BLUE RIDGE BANKSHARES, INC. 10-Q

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 and six months ended June 30, 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, as defined below, 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 relationships, including implementing enhanced controls and procedures, complying with the OCC directives and applicable laws and regulations, maintaining deposit levels and 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 its industry's reputation become damaged; 35 • the ability to maintain capital levels adequate to support the Company's business and to comply with OCC directives; • 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; • technological and social media changes; • 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 and this Form 10-Q, including those discussed in the section entitled "Risk Factors" in those filings. 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 Bank's primary regulator. 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, 36 and information technology 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. Private Placements On April 3, 2024 and June 13, 2024, the Company closed private placements in which it issued and sold shares of its common and preferred stock for gross proceeds of $150.0 million and $11.6 million, respectively (collectively, the "Private Placements"). At a special meeting of shareholders held June 20, 2024, the Company’s shareholders approved the conversion of the preferred shares issued in the Private Placements into shares of the Company’s common stock. On June 28, 2024, all outstanding shares of the Company’s Mandatorily Convertible Cumulative Perpetual Preferred Stock, Series B (the "Series B Common Stock") were automatically converted into shares of the Company’s common stock. The outstanding shares of the Company’s Mandatorily Convertible Cumulative Perpetual Preferred Stock, Series C (the “Series C Preferred Stock”), remained outstanding at June 30, 2024. Subsequent to June 30, 2024, the holder of Series C Preferred Stock received regulatory non-objection to exchange the Series C Preferred Stock for common stock as stipulated in the Private Placements. The Company expects the exchange for shares of the Company's common stock will be completed during the third quarter of 2024. Capital proceeds received, net of issuance costs, from the Private Placements totaled $152.5 million. The Private Placements also included the issuance of warrants for 6,549 shares of Series B Preferred Stock and warrants for 1,411 shares of Series C Preferred Stock. Each warrant can be exercised to purchase shares at a price of $10 thousand per share. On June 28, 2024, the warrants for preferred stock converted to warrants for common stock, except the Series C Preferred Stock warrants for the reasons noted above relating to the Series C Preferred Stock. The conversion rate on the warrants from preferred stock to common stock was 4,000 shares of common per preferred share. The warrants have 5-year terms and expire April 3, 2029. Holders of the warrants may exercise them in whole or in part and may utilize an option for cashless exercise for a net number of shares. The Company intends to use the capital from the Private Placements to propel its near-term strategic initiatives, which include repositioning business lines, supporting organic growth, and further enhancing the Bank’s capital levels, including compliance with the minimum capital ratios set forth in the Bank’s Consent Order with the OCC, which requires the Bank to maintain a tier 1 leverage ratio of 10.0% and a total risk-based capital ratio of 13.0%. As of June 30, 2024, the Bank’s capital ratios exceeded these minimum capital ratios. 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 June 30, 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 June 30, 2024. 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. 37 Comparison of Financial Condition as of June 30, 2024 and December 31, 2023 Total assets were $2.93 billion as of June 30, 2024, a decrease of $184.5 million from $3.12 billion as of December 31, 2023. Most of this decrease was attributable to a decline in loans held for investment, which decreased $171.7 million to $2.26 billion as of June 30, 2024 from $2.43 billion as of December 31, 2023. The Company previously announced it would exit its fintech depository (“banking-as-a-service” or “BaaS”) operations. The Company has purposely and selectively reduced assets to meet the liquidity needs of exiting BaaS operations and expects to do so in the future as it continues to execute its plan to wind down BaaS operations. The allowance for credit losses ("ACL") declined $7.9 million to $28.0 million as of June 30, 2024 from $35.9 million as of December 31, 2023, primarily attributable to a $9.4 million charge-off of a reserve held for a specialty finance loan that was reclassified to loans held for sale, as the Bank entered into an agreement to sell the loan. Total deposits as of June 30, 2024 were $2.33 billion, a net decrease of $240.2 million from December 31, 2023. The decrease in the first six months of 2024 was primarily due to a decrease of $245.3 million of interest-bearing fintech deposits, partially offset by higher time deposit balances of $86.9 million. Total deposits related to fintech relationships decreased by $259.2 million to $206.6 million as of June 30, 2024 from $465.9 million as of December 31, 2023, and represented 8.9% and 18.2% of total deposits as of the same respective dates. In