Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis o f Financial Condition and Results of Operations
The following presents management’s discussion and analysis of the Company’s consolidated financial condition and the results of the Company's operations. This discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in this Form 10-Q and the audited consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2023, as amended (the “ 2023 Form 10-K ” ). Results of operations for the three months ended March 31, 2024 are not necessarily indicative of the results of operations for the balance of 2024, or for any other period. As used in this report, the terms “the Company,” “we,” “us,” and “our” refer to Blue Ridge Bankshares, Inc. and its consolidated subsidiaries. The term “Bank” refers to Blue Ridge Bank, National Association.
Cautionary Note About Forward-Looking Statements
The Company makes certain forward-looking statements in this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of management’s beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate, or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. The Company cautions that the forward-looking statements are based largely on management’s expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond its control. Actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.
The following factors, among others, could cause the Company’s financial performance to differ materially from that expressed in such forward-looking statements:
• the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations;
• the effects of, and changes in, the macroeconomic environment and financial market conditions, including monetary and fiscal policies, interest rates and inflation;
• the impact of, and the ability to comply with, the terms of the Consent Order with the Office of the Comptroller of the Currency ("OCC"), including the heightened capital requirements and other restrictions therein, and other regulatory directives;
• the imposition of additional regulatory actions or restrictions for noncompliance with the Consent Order or otherwise;
• the Company’s involvement in, and the outcome of, any litigation, legal proceedings, or enforcement actions that may be instituted against the Company;
• reputational risk and potential adverse reactions of the Company’s customers, suppliers, employees, or other business partners;
• the Company’s ability to manage its fintech operations, including implementing enhanced controls and procedures, complying with the Consent Order, other regulatory directives and applicable laws and regulations, maintaining the quality of loans associated with these relationships, and, in certain cases, winding down certain of these partnerships;
• the quality and composition of the Company’s loan and investment portfolios, including changes in the level of the Company’s nonperforming assets and charge-offs;
• the Company’s management of risks inherent in its loan portfolio, the credit quality of its borrowers, and the risk of a prolonged downturn in the real estate market, which could impair the value of the Company’s collateral and its ability to sell collateral upon any foreclosure;
• the ability to maintain adequate liquidity by growing and retaining deposits and secondary funding sources, especially if the Company's or industry's reputation become damaged;
31
• the ability to maintain capital levels adequate to support the Company's business and to comply with the Consent Order and other regulatory directives placed upon the Bank;
• the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;
• changes in consumer spending and savings habits;
• the willingness of users to substitute competitors’ products and services for the Company’s products and services;
• the impact of unanticipated outflows of deposits;
• changes in technological and social media;
• potential exposure to fraud, negligence, computer theft, and cyber-crime;
• adverse developments in the financial industry generally, such as recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer and client behavior;
• changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products;
• the impact of changes in financial services policies, laws, and regulations, including laws, regulations and policies concerning taxes, banking, securities, real estate and insurance, and the application thereof by regulatory bodies;
• the effect of changes in accounting standards, policies and practices as may be adopted from time to time;
• estimates of the fair value and other accounting values, subject to impairment assessments, of certain of the Company’s assets and liabilities;
• geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad;
• the occurrence or continuation of widespread health emergencies or pandemics, significant natural disasters, severe weather conditions, floods and other catastrophic events; and
• other risks and factors identified in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” sections and elsewhere in the 2023 Form 10-K and in this Form 10-Q and in filings the Company makes from time to time with the Securities and Exchange Commission (“SEC”).
The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in the 2023 Form 10-K including those discussed in the section entitled "Risk Factors." If one or more of the factors affecting forward-looking information and statements proves incorrect, then actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, the Company cautions not to place undue reliance on its forward-looking information and statements. The Company will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how these risks and uncertainties will affect it.
Regulatory Matters
On January 24, 2024, the Bank consented to the issuance of a consent order (the “Consent Order”) with the OCC. The Consent Order generally incorporates the provisions of the formal written agreement (the "Written Agreement") entered into between the Bank and the OCC on August 29, 2022, as well as adding new provisions. The Written Agreement principally concerned the Bank’s fintech operations and required the Bank to continue enhancing its controls for assessing and managing the third-party, Bank Secrecy Act/Anti-Money Laundering, and information technology
32
risks stemming from its fintech partnerships. The Consent Order adds time frames by which certain of the directives are required, requires the Bank to submit a strategic plan and a capital plan, and places further restrictions on the Company’s fintech operations. The Consent Order also requires the Bank to maintain a leverage ratio of 10.0% and a total capital ratio of 13.0%, referred to as minimum capital ratios. Complete copies of the Written Agreement and the Consent Order are included as Exhibits 10.14 and 10.15, respectively, to the 2023 Form 10-K.
Restatement
On October 31, 2023, the Company and the Audit Committee of its board of directors, after consultation with the Company’s independent registered public accounting firm and the OCC, determined that certain specialty finance loans that, as previously disclosed, were placed on nonaccrual, reserved for, or charged off in the interim periods ended March 31, 2023 and June 30, 2023 should have been reported as nonaccrual, reserved for, or charged off in earlier periods. On November 14, 2023, the Company filed amendments to its annual report on Form 10-K for the year ended December 31, 2022 and its quarterly reports on Form 10-Q for the periods ended March 31, 2023 and June 30, 2023 to restate the consolidated financial statements included therein.
The Company does not believe that the restatements reflect any significant financial impact on the Company's financial condition as of March 31, 2024, or any trends in the Company's business or its prospects. The consolidated financial statements included in this Quarterly Report on Form 10-Q reflect the effects of the aforementioned restatement as of and for the period ended March 31, 2023.
Private Placement
On April 3, 2024, the Company closed and funded a private placement of securities pursuant to an amended and restated securities purchase agreement, dated April 3, 2024, with certain investors for gross proceeds of $150.0 million (the "Private Placement"). In the Private Placement, the Company issued and sold 3.4 million shares of common stock at a purchase price of $2.50 per common share, 14,150 shares of convertible Series B or Series C preferred stock at a purchase price of $10 thousand per preferred share, and 7,383 warrants to purchase convertible Series B or Series C preferred stock at an exercise price of $10 thousand per preferred share. Each share of convertible Series B and Series C preferred stock represents the equivalent of 4,000 shares of common stock. The Private Placement amends and replaces the previously announced private placement of the Company's common stock and warrants that was announced on December 22, 2023.
