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Item 2. Management’s Discussion and Analysis

2024-11-06 compared with 2024-08-06 · 289 added, 223 removed, 445 unchanged (54% of the section changed)

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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.

Results of operations for the three and nine months ended September 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.

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• 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;

• the ability to maintain capital levels adequate to support the Company's business and to comply with OCC directives;

• the ability to maintain capital levels adequate to support the Company's business and to comply with the Consent Order directives;

• the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers;

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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.

As of September 30, 2024, the Company believes it has timely submitted the required documents under the Consent Order.

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.

In connection with the requirements of the Consent Order, during 2024, the Company developed and submitted a three-year strategic plan.

The strategic plan sets forth the Company’s priorities, which include;

1) remediation and compliance with the Consent Order;

2) redefining its fintech business, including exiting fintech banking-as-a-service (“BaaS”) depository operations;

3) refocusing on core community banking;

4) enhancing its enterprise risk management and credit risk administration infrastructures;

5) achieving operational efficiency, and 6) building development and training infrastructure for its employees.

The Company also submitted its annual capital plan for the Company and the Bank.

The capital plan supports the strategic plan and forecasts capital needs based on the Company’s proposed strategy.

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.

At a special meeting of shareholders held June 20, 2024, the Company’s shareholders approved various proposals, thus approving 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") 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 September 30, 2024.

On July 11, 2024, the holder of Series C Preferred Stock received the required regulatory non-objection to exchange the Series C Preferred Stock for common stock as stipulated in the Private Placements.

The Company expects the exchange of the Series C Preferred Stock for shares of the Company's common stock will be completed during the fourth quarter of 2024.

Capital proceeds received, net of issuance costs, from the Private Placements totaled $152.1 million.

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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.

On June 28, 2024, the warrants for Series B Preferred Stock converted to warrants for common stock, and the warrants for Series C Preferred Stock remain outstanding pending exchange of 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.

As of September 30, 2024, there were warrants outstanding to purchase 26,195,999 common shares.

Of these, warrants to purchase 21,635,999 common shares have an exercise price of $2.50 per share, and warrants to purchase 4,560,000 common shares have an exercise price of $2.39 per 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.

The issued warrants have been accounted for as freestanding financial instruments and classified as equity in the Company's consolidated financial statements.

The warrants were deemed freestanding because they are (1) legally detachable and separately exercisable from the common or preferred shares, as applicable, issued in the Private Placements, (2) only exercisable into shares of the Company’s stock, with no obligation for the Company to transfer any asset in settlement, and (3) do not obligate the Company to issue a variable number of shares.

The warrants are classified as equity because they are freestanding and (1) the Company has sufficient authorized and unissued shares available for issuance, (2) the warrant agreements specify a fixed number of shares to be issued upon exercise, and (3) there are no provisions requiring cash payments by the Company in any "top-off" or "make-whole" situations or for failure to make timely filings with the SEC.

As of September 30, 2024 and June 30, 2024, the Bank’s capital ratios exceeded these minimum capital ratios.

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.

Following the restatements, the Company has partially recovered—and, in some cases, fully recovered—amounts from certain specialty finance loans previously charged off.

See Note 3 of this Form 10-Q for additional information.

The Company does not believe that the restatements reflect any significant financial impact on the Company's financial condition as of September 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 for the nine-month period ended September 30, 2023.

There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2023 Form 10-K.

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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 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.

Comparison of Financial Condition as of September 30, 2024 and December 31, 2023

Total assets were $2.94 billion as of September 30, 2024, a decrease of $172.9 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 $250.5 million to $2.18 billion as of September 30, 2024 from $2.43 billion as of December 31, 2023.

The Company previously announced it would exit its fintech BaaS operations.

The Company has purposely and selectively reduced assets to meet the liquidity needs of exiting its fintech BaaS operations, which is expected to be completed by the fourth quarter of 2024.

The allowance for credit losses ("ACL") declined $10.4 million to $25.5 million as of September 30, 2024 from $35.9 million as of December 31, 2023, primarily attributable to a $9.4 million charge-off as a result of the previously noted specialty finance loan's reclassification to loans held for sale in the second quarter of 2024 and lower reserve needs due to loan portfolio balance reductions, partially offset by higher specific reserves for certain purchased loans.

