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Section 1: 10-Q (10-Q)

bayk-10q_20180930.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 0-22955

 

BAY BANKS OF VIRGINIA, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

VIRGINIA

54-1838100

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

(I.R.S. EMPLOYER

IDENTIFICATION NO.)

1801 BAYBERRY COURT, SUITE 101

RICHMOND, VIRGINIA 23226

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(804) 325-3775

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A

(FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

 

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      no

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).      yes      no

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      yes      no

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 13,248,716 shares of common stock on November 2, 2018.

 

 

1


 

FORM 10-Q

For the interim period ending September 30, 2018

INDEX

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

3

 

 

 

CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2018 (UNAUDITED) AND DECEMBER 31, 2017

 

3

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)

 

4

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)

 

5

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 (UNAUDITED)

 

6

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)

 

7

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

8

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

28

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

39

 

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

39

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

40

 

 

 

ITEM 1A. RISK FACTORS

 

40

 

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

40

 

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

40

 

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

40

 

 

 

ITEM 5. OTHER INFORMATION

 

40

 

 

 

ITEM 6. EXHIBITS

 

41

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

2018

 

 

December 31,

2017 (1)

 

(Dollars in thousands, except share data)

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

6,610

 

 

$

9,396

 

Interest-bearing deposits

 

 

15,906

 

 

 

41,971

 

Certificates of deposit

 

 

2,976

 

 

 

3,224

 

Federal funds sold

 

 

197

 

 

 

6,961

 

Available-for-sale securities, at fair value

 

 

81,215

 

 

 

77,153

 

Restricted securities

 

 

6,750

 

 

 

5,787

 

Loans receivable, net of allowance for loan losses of $7,287 and $7,770,

   respectively

 

 

846,993

 

 

 

758,726

 

Loans held for sale

 

 

-

 

 

 

1,651

 

Premises and equipment, net

 

 

18,315

 

 

 

17,463

 

Accrued interest receivable

 

 

3,060

 

 

 

3,194

 

Other real estate owned, net

 

 

3,663

 

 

 

4,284

 

Bank owned life insurance

 

 

19,147

 

 

 

18,773

 

Goodwill

 

 

10,374

 

 

 

10,374

 

Mortgage servicing rights

 

 

981

 

 

 

999

 

Core deposit intangible

 

 

2,381

 

 

 

2,991

 

Other assets

 

 

8,872

 

 

 

7,609

 

Total assets

 

$

1,027,440

 

 

$

970,556

 

LIABILITIES

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

108,602

 

 

$

103,037

 

Savings and interest-bearing demand deposits

 

 

330,690

 

 

 

299,820

 

Time deposits

 

 

369,836

 

 

 

358,989

 

Total deposits

 

 

809,128

 

 

 

761,846

 

Securities sold under repurchase agreements

 

 

6,083

 

 

 

9,498

 

Federal Home Loan Bank advances

 

 

80,000

 

 

 

70,000

 

Subordinated notes, net of issuance costs

 

 

6,889

 

 

 

6,877

 

Other liabilities

 

 

8,793

 

 

 

7,781

 

Total liabilities

 

 

910,893

 

 

 

856,002

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock ($5 par value; authorized - 30,000,000 shares; outstanding -

   13,238,716 and 13,203,605 shares, respectively) (2)

 

 

66,194

 

 

 

66,018

 

Additional paid-in capital

 

 

37,276

 

 

 

37,142

 

Unearned employee stock ownership plan shares

 

 

(1,006

)

 

 

(1,129

)

Retained earnings

 

 

16,775

 

 

 

13,679

 

Accumulated other comprehensive loss, net

 

 

(2,692

)

 

 

(1,156

)

Total shareholders’ equity

 

 

116,547

 

 

 

114,554

 

Total liabilities and shareholders’ equity

 

$

1,027,440

 

 

$

970,556

 

 

(1)

Derived from audited December 31, 2017 Consolidated Financial Statements.

(2)

Preferred stock is authorized; however, none was outstanding as of September 30, 2018 and December 31, 2017.

See Notes to Consolidated Financial Statements.