The Company will use the net proceeds from the Private Placement to reposition business lines, support organic growth, and enhance capital levels of the Bank.
General
There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2023 Form 10-K.
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, total assets, total liabilities, or stockholders’ equity as previously reported.
Comparison of Financial Condition as of March 31, 2024 and December 31, 2023
Total assets were $3.08 billion as of March 31, 2024, a decrease of $41.4 million from $3.12 billion as of December 31, 2023. Most of this decrease was attributable to a lower loans held for investment balances, which decreased $36.9 million to $2.39 billion as of March 31, 2024 from $2.43 million as of December 31, 2023. The Company purposely reduced assets to fund the wind down of the Bank's fintech banking-as-a-service ("BaaS") operations. The allowance for credit losses ("ACL") decreased $868 thousand to $35.0 million as of March 31, 2024 from $35.9 million as of December 31, 2023.
Total deposits as of March 31, 2024 were $2.47 billion, a net decrease of $100.3 million from December 31, 2023. The decrease in the first three months of 2024 was primarily due to a decrease of $150.0 million of interest-bearing fintech deposits, partially offset by higher time deposit balances of $64.0 million. Total deposits related to fintech relationships decreased by $162.9 million to $303.0 million as of March 31, 2024 from $465.9 million as of December 31, 2023, and represented 12.3% and 18.2% of total deposits as of the same respective dates.
33
Total stockholders’ equity decreased by $5.1 million to $181.0 million as of March 31, 2024 compared to $186.0 million at December 31, 2023. The fair value of the Company’s portfolio of securities available for sale ("AFS") decreased in the first three months of 2024, primarily as a result of a modest increase in market longer-term interest rates, resulting in an after-tax decrease in stockholders’ equity of $2.6 million. The Company did not have any investment securities classified as held to maturity as of March 31, 2024 and December 31, 2023.
Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023
For the three months ended March 31, 2024, the Company reported a net loss of $2.9 million, or ($0.15) per diluted common share, compared to net income of $4.0 million, or $0.21 per diluted common share, for the three months ended March 31, 2023. The net loss for the three months ended March 31, 2024 included $2.3 million of after tax costs incurred for professional services related to regulatory remediation efforts in connection with the Consent Order, compared to $876 thousand of after tax costs incurred for the same period in 2023 in connection with the Written Agreement. Net interest income for the three months ended March 31, 2024 was $20.3 million, a decline of $4.8 million from the same period in 2023, primarily due to higher funding costs, which increased 92 basis points.
Net Interest Income. Net interest income is the amount by which interest earned on interest-earning assets exceeds the interest paid on interest-bearing liabilities and is the Company’s primary revenue source. Net interest income is thereby affected by overall balance sheet size, changes in interest rates, and changes in the mix of investments, loans, deposits, and borrowings. The Company’s principal interest-earning assets are loans to businesses, real estate investors, and individuals, and its investment securities portfolio. Interest-bearing liabilities consist primarily of negotiable order of withdrawal and savings accounts, money market accounts, certificates of deposit, and Federal Home Loan Bank of Atlanta (“FHLB”) advances. A common net interest income measure is net interest margin. Net interest margin represents the difference between interest income and interest expense calculated as a percentage of average interest-earning assets.
34
The following table presents the average balance sheets for the three months ended March 31, 2024 and 2023. Also shown are the amounts of interest earned on interest-earning assets, with related tax-equivalent yields, and interest expense on interest-bearing liabilities, with related rates, as well as a volume and rate analysis of changes in net interest income for the periods stated.
Average Balances, Income and Expense, Yields and Rates
For the three months ended March 31,
2024
2023
Total
Increase/
Increase/(Decrease)
Due to
(Dollars in thousands)
Average
Balance
Interest
Yield/
Rate (1)
Average
Balance
Interest
Yield/
Rate (1)
(Decrease)
Volume (2)
Rate (2)
Average Assets
Taxable securities
$
337,839
$
2,438
2.89
%
$
374,956
$
2,628
2.80
%
$
(190
)
$
(260
)
$
70
Tax-exempt securities (3)
12,621
77
2.44
%
20,726
116
2.25
%
(39
)
(46
)
6
Total securities
350,460
2,515
2.87
%
395,682
2,744
2.77
%
(229
)
(306
)
76
Interest-earning deposits in other banks
129,366
1,557
4.81
%
107,614
941
3.50
%
616
190
426
Federal funds sold
9,668
130
5.38
%
8,890
99
4.45
%
31
9
22
Loans held for sale
57,646
305
2.12
%
40,024
282
2.82
%
23
124
(101
)
Loans held for investment (4,5,6)
2,419,351
38,041
6.29
%
2,508,324
36,849
5.88
%
1,192
(1,307
)
2,499
Total average interest-earning assets
2,966,491
42,548
5.74
%
3,060,534
40,915
5.35
%
1,633
(1,290
)
2,922
Less: allowance for credit losses
(35,874
)
(24,722
)
Total noninterest-earning assets
234,315
234,297
Total average assets
$
3,164,932
$
3,270,109
Average Liabilities and Stockholders’ Equity:
Interest-bearing demand, money market, and savings
$
1,112,060
$
7,667
2.76
%
$
1,287,839
$
8,259
2.57
%
$
(592
)
$
(1,127
)
$
535
Time (7)
970,952
10,818
4.46
%
513,642
3,072
2.39
%
7,746
2,735
5,011
Total interest-bearing deposits
2,083,012
18,485
3.55
%
1,801,481
11,331
2.52
%
7,154
1,608
5,546
FHLB borrowings
223,824
2,369
4.23
%
328,223
3,810
4.64
%
(1,441
)
(1,212
)
(229
)
FRB borrowings
65,000
768
4.73
%
4
—
—
768
—
—
Subordinated notes and other borrowings (8)
39,847
560
5.62
%
39,935
555
5.56
%
5
(1
)
6
Total average interest-bearing liabilities
2,411,683
22,182
3.68
%
2,169,643
15,696
2.89
%
6,486
395
5,323
Noninterest-bearing demand deposits
515,486
808,425
Other noninterest-bearing liabilities
53,862
32,130
Stockholders' equity
183,901
259,911
Total average liabilities and stockholders’ equity
$
3,164,932
$
3,270,109
Net interest income and margin (9)
$
20,366
2.75
%
$
25,219
3.30
%
$
(4,853
)
$
(1,684
)
$
(2,401
)
Cost of funds (10)
3.03
%
2.11
%
Net interest spread (11)
2.06
%
2.45
%
(1) Annualized.