Total deposits as of September 30, 2024 were $2.35 billion, a net decrease of $219.5 million from December 31, 2023.

The decrease in the first nine months of 2024 was primarily due to a decrease of $264.4 million of interest-bearing fintech-related deposits.

Total deposits related to fintech relationships decreased by $278.4 million to $187.5 million as of September 30, 2024 from $465.9 million as of December 31, 2023, and represented 8.0% and 18.2% of total deposits as of the same respective dates.

Fintech BaaS deposits decreased by $307.3 million to $63.7 million as of September 30, 2024 from $371.0 million as of December 31, 2023.

During the first nine months of 2024, deposits, excluding fintech-related and brokered deposits, increased $143.5 million.

Total stockholders’ equity increased by $150.4 million to $336.3 million as of September 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 Nine Months Ended September 30, 2024 and 2023

For the three months ended September 30, 2024, the Company reported net income of $946 thousand, or $0.01 per diluted common share, compared to a net loss of $41.4 million, or ($2.18) per diluted common share, for the three months ended September 30, 2023.

In the second quarter of 2024, the Company executed an agreement to sell a nonperforming specialty finance loan to a third party, reclassifying the loan from loans held for investment to loans held for sale in the same period at its estimated fair value.

Upon reclassification, the Company recorded a charge-off of substantially all of the reserve held on the loan, which was provisioned for in prior years.

In the third quarter, the sale was completed upon the receipt of all contractual amounts due.

Income before income taxes of $1.5 million for the

quarter included a $6.2 million recovery of credit losses resulting primarily from an $8.4 million recovery upon the completion of the specialty finance loan sale.

For the nine months ended September 30, 2024, the Company reported a net loss of $13.4 million, or ($0.35) per diluted common share, compared to a net loss of $46.0 million, or ($2.43) per diluted common share, for the nine months ended September 30, 2023.

The net loss for the nine months ended September 30, 2024 included a second quarter $6.7 million non-cash, after-tax negative fair value adjustment recorded for an equity investment in a fintech company, partially offset by a $6.6 million after-tax recovery of credit losses on a specialty finance loan that was sold in the third quarter upon the receipt of all contractual amounts due.

The third quarter 2023 loss included a non-cash, after-tax goodwill impairment charge of $26.8 million, which was the entirety of the goodwill balance, and a $4.7 million after-tax settlement reserve for the now-settled Employee Stock Ownership Plan (“ESOP”) litigation assumed in the 2019 acquisition of Virginia Community Bankshares, Inc (“VCB”).

The net loss for the three and nine months ended September 30, 2024 also included $282 thousand and $3.5 million, respectively, of after tax-costs incurred for professional services related to regulatory remediation efforts in connection with the Consent Order, compared to $2.9 million and $5.7 million, respectively, of after tax-costs incurred for the same periods in 2023 in connection with the Written Agreement.

Net Interest Income.

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Net interest margin represents the difference between interest income and interest expense calculated as a percentage of average interest-earning assets.

The following table presents the average balance sheets for the three months ended June 30, 2024 and 2023.

The following table presents the average balance sheets for the three months ended September 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,

For the three months ended September 30,

Increase/(Decrease)

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(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.

(3) Computed on a fully taxable equivalent basis assuming a 21.89% and 22.65% income tax rate for the three months ended September 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.

(6) Includes accretion of fair value adjustments (discounts) on acquired loans of $311 thousand and $624 thousand for the three months ended September 30, 2024 and 2023, respectively.

(7) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $70 thousand and $160 thousand for the three months ended September 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 September 30, 2024 and 2023, respectively.

(9) Net interest margin is net interest income divided by average interest-earning assets.

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(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

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.

Average interest-earning assets were $2.80 billion for the three months ended September 30, 2024 compared to $3.04 billion for the same period of 2023, a $242.7 million decrease.

This decrease was primarily attributable to lower average balances of loans held for investment and securities, which decreased $229.5 million and $36.3 million, respectively, partially offset by higher average balances of interest-earning deposits in other banks.

Total interest income (on a taxable equivalent basis) decreased $3.3 million for the three-month period ended September 30, 2024 from the same period of 2023, primarily due to lower average balances of interest-earning assets.

Lower loan yields in the 2024 period were primarily attributable to lower relative average balances of variable rate commercial and industrial loans, reversal of interest income on loans moved to nonaccrual, reversal of interest income for other loan adjustments, and lower accretion of purchase accounting adjustments (discounts) on acquired loans.

