Document Contents

(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.

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: 13,332,874 shares of common stock on May 1, 2020.

	March 31, 2020			December 31, 2019 (1)
(Dollars in thousands, except share data)	(unaudited)
ASSETS
Cash and due from banks	$	9,976		$	6,096
Interest-earning deposits		44,711			34,358
Federal funds sold		1,319			1,359
Certificates of deposit		2,754			2,754
Available-for-sale securities, at fair value		94,618			99,454
Restricted securities		5,752			5,706
Loans receivable, net of allowance for loan losses of $10,172 and $7,562, respectively		960,023			916,628
Loans held for sale		747			1,231
Premises and equipment, net		19,462			20,141
Accrued interest receivable		3,139			3,035
Other real estate owned, net		1,679			1,916
Bank owned life insurance		19,870			19,752
Goodwill		10,374			10,374
Mortgage servicing rights		774			935
Core deposit intangible		1,369			1,518
Other assets		6,986			6,666
Total assets	$	1,183,553		$	1,131,923
LIABILITIES
Noninterest-bearing demand deposits	$	136,437		$	137,933
Savings and interest-bearing demand deposits		394,637			382,607
Time deposits		433,393			389,900
Total deposits		964,467			910,440
Securities sold under repurchase agreements		3,284			6,525
Federal Home Loan Bank advances		45,000			45,000
Subordinated notes, net of issuance costs		31,029			31,001
Other liabilities		12,371			12,772
Total liabilities		1,056,151			1,005,738
SHAREHOLDERS’ EQUITY
Common stock ($5 par value; authorized - 30,000,000 shares; outstanding - 13,346,789 and 13,261,801 shares, respectively) (2)		66,734			66,309
Additional paid-in capital		36,536			36,658
Unearned employee stock ownership plan shares		(1,463	)		(1,525	)
Retained earnings		24,646			24,660
Accumulated other comprehensive income, net		949			83
Total shareholders’ equity		127,402			126,185
Total liabilities and shareholders’ equity	$	1,183,553		$	1,131,923

	For the Three Months Ended
(Dollars in thousands, except per share data)	March 31, 2020			March 31, 2019
INTEREST INCOME
Loans, including fees	$	11,352		$	11,461
Securities:
Taxable		652			595
Tax-exempt		94			118
Federal funds sold		2			7
Interest-bearing deposit accounts		104			135
Certificates of deposit		14			20
Total interest income		12,218			12,336
INTEREST EXPENSE
Deposits		2,848			2,809
Securities sold under repurchase agreements		2			3
Subordinated notes		512			137
Federal Home Loan Bank advances		234			704
Total interest expense		3,596			3,653
Net interest income		8,622			8,683
Provision for loan losses		2,777			314
Net interest income after provision for loan losses		5,845			8,369
NONINTEREST INCOME
Trust management		193			214
Service charges and fees on deposit accounts		236			238
Wealth management		247			206
Interchange fees, net		98			101
Other service charges and fees		33			29
Secondary market sales and servicing		202			71
Increase in cash surrender value of bank owned life insurance		118			120
Net gains on sales and calls of available-for-sale securities		26			—
Net losses on disposition of other assets		(7	)		(1	)
Net (losses) gains on rabbi trust assets		(263	)		90
Referral fees		471			—
Other		37			22
Total noninterest income		1,391			1,090
NONINTEREST EXPENSE
Salaries and employee benefits		3,628			4,001
Occupancy		751			868
Data processing		537			588
Bank franchise tax		256			216
Telecommunications and other technology		358			207
FDIC assessments		148			216
Foreclosed property		7			43
Consulting		71			115
Advertising and marketing		67			67
Directors’ fees		192			164
Audit and accounting		140			204
Legal		191			83
Core deposit intangible amortization		149			180
Net other real estate owned gains		—			(6	)
Other		813			684
Total noninterest expense		7,308			7,630
(Loss) income before income taxes		(72	)		1,829
Income tax (benefit) expense		(58	)		337
Net (loss) income	$	(14	)	$	1,492
Basic and diluted earnings per share	$	—		$	0.11

										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			Income, net		Equity
Three months ended March 31, 2020
Balance at beginning of period		13,261,801		$	66,309		$	36,658		$	(1,525	)	$	24,660		$	83	$	126,185
Net loss		—			—			—			—			(14	)		—		(14	)
Other comprehensive income, net		—			—			—			—			—			866		866
Stock options exercised, net		15,514			77			4			—			—			—		81
Director and executive stock grant		11,734			59			46			—			—			—		105
Restricted stock awards		61,020			305			(305	)		—			—			—		—
Shares repurchased pursuant to ESOP		(3,280	)		(16	)		(9	)		—			—			—		(25	)
ESOP collateral release		—			—			—			62			—			—		62
Share-based compensation expense		—			—			142			—			—			—		142
Balance at end of period		13,346,789		$	66,734		$	36,536		$	(1,463	)	$	24,646		$	949	$	127,402