the first half of 2024, core deposits, which exclude fintech-related and wholesale deposits, increased $69.8 million. Total stockholders’ equity increased by $139.6 million to $325.6 million as of June 30, 2024 compared to $186.0 million at December 31, 2023, primarily due to the closing of the Private Placements in the second quarter of 2024. Comparison of Results of Operations for the Three and Six Months Ended June 30, 2024 and 2023 For the three months ended June 30, 2024, the Company reported a net loss of $11.4 million, or ($0.47) per diluted common share, compared to a net loss of $8.6 million, or ($0.45) per diluted common share, for the three months ended June 30, 2023. For the six months ended June 30, 2024, the Company reported a net loss of $14.3 million, or ($0.66) per diluted common share, compared to a net loss of $4.6 million, or ($0.25) per diluted common share, for the six months ended June 30, 2023. The net loss for the three and six months ended June 30, 2024 included a $6.7 million after-tax negative fair value adjustment recorded for an equity investment in a fintech company. The net loss for the three and six months ended June 30, 2024 also included $1.1 million and $3.2 million, respectively, of after tax-costs incurred for professional services related to regulatory remediation efforts in connection with the Consent Order, compared to $1.8 million and $2.7 million, respectively, of after tax-costs incurred for the same periods in 2023 in connection with the Written Agreement. 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 investment securities. 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. 38 The following table presents the average balance sheets for the three months ended June 30, 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 June 30, 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 $ 324,381 $ 2,399 2.96 % $ 367,814 $ 2,543 2.77 % $ (144 ) $ (300 ) $ 156 Tax-exempt securities (3) 12,570 80 2.55 % 20,713 121 2.34 % (41 ) (48 ) 7 Total securities 336,951 2,479 2.94 % 388,527 2,664 2.74 % (185 ) (348 ) 163 Interest-earning deposits in other banks 135,283 1,891 5.59 % 121,248 1,452 4.79 % 439 168 271 Federal funds sold 6,079 83 5.46 % 3,539 45 5.09 % 38 32 6 Loans held for sale 64,379 2,212 13.74 % 56,102 1,928 13.75 % 284 284 — Loans held for investment (4,5,6) 2,343,495 33,984 5.80 % 2,494,688 36,399 5.84 % (2,415 ) (2,206 ) (209 ) Total average interest-earning assets 2,886,187 40,649 5.63 % 3,064,104 42,488 5.55 % (1,839 ) (2,069 ) 230 Less: allowance for credit losses (34,594 ) (31,151 ) Total noninterest-earning assets 233,544 244,330 Total average assets $ 3,085,137 $ 3,277,283 Average Liabilities and Stockholders’ Equity: Interest-bearing demand, money market, and savings $ 958,671 $ 6,170 2.57 % $ 1,347,499 $ 8,860 2.63 % $ (2,690 ) $ (2,557 ) $ (133 ) Time (7) 980,324 11,102 4.53 % 661,259 5,764 3.49 % 5,338 2,781 2,557 Total interest-bearing deposits 1,938,995 17,272 3.56 % 2,008,758 14,624 2.91 % 2,648 225 2,423 FHLB borrowings 221,359 2,410 4.35 % 262,345 2,958 4.51 % (548 ) (462 ) (86 ) FRB borrowings 27,857 313 4.49 % 35,714 439 4.92 % (126 ) (97 ) (29 ) Subordinated notes and other borrowings (8) 39,860 551 5.53 % 39,905 548 5.49 % 3 (1 ) 4 Total average interest-bearing liabilities 2,228,071 20,546 3.69 % 2,346,722 18,569 3.17 % 1,977 (335 ) 2,312 Noninterest-bearing demand deposits 494,762 638,274 Other noninterest-bearing liabilities 44,262 35,170 Stockholders' equity 318,042 257,117 Total average liabilities and stockholders’ equity $ 3,085,137 $ 3,277,283 Net interest income and margin (9) $ 20,103 2.79 % $ 23,919 3.12 % $ (3,816 ) $ (1,734 ) $ (2,081 ) Cost of funds (10) 3.02 % 2.49 % Net interest spread (11) 1.95 % 2.38 % (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% and 22.65% income tax rate for the three months ended June 30, 2024 and 2023, respectively. (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 $274 thousand and $463 thousand for the three months ended June 30, 2024 and 2023, respectively. (7) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $81 thousand and $222 thousand for the three months ended June 30, 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 June 30, 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 $2.89 billion for the three months ended June 30, 2024 compared to $3.06 billion for the same period of 2023, a $177.9 million decrease. This decrease was primarily attributable to declines in average balances of loans held for investment and securities, which decreased $151.2 million and $51.6 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) decreased $1.8 million for the three-month period ended June 30, 2024 from the same period of 2023. This decrease was primarily due to lower average balances of loans, which declined $151.2 million. Lower yields in the 2024 period were primarily attributable to lower volume and lower accretion of purchase accounting adjustments (discounts) on acquired loans. Interest income for the three months ended June 30, 2024 and 2023 included accretion of discounts on acquired loans of $274 thousand and $463 thousand, respectively. Average interest-bearing liabilities were $2.23 billion for the three months ended June 30, 2024 compared to $2.35 billion for the same period of 2023, a $118.7 million decrease. Interest expense increased by $2.0 million to $20.5 million for the three months ended June 30, 2024 compared to the same period of 2023. Cost of interest-bearing 39 liabilities increased to 3.69% for the