(2) Change in income/expense due to both volume and rate has been allocated in proportion to the absolute dollar amounts of the change in each.
(3) Computed on a fully taxable equivalent basis assuming a 21% income tax rate.
(4) Includes deferred loan fees/costs.
(5) Non-accrual loans have been included in the computations of average loan balances.
(6) Includes accretion of fair value adjustments (discounts) on acquired loans of $329 thousand and $698 thousand for the three months ended March 31, 2024 and 2023, respectively.
(7) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $97 thousand and $284 thousand for the three months ended March 31, 2024 and 2023, respectively.
(8) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $25 thousand for both the three months ended March 31, 2024 and 2023, respectively.
(9) Net interest margin is net interest income divided by average interest-earning assets.
(10) Cost of funds is total interest expense divided by total interest-bearing liabilities and non-interest bearing demand deposits.
(11) Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities.
Average interest-earning assets were $2.97 billion for the three months ended March 31, 2024 compared to $3.06 billion for the same period of 2023, a $94.0 million decrease. This decrease was primarily attributable to declines in average balances of loans held for investment and taxable securities, which decreased $89.0 million and $37.1 million, respectively, partially offset by higher average balances of interest-earning deposits in other banks and loans held for sale. Total interest income (on a taxable equivalent basis) increased $1.6 million for the three-month period ended March 31, 2024 from the same period of 2023. This increase was primarily due to higher yields, including fee income, on loans held for investment and interest-earning deposits in other banks. Interest income on loans held for investment in the first quarter of 2024 included $671 thousand of interest received as a result of the payoff of a nonaccrual loan, which had an 11 and 9 basis point positive effect on the yield on loans held for investment and net interest margin, respectively. In addition, higher yields in the 2024 period were primarily attributable to the re-pricing of variable rate loans in the higher interest rate environment, partially offset by lower accretion of purchase accounting adjustments (discounts) on acquired loans. Interest income in the first quarters of 2024 and 2023 included accretion of discounts on acquired loans of $329 thousand and $698 thousand, respectively.
35
Average interest-bearing liabilities were $2.41 billion for the three months ended March 31, 2024 compared to $2.17 billion for the same period of 2023, a $242.0 million increase. Interest expense increased by $6.5 million to $22.2 million for the three months ended March 31, 2024 compared to the same period of 2023. Cost of interest-bearing liabilities increased to 3.68% for the first quarter of 2024 from 2.89% for the first quarter of 2023, while total cost of funds was 3.03% and 2.11% for the same respective periods. Higher cost of funds in the 2024 period was primarily due to higher rates on time deposits, particularly brokered time deposits the Company began issuing late in the first quarter of 2023 to increase liquidity in response to financial industry events. Interest expense in the first quarters of 2024 and 2023 included the amortization of fair value adjustments (premium) on assumed time deposits of $97 thousand and $284 thousand, respectively, which was a reduction to interest expense.
Net interest income (on a taxable equivalent basis) for the three months ended March 31, 2024 was $20.4 million compared to $25.2 million for the same period in 2023, an decrease of $4.9 million. Net interest margin was 2.75% and 3.30% for the first quarters of 2024 and 2023, respectively. Accretion and amortization of purchase accounting adjustments had a 6 and 13 basis point positive effect on net interest margin for the same respective periods.
Provision for Credit Losses. The Company recorded a recovery of credit losses of $1.0 million in the first quarter of 2024 compared to a recovery of credit losses of $1.5 million in the first quarter of 2023. The recovery of credit losses in in the 2024 period was attributable to lower balances of unfunded loan commitments. The recovery of credit losses in the 2023 period was primarily attributable to the release of specific reserves on a collateral-dependent loan, due to cash payments applied to the recorded investment and a credit to provision for credit losses on unfunded loan commitments of $400 thousand.
Noninterest Income . The following table presents a summary of noninterest income and the dollar and percentage change for the periods presented.
For the three months ended
(Dollars in thousands)
March 31, 2024
March 31, 2023
Change $
Change %
Fair value adjustments of other equity investments
$
(7
)
$
(51
)
$
44
(86.3
%)
Residential mortgage banking income
2,664
3,199
(535
)
(16.7
%)
Mortgage servicing rights
729
(1,896
)
2,625
(138.4
%)
Gain on sale of guaranteed government loans
110
2,409
(2,299
)
(95.4
%)
Wealth and trust management
520
432
88
20.4
%
Service charges on deposit accounts
398
343
55
16.0
%
Increase in cash surrender value of bank owned life insurance
337
282
55
19.5
%
Bank and purchase card, net
242
340
(98
)
(28.8
%)
Other
2,832
2,225
607
27.3
%
Total noninterest income
$
7,825
$
7,283
$
542
7.4
%
Noninterest income in the first quarter of 2024 increased slightly from the first quarter of 2023. Mortgage servicing right ("MSR") assets resulted in a positive fair value adjustment compared to a negative adjustment driven by higher market interest rates for the same period in 2023. Changes in the fair value of MSR assets are due primarily to future interest rate expectations. Offsetting this increase, were lower gains on sale of guaranteed government loans in the 2024 period compared to the 2023 period, attributable to lower volumes, which were $1.5 million and $30.6 million in the same respective periods.
36
Noninterest Expense. The following tables present a summary of noninterest expense and the dollar and percentage change for the periods stated.
