Directors upon issuance of the stock.
The Company has a dividend reinvestment plan under which shareholders
may choose to receive additional shares of common stock in lieu of cash
dividends. Shares were formerly issued at 95% of the market price on
the dividend payment date. Beginning January 1, 2000, dividend
reinvestment plan shares are issued at 100% of market price. Shares
totaling 9,548 and 11,231 were issued in 2000 and 1999, respectively.
The Board has authorized the repurchase of 65,000 shares of
outstanding Company stock. In 1999 and 2000, 40,000 shares and 25,000
shares were authorized for repurchase, respectively. The number of
shares repurchased was 11,677 in 1999 and 16,903 in 2000.
Note 11. Stock Option Plan
The Company has three incentive stock option plans. The 1985 incentive
stock option plan expired in 1995 and no additional shares may be
granted under this plan. Under the incentive stock option plan adopted
in 1994, the Company may grant options to certain key employees for up
to 75,000 shares. At December 31, 2000, the 1994 plan had 39,978 shares
available for grant. Under both plans, the exercise price of each
option equals the market price of the Company's common stock on the
date of grant and an option's maximum term is ten years. Options
granted are exercisable only after meeting certain performance targets
during a specified time period. If the targets are not met, the options
lapse. The 1998 Non-Employee Directors Stock Option Plan grants an
option for 250 shares to each director annually. The plan had 17,000
shares available for grant at December 31, 2000.
A summary of the status of the incentive stock option plans as of
December 31, 2000, 1999 and 1998, and changes during the years ending
on those dates is presented below:
Exercisable Stock Options
-----------------------------------------------
Outstanding Granted Exercised Outstanding
Beginning During During At End
of Year the Year the Year of Year
---------- -------- ---------- -----------
2000
Shares 51,562 12,830 (4,000) 60,392
Weighted average exercise price $ 18.79 $ 31.25 $ 14.38 $ 20.94
1999
Shares 42,650 10,162 (1,250) 51,562
Weighted average exercise price $ 16.45 $ 27.50 $ 19.10 $ 18.79
1998
Shares 39,550 8,400 (5,300) 42,650
Weighted average exercise price $ 15.62 $ 23.50 $ 18.07 $ 16.45
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 11. Stock Option Plan (Concluded)
At December 31, 2000, exercise prices on outstanding options ranged
from $11.00 to $35.00 per share and the weighted average remaining
contractual life was 6.5 years.
The Company accounts for its stock option plans in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, which does
not allocate costs to stock options granted at current market values.
The Company could, as an alternative, allocate costs to stock options
using option pricing models, as provided in Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Because of the limited number of options granted and the limited
amount of trading activity in the Company's stock, management believes
that the Company's stock options are best accounted for in accordance
with APB Opinion No. 25.
However, had the Company accounted for its stock options in accordance
with SFAS No. 123, net earnings and earnings per share would have
been as follows for each of the years ending December 31,
2000 1999 1998
---- ---- ----
Pro-forma reduction in
net income $(89,000) $(38,000) $(16,000)
======== ======== ========
Pro-forma earnings per share $ 1.31 $ 1.83 $ 1.66
======== ======== ========
Pro-forma amounts were computed using a 6.0% discount rate over the
term of the options and dividend rates which approximate current
payments.
Note 12. Related Parties
The Company has entered into transactions with its directors and
principal officers of the Company, their immediate families and
affiliated companies in which they are the principal stockholders
(related parties).The aggregate amount of loans to such related parties
was approximately $3,531,560 and $3,763,000 at December 31, 2000
and 1999, 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, December 31, 1999 $ 3,763,000
New loans 1,713,696
Repayments (2,104,692)
Other changes 159,556
-----------
Balance, December 31, 2000 $ 3,531,560
===========
Commitments to extend credit to directors and their related interests
were $1,636,906 and $1,508,863 in 2000 and 1999, respectively.
Note 13. Commitments and Contingencies
In the ordinary course of business, the Company has various
outstanding commitments and contingent liabilities that are not
reflected in the accompanying financial statements. At December 31,
2000, the Company was not involved in any litigation.
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 14. Fair Value of Financial Instruments
The estimated fair values of the financial instruments at December 31,
2000, are shown in the following table. The carrying amounts in the
table are included in the balance sheet under the applicable captions.
Dollars in Thousands
--------------------------
Carrying Fair
Amount Value
---------- ---------
Financial assets:
Cash and due from banks $ 6,538,567 $ 6,538,567
Interest-bearing deposits 100,000 100,000
Federal funds sold 4,757,000 4,757,000
Securities available-for-sale 52,582,952 52,582,952
Loans, net of allowance for loan losses 147,677,876 143,845,095
Financial liabilities:
Non-interest bearing deposits 23,657,690 23,657,690
Savings and NOW deposits 100,481,431 100,564,544
Other time deposits 75,878,971 75,898,555
Securities sold under repurchase agreements 2,805,091 2,805,091
Off-balance-sheet liabilities:
Commitments to extend credit 15,850,733 15,850,733
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 nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented
do not represent the underlying value of the Company.
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument.
The carrying amounts of cash and due from banks, federal funds sold,
non-interest bearing demand deposits, savings deposits, and
commitments to extend credit represent items which do not present
significant market risks, are payable on demand, or are of such short
duration that carrying value approximates market value.
Securities available-for-sale are valued at the quoted market prices
for the individual securities held. Therefore carrying value equals
market value.
The fair value of loans is estimated by discounting future cash flows
using the current interest rates at which similar loans would be made
to borrowers.
Other time deposits are presented at estimated fair value using
interest rates currently offered for deposits of similar remaining
maturities.
Fair value for off-balance-sheet lending commitments is approximated
by the carrying value.
BAY BANKS OF VIRGINIA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
Note 15. Regulatory Matters
The Company is 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's financial
statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company must meet specific
capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Company to maintain minimum amounts and ratios of
Total and Tier I capital (as defined in the regulations) to risk-
weighted assets (as defined), and of Tier I capital to adjusted average
assets (as defined). At December 31, 2000, the Company met all capital
adequacy requirements to which it is subject.
The Company is subject to the following capital requirements:
Regulatory
Minimum Actual
---------- ------
Total capital to risk weighted assets 10.0 13.6
Tier 1 capital to risk weighted assets 6.0 12.7
Tier 1 capital to adjusted average assets 5.0 8.3
INDEPENDENT AUDITORS' REPORT
Eggleston Smith P.C.
603 Pilot House Drive, Suite 400
Newport News, Virginia 23606
To the Board of Directors
Bay Banks of Virginia, Inc.
Kilmarnock, Virginia
We have audited the accompanying consolidated balance sheets of Bay Banks of
Virginia, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, cash flows and changes in
shareholders' equity for each of the years in the three-year period ended
December 31, 2000. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bay Banks of
Virginia, Inc. and subsidiaries as of December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000, in conformity with
generally accepted accounting principles.
EGGLESTON SMITH P.C.
January 29, 2001
Newport News, Virginia