Interest income for the three months ended September 30, 2024 and 2023 included accretion of discounts on acquired loans of $311 thousand and $624 thousand, respectively.

Average interest-bearing liabilities were $2.12 billion for the three months ended September 30, 2024 compared to $2.35 billion for the same period of 2023, a $232.9 million decrease.

Interest expense decreased by $170 thousand to

$20.1 million for the three months ended September 30, 2024 compared to the same period of 2023.

Cost of interest-bearing liabilities increased to 3.79% for the third quarter of 2024 from 3.45% for the third quarter of 2023, while total cost of funds was 3.09% and 2.73% for the same respective periods.

Interest expense in the third quarters of 2024 and 2023 included the amortization of fair value adjustments (premium) on assumed time deposits of $70 thousand and $160 thousand, respectively, which was a reduction to interest expense.

Net interest income (on a taxable equivalent basis) for the three months ended September 30, 2024 was $19.1 million compared to $22.2 million for the same period in 2023, a decrease of $3.1 million.

Net interest margin was 2.74% and 2.92% for the third quarters of 2024 and 2023, respectively.

Accretion and amortization of purchase accounting adjustments had a 6 and 11 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.

The following table presents the average balance sheets for the nine months ended September 30, 2024 and 2023.

Average Balances, Income and Expense, Yields and Rates

For the six months ended June 30,

For the nine months ended September 30,

Increase/(Decrease)

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(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.

(3) Computed on a fully taxable equivalent basis assuming a 21.89% and 22.65% income tax rate for the nine months ended September 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.

(6) Includes accretion of fair value adjustments (discounts) on acquired loans of $915 thousand and $1.8 million for the nine months ended September 30, 2024 and 2023, respectively.

(7) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $248 thousand and $666 thousand for the nine months ended September 30, 2024 and 2023, respectively.

(8) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $75 thousand for both the nine months ended September 30, 2024 and 2023.

(9) Net interest margin is net interest income divided by average interest-earning assets.

1 unchanged sentence

(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 $2.93 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.

Average interest-earning assets were $2.88 billion for the nine months ended September 30, 2024 compared to $3.05 billion for the same period of 2023, a $168.4 million decrease.

This decrease was primarily attributable to declines in average balances of loans held for investment and securities, which decreased $155.6 million and $44.1 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) decreased $209 thousand for the six-month period ended June 30, 2024 from the same period of 2023.

Total interest income (on a taxable equivalent basis) decreased $3.5 million for the nine month period ended September 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.

Interest income on loans held for investment for the nine month period ended September 30, 2024 included $671 thousand of interest received as a result of the payoff of a nonaccrual loan, which had a 4 and 3 basis point positive effect on the yield on loans held for investment and net interest margin, respectively.

Interest income for the nine months ended September 30, 2024 and 2023 included accretion of discounts on acquired loans of $915 thousand and $1.8 million, respectively.

Average interest-bearing liabilities were $2.25 billion for the nine months ended September 30, 2024 compared to $2.29 billion for the same period of 2023, a $37.7 million decrease.

Interest expense increased by $8.3 million to $62.9 million for the nine months ended September 30, 2024 compared to the same period of 2023.

Cost of interest-bearing liabilities increased to 3.72% for the nine months ended September 30, 2024 from 3.18% for the nine months ended September 30, 2023, while cost of funds were 3.04% and 2.44% 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 brokered funding sources.

Interest expense in the first nine months of 2024 and 2023 included the amortization of fair value adjustments (premium) on assumed time deposits of $248 thousand and $666 thousand, respectively, which was a reduction to interest expense.

Net interest income (on a taxable equivalent basis) was $59.6 million for the nine months ended September 30, 2024 compared to $71.4 million for the same period in 2023.

Net interest margin was 2.76% and 3.12% for the first nine months 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.

The Company recorded a recovery of credit losses of $6.2 million in the third quarter of 2024 compared to a provision for credit losses of $11.1 million in the third quarter of 2023.

The recovery of credit losses for the first nine months of 2024 was $4.1 million compared to a provision for credit losses of $19.6 million for the same period in 2023.

The recovery of credit losses in the 2024 periods was primarily attributable to an $8.4 million recovery from the sale of the previously mentioned specialty finance loan and lower reserve needs due to loan portfolio balance reductions, partially offset by higher specific reserves for certain purchased loans.