For the three months ended
(Dollars in thousands)
March 31, 2024
March 31, 2023
Change $
Change %
Salaries and employee benefits
$
16,045
$
15,289
$
756
4.9
%
Occupancy and equipment
1,524
1,569
(45
)
(2.9
%)
Data processing
1,106
1,346
(240
)
(17.8
%)
Legal and regulatory filings
447
1,234
(787
)
(63.8
%)
Advertising and marketing
297
286
11
3.8
%
Communications
1,173
1,131
42
3.7
%
Audit and accounting fees
1,155
146
1,009
691.1
%
FDIC insurance
1,377
729
648
88.9
%
Intangible amortization
287
355
(68
)
(19.2
%)
Other contractual services
1,717
939
778
82.9
%
Other taxes and assessments
943
802
141
17.6
%
Regulatory remediation
2,644
1,134
1,510
133.2
%
Other
3,759
3,887
(128
)
(3.3
%)
Total noninterest expense
$
32,474
$
28,847
$
3,627
12.6
%
Excluding regulatory remediation, noninterest expense increased $2.1 million for the three months ended March 31, 2024 compared to the same period of 2023. Higher noninterest expense for the 2024 period was primarily attributable to higher salaries and employee benefits expense, primarily headcount additions in the areas of risk and compliance to support fintech operations and leadership personnel, partially offset by lower headcount in the mortgage banking segment. Higher other contractual services expense in the 2024 period was primarily due to outsourced BSA/AML and other compliance services as the Bank has augmented its compliance staff primarily to support fintech operations. Higher audit and accounting fees in the 2024 period were primarily due to outsourced internal audits and assessments related to fintech operations. Higher Federal Deposit Insurance Corporation ("FDIC") insurance expense relative to the prior period was primarily due to balance sheet growth and other factors such as lower profitability and regulatory capital levels, which increase the insurance assessment rate. Partially offsetting these higher noninterest expenses were lower legal and regulatory filings fees as the 2023 period included legal costs associated with the Virginia Community Bankshares, Inc. Employee Stock Ownership Plan litigation.
Income Tax Expense . Income tax benefit for the three months ended March 31, 2024 was $407 thousand compared to income tax expense of $1.2 million for the same period of 2023, resulting in an effective income tax rates of 12.3% and 22.8%, respectively. The lower effective income tax rate in the 2024 period was primarily attributable to tax-exempt income, primarily from bank owned life insurance and tax-exempt securities and loans, relative to income subject to statutory tax rates.
Analysis of Financial Condition
Loan Portfolio. The Company makes loans to commercial entities and to individuals. Loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan and the creditworthiness of the borrower. Credit risk tends to be geographically concentrated in that a majority of the loans are to borrowers located in the markets served by the Company. All loans are underwritten within specific lending policy guidelines that are designed to maximize the Company’s profitability within an acceptable level of business risk.
37
The following table presents the Company’s loan portfolio by category of loan and the percentage of loans in each category to total loans as of the dates stated.
March 31, 2024
December 31, 2023
(Dollars in thousands)
Amount
Percent
Amount
Percent
Commercial and industrial
$
489,972
20.5
%
$
508,944
21.0
%
Real estate – construction, commercial
156,943
6.6
%
180,052
7.4
%
Real estate – construction, residential
62,947
2.6
%
75,832
3.1
%
Real estate – commercial
881,798
36.8
%
870,540
35.8
%
Real estate – residential
740,249
30.9
%
730,110
30.1
%
Real estate – farmland
5,673
0.2
%
5,470
0.2
%
Consumer
55,782
2.3
%
59,169
2.4
%
Gross loans held for investment
2,393,364
100.0
%
2,430,117
100.0
%
Less: deferred loan fees, net of costs
725
830
Gross loans held for investment, net of deferred loans fees
2,394,089
2,430,947
Less: allowance for credit losses
(35,025
)
(35,983
)
Net loans
$
2,359,064
$
2,394,964
Loans held for sale
(not included in totals above)
$
34,902
$
46,337
The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of March 31, 2024.
Variable rate
Fixed rate
(Dollars in thousands)
Total Maturities
One Year
or Less
Total
1-5 years
5-15 years
More than 15 years
Total
1-5 years
5-15 years
More than 15 years
Commercial and industrial
$
489,972
$
141,905
$
195,812
$
167,811
$
26,775
$
1,226
$
152,255
$
59,286
$
74,468
$
18,501
Real estate – construction, commercial
156,943
30,544
100,199
36,136
15,344
48,719
26,200
23,526
1,078
1,596
Real estate – construction, residential
62,947
21,438
12,196
10,973
65
1,158
29,313
12,387
465
16,461
Real estate – commercial
881,798
61,868
464,524
84,509
204,992
175,023
355,406
220,912
126,396
8,098
Real estate – residential
740,249
18,775
422,419
12,225
78,722
331,472
299,055
42,559
37,218
219,278
Real estate – farmland
5,673
810
1,909
95
248
1,566
2,954
1,883
354
717
Consumer loans
55,782
2,452
7,947
7,848
99
—
45,383
27,080
18,298
5
Gross loans
$
2,393,364
$
277,792
$
1,205,006
$
319,597
$
326,245
$
559,164
$
910,566
$
387,633
$
258,277
$
264,656
Allowance for Credit Losses . Management makes estimates based on facts available at the time the ACL is determined. Such estimation requires significant judgment at the time made. Management believes that the Company’s ACL was adequate as of March 31, 2024 and December 31, 2023. There can be no assurance, however, that adjustments to the ACL will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments; adverse developments in the economy, on a national basis or in the Company’s market area; and changes in the circumstances of particular borrowers are criteria, among others, that could increase the level of the ACL required, resulting in charges to the provision for credit losses for loans. In addition, bank regulatory agencies periodically review the Bank's ACL and may, on occasion, require an increase in the ACL or the recognition of further loan charge-offs, based on their judgment of the facts at the time of their review that may differ than that of management.
38
The following table presents an analysis of the change in the ACL by loan type as of and for the periods stated.