								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
Three months ended March 31, 2019
Balance at beginning of period		13,201,682	$	66,008	$	36,972		$	(1,734	)	$	17,557	$	(1,327	)	$	117,476
Net income		—		—		—			—			1,492		—			1,492
Other comprehensive income, net		—		—		—			—			—		806			806
Stock options exercised, net		5,173		26		(17	)		—			—		—			9
Director stock grant		762		4		2			—			—		—			6
Restricted stock awards		105,920		530		(530	)		—			—		—			—
ESOP collateral release		—		—		—			37			—		—			37
Share-based compensation expense		—		—		66			—			—		—			66
Cumulative effect adjustment of adoption of accounting principle		—		—		—			—			45		—			45
Balance at end of period		13,313,537	$	66,568	$	36,493		$	(1,697	)	$	19,094	$	(521	)	$	119,937

	For the Three Months Ended
(Dollars in thousands)	March 31, 2020			March 31, 2019
Cash Flows From Operating Activities
Net (loss) income	$	(14	)	$	1,492
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		375			446
Net premium amortization on available-for-sale securities		130			118
Amortization of subordinated notes issuance costs		28			4
Amortization of core deposit intangible		149			180
Accretion of fair value adjustment on acquired time deposits		(24	)		(34	)
Accretion of fair value adjustments (discounts) on acquired loans		(189	)		(439	)
Provision for loan losses		2,777			314
Share-based compensation expense		142			66
Increase in other real estate owned valuation allowance		10			16
Gain on sale of other real estate owned		(10	)		(22	)
Net loss on the disposition of fixed and other assets		7			1
Decrease in value of mortgage servicing rights		161			54
Increase in cash surrender value of bank owned life insurance		(118	)		(120	)
Net gains on sales and calls of available-for-sale securities		(26	)		—
Originations of loans held for sale (HFS)		(23,327	)		(2,344	)
Proceeds from HFS loan sales		24,068			2,773
Gain on HFS sold loans		(257	)		(61	)
Decrease (increase) in other assets and accrued interest receivable		103			(4,099	)
(Decrease) increase in other liabilities		(444	)		5,116
Net cash provided by operating activities		3,541			3,461
Cash Flows From Investing Activities
Proceeds from maturities, calls, and principal paydowns of available-for-sale securities		7,846			1,098
Purchases of available-for-sale securities		(2,018	)		—
Purchases of restricted securities, net		(46	)		(204	)
Decrease in federal funds sold		40			443
Net increase in loans		(46,113	)		(16,583	)
Proceeds from sale of other real estate owned		367			22
Net (purchases) disposals of premises and equipment		(230	)		27
Net cash used in investing activities		(40,154	)		(15,197	)
Cash Flows From Financing Activities
Increase in demand, savings, and other interest-bearing demand deposits		10,534			10,380
Net increase in time deposits		43,517			4,115
Stock options exercised, net		81			9
Net (decrease) increase in securities sold under repurchase agreements and other borrowings		(3,261	)		1,061
Shares repurchased pursuant to ESOP		(25	)		—
Net cash provided by financing activities		50,846			15,565
Net increase in cash and due from banks		14,233			3,829
Cash and cash equivalents (including interest-earning deposits) at beginning of period		40,454			26,666
Cash and cash equivalents (including interest-earning deposits) at end of period	$	54,687		$	30,495
Supplemental Schedule of Cash Flow Information
Cash paid for:
Interest	$	3,523		$	3,587
Income taxes		—			—
Non-cash investing and financing activities:
Unrealized gain on available-for-sale securities		1,096			1,020
Loans transferred to other real estate owned		130			137
Changes in deferred taxes resulting from other comprehensive income transactions		(230	)		(214	)
Cumulative effect adjustment of adoption of accounting principle		—			(45	)
Employee stock ownership plan transactions		(62	)		(37	)
Director and executive stock grant		105			6

Bay Banks of Virginia, Inc. (the “Company”) is the holding company for Virginia Commonwealth Bank (the “Bank”), for VCB Financial Group, Inc. (the “Financial Group”), 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, the Financial Group, and Steptoes Holdings. All significant intercompany accounts and transactions are eliminated upon consolidation.

