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Section 1: 10-Q (10-Q)

bayk-10q_20200331.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 MARCH 31, 2020

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

 

None

 

 

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

 

 

1


 

FORM 10-Q

For the interim period ending March 31, 2020

INDEX

 

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

 

2


 

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

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

 

 

(1)

Derived from audited December 31, 2019 Consolidated Financial Statements.

(2)

Preferred stock is authorized; however, none was outstanding as of March 31, 2020 and December 31, 2019.

See Notes to Consolidated Financial Statements.

3


BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

 

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

 

 

See Notes to Consolidated Financial Statements.

4


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)

 

 

 

For the Three Months Ended

 

(Dollars in thousands)

 

March 31, 2020

 

 

March 31, 2019

 

Net (loss) income

 

$

(14

)

 

$

1,492

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Unrealized holding gain on available-for-sale securities arising during the

   period

 

 

1,070

 

 

 

1,020

 

Deferred income tax expense on unrealized gain on available-for-sale

   securities

 

 

(225

)

 

 

(214

)

Reclassification of net gains on sales and calls of available-for-sale

   securities recognized in net income

 

 

26

 

 

 

 

Deferred income tax expense on realized gain on available-for-sale

   securities

 

 

(5

)

 

 

 

Total other comprehensive income

 

 

866

 

 

 

806

 

Comprehensive income

 

$

852

 

 

$

2,298

 

 

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

 

 

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

 

 

See Notes to Consolidated Financial Statements.

 

6


 

BAY BANKS OF VIRGINIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

 

 

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

 

 

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 (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.

Note 2: Amendments to the Accounting Standards Codification

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

8


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.

Note 3: Securities

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

 

 

 

 

 

 

 

 

Gross

 

 

Gross

 

 

 

 

 

 

 

Amortized

 

 

Unrealized

 

 

Unrealized

 

 

Fair

 

December 31, 2019

 

Cost

 

 

Gains

 

 

(Losses)

 

 

Value

 

U.S. Government agencies and mortgage backed securities

 

$

67,491

 

 

$

284

 

 

$

(178

)

 

$

67,597

 

State and municipal obligations