As of and for the three months ended
(Dollars in thousands)
March 31, 2024
March 31, 2023
Allowance for credit losses, beginning of period
$
35,893
$
30,740
Impact of ASC 326 adoption
—
7,418
Charge-offs
Commercial
(1,957
)
(799
)
Consumer
(745
)
(510
)
Total charge-offs
(2,702
)
(1,309
)
Recoveries
Commercial
1,531
118
Consumer
303
104
Total recoveries
1,834
222
Net charge-offs
(868
)
(1,087
)
Recovery of credit losses - loans
—
(1,110
)
Allowance for credit losses, end of period
$
35,025
$
35,961
Ratio of net charge-offs to average loans outstanding during period:
Commercial
0.10
%
0.17
%
Consumer
0.22
%
0.19
%
Total loans
0.14
%
0.17
%
The ACL includes specific reserves for individually evaluated loans and a general allowance applicable to all loan categories; however, management has allocated the ACL by loan type to provide an indication of the relative risk characteristics of the loan portfolio. The allocation is an estimate and should not be interpreted as an indication that charge-offs will occur in these amounts, or that the allocation indicates future trends, and does not restrict the usage of the allowance for any specific loan or category. The following presents the allocation of the ACL by loan category and the percentage of loans in each category to total loans as of the dates stated.
March 31, 2024
December 31, 2023
(Dollars in thousands)
$
% of
Loans
$
% of
Loans
Commercial and industrial
$
13,619
20.5
%
$
13,787
21.0
%
Real estate – construction, commercial
3,596
6.6
%
4,024
7.4
%
Real estate – construction, residential
919
2.6
%
1,094
3.1
%
Real estate – commercial
9,832
36.8
%
9,929
35.8
%
Real estate – residential
6,338
30.9
%
6,286
30.1
%
Real estate – farmland
18
0.2
%
15
0.2
%
Consumer
703
2.3
%
758
2.4
%
Total
$
35,025
100.0
%
$
35,893
100.0
%
Nonperforming Assets. The following table presents a summary of nonperforming assets and various measures as of the dates stated.
(Dollars in thousands)
March 31, 2024
December 31, 2023
Nonaccrual loans
$
50,874
$
60,026
Loans past due 90 days and still accruing
2,309
3,037
Total nonperforming loans
$
53,183
$
63,063
Allowance for credit losses
$
35,025
$
35,893
Loans held for investment
$
2,394,089
$
2,430,947
Total assets
$
3,076,187
$
3,117,554
ACL to total loans held for investment
1.46
%
1.48
%
ACL to nonaccrual loans
68.85
%
59.80
%
ACL to nonperforming loans
65.86
%
56.92
%
Nonaccrual loans to total loans held for investment
2.12
%
2.47
%
Nonperforming loans to total loans held for investment
2.22
%
2.59
%
Nonperforming loans to total assets
1.73
%
2.02
%
39
Nonperforming loans, which include nonaccrual loans and loans past due 90 days and still accruing interest, decreased $9.9 million from December 31, 2023, to $53.2 million as of March 31, 2024. This decline was primarily attributable to payoffs of and cash payments applied to nonaccrual loans. Nonaccrual loans as of March 31, 2024 and December 31, 2023 included specialty finance loans with carrying values totaling $29.8 million and $34.2 million, respectively. Of the $34.2 million of these loans reported as of December 31, 2023, the Company received cash payments totaling $3.0 million in the first quarter of 2024 and an additional $1.5 million subsequent to March 31, 2024, pursuant to a forbearance agreement under which the largest of the specialty finance loans is subject. An additional specialty finance loan paid in full in the first quarter of 2024. The remaining purchase accounting adjustments (discounts) related to loans acquired by the Company were $4.9 million and $5.1 million at March 31, 2024 and December 31, 2023, respectively.
Modified Loans. The Company did not grant any loan modifications to borrowers experiencing financial difficulties during the first quarter of 2024. The total recorded investment of previously modified loans within the 12 months preceding March 31, 2024, was $35.0 million, or 1.5% of gross loans held for investment, of which $33.0 million were on nonaccrual status as of the same date.
Investment Securities. The investment portfolio is used as a source of interest income, credit risk diversification, and liquidity, as well as to provide collateral for borrowings. Securities in the investment portfolio classified as securities AFS may be sold in response to changes in market interest rates, changes in the security's prepayment risk, general liquidity needs, such as funding loans and deposits, and other similar factors, and are carried at estimated fair value. The fair value of the Company’s AFS investment securities portfolio was $314.4 million as of March 31, 2024, a slight decrease from $321.1 million at December 31, 2023, primarily due to the amortization of securities. As a result of elevated market interest rates, the Company’s portfolio of AFS securities had an unrealized loss of approximately $61.5 million as of March 31, 2024.
As of March 31, 2024 and December 31, 2023, the majority of the investment securities portfolio consisted of securities rated as investment grade by a leading rating agency. Investment grade securities are judged to have a low risk of default. At March 31, 2024 and December 31, 2023, securities with a fair value of $213.2 million and $35.9 million, respectively, were pledged to secure the Bank’s borrowing facility with the FHLB. As of March 31, 2024, the Company pledged securities with $69.0 million of par value (amortized cost and fair value of $69.7 million and $56.1 million, respectively) as collateral for the Bank Term Funding Program (“BTFP”) established by the Federal Reserve.
The Company reviews its AFS investment securities portfolio for potential credit losses at least quarterly. AFS investment securities with unrealized losses are generally a result of pricing changes due to changes in the current interest rate environment and not as a result of permanent credit impairment. The Company does not intend to sell, nor does it believe that it will be required to sell, any of its temporarily impaired AFS securities prior to the recovery of the amortized cost. No ACL has been recognized for AFS securities as of both March 31, 2024 and December 31, 2023.
Restricted equity investments consisted of stock in the FHLB (carrying basis $15.6 million and $12.3 million at March 31, 2024 and December 31, 2023, respectively), stock in the Federal Reserve Bank of Richmond (the "FRB") (carrying value of $6.0 million and $5.9 million at March 31, 2024 and December 31, 2023, respectively), and stock in the Company’s correspondent bank (carrying value of $468 thousand at both March 31, 2024 and December 31, 2023). Restricted equity investments are carried at cost. The Company holds various other equity investments, including an investment in a fintech company and other limited partnership investments, totaling $12.9 million as of both March 31, 2024 and December 31, 2023, respectively, which are carried at fair value with any gain or loss reported in the consolidated statements of operations each reporting period.