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 recovery of credit losses on lower balances of unfunded loan commitments.

Noninterest Income .

2 unchanged sentences

(Dollars in thousands)

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

Fair value adjustments of other equity investments

1 unchanged sentence

Mortgage servicing rights

Loss on sale of mortgage servicing rights

Gain on sale of guaranteed government loans

3 unchanged sentences

Bank and purchase card, net

Loss on sale of securities available for sale

Total noninterest income

For the six months ended

For the nine months ended

(Dollars in thousands)

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

Fair value adjustments of other equity investments

1 unchanged sentence

Mortgage servicing rights

Loss on sale of mortgage servicing rights

Gain on sale of guaranteed government loans

3 unchanged sentences

Bank and purchase card, net

Loss on sale of securities available for sale

Total noninterest income

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.

The decline in MSR income was primarily due to negative fair value adjustments in the 2024 periods, arising from lower future interest rate expectations, and a $1.0 million third quarter of 2024 loss on the sale of a portion of the Company's portfolio of MSRs.

The decline in other noninterest income in the 2024 periods compared to the same periods of 2023 was primarily attributable to a decline in income from fintech BaaS deposit partnerships.

This decline was also attributable to a decline in income from SBIC investments as the Company sold the majority of these small business investment companies ("SBIC") in the second quarter of 2024.

Lower gain on sale of guaranteed government loans in the nine months ended September 30, 2024 was attributable to the exit of the majority of the Company's guaranteed government lending team, which aligns with the Company’s enhanced focus on lending opportunities within its core geographic market.

Noninterest income in the nine months ended September 30, 2024 also included an $8.5 million non-cash, negative fair value adjustment of an equity investment the Company holds in a fintech company.

For the three and nine months ended September 30, 2024, other noninterest income included $831 thousand and $2.5 million, respectively, from fintech lending partnerships, compared to $821 thousand and $2.3 million for the same periods in 2023.

The Company is currently evaluating these partnerships and, as a result, anticipates a decline in noninterest income associated with fintech lending partnerships beginning in 2025.

Noninterest Expense.

2 unchanged sentences

(Dollars in thousands)

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

Salaries and employee benefits

Occupancy and equipment

Data processing

Technology and communications

Legal and regulatory filings

Advertising and marketing

Communications

Audit and accounting fees

FDIC insurance

3 unchanged sentences

Regulatory remediation

Goodwill impairment

ESOP litigation

Total noninterest expense

For the six months ended

For the nine months ended

(Dollars in thousands)

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

Salaries and employee benefits

Occupancy and equipment

Data processing

Technology and communications

Legal and regulatory filings

Advertising and marketing

Communications

Audit and accounting fees

FDIC insurance

3 unchanged sentences

Regulatory remediation

Goodwill impairment

ESOP litigation

Total noninterest expense

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.

Excluding the goodwill impairment charge, the ESOP litigation settlement charge, and regulatory remediation expenses, noninterest expense decreased $1.9 million and $3.5 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods of 2023.

Salaries and employee benefits expense in third quarter of 2024 reflected lower head count, primarily in the Bank's GGL and compliance areas, and lower health insurance expense compared to the same respective period of 2023.

Lower legal and regulatory filings expenses in the 2024 periods were primarily the result of reduced legal costs associated with the VCB ESOP litigation.

Lower other contractual services and regulatory remediation 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 the Bank completes certain requirements under the Consent Order and exits its fintech BaaS operations.

Higher audit fees in the first nine months 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 first nine months of 2024 was primarily due to changes in the Bank's insurance assessment rate.

Other noninterest expense in the 2024 periods included approximately $940 thousand of excise taxes related to the surrender of bank owned life insurance policies in the period.

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.

Income tax expense for the three months ended September 30, 2024 was $599 thousand compared to an income tax benefit of $4.7 million for the same period of 2023, resulting in effective income tax rates of 38.8% and 10.2%, respectively.

Income tax benefit for the nine months ended September 30, 2024 was $424 thousand compared to income tax benefit of $5.3 million for the same period in 2023, resulting in effective income tax rates of 3.1% and 10.4% for the same respective periods.