second quarter of 2024 from 3.17% for the second quarter of 2023, while total cost of funds was 3.02% and 2.49% 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 and in anticipation of the wind down of fintech BaaS operations. Interest expense in the second quarters of 2024 and 2023 included the amortization of fair value adjustments (premium) on assumed time deposits of $81 thousand and $222 thousand, respectively, which was a reduction to interest expense. Net interest income (on a taxable equivalent basis) for the three months ended June 30, 2024 was $20.1 million compared to $23.9 million for the same period in 2023, a decrease of $3.8 million. Net interest margin was 2.79% and 3.12% for the second quarters of 2024 and 2023, respectively. Accretion and amortization of purchase accounting adjustments had a 5 and 9 basis point positive effect on net interest margin for the same respective periods. The following table presents the average balance sheets for the six months ended June 30, 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 six months ended June 30, 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 $ 331,110 $ 4,837 2.92 % $ 371,270 $ 5,171 2.79 % $ (334 ) $ (559 ) $ 225 Tax-exempt securities (3) 12,596 157 2.49 % 20,719 239 2.31 % (82 ) (94 ) 12 Total securities 343,706 4,994 2.91 % 391,989 5,410 2.76 % (416 ) (653 ) 237 Interest-earning deposits in other banks 132,324 3,447 5.21 % 114,469 2,393 4.18 % 1,054 373 681 Federal funds sold 7,874 213 5.41 % 6,200 144 4.65 % 69 39 30 Loans held for sale 61,012 4,132 13.54 % 48,107 3,412 14.19 % 720 915 (195 ) Loans held for investment (4,5,6) 2,381,423 70,410 5.91 % 2,501,468 72,046 5.76 % (1,636 ) (3,457 ) 1,821 Total average interest-earning assets 2,926,339 83,196 5.69 % 3,062,233 83,405 5.45 % (209 ) (2,783 ) 2,574 Less: allowance for credit losses (35,234 ) (27,954 ) Total noninterest-earning assets 233,679 239,584 Total average assets $ 3,124,784 $ 3,273,863 Average Liabilities and Stockholders’ Equity: Interest-bearing demand, money market, and savings $ 1,035,366 $ 13,838 2.67 % $ 1,317,834 $ 17,119 2.60 % $ (3,281 ) $ (3,669 ) $ 388 Time (7) 975,637 21,919 4.49 % 587,858 8,836 3.01 % 13,083 5,829 7,254 Total interest-bearing deposits 2,011,003 35,757 3.56 % 1,905,692 25,955 2.72 % 9,802 2,159 7,643 FHLB borrowings 222,592 4,779 4.29 % 295,102 6,768 4.59 % (1,989 ) (1,663 ) (326 ) FRB borrowings 46,429 1,080 4.65 % 17,958 439 4.89 % 641 696 (55 ) Subordinated notes and other borrowings (8) 39,853 1,112 5.58 % 39,916 1,102 5.52 % 10 (2 ) 12 Total average interest-bearing liabilities 2,319,877 42,728 3.68 % 2,258,668 34,264 3.03 % 8,464 1,191 7,273 Noninterest-bearing demand deposits 507,619 723,131 Other noninterest-bearing liabilities 46,317 34,947 Stockholders' equity 250,971 257,117 Total average liabilities and stockholders’ equity $ 3,124,784 $ 3,273,863 Net interest income and margin (9) $ 40,468 2.77 % $ 49,141 3.21 % $ (8,673 ) $ (3,974 ) $ (4,699 ) Cost of funds (10) 3.02 % 2.30 % Net interest spread (11) 2.00 % 2.41 % (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% and 22.65% income tax rate for the six months ended June 30, 2024 and 2023, respectively. (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 $603 thousand and $1.2 million for the six months ended June 30, 2024 and 2023, respectively. (7) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $178 thousand and $506 thousand for the six months ended June 30, 2024 and 2023, respectively. (8) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $50 thousand for both the six months ended June 30, 2024 and 2023. (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. 40 Average interest-earning assets were $2.93 billion for the six months ended June 30, 2024 compared to $3.06 billion for the same period of 2023, a $135.9 million decrease. This decrease was primarily attributable to declines in average balances of loans held for investment and securities, which decreased $120.0 million and $48.3 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) decreased $209 thousand for the six-month period ended June 30, 2024 from the same period of 2023. This decrease was primarily due to lower average balances on loans held for investment, in addition to lower accretion of purchase accounting adjustments (discounts) on acquired loans. Interest income on loans held for investment for the six-month period ended June 30, 2024 included $671 thousand of interest received as a result of the payoff of a nonaccrual loan, which had a 6 and 5 basis point positive effect on the yield on loans held for investment and net interest margin, respectively. Interest income for the six months ended June 30, 2024 and 2023 included accretion of discounts on acquired loans of $603 thousand and $1.2 million, respectively. Average interest-bearing liabilities were $2.32 billion for the six months ended June 30, 2024 compared to $2.26 billion for the same period of 2023, a $61.2 million increase. Interest expense increased by $8.5 million to $42.7 million for the six months ended June 30, 2024 compared to the same period of 2023. Cost of interest-bearing liabilities increased to 3.68% for the second half of 2024 from 3.03% for the second half of 2023, while cost of funds were 3.02% and 2.30% for the same respective periods. Higher cost of funds in the 2024 period was primarily due to higher market interest rates and a shift in the mix of average interest-bearing liabilities, partially to higher cost wholesale funding sources. Interest expense in the