The following table presents the amortized cost of the investment portfolio by contractual maturities, as well as the weighted average yields for each of the maturity ranges as of and for the period stated. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2024
Within One Year
One to Five Years
Five to Ten Years
Over Ten Years
(Dollars in thousands)
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Amortized
Cost
Weighted
Average
Yield
Total Amortized Cost
Securities available for sale
Mortgage backed securities
$
2,982
0.52
%
$
—
—
$
21,601
3.97
%
$
184,273
1.90
%
$
208,856
U. S. Treasury and agencies
1
—
35,199
1.14
%
37,153
2.09
%
7,280
2.25
%
79,633
State and municipal
—
—
5,125
2.86
%
33,497
1.95
%
11,891
2.66
%
50,513
Corporate bonds
—
—
6,300
7.50
%
30,095
4.37
%
500
4.00
%
36,895
Total
$
2,983
$
46,624
$
122,346
$
203,944
$
375,897
40
Deposits. The principal sources of funds for the Company are core deposits, which include transaction accounts (demand deposits and money market accounts), time deposits, and savings accounts, all of which provide the Bank a source of fee income and cross-marketing opportunities. Core deposits are generally a lower cost source of funding for the Bank and are preferred to brokered deposits. The Company's fintech partnerships have been a significant source of deposits and comprised approximately $303.0 million, or 12.3%, of the Company's deposits as of March 31, 2024, compared to approximately $465.9 million, or 18.2%, as of December 31, 2023. This $162.9 million decline was anticipated as part of a previously reported and closely managed fintech BaaS deposit wind down plan.
Brokered deposits comprising both time deposits and money market accounts totaled $514.1 million and $515.5 million as of March 31, 2024 and December 31, 2023, respectively. The Company added brokered deposit balances throughout 2023 in anticipation of the substantial exit of its BaaS operations, to fund the decline in core deposits, and to enhance liquidity in light of financial industry events that began in March 2023. Brokered deposits represented approximately 20.8% and 20.1% of total deposits as of March 31, 2024 and December 31, 2023, respectively.
As a result of the Consent Order, the Bank is prohibited from soliciting, accepting, renewing, or rolling over any brokered deposits, except in compliance with certain applicable restrictions under federal law, while subject to the Consent Order. In response and pursuant to 12 USC 1831f, 12 CFR 337.6(c) and 12 CFR 303.243(a), the Bank submitted to the FDIC an application for a waiver of the prohibition on the acceptance, renewal, or rollover of brokered deposits by an adequately capitalized insured depository institution.
Total deposits as of March 31, 2024 were $2.47 billion, a decrease of $100.3 million from December 31, 2023, of which $150.7 million was due to lower interest-bearing deposits, primarily due to the BaaS deposit wind down, partially offset by an increase in time deposits. Estimated uninsured deposits totaled approximately $553.8 million as of March 31, 2024, or 22.4% of total deposits, compared to $573.9 million, or 22.3% of total deposits, as of December 31, 2023. Excluding fintech-related deposits, estimated uninsured deposits were 19.0% and 18.2% of total deposits as of March 31, 2024 and December 31, 2023, respectively.
Approximately 20.1% of total deposits as of March 31, 2024 were composed of noninterest-bearing demand deposits compared to 19.7% as of December 31, 2023. In contrast, approximately 38.8% and 34.8% of total deposits as of March 31, 2024 and December 31, 2023, respectively, were composed of time deposits.
The following table presents maturities of time deposits for certificate of deposits of $250 thousand or greater as of the dates stated.
(Dollars in thousands)
March 31, 2024
December 31, 2023
Maturing in:
3 months or less
$
22,162
$
30,547
Over 3 months through 6 months
28,254
19,961
Over 6 months through 12 months
44,837
36,254
Over 12 months
18,106
9,500
Total
$
113,359
$
96,262
Borrowings. The following tables present information on the balances and interest rates on borrowings as of and for the periods stated.
As of and for the three months ended March 31, 2024
(Dollars in thousands)
Period-End Balance
Highest Month-End Balance
Average Balance
Weighted Average Rate
FHLB borrowings
$
280,000
$
280,000
$
223,824
4.23
%
FRB borrowings
65,000
65,000
65,000
4.73
%
As of and for the three months ended March 31, 2023
(Dollars in thousands)
Period-End Balance
Highest Month-End Balance
Average Balance
Weighted Average Rate
FHLB borrowings
$
239,100
$
310,800
$
328,223
4.64
%
FRB borrowings
—
—
4
0.40
%
FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Company’s residential, multi-family, and commercial real estate mortgage loan portfolios, as well as selected investment securities.
41
FRB advances through the Discount Window are secured by qualifying pledged commercial and industrial loans.
Subordinated notes, net, totaled $39.8 million as of both March 31, 2024 and December 31, 2023. The effective interest rate on the subordinated notes for the three months ended March 31, 2024 and 2023 was 5.62% and 5.56%, respectively. The Company's subordinated notes are comprised of an issuance in October 2019 maturing October 15, 2029 (the “2029 Notes”) and an issuance in May 2020 maturing June 1, 2030 (the “2030 Note”). The fixed rates on these subordinated notes transition to variable rates based on the Secured Overnight Funding Rate ("SOFR") roughly five years from issued date. On October 15, 2024, the rate on the 2029 Notes will reset quarterly to the current three-month SOFR interest rate plus 433.5 basis points. On June 1, 2025, the rate on the 2030 Note will reset quarterly to the current three-month SOFR interest rate plus 587 basis points.
Liquidity . Liquidity is essential to the Company’s business. The Company’s liquidity could be impaired by unforeseen outflows of cash, including deposits, or the inability to access the capital and/or wholesale funding markets. This situation may arise due to circumstances that the Company may be unable to control, such as general market disruption, negative views about the Company or the financial services industry generally, or an operational problem that affects the Company or a third party. The Company’s ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the markets in which they operate or other events.
The Company has established a formal liquidity contingency plan that provides guidelines for liquidity management. Pursuant to the Company’s liquidity management program, it forecasts liquidity based on anticipated changes in the balance sheet. In this forecast, the Company expects to maintain a liquidity cushion. Management then stress tests the Company’s liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. Management also monitors the Company’s liquidity position through daily cash monitoring and cash flow forecasting and believes its sources of liquidity are adequate to conduct the business of the Company.