The Bank is a state-chartered bank, headquartered in Richmond, Virginia, and a member of the Federal Reserve System. It serves businesses, professionals, and consumers through 18 banking offices, including one loan production office, located in the greater Richmond region, the Northern Neck region, Middlesex County, and the Hampton Roads region of Virginia. The Bank offers a wide 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.

The Financial Group provides management services for personal and corporate trusts, including estate planning, estate settlement, trust administration, and investment and wealth management services from its Richmond and Kilmarnock, Virginia offices. Products and services include revocable and irrevocable living trusts, testamentary trusts, custodial accounts, investment planning, brokerage services, insurance investment managed accounts, and managed and self-directed individual retirement accounts.

On April 1, 2017, the Company completed a merger with Virginia BanCorp, Inc. (“Virginia BanCorp”), a bank holding company conducting substantially all of its operations through its subsidiary, Virginia Commonwealth Bank. Immediately following the Company’s merger with Virginia BanCorp, Virginia BanCorp’s subsidiary bank was merged with and into the Company’s banking subsidiary, Bank of Lancaster (collectively, the “Merger”). Bank of Lancaster then changed its name to Virginia Commonwealth Bank.

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 necessary for a fair presentation of the consolidated financial statements have been included.

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.

In December 2019, the FASB issued Accounting Standards Update (ASU) 2019-12, Income Taxes (Topic 740), which is guidance for the simplification of accounting for income taxes. This ASU removes certain exceptions to the general principals of Topic 740 and simplifies existing guidance to improve consistent application of GAAP. The exceptions removed by this ASU are the exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items and the exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. This ASU simplifies the accounting by requiring that an entity recognize a franchise tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax; requiring that an entity evaluate when a step-up in the tax basis of goodwill should be considered part of the of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction; requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date; and making minor codification improvements for income taxes related to employee stock ownership plans and investments in qualified affordable housing projects accounted for using the equity method. This ASU is effective for interim and annual reporting periods beginning after December 15, 2020. The Company is currently evaluating the effect that this ASU will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), which is guidance for the modifications to fair value measurement disclosure requirements. This ASU removes, modifies, and adds disclosure requirements for Topic 820, Fair Value Measurement (“ASC 820”). The disclosure requirement for the valuation process of Level 3 fair value measurements was removed from ASC 820. This ASU clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date. The disclosure requirements added to ASC 820 were the changes in unrealized gains and losses for the period included in other comprehensive income for the recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This ASU was effective for interim and annual reporting periods beginning after December 15, 2019. The additional

disclosure requirements are to be applied prospectively and the other modifications will be applied retrospectively. The adoption of this ASU in the first quarter of 2020 did not have a material effect on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which is new guidance for the accounting for credit losses on instruments within its scope. This ASU introduces a new model for current expected credit losses (“CECL”), which applies to financial assets subject to credit losses and measured at amortized cost and certain off-balance sheet credit exposures, including 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 standard 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. This 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. On October 16, 2019, the FASB voted to extend the effective date of ASU 2016-13 for smaller reporting companies (including the Company) and non-SEC registrants; therefore, this ASU is effective for interim and annual reporting periods beginning after December 15, 2022. The Company has a CECL cross-functional working group that implemented a third-party CECL software in 2019 and will continue to assess and implement the requirements of ASU 2016-13 by the adoption date.

The aggregate amortized costs and fair values of available-for-sale securities as of the dates stated were as follows.

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
March 31, 2020	Cost		Gains		(Losses)			Value
U.S. Government agencies and mortgage backed securities	$	60,305	$	1,250	$	(14	)	$	61,541
State and municipal obligations		15,492		369		—			15,861
Corporate bonds		17,175		94		(53	)		17,216
Total available-for-sale securities	$	92,972	$	1,713	$	(67	)	$	94,618


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
	None

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS		3

CONSOLIDATED BALANCE SHEETS AS OF MARCH 31, 2020 (UNAUDITED) AND DECEMBER 31, 2019		3

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)		4

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)		5

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)		6

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2020 AND 2019 (UNAUDITED)		7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)		8

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		25

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		33

ITEM 4. CONTROLS AND PROCEDURES		33

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		34

ITEM 1A. RISK FACTORS		34

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		34

ITEM 3. DEFAULTS UPON SENIOR SECURITIES		35

ITEM 4. MINE SAFETY DISCLOSURES		35

ITEM 5. OTHER INFORMATION		35

ITEM 6. EXHIBITS		36

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

Section 1: 10-Q (10-Q)