first halves of 2024 and 2023 included the amortization of fair value adjustments (premium) on assumed time deposits of $178 thousand and $506 thousand, respectively, which was a reduction to interest expense. Net interest income (on a taxable equivalent basis) was $40.5 million for the six months ended June 30, 2024 compared to $49.1 million the same period in 2023. Net interest margin was 2.77% and 3.21% for the first halves of 2024 and 2023, respectively. Accretion and amortization of purchase accounting adjustments had a 6 basis point and 11 basis point positive effect on net interest margin for the same respective periods. Provision for Credit Losses. The Company recorded a provision for credit losses of $3.1 million in the second quarter of 2024 compared to $10.0 million in the second quarter of 2023. Provision for credit losses for the first halves of 2024 and 2023 was $2.1 million and $8.5 million, respectively. The provision in the second quarter of 2024 was related primarily to certain purchased loans and increased reserves for the non-guaranteed portion of government guaranteed loans, which offset lower reserve needs due to loan portfolio balance reductions. Provision for credit losses in the 2023 periods was primarily attributable to specific reserves on the previously reported group of specialty finance loans, partially offset by a credit (benefit) to provision for credit losses on lower balances of unfunded commitments. 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) June 30, 2024 June 30, 2023 Change $ Change % Fair value adjustments of other equity investments $ (8,537 ) $ (281 ) $ (8,256 ) 2,938.1 % Residential mortgage banking income 3,090 3,145 (55 ) (1.7 %) Mortgage servicing rights 2,019 1,150 869 75.6 % Gain on sale of guaranteed government loans 11 2,384 (2,373 ) (99.5 %) Wealth and trust management 623 462 161 34.8 % Service charges on deposit accounts 423 349 74 21.2 % Increase in cash surrender value of bank owned life insurance 333 292 41 14.0 % Bank and purchase card, net 513 560 (47 ) (8.4 %) Other 1,833 1,675 158 9.4 % Total noninterest income $ 308 $ 9,736 $ (9,428 ) (96.8 %) 41 For the six months ended (Dollars in thousands) June 30, 2024 June 30, 2023 Change $ Change % Fair value adjustments of other equity investments $ (8,544 ) $ (332 ) $ (8,212 ) 2,473.5 % Residential mortgage banking income 5,754 6,344 (590 ) (9.3 %) Mortgage servicing rights 2,748 (746 ) 3,494 (468.4 %) Gain on sale of guaranteed government loans 121 4,793 (4,672 ) (97.5 %) Wealth and trust management 1,143 894 249 27.9 % Service charges on deposit accounts 821 692 129 18.6 % Increase in cash surrender value of bank owned life insurance 670 574 96 16.7 % Bank and purchase card, net 755 900 (145 ) (16.1 %) Other 4,665 3,900 765 19.6 % Total noninterest income $ 8,133 $ 17,019 $ (8,886 ) (52.2 %) Noninterest income in the three and six months ended June 30, 2024 included a $8.5 million negative fair value adjustment of an equity investment the Company holds in a fintech company. Lower gain on sale of guaranteed government loans in the 2024 periods was attributable to less favorable secondary market conditions and a significant decrease in the number of lending officers on the guaranteed government production team, which aligns with the Company’s enhanced focus on lending opportunities within its core geographic market. Mortgage servicing rights ("MSR") assets had more favorable fair value adjustments in the 2024 periods, driven primarily by higher longer-term interest rate expectations. 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) June 30, 2024 June 30, 2023 Change $ Change % Salaries and employee benefits $ 14,932 $ 14,518 $ 414 2.9 % Occupancy and equipment 1,303 1,913 (610 ) (31.9 %) Data processing 896 1,131 (235 ) (20.8 %) Legal and regulatory filings 363 2,753 (2,390 ) (86.8 %) Advertising and marketing 183 337 (154 ) (45.7 %) Communications 1,436 1,171 265 22.6 % Audit and accounting fees 295 503 (208 ) (41.4 %) FDIC insurance 1,817 1,246 571 45.8 % Intangible amortization 276 335 (59 ) (17.6 %) Other contractual services 1,760 3,218 (1,458 ) (45.3 %) Other taxes and assessments 588 803 (215 ) (26.8 %) Regulatory remediation 1,397 2,388 (991 ) (41.5 %) Other 4,098 3,736 362 9.7 % Total noninterest expense $ 29,344 $ 34,052 $ (4,708 ) (13.8 %) For the six months ended (Dollars in thousands) June 30, 2024 June 30, 2023 Change $ Change % Salaries and employee benefits $ 30,977 $ 29,807 $ 1,170 3.9 % Occupancy and equipment 2,827 3,482 (655 ) (18.8 %) Data processing 2,002 2,477 (475 ) (19.2 %) Legal and regulatory filings 810 3,987 (3,177 ) (79.7 %) Advertising and marketing 480 623 (143 ) (23.0 %) Communications 2,609 2,302 307 13.3 % Audit and accounting fees 1,450 649 801 123.4 % FDIC insurance 3,194 1,975 1,219 61.7 % Intangible amortization 563 690 (127 ) (18.4 %) Other contractual services 3,477 4,157 (680 ) (16.4 %) Other taxes and assessments 1,531 1,605 (74 ) (4.6 %) Regulatory remediation 4,041 3,522 519 14.7 % Other 7,857 7,623 234 3.1 % Total noninterest expense $ 61,818 $ 62,899 $ (1,081 ) (1.7 %) 42 Excluding regulatory remediation, noninterest expense decreased $3.7 million and $1.6 million for the three and six months ended June 30, 2024, respectively, compared to the same periods of 2023. Lower legal and regulatory filings expenses in the 2024 periods were the result of legal costs associated with the Virginia Community Bankshares, Inc. Employee Stock Ownership Plan litigation incurred in the 2023 periods. Lower other contractual services expenses in the 2024 period were due to the reduction in the use of third-party resources in the Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) area, as these resources were complementing internal resources in meeting the Bank’s BSA/AML requirements for the fintech BaaS operations. Higher audit and accounting fees in the first half of 2024 were primarily due to outsourced internal audits and assessments related to fintech operations. Higher Federal Deposit Insurance Corporation ("FDIC") insurance expense in the 2024 periods was primarily due to lower profitability and regulatory capital levels, which increase the insurance assessment rate. Other noninterest expense in the second quarter of 2024 also included approximately $940 thousand of excise taxes related to the surrender of bank-owned life insurance policies in the period. Regulatory remediation expenses in the second quarter of 2024 were approximately half of the amount in the first quarter of 2024, which reflect the reduction in the use of third-party resources in the BSA/AML area, as the Bank completes certain requirements under the Consent Order. Income Tax Expense . Income tax benefit for the three months ended June 30, 2024 was $616 thousand compared to income tax benefit of $1.8 million for the same period of 2023, resulting in an effective income tax rate of 5.1% and 17.5%, respectively. Income tax benefit for the six months ended June 30, 2024 was $1.0 million compared to income tax benefit of $654 thousand for the same period in 2023, resulting in effective tax rates of 6.7% and 12.3% for the same respective periods. Lower effective income tax rates in the 2024 periods were primarily attributable to $2.0 million of provision expense recognized in the second quarter of 2024 upon surrendering bank-owned life insurance policies, representing the tax effect of the life-to-date income earned on the policies. Taxes on such earnings were previously permanently deferred but became subject to tax upon the surrender of the policies. 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. 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. June 30, 2024 December 31, 2023 (Dollars in thousands) Amount Percent Amount Percent Commercial and industrial $ 401,589 17.8 % $ 508,944 21.0 % Real estate – construction, commercial 135,517 6.0 % 180,052 7.4 % Real estate – construction, residential 55,849 2.5 % 75,832 3.1 % Real estate – commercial 879,098 38.8 % 870,540 35.8 % Real estate – residential 727,246 32.2 % 730,110 30.1 % Real estate – farmland 5,717 0.3 % 5,470 0.2 % Consumer 53,427 2.4 % 59,169 2.4 % Gross loans held for investment 2,258,443 100.0 % 2,430,117 100.0 % Less: deferred loan fees, net of costs 836 830 Gross loans held for investment, net of deferred loans fees 2,259,279 2,430,947 Less: allowance for credit losses (28,036 ) (35,983 ) Net loans $ 2,231,243 $ 2,394,964 Loans held for sale (not included in totals above) $ 54,377 $ 46,337 43 The following table presents the Company’s portfolio of commercial real estate loans by property type as of the dates stated. June 30, 2024 December 31, 2023 (Dollars in thousands) Amount Percent Amount Percent Commercial real estate – owner occupied $ 207,788 23.7 % $ 210,233 24.1 % Commercial real estate – non-owner occupied Multifamily 189,382 21.5 % 162,888 18.7 % Hospitality 129,104 14.7 % 136,679 15.7 % Retail 111,858 12.7 % 118,638 13.6 % Office 68,636 7.8 % 71,717 8.2 % Mixed use 49,953 5.7 % 54,590 6.3 % Warehouse and industrial 41,361 4.7 % 40,643 4.7 % Other 81,016 9.2 % 75,152 8.6 % Total real estate – commercial $ 879,098 100.0 % $ 870,540 100.0 % The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of June 30, 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 $ 401,589 $ 73,273 $ 186,313 $ 159,606 $ 25,093 $ 1,614 $ 142,003 $ 53,182 $ 70,148 $ 18,673 Real estate – construction, commercial 135,517 24,086 90,011 16,904 15,031 58,076 21,420 18,740 1,084 1,596 Real estate – construction, residential 55,849 16,693 14,036 13,182 62 792 25,120 12,434 — 12,686 Real estate – commercial 879,098 81,333 470,241 85,424 202,456 182,361 327,524 197,920 121,545 8,059 Real estate – residential 727,246 19,029 419,364 12,406 78,305 328,653 288,853 36,157 35,026 217,670 Real estate – farmland 5,717 708 2,110 167 244 1,699 2,899 1,849 333 717 Consumer loans 53,427 2,150 7,304 7,206 98 — 43,973 29,087 14,884 2 Gross loans $ 2,258,443 $ 217,272 $ 1,189,379 $ 294,895 $ 321,289 $ 573,195 $ 851,792 $ 349,369 $ 243,020 $ 259,403 Allowance for Credit Losses . In determining the adequacy of the Company’s ACL, 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 June 30, 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. 44 The following table presents an analysis of the change in the ACL by loan type as of the dates and for the periods stated. As of and for the three months ended As of and for the six months ended (Dollars in thousands) June 30, 2024 June 30, 2023 June 30, 2024 June 30, 2023 Allowance for credit losses, beginning of period $ 35,025 $ 35,961 $ 35,893 $ 30,740 Impact of ASC 326 adoption — — — 7,418 Charge-offs Commercial (11,982 ) (7,326 ) (13,939 ) (8,125 ) Consumer (628 ) (1,694 ) (1,373 ) (2,204 ) Total charge-offs (12,610 ) (9,020 ) (15,312 ) (10,329 ) Recoveries Commercial 1,829 887 3,360 1,005 Consumer 192 126 495 230 Total recoveries 2,021 1,013 3,855 1,235 Net charge-offs (10,589 ) (8,007 ) (11,457 ) (9,094 ) Provision for credit losses - loans 3,600 10,613 3,600 9,503 Allowance for credit losses, end of period $ 28,036 $ 38,567 $ 28,036 $ 38,567 Ratio of net charge-offs to average loans outstanding during period: Commercial 2.62 % 1.64 % 2.67 % 0.89 % Consumer 0.22 % 0.68 % 0.44 % 0.44 % Total loans 1.81 % 1.29 % 1.93 % 0.73 % As a result of an agreement the Company executed in the second quarter of 2024 to sell a nonperforming, specialty finance loan to a third party, the Company reclassified this loan from loans held for investment to loans held for sale in the same period at its estimated fair value and recorded a charge-off of substantially all of the reserve held on the loan, which was provisioned for in prior years. The charge-off was approximately $9.4 million and is included in the commercial charge-off lines above for both the three and six-month periods ended June 30, 2024. 