Deposits are the primary source of the Company’s liquidity. Cash flow from amortizing assets or maturing assets also provides funding to meet the liquidity needs of the Company. Deposit sources are from the Bank’s core customers and from brokered deposit markets. These markets are accessed through brokers or through the IntraFi Network (“IntraFi”), of which the Bank is a member. IntraFi facilitates the Bank attaining brokered deposits via an on-line marketplace. The Bank utilizes IntraFi's reciprocal deposit services to offer its high-value customers access to FDIC insurance through IntraFi's network of banks. Partly through the use of the IntraFi reciprocal deposit program, the Company has reduced uninsured deposits to $553.8 million and $573.9 million as of March 31, 2024 and December 31, 2023, respectively.
As a result of the Consent Order, subsequent to December 31, 2023, the Bank is prohibited from soliciting, accepting, renewing, or rolling over any brokered deposits, except in compliance with certain applicable restrictions under federal law, while subject to the Consent Order. In response and pursuant to 12 USC 1831f, 12 CFR 337.6(c) and 12 CFR 303.243(a), the Bank submitted to the FDIC an application for a waiver of the prohibition on the acceptance, renewal, or rollover of brokered deposits by an adequately capitalized insured depository institution.
The Company has access to secured funding sources, including a secured line of credit with the FHLB under which the Company can borrow up to the allowable amount for the collateral pledged. The Bank's line of credit with the FHLB was $656.5 million as of March 31, 2024, with available credit of $265.4 million as of the same date. Outstanding advances totaled $280.0 million as of March 31, 2024. Additionally, letters of credit issued primarily for the purpose of collateral for public deposits with the Treasury Board of the Commonwealth of Virginia reduce the available credit balance, which totaled $110.0 million as of March 31, 2024.
The Company also has access to advances from the FRB through its Discount Window. As of March 31, 2024, the Company had secured borrowing capacity through the FRB Discount Window of $101.8 million, of which there were no outstanding advances.
The Bank had an unsecured federal fund line available with a correspondent bank for overnight borrowing totaling $10.0 million as of both March 31, 2024 and December 31, 2023. This line bears interest at the prevailing rates for such a loan and is cancelable any time by the correspondent bank. As of both March 31, 2024 and December 31, 2023, this line of credit was undrawn.
Managing the Company's liquidity position through the substantial exit of the BaaS operations will require significant liquidity oversight. The Company's closely managed BaaS wind down plan is an element of its liquidity management. Management intends to utilize proceeds from the Private Placement, the contraction of the Company’s
42
balance sheet, particularly loans, secured funding facilities, as well as core deposit growth to meet its liquidity requirements.
Capital. Capital adequacy is an important measure of financial stability and performance. The Company’s objectives are to maintain a level of capitalization that is sufficient support the Company's strategic objectives.
Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, 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, financial institutions must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. A financial institution's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Pursuant to the Basel III rules, banks must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios for all ratios, except the Tier 1 Leverage ratio. If a banking organization dips into its capital conservation buffer, it is subject to limitations on certain activities, including payment of dividends, share repurchases, and discretionary compensation to certain officers. Additionally, regulators may place certain restrictions on dividends paid by banks. The total amount of dividends which may be paid at any date is generally limited to retained earnings of banks.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized; although, these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.
On January 24, 2024, the Bank consented to the issuance of the Consent Order, which requires the Bank to achieve and maintain minimum capital requirements, which are higher than those required for capital adequacy purposes. Specifically, the Bank is required to maintain a leverage ratio of 10.00% and a total capital ratio of 13.00%. As of both March 31, 2024 and December 31, 2023, the Bank did not meet these capital ratios. Until such levels are met and the Consent Order has been lifted, the Bank is deemed to be less than well capitalized, thus adequately capitalized.
Because the Bank may not be deemed to be “well capitalized” while subject to the Consent Order, it could be required to pay higher insurance premiums to the FDIC, to obtain approval prior to acquiring branches or opening new lines of business, and be subject to increased regulatory scrutiny such as limitations on asset growth.
As previously noted, the Company adopted CECL effective January 1, 2023. Federal and state banking regulations allow financial institutions to irrevocably elect to phase-in the after-tax cumulative effect adjustment at adoption to retained earnings ("CECL Transitional Amount") over a three-year period. The three-year phase-in of the CECL Transitional Amount to regulatory capital is 25%, 50%, and 25% in 2023, 2024, and 2025, respectively. The Bank made this irrevocable election effective with its first quarter 2023 call report.
The following tables present the capital ratios to which banks are subject to be adequately and well capitalized, as well as capital for the Bank to meet these capital ratio levels, as of the dates stated. Adequately capitalized ratios include the conversation buffer, if applicable. Also presented are the minimum capital ratios set forth in the Consent Order for the Bank, with the corresponding capital amounts for both the leverage ratio and the total capital ratio as of both March 31, 2024 and December 31, 2023. The CECL Transitional Amount was $8.1 million, of which $4.1 million and
43
$2.0 million reduced the regulatory capital amounts and capital ratios as of March 31, 2024 and December 31, 2023, respectively.
March 31, 2024
Actual
For Capital
Adequacy Purposes
To Be Well Capitalized
Minumum Capital Ratios
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk based capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.
$
268,846
10.51
%
$
268,590
10.50
%
$
255,800
10.00
%
$
332,540
13.00
%
Tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.
$
237,584
9.28
%
$
217,615
8.50
%
$
204,814
8.00
%
n/a
n/a
Common equity tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.
$
237,584
9.28
%
$
179,212
7.00
%
$
166,411
6.50
%
n/a
n/a
Tier 1 leverage
(To average assets)
Blue Ridge Bank, N.A.
$
237,584
7.44
%
$
127,733
4.00
%
$
159,667
5.00
%
$
319,333
10.00
%
December 31, 2023
Actual
For Capital
Adequacy Purposes
To Be Well Capitalized
Minumum Capital Ratios
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk based capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.
$
270,293
10.25
%
$
276,842
10.50
%
$
263,659
10.00
%
$
342,757
13.00
%
Tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.
$
239,775
9.09
%
$
224,111
8.50
%
$
210,928
8.00
%
n/a
n/a
Common equity tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.
$
239,775
9.09
%
$
184,562
7.00
%
$
171,379
6.50
%
n/a
n/a
Tier 1 leverage
(To average assets)
Blue Ridge Bank, N.A.
$
239,775
7.49
%
$
128,001
4.00
%
$
160,001
5.00
%
$
320,003
10.00
%
On April 3, 2024, the Company closed and funded the Private Placement for $150.0 million of gross proceeds; therefore, the Bank's capital and capital ratios as of March 31, 2024 do not reflect the effect of the Private Placement.
The following table presents the capital and capital ratios of the Bank on a pro forma basis as of March 31, 2024, assuming the Private Placement had closed, funded, and the Company had immediately contributed $100.0 million as tier 1 regulatory capital to the Bank on the same date. The pro forma capital ratios below exceed the those set forth in the Consent Order.
44
March 31, 2024
As Reported
Pro Forma (A)
Minimum Capital Ratios
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
Total risk based capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.
$
268,988
10.51
%
$
368,988
14.42
%
$
332,722
13.00
%
Tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.
$
237,584
9.28
%
$
337,584
13.19
%
n/a
n/a
Common equity tier 1 capital
(To risk-weighted assets)
Blue Ridge Bank, N.A.
$
237,584
9.28
%
$
337,584
13.19
%
n/a
n/a
Tier 1 leverage
(To average assets)
Blue Ridge Bank, N.A.
$
237,584
7.44
%
$
337,584
10.57
%
$
319,239
10.00
%
(A) Assumes $100.0 million received by the Company from the Private Placement is contributed as tier 1 capital to the Bank as of the date presented.
Off-Balance Sheet Activities
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and involve the same credit risk and evaluation as making a loan to a customer. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis, in a manner similar to that if underwriting a loan. As of March 31, 2024 and December 31, 2023, the Company had outstanding loan commitments of $408.5 million and $480.8 million, respectively. Of these amounts, $110.4 million and $113.5 million were unconditionally cancelable at the sole discretion of the Company as of the same respective dates.
Conditional commitments are issued by the Company in the form of financial stand-by letters of credit, which guarantee payment to the underlying beneficiary (i.e., third party) if the customer fails to meet its designated financial obligation. As of March 31, 2024 and December 31, 2023, commitments under outstanding financial stand-by letters of credit totaled $11.6 million and $12.6 million, respectively. The credit risk of issuing stand-by letters of credit can be greater than the risk involved in extending loans to customers.
For the three months ended March 31, 2024 and March 31, 2023, the Company recorded a recovery of provision for credit losses for unfunded commitments of $1.0 million and $400 thousand, respectively, primarily due to lower balances of unfunded loan commitments. As of March 31, 2024, the reserve for unfunded commitments was $2.1 million compared to $3.1 million as of December 31, 2023.
The Company invests in various partnerships, limited liability companies, and small business investment company funds. Pursuant to these investments, the Company commits to an investment amount that may be fulfilled in future periods. At March 31, 2024, the Company had future commitments outstanding totaling $13.4 million related to these investments.
Interest Rate Risk Management
As a financial institution, the Company is exposed to various business risks, including interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities, changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers' ability to prepay loans and depositors' ability to redeem certificates of deposit before maturity, changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion, and changes in spread relationships between different yield curves, such as U.S. Treasuries and other market-based index rates. The Company’s goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that the Bank maintains. The Company manages interest rate risk
45
through an asset and liability committee (the “ALCO”) comprised of members of management. The ALCO is responsible for monitoring the Company’s interest rate risk in conjunction with liquidity and capital management.
The Company employs an independent consulting firm to model its interest rate sensitivity that uses a net interest income simulation model as its primary tool to measure interest rate sensitivity. Assumptions for modeling are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how management expects rates to change on non-maturity deposits such as interest checking, money market checking, savings accounts, as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates, and the developed assumptions, the model produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. The model then simulates what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two-year period and include rapid rate changes of down 100 basis points to 400 basis points and up 100 basis points to 400 basis points. The results of these simulations are then compared to the base case.
The following table presents the estimated change in net interest income under various rate change scenarios. The scenarios assume rate changes occur instantaneous and in a parallel manner, which means the changes are the same on all points of the rate curve.
March 31, 2024
Instantaneous Parallel Rate Shock Scenario
Change in Net Interest Income - Year 1
Change in Net Interest Income - Year 2
Change in interest rates:
+400 basis points
$
(10,998
)
(13.1
%)
$
(8,624
)
(9.3
%)
+300 basis points
(7,320
)
(8.7
%)
(5,507
)
(5.9
%)
+200 basis points
(4,172
)
(5.0
%)
(2,816
)
(3.0
%)
+100 basis points
(1,693
)
(2.0
%)
(877
)
(0.9
%)
Base case
-100 basis points
383
0.5
%
(584
)
(0.6
%)
-200 basis points
380
0.5
%
(2,296
)
(2.5
%)
-300 basis points
(90
)
(0.1
%)
(5,338
)
(5.7
%)
-400 basis points
(327
)
(0.4
%)
(7,882
)
(8.5
%)
The severity of the effect of instantaneous increases in interest rates as shown above is due to the timing of pricing change in the Company's interest-bearing liabilities compared to its interest-earning assets. A significant portion of the Company's deposits through its fintech partnerships reprice with changes in federal funds rates by contractual agreement. Therefore, an instantaneous change in this index rate results in a relative change in deposit costs for this portion of deposits.
Stress testing the balance sheet and net interest income using instantaneous parallel rate shock movements in the yield curve is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve. In addition, instantaneous parallel rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of the Company’s interest rate risk position over a historical time frame for comparison purposes.
The asset and liability repricing characteristics of the Company’s assets and liabilities will have a significant impact on its future interest rate risk profile.
Item 3. Quantitative and Qualitati ve Disclosures about Market Risk
This information is incorporated herein by reference to the information in section "Interest Rate Risk Management" within Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.