The higher effective income tax rate for the three months ended September 30, 2024 was primarily attributable to the vesting of restricted stock awards, where the fair value of the underlying stock at the time of vesting was lower than the fair value previously recognized for financial reporting purposes.

The lower effective income tax rate for the nine months ended September 30, 2024 was primarily attributable to $2.0 million of tax expense recognized in the second quarter of 2024 upon surrendering bank owned life insurance policies.

Taxes on such earnings were previously permanently deferred but became subject to tax upon the surrender of the policies.

The effective tax rates in the 2023 periods were primarily attributable to the goodwill impairment charge of $26.8 million, which had no tax effect, thus resulting in a lower income tax benefit.

Analysis of Financial Condition

5 unchanged sentences

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

September 30, 2024

December 31, 2023

7 unchanged sentences

Gross loans held for investment

deferred loan fees, net of costs

Gross loans held for investment, net of deferred loans fees

Deferred costs, net of loan fees

Gross loans held for investment, net of deferred costs

allowance for credit losses

2 unchanged sentences

The following table presents the Company’s portfolio of commercial real estate loans by property type as of the dates stated.

June 30, 2024

September 30, 2024

December 31, 2023

4 unchanged sentences

Total real estate – commercial

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.

The current lending environment for commercial real estate (“CRE”) loans has heightened risk due to a higher interest rate environment.

Potential negative impacts include higher debt service burdens for floating rate loans and fixed rate loans that mature and require renewal or refinancing.

Collateral values overall may be impaired by higher capitalization rates and also pose risks for refinancing maturing loans.

In addition, certain CRE collateral types have experienced declining occupancy, demand, and rental rates, which could potentially lead to material declines in property level economics and borrowers' ability to service their debt.

In response to the heightened risk, earlier in 2024 the Bank’s credit policy and risk committee conducted a targeted exam of certain of the Bank’s loan types, including office loans, to confirm its internal risk ratings.

In addition, the Bank’s credit administration department led by its Chief Credit Officer performs a periodic analysis of emerging trends by geography where the Bank has the largest concentrations by CRE property type.

The analysis includes all real estate property types and geographic markets represented in the loan portfolio.

This analysis is provided to the board of directors to assess whether the CRE lending strategy and risk appetite continue to be appropriate, considering changes in local market conditions and the Bank’s exposure to collateral type concentrations.

Also, concentration limits by real estate collateral type are approved and monitored by the board of directors.

As of September 30, 2024, all limits are in compliance.

The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of September 30, 2024.

Variable rate

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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.

Management believes that the Company’s ACL was adequate as of September 30, 2024 and December 31, 2023.

There can be no assurance, however, that adjustments to the ACL will not be required in the future.

2 unchanged sentences

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.

In addition, bank regulatory agencies periodically review the Bank's ACL and may 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.

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

As of and for the nine months ended

(Dollars in thousands)

June 30, 2024

June 30, 2023

June 30, 2024

June 30, 2023

September 30, 2024

September 30, 2023

September 30, 2024

September 30, 2023

Allowance for credit losses, beginning of period

Impact of ASC 326 adoption

Commercial and industrial

Real estate – construction, commercial

Real estate – construction, residential

Real estate – commercial

Real estate – residential

Total charge-offs

Commercial and industrial

Real estate – construction, commercial

Real estate – construction, residential

Real estate – commercial

Real estate – residential

Total recoveries

Net charge-offs

Provision for credit losses - loans

Net recoveries (charge-offs)

(Recovery of) provision for credit losses - loans

Allowance for credit losses, end of period

Ratio of net charge-offs to average loans outstanding during period:

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.

Ratio of net recoveries (charge-offs) to average loans outstanding during period:

Commercial and industrial

Real estate – construction, commercial

Real estate – construction, residential

Real estate – commercial

Real estate – residential

Upon reclassification, the Company recorded a charge-off of substantially all of the reserve held on the loan, which was provisioned for in prior years.

In the third quarter, the sale was completed upon the receipt of all contractual amounts due, and pursuant to the note sale agreement, the Company recorded an $8.4 million recovery of credit losses.

The ACL includes specific reserves for individually evaluated loans and a general allowance applicable to all loan categories;

1 unchanged sentence

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

The following table 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.