3


BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

(Dollars in thousands, except per share data)

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans, including fees

 

$

10,124

 

 

$

8,874

 

 

$

29,853

 

 

$

21,588

 

Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

498

 

 

 

329

 

 

 

1,392

 

 

 

946

 

Tax-exempt

 

 

119

 

 

 

116

 

 

 

356

 

 

 

344

 

Federal funds sold

 

 

45

 

 

 

43

 

 

 

171

 

 

 

77

 

Interest-bearing deposit accounts

 

 

64

 

 

 

116

 

 

 

242

 

 

 

176

 

Certificates of deposit

 

 

18

 

 

 

18

 

 

 

54

 

 

 

55

 

Total interest income

 

 

10,868

 

 

 

9,496

 

 

 

32,068

 

 

 

23,186

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

2,027

 

 

 

1,292

 

 

 

5,427

 

 

 

2,999

 

Federal funds purchased

 

 

 

 

 

 

 

 

 

 

 

10

 

Securities sold under repurchase agreements

 

 

3

 

 

 

5

 

 

 

10

 

 

 

12

 

Subordinated notes

 

 

128

 

 

 

118

 

 

 

384

 

 

 

354

 

Federal Home Loan Bank advances

 

 

441

 

 

 

279

 

 

 

1,140

 

 

 

681

 

Total interest expense

 

 

2,599

 

 

 

1,694

 

 

 

6,961

 

 

 

4,056

 

Net interest income

 

 

8,269

 

 

 

7,802

 

 

 

25,107

 

 

 

19,130

 

Provision for loan losses

 

 

509

 

 

 

1,075

 

 

 

481

 

 

 

1,833

 

Net interest income after provision for loan losses

 

 

7,760

 

 

 

6,727

 

 

 

24,626

 

 

 

17,297

 

NON-INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from fiduciary activities

 

 

151

 

 

 

217

 

 

 

596

 

 

 

691

 

Service charges and fees on deposit accounts

 

 

251

 

 

 

238

 

 

 

538

 

 

 

696

 

Non-deposit product income

 

 

144

 

 

 

105

 

 

 

558

 

 

 

300

 

Interchange fees, net

 

 

105

 

 

 

101

 

 

 

221

 

 

 

314

 

Other service charges and fees

 

 

30

 

 

 

40

 

 

 

91

 

 

 

75

 

Secondary market lending income

 

 

152

 

 

 

157

 

 

 

528

 

 

 

358

 

Increase in cash surrender value of bank owned life insurance

 

 

123

 

 

 

133

 

 

 

374

 

 

 

341

 

Net gains on sale of available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

2

 

Net gains (losses) on disposition of other assets

 

 

51

 

 

 

 

 

 

(18

)

 

 

 

Gain on curtailment of post-retirement benefit plan

 

 

 

 

 

 

 

 

352

 

 

 

 

Other

 

 

(11

)

 

 

17

 

 

 

90

 

 

 

169

 

Total non-interest income

 

 

996

 

 

 

1,008

 

 

 

3,330

 

 

 

2,946

 

NON-INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,022

 

 

 

3,687

 

 

 

12,407

 

 

 

9,832

 

Occupancy

 

 

962

 

 

 

811

 

 

 

2,639

 

 

 

1,943

 

Data processing

 

 

556

 

 

 

299

 

 

 

1,941

 

 

 

897

 

Bank franchise tax

 

 

178

 

 

 

141

 

 

 

531

 

 

 

359

 

Telecommunications

 

 

132

 

 

 

111

 

 

 

369

 

 

 

215

 

FDIC assessments

 

 

151

 

 

 

119

 

 

 

521

 

 

 

315

 

Foreclosed property

 

 

45

 

 

 

45

 

 

 

110

 

 

 

114

 

Consulting

 

 

228

 

 

 

58

 

 

 

957

 

 

 

209

 

Advertising and marketing

 

 

126

 

 

 

100

 

 

 

347

 

 

 

227

 

Directors’ fees

 

 

146

 

 

 

135

 

 

 

382

 

 

 

466

 

Audit and accounting

 

 

236

 

 

 

121

 

 

 

839

 

 

 

366

 

Legal

 

 

123

 

 

 

9

 

 

 

380

 

 

 

95

 

Merger related

 

 

 

 

 

141

 

 

 

363

 

 

 

1,126

 

Core deposit intangible amortization

 

 

196

 

 

 

227

 

 

 

610

 

 

 

461

 

Net other real estate owned (gains) losses

 

 

(112

)

 

 

9

 

 

 

(169

)

 

 

102

 

Other

 

 

543

 

 

 