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. June 30, 2024 December 31, 2023 (Dollars in thousands) ACL Amount % of Loans ACL Amount % of Loans Commercial and industrial $ 6,917 17.8 % $ 13,787 21.0 % Real estate – construction, commercial 3,188 6.0 % 4,024 7.4 % Real estate – construction, residential 737 2.5 % 1,094 3.1 % Real estate – commercial 10,262 38.8 % 9,929 35.8 % Real estate – residential 6,239 32.2 % 6,286 30.1 % Real estate – farmland 18 0.3 % 15 0.2 % Consumer 675 2.4 % 758 2.4 % Total $ 28,036 100.0 % $ 35,893 100.0 % 45 Nonperforming Assets. The following table presents a summary of nonperforming assets and various measures as of the dates stated. (Dollars in thousands) June 30, 2024 December 31, 2023 Nonaccrual loans held for sale $ 14,387 $ — Nonaccrual loans held for investment 23,671 60,026 Loans past due 90 days and still accruing 3,127 3,037 Total nonperforming loans $ 41,185 $ 63,063 ACL $ 28,036 $ 35,893 Loans held for sale $ 54,377 $ 46,337 Loans held for investment 2,259,279 2,430,947 Total loans $ 2,313,656 $ 2,477,284 Total assets $ 2,933,072 $ 3,117,554 ACL to total loans held for investment 1.24 % 1.48 % ACL to nonaccrual loans 73.67 % 59.80 % ACL to nonperforming loans 68.07 % 56.92 % Nonaccrual loans to total loans 1.64 % 2.42 % Nonperforming loans to total loans 1.78 % 2.55 % Nonperforming loans to total assets 1.40 % 2.02 % The previously noted specialty finance loan's carrying value was $14.4 million and $32.8 million as of June 30, 2024 and December 31, 2023, respectively, and is included in the nonperforming loan held for sale amount in the table above. In the first half of 2024, the Company received approximately $9.0 million of cash payments which were applied to the book principal balance of this loan. Remaining payments pursuant to the loan sale agreement are to occur over a period of time, with the sale expected to consummate in the third quarter of 2024. Nonperforming loans, which include nonaccrual loans and loans past due 90 days and still accruing interest, decreased $21.9 million from December 31, 2023 to $41.2 million as of June 30, 2024. This decline primarily reflects payments received on and a charge-off of substantially all of the reserve related to the previously noted specialty finance loan. The remaining purchase accounting adjustments (discounts) related to loans acquired by the Company were $4.4 million and $5.1 million at June 30, 2024 and December 31, 2023, respectively. Modified Loans. The Company granted one loan modification to a borrower experiencing financial difficulties during the six months ended June 30, 2024. The total recorded investment of previously modified loans within the 12 months preceding June 30, 2024, was $19.9 million, or 0.88% of gross loans held for investment, of which $17.9 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 $307.4 million as of June 30, 2024, a decrease of $13.7 million from $321.1 million at December 31, 2023, primarily due to the sale of several mortgage backed securities, in addition to amortization. As a result of elevated market interest rates, the Company’s portfolio of AFS securities had an unrealized loss of approximately $57.5 million as of June 30, 2024. As of June 30, 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 June 30, 2024 and December 31, 2023, securities with a fair value of $266.7 million and $35.9 million, respectively, were pledged to secure the Bank’s borrowing facility with the FHLB. 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 June 30, 2024 and December 31, 2023. 46 Restricted equity investments consisted of stock in the FHLB (carrying basis $11.9 million and $12.3 million at June 30, 2024 and December 31, 2023, respectively), stock in the Federal Reserve Bank of Richmond (the "FRB") (carrying value of $5.9 million at both June 30, 2024 and December 31, 2023), and stock in the Company’s correspondent bank (carrying value of $468 thousand at both June 30, 2024 and December 31, 2023). Restricted equity investments are carried at cost. The Company also has various other equity investments, including an investment in a fintech company and limited partnerships, totaling $4.4 million and $12.9 million as of June 30, 2024 and December 31, 2023, respectively. The Company reports such investments at fair value if observable market transactions have occurred in similar securities, resulting in a new carrying value that is evaluated for impairment no less than quarterly. These impairment analyses may include quantitative and/or qualitative information obtained either directly from the investee, a third-party broker, or a third-party valuation firm. If a potential impairment has been identified, the carrying value of the investment would be written down to its estimated fair market value through a charge to earnings. In the second quarter of 2024, the Company identified potential impairment triggers related to its holdings, mainly due to regulatory pressures on banks partnering with fintech companies in the BaaS sector. These pressures led some fintech companies to announce cost-saving measures and at least one to seek bankruptcy protection. As a result, the Company engaged a third-party valuation firm to value the Company's investment in a fintech company. This valuation resulted in an $8.5 million impairment charge, recorded in fair value adjustments of other equity investments, to adjust the investment to its estimated fair market value as of June 30, 2024. 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. June 30, 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 $ 2,886 0.49 % $ — — $ 14,396 2.23 % $ 180,760 1.89 % $ 198,042 U. S. Treasury and agencies 1 — 35,202 1.14 % 37,155 2.09 % 7,276 2.25 % 79,634 State and municipal 130 3.76 % 6,008 2.64 % 34,037 2.03 % 10,181 2.53 % 50,356 Corporate bonds — — 6,375 7.51 % 30,014 4.36 % 500 4.00 % 36,889 Total $ 3,017 $ 47,585 $ 115,602 $ 198,717 $ 364,921 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, of customers in the Company’s primary geographic market area, 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 the Company has determined it will exit its fintech BaaS operations and is undergoing a closely managed wind down project in connection with its fintech partners. Fintech BaaS deposits comprise a significant portion of the Company’s fintech-related deposits. Fintech-related deposits comprised approximately $206.6 million, or 8.9%, of the Company's deposits as of June 30, 2024, compared to approximately $465.9 million, or 18.2%, as of December 31, 2023. This decline of approximately $259.2 million decline was anticipated in the wind down plan. The Company expects BaaS deposits to continue to decline and that such balances will be insignificant by the end of 2024. Brokered deposits comprising both time deposits and money market accounts totaled $484.6 million and $515.5 million as of June 30, 2024 and December 31, 2023, respectively. The Company added brokered deposit balances throughout 2023 to enhance liquidity in light of financial industry events that began in March 2023 and in anticipation of the substantial exit of its BaaS operations. Brokered deposits represented approximately 20.8% and 20.1% of total deposits as of June 30, 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. Subsequent to the end of the second quarter, the Bank received approval from the FDIC allowing the Bank to accept, renew, or rollover brokered deposits. The approval is for a six-month period and in the amount of maturities during this period. 47 Total deposits as of June 30, 2024 were $2.33 billion, a decrease of $240.2 million from December 31, 2023, of which $291.0 million was due to lower interest-bearing deposits, primarily due to the BaaS deposit wind down, partially offset by an increase in time deposits. In the first half of 2024, core deposits, which exclude fintech-related and wholesale deposits, increased $69.8 million. Estimated uninsured deposits totaled approximately $425.3 million as of June 30, 2024, or 17.9% of total deposits, compared to $573.9 million, or 22.3% of total deposits, as of December 31, 2023. Excluding fintech BaaS deposits, estimated uninsured deposits were 16.7% and 18.2% of total deposits as of June 30, 2024 and December 31, 2023, respectively. Approximately 20.2% of total deposits as of June 30, 2024 were composed of noninterest-bearing demand deposits compared to 19.7% as of December 31, 2023. In contrast, approximately 42.1% and 34.8% of total deposits as of June 30, 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) June 30, 2024 December 31, 2023 Maturing in: 3 months or less $ 30,776 $ 30,547 Over 3 months through 6 months 23,376 19,961 Over 6 months through 12 months 49,997 36,254 Over 12 months 20,945 9,500 Total $ 125,094 $ 96,262 Borrowings. The following tables present information on the balances and interest rates on borrowings as of the dates and for the periods stated. As of and for the six months ended June 30, 2024 (Dollars in thousands) Period-End Balance Highest Month-End Balance Average Balance Weighted Average Rate FHLB borrowings $ 202,900 $ 280,000 $ 222,592 4.29 % FRB borrowings — 65,000 46,429 4.65 % As of and for the year ended December 31, 2023 (Dollars in thousands) Period-End Balance Highest Month-End Balance Average Balance Weighted Average Rate FHLB borrowings $ 210,000 $ 310,800 $ 263,259 4.48 % FRB borrowings 65,000 65,000 41,672 4.78 % 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. FRB advances through the Discount Window are secured by qualifying pledged commercial and industrial loans. Subordinated notes, net, totaled $39.8 million and $39.9 million as of June 30, 2024 and December 31, 2023, respectively. The effective interest rate on the subordinated notes for the three and six months ended June 30, 2024 was 5.53% and 5.58%, respectively, compared to 5.49% and 5.52% for the same periods in 2023. 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. 48 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 $425.3 million and $573.9 million as of June 30, 2024 and December 31, 2023, respectively. 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. 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. Subsequent to the end of the second quarter, the Bank received approval from the FDIC allowing the Bank to accept, renew, or rollover brokered deposits. The approval is for a six-month period and in the amount of maturities during this period. 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 $711.0 million as of June 30, 2024, with available credit of $427.0 million as of the same date. Outstanding advances totaled $202.9 million as of June 30, 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 $80.0 million as of June 30, 2024. The Company also has access to advances from the FRB through its Discount Window. As of June 30, 2024, the Company had secured borrowing capacity through the FRB Discount Window of $81.2 million, of which there were no outstanding advances. The $65.0 million advance obtained through the FRB Bank Term Funding Program was repaid at its maturity in the second quarter of 2024. The Bank had an unsecured federal fund line available with a correspondent bank for overnight borrowing totaling $10.0 million as of both June 30, 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 June 30, 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 requires significant liquidity oversight. Management intends to utilize proceeds from the Private Placements, loan portfolio amortization and prepayments, core deposit growth, and as needed, availability of secured borrowing capacity to offset the outflow of funding from the BaaS wind down. 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. 49 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 June 30, 2024, the Bank met these minimum capital ratios. Until such levels are maintained 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 Accounting Standards Codification 326, Financial Instruments - Credit Losses (referred herein as “current expected credit losses” or “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 June 30, 2024 and December 31, 2023. The CECL Transitional Amount was $8.1 million, of which $4.1 million and $2.0 million reduced the regulatory capital amounts and capital ratios as of June 30, 2024 and December 31, 2023, respectively. June 30, 2024 Actual For Capital Adequacy Purposes To Be Well Capitalized Minimum 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. $ 367,696 15.18 % $ 254,335 10.50 % $ 242,224 10.00 % $ 314,891 13.00 % Tier 1 capital (To risk-weighted assets) Blue Ridge Bank, N.A. $ 343,744 14.19 % $ 205,907 8.50 % $ 193,795 8.00 % n/a n/a Common equity tier 1 capital (To risk-weighted assets) Blue Ridge Bank, N.A. $ 343,744 14.19 % $ 169,571 7.00 % $ 157,458 6.50 % n/a n/a Tier 1 leverage (To average assets) Blue Ridge Bank, N.A. $ 343,744 11.02 % $ 124,771 4.00 % $ 155,964 5.00 % $ 311,927 10.00 % 50 December 31, 2023 Actual For Capital Adequacy Purposes To Be Well Capitalized Minimum 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 % 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 June 30, 2024 and December 31, 2023, the Company had outstanding loan commitments of $386.6 million and $480.8 million, respectively. Of these amounts, $107.7 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 June 30, 2024 and December 31, 2023, commitments under outstanding financial stand-by letters of credit totaled $13.1 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 and six months ended June 30, 2024, the Company recorded a recovery of credit losses for unfunded commitments of $500 thousand and $1.5 million, respectively, primarily due to lower balances of unfunded loan commitments. As of June 30, 2024, the reserve for unfunded commitments was $1.6 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 June 30, 2024, the Company had future commitments outstanding totaling $8.1 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 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, pursuant to policy guidelines approved by the board of directors. 51 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 tables present the estimated change in net interest income under various rate change scenarios as of the dates presented. 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. June 30, 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 $ (391 ) (0.4 %) $ 1,350 1.4 % +300 basis points 577 0.6 % 1,825 1.8 % +200 basis points 1,046 1.2 % 1,980 2.0 % +100 basis points 888 1.0 % 1,465 1.5 % Base case -100 basis points (2,118 ) (2.3 %) (2,789 ) (2.8 %) -200 basis points (4,693 ) (5.2 %) (6,684 ) (6.7 %) -300 basis points (7,525 ) (8.3 %) (11,431 ) (11.5 %) -400 basis points (9,716 ) (10.8 %) (15,160 ) (15.2 %) December 31, 2023 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 $ (17,416 ) (19.6 %) $ (14,978 ) (15.7 %) +300 basis points (12,160 ) (13.7 %) (10,262 ) (10.7 %) +200 basis points (7,416 ) (8.4 %) (5,957 ) (6.2 %) +100 basis points (3,324 ) (3.7 %) (2,448 ) (2.6 %) Base case -100 basis points 2,028 2.3 % 930 1.0 % -200 basis points 3,615 4.1 % 778 0.8 % -300 basis points 4,732 5.3 % (305 ) (0.3 %) -400 basis points 5,621 6.3 % (1,238 ) (1.3 %) The change in the results of interest rate scenarios from December 31, 2023 to June 30, 2024 is partially the result of the decrease in the Bank’s fintech BaaS deposits. A significant portion of BaaS deposits bear interest rates that adjust with changes in the federal funds rate making them highly sensitive to instantaneous rate changes. The severity of the effect of instantaneous increases in interest rates as shown above is due to the assumption of the timing of pricing changes 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 52 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.