September 30, 2024

December 31, 2023

9 unchanged sentences

(Dollars in thousands)

June 30, 2024

September 30, 2024

December 31, 2023

Nonaccrual loans held for sale

Nonaccrual loans held for investment

1 unchanged sentence

Total nonperforming loans

Total nonperforming assets

Loans held for sale

6 unchanged sentences

Nonperforming loans to total assets

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.

Nonperforming assets to total assets

(1) Included in other assets on the consolidated balance sheets.

Nonperforming loans, which include nonaccrual loans and loans past due 90 days and still accruing interest, decreased $31.0 million from December 31, 2023 to $32.1 million as of September 30, 2024.

This decline primarily reflects the sale of the previously noted specialty finance loan, which had a December 31, 2023 carrying value of $32.8 million.

The remaining purchase accounting adjustments (discounts) related to loans acquired by the Company were $4.2 million and $5.1 million at September 30, 2024 and December 31, 2023, respectively.

Investment Securities.

1 unchanged sentence

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.

The fair value of the Company’s AFS investment securities portfolio was $314.8 million as of September 30, 2024, a decrease of $6.3 million from $321.1 million at December 31, 2023, primarily due to the sale of several mortgage backed securities and normal principal amortization, partially offset by year-to-date unrealized gains.

As a result of elevated market interest rates, the Company’s portfolio of AFS securities had an unrealized loss of approximately $44.7 million as of September 30, 2024.

As of September 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.

At September 30, 2024 and December 31, 2023, securities with a fair value of $273.0 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.

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).

The Company does not intend to sell, nor does it believe that it will be required to sell, any of its impaired AFS securities prior to the recovery of the amortized cost.

No ACL has been recognized for AFS securities as of both September 30, 2024 and December 31, 2023.

Restricted equity investments consisted of stock in the FHLB (carrying basis $11.3 million and $12.3 million at September 30, 2024 and December 31, 2023, respectively), stock in the Federal Reserve Bank of Richmond (the "FRB") (carrying value of $9.2 million and $5.9 million at September 30, 2024 and December 31, 2023, respectively), and stock in the Company’s correspondent bank (carrying value of $468 thousand at both September 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 also has various other equity investments, including an investment in a fintech company and limited partnerships, totaling $4.5 million and $12.9 million as of September 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.

1 unchanged sentence

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.

In the second quarter of 2024, the Company identified potential impairment triggers related to one of its investments, 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

September 30, 2024

Within One Year

9 unchanged sentences

Corporate bonds

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.

The principal sources of funds for the Company are deposits, including transaction accounts (demand deposits and money market accounts), time deposits, and savings accounts, of customers in the Company’s primary geographic market area.

Such customers provide the Bank a source of fee income and cross-marketing opportunities and are generally a lower cost source of funding for the Bank.

Fintech-related deposits are sourced from fintech partnerships and in recent history have been a significant source of deposits for the Company.

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.

The Company is exiting its fintech BaaS operations and expects to be fully exited by the end of the fourth quarter of 2024.

Brokered deposit balances are sourced through intermediaries and are an unsecured source of funding for the Bank.

Brokered deposits were added throughout 2023 to enhance liquidity in light of financial industry events that began in March 2023 and in anticipation of the exit of the Company's fintech BaaS operations.

Brokered deposits represented approximately 18.3% and 20.1% of total deposits as of September 30, 2024 and December 31, 2023, respectively, and were all time deposits at September 30, 2024.

The Bank has a liquidity management program, with oversight of the Bank’s asset and liability committee (the “ALCO”) that sets forth guidelines for the desired maximum level of brokered deposits, which is 20.0% of total deposits.

As noted, the Company issued brokered deposits as a liquidity management tool in light of industry events and the exit of its fintech BaaS operations, and for these reasons, brokered deposit levels approximated the high-end of the guideline at September 30, 2024.

In recent quarters, the Company has reduced levels of brokered deposits and expects to continue to reduce levels in future periods to a level of 10.0% or less of total deposits.

As certain brokered deposits have multiple-year terms, the Company expects brokered deposits to be a funding source for several years.

The ALCO monitors brokered deposit concentrations as part of its liquidity risk management program.

Total deposits decreased $219.5 million from $2.57 billion as of December 31, 2023 to $2.35 billion as of September 30, 2024, as:

• Deposits, excluding fintech-related and brokered deposits, increased $143.5 million from approximately $1.58 billion as of December 31, 2023 to approximately $1.73 billion as of September 30, 2024;

• Fintech-related deposits decreased $278.4 million from approximately $465.9 million as of December 31, 2023 to approximately $187.5 million as of September 30, 2024.