707

 

 

 

1,988

 

 

 

1,988

 

Total non-interest expense

 

 

7,532

 

 

 

6,720

 

 

 

24,215

 

 

 

18,715

 

Income before income taxes

 

 

1,224

 

 

 

1,015

 

 

 

3,741

 

 

 

1,528

 

Income tax expense

 

 

198

 

 

 

273

 

 

 

645

 

 

 

406

 

Net income

 

$

1,026

 

 

$

742

 

 

$

3,096

 

 

$

1,122

 

Basic and diluted earnings per share

 

$

0.08

 

 

$

0.07

 

 

$

0.24

 

 

$

0.14

 

 

See Notes to Consolidated Financial Statements.

4


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

(Dollars in thousands)

 

September 30, 2018

 

 

September 30, 2017

 

 

September 30, 2018

 

 

September 30, 2017

 

Net income

 

$

1,026

 

 

$

742

 

 

$

3,096

 

 

$

1,122

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (loss) gain on available-for-sale securities arising during the period

 

 

(477

)

 

 

59

 

 

 

(1,944

)

 

 

545

 

Deferred tax benefit (expense)

 

 

100

 

 

 

(20

)

 

 

408

 

 

 

(185

)

Reclassification of net available-for-sale securities gains recognized in net income

 

 

 

 

 

 

 

 

 

 

 

(2

)

Deferred tax benefit

 

 

 

 

 

 

 

 

 

 

 

1

 

Total other comprehensive (loss) income

 

 

(377

)

 

 

39

 

 

 

(1,536

)

 

 

359

 

Comprehensive income

 

$

649

 

 

$

781

 

 

$

1,560

 

 

$

1,481

 

 

See Notes to Consolidated Financial Statements.

5


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unearned

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee

Stock

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Shares of

 

 

 

 

 

 

Additional

 

 

Ownership

 

 

 

 

 

 

Other

 

 

Total

 

 

 

Common

 

 

Common

 

 

Paid-in

 

 

Plan

 

 

Retained

 

 

Comprehensive

 

 

Shareholders’

 

(Dollars in thousands)

 

Stock

 

 

Stock

 

 

Capital

 

 

Shares

 

 

Earnings

 

 

Loss, net

 

 

Equity

 

Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

 

13,203,605

 

 

$

66,018

 

 

$

37,142

 

 

$

(1,129

)

 

$

13,679

 

 

$

(1,156

)

 

$

114,554

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,096

 

 

 

 

 

 

3,096

 

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,536

)

 

 

(1,536

)

Stock options exercised

 

 

22,491

 

 

 

112

 

 

 

19

 

 

 

 

 

 

 

 

 

 

 

 

131

 

Director stock grant

 

 

12,620

 

 

 

64

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64

 

ESOP collateral release

 

 

 

 

 

 

 

 

 

 

 

123

 

 

 

 

 

 

 

 

 

123

 

Share-based compensation expense

 

 

 

 

 

 

 

 

115

 

 

 

 

 

 

 

 

 

 

 

 

115

 

Balance at end of period

 

 

13,238,716

 

 

$

66,194

 

 

$

37,276

 

 

$

(1,006

)

 

$

16,775

 

 

$

(2,692

)

 

$

116,547

 

 

See Notes to Consolidated Financial Statements.

 

6


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

For the Nine Months Ended

 

(Dollars in thousands)

 

September 30, 2018

 

 

September 30, 2017

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

3,096

 

 

$

1,122

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,261

 

 

 

1,041

 

Net premium amortization and discount accretion of securities

 

 

167

 

 

 

271

 

Amortization of subordinated debt issuance costs

 

 

12

 

 

 

13

 

Amortization of core deposit intangible

 

 

610

 

 

 

461

 

Accretion of fair value adjustment of time deposits

 

 

(150

)

 

 

(219

)

Accretion of fair value adjustments (discounts) of loans

 

 

1,408

 

 

 

(860

)

Provision for loan losses

 

 

481

 

 

 

1,833

 

Share-based compensation

 

 

115

 

 

 

178

 

Gain on sale of available-for-sale securities

 

 

 

 

 

2

 

(Decrease) increase in other real estate owned valuation allowance

 

 

(33

)

 

 

145

 

Gain on sale of other real estate owned

 

 

(136

)

 

 

(44

)

Loss on disposal of fixed and other assets

 

 

18

 

 

 

 

Decrease in value of mortgage servicing rights

 

 

18

 

 

 

16

 

Originations of loans held for sale

 

 

(17,096

)

 

 

(10,204

)

Proceeds from loan sales

 

 

19,039

 

 

 

10,438

 

Gain on sold loans

 

 

(292

)

 

 

(120

)

Increase in cash surrender value of bank owned life insurance

 

 

(374

)

 

 

(342

)

Gain on curtailment of post-retirement benefit plan

 

 

(352

)

 

 

 

Decrease in accrued interest receivable and other assets

 

 

(675

)

 

 

(145

)

Increase in other liabilities

 

 

1,487

 

 

 

1,160

 

Net cash provided by operating activities

 

 

8,604

 

 

 

4,746

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Proceeds from maturities and principal paydowns of available-for-sale securities

 

 

3,477

 

 

 

3,093

 

Proceeds from sales and calls of available-for-sale securities

 

 

 

 

 

17,662

 

Maturities of certificates of deposit

 

 

248

 

 

 

992

 

Purchases of available-for-sale securities and certificates of deposit

 

 

(9,650

)

 

 

(19,121

)

Purchases of restricted securities, net

 

 

(963

)

 

 

(1,807

)

Decrease (increase) in federal funds sold

 

 

6,764

 

 

 

(21,451

)

Net increase in loans

 

 

(92,525

)

 

 

(57,147

)

Loan purchases

 

 

 

 

 

(34,037

)

Cash acquired in the merger with Virginia BanCorp

 

 

 

 

 

14,698

 

Proceeds from sale of other real estate owned

 

 

3,159

 

 

 

603

 

Proceeds from sale of equipment

 

 

 

 

 

9

 

Purchases of premises and equipment

 

 

(2,113

)

 

 

(1,643

)

Net cash used in investing activities

 

 

(91,603

)

 

 

(98,149

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Net increase (decrease) in demand, savings, and other interest-bearing deposits

 

 

36,435

 

 

 

(2,527

)

Net increase in time deposits

 

 

10,997

 

 

 

88,512

 

Stock options exercised

 

 

131

 

 

 

195

 

Net decrease in securities sold under repurchase agreements

 

 

(3,415

)

 

 

(1,219

)

Issuance of stock

 

 

 

 

 

32,888

 

Dividends paid

 

 

 

 

 

(376

)

Increase in Federal Home Loan Bank advances

 

 

10,000

 

 

 

15,000

 

Net cash provided by financing activities

 

 

54,148

 

 

 

132,473

 

Net (decrease) increase in cash and due from banks

 

 

(28,851

)

 

 

39,070

 

Cash and cash equivalents (including interest-earning deposits) at beginning of period

 

 

51,367

 

 

 

12,796

 

Cash and cash equivalents (including interest-earning deposits) at end of period

 

$

22,516

 

 

$

51,866

 

Supplemental Schedule of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

 

Interest

 

$

6,983

 

 

$

4,303

 

Income taxes

 

 

700

 

 

 

690

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Unrealized (loss) gain on available-for-sale securities

 

 

(1,944

)

 

 

545

 

Loans transferred to other real estate owned

 

 

2,369

 

 

 

259

 

Loans originated to facilitate sale of other real estate owned

 

 

 

 

 

164

 

Changes in deferred taxes resulting from other comprehensive income transactions

 

 

(408

)

 

 

184

 

Unpaid dividends declared

 

 

 

 

 

527

 

 

See Notes to Consolidated Financial Statements.

7


Notes to Consolidated Financial Statements (Unaudited)

Note 1: Basis of Presentation

Bay Banks of Virginia, Inc. (the “Company”) is the holding company for Virginia Commonwealth Bank, formerly known as Bank of Lancaster (the “Bank” or “VCB”), for VCB Financial Group, Inc., formerly known as Bay Trust Company (“VCBFG”), and for Steptoes Holdings, LLC (“Steptoes Holdings”). The consolidated financial statements of the Company include the accounts of Bay Banks of Virginia, Inc., the Bank, VCBFG, and Steptoes Holdings.

On April 1, 2017, the Company completed the merger with Virginia BanCorp Inc., which is further discussed in Note 3, and as such, the consolidated financial statements presented herein reflect the combined operations of the business combination since the effective time of the merger.