Of the decline, fintech BaaS deposits decreased $307.3 million from December 31, 2023, and represent approximately 3% of total deposits at September 30, 2024.

Partially offsetting the decline in fintech BaaS deposits were $28.9 million of increased fintech corporate deposits;

• Brokered deposits decreased $85.0 million from approximately $515.5 million as of December 31, 2023 to approximately $430.5 million as of September 30, 2024.

As a result of the Consent Order, subsequent to the date of the 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.

During the third quarter, the Bank received approval from the FDIC allowing the Bank to accept, renew, and rollover brokered deposits.

The approval is for a six-month period and in the amount of maturities during this period.

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 Bank expects to file another application for waiver of this prohibition in the fourth quarter of 2024.

Estimated uninsured deposits totaled approximately $402.0 million as of September 30, 2024, or 16.8% 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 September 30, 2024 and December 31, 2023, respectively.

Approximately 19.6% of total deposits as of September 30, 2024 were composed of noninterest-bearing demand deposits compared to 19.7% as of December 31, 2023.

In contrast, approximately 44.1% and 34.8% of total deposits as of September 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

September 30, 2024

December 31, 2023

4 unchanged sentences

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

As of and for the nine months ended September 30, 2024

(Dollars in thousands)

13 unchanged sentences

FRB borrowings

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.

FHLB advances are secured by collateral consisting of a blanket lien on qualifying pledged 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 FRB Discount Window are secured by qualifying pledged commercial and industrial loans.

Total borrowings decreased $85.0 million from $275.0 million as of December 31, 2023 to $190.0 million as of September 30, 2024.

The Company utilizes its FHLB line of credit, as an element of its liquidity management program, to maintain cash levels in the range of 3%-5% of total assets.

In the year-to-date period, funding from the Private Placements contributed to the reduction of outstanding balances.

Conversely, FHLB advances were used to meet the effects from fintech BaaS operation wind down, if and when the timing of such differed from loan payoffs/paydowns and asset liquidations.

Subordinated notes, net, totaled $39.8 million and $39.9 million as of September 30, 2024 and December 31, 2023, respectively.

The effective interest rate on the subordinated notes for the three and nine months ended September 30, 2024 was 5.69% and 5.61%, respectively, compared to 5.67% and 5.57% 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 October 15, 2024, the rate on the 2029 Notes reset quarterly to the current three-month SOFR interest rate, which was 465.0 basis points, 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.

4 unchanged sentences

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.

Cash flow from amortizing or maturing assets also provides funding to meet the liquidity needs of the Company.

Deposit sources are the Bank’s core customers and through brokered deposit markets.

These markets are accessed through brokers or through the IntraFi Network (“IntraFi”), of which the Bank is a member.

1 unchanged sentence

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.

Partly through the use of the IntraFi reciprocal deposit program, the Company has reduced uninsured deposits to $402.0 million as of September 30, 2024 from $573.9 million as of 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.

Pursuant to the Company’s liquidity contingency plan, liquidity needs are forecasted based on anticipated changes in the balance sheet.

In this forecast, the Company expects to maintain a liquidity cushion.

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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.

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.

Management also monitors the Company’s liquidity position on a day-to-day basis through daily cash monitoring and short- and long-term cash flow forecasting and believes its sources of liquidity are adequate to conduct the business of the Company.

The following table presents information on the available sources of liquidity as of the period stated.

(Dollars in thousands)

Outstanding Borrowings

Available Balance

Cash and due from banks

Fed funds sold

Unpledged securities available for sale

Unsecured line of credit

Available liquidity as of September 30, 2024

(1) Outstanding borrowings is comprised of advances of $190.0 million and letters of credit totaling $81.2 million, of which $80.0 million served as collateral for public deposits with the Treasury Board of the Commonwealth of Virginia.

Managing the Company's liquidity position through the exit of the fintech BaaS operations has required significant liquidity oversight.

Management has utilized proceeds from the Private Placements, loan portfolio amortization and prepayments, in-market deposit growth, and, as needed, availability of secured borrowing capacity to offset the outflow of fintech BaaS deposits.

Fintech BaaS deposits have declined $307.3 million since December 31, 2023, with $63.7 million remaining as of September 30, 2024.