In August 2017, the Company completed a private placement of 3,783,784 shares of common stock at an offering price of $9.25 per share to certain existing shareholders, institutional investors, and other accredited investors. Proceeds from the offering, net of offering expenses, were $32.9 million.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and to the general practices within the banking industry. In management’s opinion, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results to be expected for the full year or for any other interim periods. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share, or shareholders’ equity as previously reported. All dollar amounts included in the tables in these notes are in thousands, except per share data, unless otherwise stated.

Note 2: Amendments to the Accounting Standards Codification

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation – Stock Compensation (Accounting Standards Codification (“ASC”) 718). The amendments in this ASU provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to account for modifications in Topic 718. An entity should account for the effects of a modification unless all the following are met: (1) The fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement method is used) of the original award immediately before the original award is modified. If the modification does not affect any of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The current disclosure requirements in ASC 718 apply regardless of whether an entity is required to apply modification accounting under the amendments in this ASU. This ASC was effective for annual periods and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company adopted this ASC in the first quarter of 2018. The adoption did not have a material effect on the Company’s financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (ASC 310-20), Premium Amortization on Purchased Callable Debt Securities. The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company early adopted this ASU, and the adoption did not have a material effect on its consolidated financial statements.

8


In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (ASC 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU intends to improve the presentation of net periodic pension cost and net periodic postretirement benefit costs in the income statement and to narrow the amounts eligible for capitalization in assets. This ASU is effective for fiscal years beginning after December 15, 2017. The Company adopted this ASU in the first quarter of 2018. The adoption did not have a material effect on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (ASC 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies accounting for goodwill impairments by eliminating step two (the implied fair value to carrying value of goodwill) from the existing goodwill impairment test. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value. The effective date and transition requirements for the technical corrections will be effective for the Company for reporting periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this ASU, and the adoption did not have a material effect on the Company’s financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (ASC 326), which is new guidance for the accounting for credit losses on instruments within its scope. It introduces a new model for current expected credit losses (“CECL”), which will apply to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures. This will include loans, held-to-maturity debt securities, loan commitments, financial guarantees, net investments in leases, reinsurance, and trade receivables. The CECL model requires an entity to estimate the credit losses expected over the life of an exposure (or pool of exposures). The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. In addition, this ASC will replace the current available-for-sale debt securities other-than-temporary impairment model with an estimate of expected credit losses only when the fair value falls below the amortized cost of the asset. Credit losses on available-for-sale debt securities will be limited to the difference between the security’s amortized cost basis and its fair value. The available-for-sale debt security model will also require the use of an allowance to record estimated credit losses and subsequent recoveries. The ASU also addresses purchased financial assets with credit deterioration. Disclosure requirements are expanded regarding an entity’s assumptions, models, and methods for estimating the allowance for loan losses. This ASU is effective for interim and annual reporting periods beginning after December 15, 2019. The Company has formed an implementation group, which is evaluating the effect that this ASU will have on its consolidated financial statements. During the third quarter of 2018, the work group reviewed various CECL software tools and vendors, and subsequent to the end of the quarter, the Company selected a third party vendor and model to support the requirements of the standard and to assist in implementation.

In February 2016, the FASB issued ASU 2016-02, Leases (ASC 842). This ASC increases transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and requiring more disclosures related to leasing transactions. This ASC is effective for the fiscal years beginning after December 15, 2018, with early adoption permitted. The Company has several lease agreements, such as for office space, which are currently considered operating leases and not recognized on its balance sheet. The Company expects the new guidance to require these lease agreements to be recognized on its balance sheet as a right-to-use asset with a corresponding liability. The Company is currently taking inventory of its lease agreements and accumulating the data needed to implement the new standard. However, the Company does not expect the new standard to have a material effect on its financial statements.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (ASC 825-10), which requires equity investments, other than those accounted for using the equity method, to be measured at fair value through earnings. There will no longer be an available-for-sale classification measured (changes in fair value reported in other comprehensive income) for equity securities with readily determinable fair values. The cost method is also eliminated for equity instruments without a readily determinable fair value. For these investments, companies can elect to record the investment at cost, less impairment, plus or minus subsequent adjustments for observable price changes. This election only applies to equity investments that do not qualify for the net asset value practical expedient. Public companies will be required to use the exit price when measuring the fair value of financial instruments measured at amortized cost for disclosure purposes. In addition, this ASC requires financial assets and financial liabilities to be presented separately in the notes to the financial statements, grouped by measurement category and form of financial asset. The classification and measurement guidance is effective for periods beginning after December 15, 2017. The Company’s primary available-for sale investments are debt securities and are therefore not included in the scope of this ASU. However, the Company is subject to certain disclosure requirements of the standard and engaged a third party to assist with the measurement of exit prices of its financial instruments, including its loans receivables, deposits, and borrowings and adopted this standard in the first quarter of 2018. The adoption of this ASC did not have a material effect on the Company’s financial statements, other than the fair value disclosures in Note 11.

In May 2014, the FASB issued ASC 2014-09, Revenue from Contracts with Customers (ASC 606). The amendments in this ASU modify the guidance companies use to recognize revenue from contracts with customers for transfers of goods or services and transfers of nonfinancial assets, unless those contracts are within the scope of other standards. The ASC requires that entities apply a specific method to recognize revenue reflecting the consideration expected from customers in exchange for the transfer of goods and

9


services. The guidance also requires new qualitative and quantitative disclosures, including information about contract balances and performance obligations. Entities are also required to disclose significant judgments and changes in judgments for determining the satisfaction of performance obligations. Subsequent to the issuance of this ASC, the FASB issued targeted updates to clarify specific implementation issues including ASU 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Identifying Performance Obligations and Licensing, ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, and ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoptions, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect on initially applying the standard being recognized at the date of initial application. The effective date for this ASC was for annual reporting periods beginning after December 15, 2017. The Company’s primary source of revenue is interest income from loans and investments and loan fees. As these items are outside the scope of the standard, this income was not affected by this ASC. The Company reviewed other sources of income including fiduciary fees, secondary market lending fees, and other deposit account fees against the requirements of the standard and concluded no changes in the accounting methods were necessary. These sources of revenue are recognized in income when the Company’s performance obligation is completed, which generally is when the transaction occurs for transaction related fees or when the asset is transferred on the sale of loans. The Company also completed its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross versus net). Based on its evaluation, the Company determined that the classification of certain debit and credit card related costs should change (i.e., costs should be presented net of related revenues). This classification was made to both revenue and expense for the quarters and year to date periods ended September 30, 2018 and 2017, reported as interchange fees, net on the consolidated statements of operations.

Note 3: Business Combination

On April 1, 2017, the Company and Virginia BanCorp Inc. (“Virginia BanCorp”), a bank holding company conducting substantially all of its operations through its subsidiary, Virginia Commonwealth Bank, completed a merger pursuant to the Agreement and Plan of Merger, dated as of November 2, 2016, by and between the Company and Virginia BanCorp (the “Merger”). The Company is the surviving corporation in the Merger, and the former shareholders of Virginia BanCorp received 1.178 shares of the Company’s common stock for each share of Virginia BanCorp common stock they owned immediately prior to the merger, for a total issuance of 4,586,221 shares of the Company’s common stock valued at approximately $42.2 million at the time of closing. As of the completion of the Merger, the Company’s legacy shareholders owned approximately 51% of the outstanding common stock of the Company, and Virginia BanCorp’s former shareholders owned approximately 49% of the outstanding common stock of the Company. After the Merger of Virginia BanCorp with and into the Company, Virginia BanCorp’s subsidiary bank was merged with and into Bank of Lancaster, a wholly owned subsidiary of the Company, and immediately thereafter Bank of Lancaster changed its name to Virginia Commonwealth Bank.

The Merger was accounted for using the acquisition method of accounting in accordance with ASC 805, Business Combinations. Under this method, the assets and liabilities of Virginia BanCorp were recorded at their respective fair values as of April 1, 2017. Determining the fair value of assets and liabilities, particularly for the loan portfolio, is a complex process involving significant judgment regarding methods and assumptions used to calculate the estimated fair values. As a result, the Company recognized goodwill of $7.6 million in connection with the Merger, none of which is deductible for income tax purposes.

10


The following table details the total consideration paid by the Company, in connection with the acquisition of Virginia BanCorp, the fair value of the assets acquired and liabilities assumed, and the resulting goodwill.

 

 

 

 

 

 

 

Fair Value

 

 

 

 

 

 

 

As Recorded

 

 

Adjustments

 

 

As Recorded

 

 

 

by Virginia

BanCorp

 

 

and

Reclassifications