Management believes that it has the adequate sources of liquidity to meet the remainder of the wind down and brokered deposit maturities.

Uninsured deposits at September 30, 2024 were $402.0 million or 16.8% of total deposits.

In the unlikely event that uninsured deposit balances leave the Bank over a short period of time, management could more than satisfy the demand with cash on-hand and FHLB and FRB borrowing capacity.

Capital adequacy is an important measure of financial stability and performance.

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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.

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.

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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.

The Consent Order requires the Bank to achieve and maintain minimum capital requirements that 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.

As of September 30, 2024 and 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.

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, 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.

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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.

The following tables present the capital ratios to which banks are subject to be adequately and well capitalized, as well as the capital and capital ratios for the Bank 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

The following table also includes the capital adequacy ratios to which bank holding companies are subject.

On January 1, 2024, the Company became subject to these ratios.

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 September 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 September 30, 2024 and December 31, 2023, respectively.

September 30, 2024

Adequacy Purposes

2 unchanged sentences

(Dollars in thousands)

Total risk based capital

(To risk-weighted assets)

Total risk based capital (to risk-weighted assets)

Blue Ridge Bank, N.A.

Tier 1 capital

(To risk-weighted assets)

Blue Ridge Bankshares, Inc.

Tier 1 capital (to risk-weighted assets)

Blue Ridge Bank, N.A.

Common equity tier 1 capital

(To risk-weighted assets)

Blue Ridge Bankshares, Inc.

Common equity tier 1 capital (to risk-weighted assets)

Blue Ridge Bank, N.A.

Tier 1 leverage

(To average assets)

Blue Ridge Bankshares, Inc.

Tier 1 leverage (to average assets)

Blue Ridge Bank, N.A.

Blue Ridge Bankshares, Inc.

December 31, 2023

3 unchanged sentences

(Dollars in thousands)

Total risk based capital

(To risk-weighted assets)

Total risk based capital (to risk-weighted assets)

Blue Ridge Bank, N.A.

Tier 1 capital

(To risk-weighted assets)

Tier 1 capital (to risk-weighted assets)

Blue Ridge Bank, N.A.

Common equity tier 1 capital

(To risk-weighted assets)

Common equity tier 1 capital (to risk-weighted assets)

Blue Ridge Bank, N.A.

Tier 1 leverage

(To average assets)

Tier 1 leverage (to average assets)

Blue Ridge Bank, N.A.

Off-Balance Sheet Activities

Commitments and Contingencies

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.

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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.

As of September 30, 2024 and December 31, 2023, the Company had outstanding loan commitments of $320.3 million and $480.8 million, respectively.

Of these amounts, $106.3 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.

As of September 30, 2024 and December 31, 2023, commitments under outstanding financial stand-by letters of credit totaled $11.9 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.

For the three and nine months ended September 30, 2024, the Company recorded a recovery of credit losses for unfunded commitments of $200 thousand and $1.7 million, respectively, primarily due to lower balances of unfunded loan commitments.

As of September 30, 2024, the reserve for unfunded commitments was $1.4 million compared to $3.1 million as of December 31, 2023.

As of and for the three month period ended September 30, 2024, the Company recorded a recourse reserve of $520 thousand for estimated putbacks and transition costs as part of the sale of a portion of its MSR portfolio in the same period.

This amount is included in the loss on sale of MSRs and other liabilities on the consolidated statement of operations and consolidated balance sheet, respectively.

The putbacks relate to industry-standard items, including prepayments or early delinquencies of the underlying mortgages, as well as any deficiencies in the underlying documentation, all of which are subject to term limits per the sales agreement.

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.

At September 30, 2024, the Company had future commitments outstanding totaling $7.6 million related to these investments.

Interest Rate Risk Management

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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.

The Company manages interest rate risk through an 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.

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.

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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

September 30, 2024

Instantaneous Parallel Rate Shock Scenario

23 unchanged sentences

-400 basis points

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 change in the results of interest rate scenarios from December 31, 2023 to September 30, 2024 is primarily the result of the decrease in the Bank’s fintech BaaS deposits.

A significant portion of fintech BaaS deposits bear interest rates that adjust with changes in the federal funds rate making them highly sensitive to instantaneous interest 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.

3 unchanged sentences

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.

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.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis