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 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. 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; 36 • 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; • 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, 37 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. 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 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. The Private Placements also included the issuance of warrants for 6,549 shares of Series B Preferred Stock and warrants for 1,441 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 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. 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. 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. As of September 30, 2024 and June 30, 2024, the Bank’s capital ratios exceeded these minimum capital ratios. 38 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. 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. General There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2023 Form 10-K. Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share, total assets, total liabilities, or stockholders’ equity as previously reported. Comparison of Financial Condition as of 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 39 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. 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. 40 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 September 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 $ 321,920 $ 2,282 2.84 % $ 355,373 $ 2,493 2.81 % $ (211 ) $ (235 ) $ 24 Tax-exempt securities (3) 12,560 80 2.55 % 15,383 93 2.42 % (13 ) (17 ) 4 Total securities 334,480 2,362 2.82 % 370,756 2,586 2.79 % (224 ) (252 ) 28 Interest-earning deposits in other banks 149,990 2,053 5.48 % 126,660 1,312 4.14 % 741 242 499 Federal funds sold 5,868 81 5.52 % 4,270 57 5.34 % 24 21 3 Loans held for sale 65,219 2,242 13.75 % 67,021 2,219 13.24 % 23 (60 ) 83 Loans held for investment (4,5,6) 2,240,559 32,505 5.80 % 2,470,088 36,332 5.88 % (3,827 ) (3,376 ) (451 ) Total average interest-earning assets 2,796,116 39,243 5.61 % 3,038,795 42,506 5.60 % (3,263 ) (3,425 ) 162 Less: allowance for credit losses (32,001 ) (41,034 ) Total noninterest-earning assets 203,659 251,468 Total average assets $ 2,967,774 $ 3,249,229 Average Liabilities and Stockholders’ Equity: Interest-bearing demand, money market, and savings $ 844,747 $ 5,398 2.56 % $ 1,349,336 $ 10,038 2.98 % $ (4,640 ) $ (3,754 ) $ (886 ) Time (7) 1,003,751 11,586 4.62 % 643,449 6,077 3.78 % 5,509 3,403 2,106 Total interest-bearing deposits 1,848,498 16,984 3.68 % 1,992,785 16,115 3.23 % 869 (351 ) 1,220 FHLB borrowings 233,090 2,574 4.42 % 256,668 2,836 4.42 % (262 ) (261 ) (1 ) FRB borrowings — — — 65,000 777 4.78 % (777 ) (777 ) — Subordinated notes and other borrowings (8) 39,814 566 5.69 % 39,906 566 5.67 % — (1 ) 1 Total average interest-bearing liabilities 2,121,402 20,124 3.79 % 2,354,359 20,294 3.45 % (170 ) (1,390 ) 1,220 Noninterest-bearing demand deposits 482,809 624,202 Other noninterest-bearing liabilities 36,683 32,138 Stockholders' equity 326,880 238,530 Total average liabilities and stockholders’ equity $ 2,967,774 $ 3,249,229 Net interest income and margin (9) $ 19,119 2.74 % $ 22,212 2.92 % $ (3,093 ) $ (2,035 ) $ (1,058 ) Cost of funds (10) 3.09 % 2.73 % Net interest spread (11) 1.82 % 2.15 % (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 21.89% 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 $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. (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 $2.80 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 41 $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. Higher cost of funds in the 2024 period was primarily due to higher rates on time deposits, particularly brokered time deposits the Company began issuing late in the first quarter of 2023 to increase liquidity in response to financial industry events. Interest expense in the 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 nine 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 nine months ended September 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 $ 328,024 $ 7,119 2.89 % $ 365,802 $ 7,663 2.79 % $ (544 ) $ (791 ) $ 247 Tax-exempt securities (3) 12,584 236 2.50 % 18,921 331 2.33 % (95 ) (111 ) 16 Total securities 340,608 7,355 2.88 % 384,723 7,994 2.77 % (639 ) (902 ) 263 Interest-earning deposits in other banks 138,255 5,501 5.31 % 118,576 3,705 4.17 % 1,796 615 1,181 Federal funds sold 7,200 294 5.44 % 5,549 201 4.83 % 93 60 33 Loans held for sale 62,425 6,374 13.61 % 54,481 5,631 13.78 % 743 821 (78 ) Loans held for investment (4,5,6) 2,334,126 102,915 5.88 % 2,489,708 108,378 5.80 % (5,463 ) (6,773 ) 1,310 Total average interest-earning assets 2,882,614 122,439 5.66 % 3,053,037 125,909 5.50 % (3,470 ) (6,179 ) 2,709 Less: allowance for credit losses (34,149 ) (37,992 ) Total noninterest-earning assets 223,613 242,886 Total average assets $ 3,072,078 $ 3,257,931 Average Liabilities and Stockholders’ Equity: Interest-bearing demand, money market, and savings $ 971,362 $ 19,235 2.64 % $ 1,328,450 $ 27,157 2.73 % $ (7,922 ) $ (7,300 ) $ (622 ) Time (7) 985,077 33,505 4.54 % 606,592 14,913 3.28 % 18,592 9,305 9,287 Total interest-bearing deposits 1,956,439 52,740 3.59 % 1,935,042 42,070 2.90 % 10,670 2,005 8,665 FHLB borrowings 226,117 7,353 4.34 % 282,150 9,604 4.54 % (2,251 ) (1,907 ) (344 ) FRB borrowings 30,839 1,080 4.67 % 33,811 1,216 4.80 % (136 ) (107 ) (29 ) Subordinated notes and other borrowings (8) 39,840 1,677 5.61 % 39,908 1,666 5.57 % 11 (3 ) 14 Total average interest-bearing liabilities 2,253,235 62,850 3.72 % 2,290,911 54,556 3.18 % 8,294 (12 ) 8,306 Noninterest-bearing demand deposits 499,289 690,117 Other noninterest-bearing liabilities 43,095 38,373 Stockholders' equity 276,459 238,530 Total average liabilities and stockholders’ equity $ 3,072,078 $ 3,257,931 Net interest income and margin (9) $ 59,589 2.76 % $ 71,353 3.12 % $ (11,764 ) $ (6,167 ) $ (5,597 ) Cost of funds (10) 3.04 % 2.44 % Net interest spread (11) 1.94 % 2.32 % (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 21.89% 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 $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. (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. 42 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 $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 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 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 . 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) September 30, 2024 September 30, 2023 Change $ Change % Fair value adjustments of other equity investments $ 160 $ 55 $ 105 190.9 % Residential mortgage banking income 2,939 2,917 22 0.8 % Mortgage servicing rights (2,915 ) 894 (3,809 ) (426.1 %) Loss on sale of mortgage servicing rights (1,011 ) — (1,011 ) 100.0 % Gain on sale of guaranteed government loans 10 6 4 66.7 % Wealth and trust management 730 462 268 58.0 % Service charges on deposit accounts 417 365 52 14.2 % Increase in cash surrender value of bank owned life insurance 127 311 (184 ) (59.2 %) Bank and purchase card, net 690 357 333 93.3 % Loss on sale of securities available for sale — (649 ) 649 (100.0 %) Other 1,592 2,697 (1,105 ) (41.0 %) Total noninterest income $ 2,739 $ 7,415 $ (4,676 ) (63.1 %) 43 For the nine months ended (Dollars in thousands) September 30, 2024 September 30, 2023 Change $ Change % Fair value adjustments of other equity investments $ (8,384 ) $ (277 ) $ (8,107 ) 2,926.7 % Residential mortgage banking income 8,693 9,261 (568 ) (6.1 %) Mortgage servicing rights (166 ) 148 (314 ) (212.2 %) Loss on sale of mortgage servicing rights (1,011 ) — (1,011 ) 100.0 % Gain on sale of guaranteed government loans 131 4,799 (4,668 ) (97.3 %) Wealth and trust management 1,873 1,356 517 38.1 % Service charges on deposit accounts 1,238 1,057 181 17.1 % Increase in cash surrender value of bank owned life insurance 797 885 (88 ) (9.9 %) Bank and purchase card, net 1,444 1,257 187 14.9 % Loss on sale of securities available for sale (67 ) (649 ) 582 (89.7 %) Other 6,324 6,597 (273 ) (4.1 %) Total noninterest income $ 10,872 $ 24,434 $ (13,562 ) (55.5 %) 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. 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) September 30, 2024 September 30, 2023 Change $ Change % Salaries and employee benefits $ 13,938 $ 14,640 $ (702 ) (4.8 %) Occupancy and equipment 1,394 1,475 (81 ) (5.5 %) Technology and communications 2,767 2,891 (124 ) (4.3 %) Legal and regulatory filings 614 912 (298 ) (32.7 %) Advertising and marketing 222 350 (128 ) (36.6 %) Audit fees 498 791 (293 ) (37.0 %) FDIC insurance 1,130 1,322 (192 ) (14.5 %) Intangible amortization 265 308 (43 ) (14.0 %) Other contractual services 1,374 1,492 (118 ) (7.9 %) Other taxes and assessments 759 802 (43 ) (5.4 %) Regulatory remediation 357 3,782 (3,425 ) (90.6 %) Goodwill impairment — 26,826 (26,826 ) (100.0 %) ESOP litigation — 6,000 (6,000 ) (100.0 %) Other 3,177 3,030 147 4.9 % Total noninterest expense $ 26,495 $ 64,621 $ (38,126 ) (59.0 %) 44 For the nine months ended (Dollars in thousands) September 30, 2024 September 30, 2023 Change $ Change % Salaries and employee benefits $ 44,918 $ 44,447 $ 471 1.1 % Occupancy and equipment 4,221 4,957 (736 ) (14.8 %) Technology and communications 7,378 7,670 (292 ) (3.8 %) Legal and regulatory filings 1,424 4,899 (3,475 ) (70.9 %) Advertising and marketing 701 973 (272 ) (28.0 %) Audit fees 1,948 1,440 508 35.3 % FDIC insurance 4,324 3,297 1,027 31.1 % Intangible amortization 828 998 (170 ) (17.0 %) Other contractual services 4,851 5,649 (798 ) (14.1 %) Other taxes and assessments 2,290 2,407 (117 ) (4.9 %) Regulatory remediation 4,398 7,304 (2,906 ) (39.8 %) Goodwill impairment — 26,826 (26,826 ) (100.0 %) ESOP litigation — 6,000 (6,000 ) (100.0 %) Other 11,033 10,653 380 3.6 % Total noninterest expense $ 88,314 $ 127,520 $ (39,206 ) (30.7 %) 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 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 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. 45 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. September 30, 2024 December 31, 2023 (Dollars in thousands) Amount Percent Amount Percent Commercial and industrial $ 378,922 17.4 % $ 508,944 21.0 % Real estate – construction, commercial 116,276 5.3 % 180,052 7.4 % Real estate – construction, residential 43,322 2.0 % 75,832 3.1 % Real estate – commercial 873,721 40.1 % 870,540 35.8 % Real estate – residential 713,442 32.7 % 730,110 30.1 % Real estate – farmland 5,619 0.3 % 5,470 0.2 % Consumer 48,206 2.2 % 59,169 2.4 % Gross loans held for investment 2,179,508 100.0 % 2,430,117 100.0 % Deferred costs, net of loan fees 905 830 Gross loans held for investment, net of deferred costs 2,180,413 2,430,947 Less: allowance for credit losses (25,453 ) (35,983 ) Net loans $ 2,154,960 $ 2,394,964 Loans held for sale (not included in totals above) $ 22,082 $ 46,337 The following table presents the Company’s portfolio of commercial real estate loans by property type as of the dates stated. September 30, 2024 December 31, 2023 (Dollars in thousands) Amount Percent Amount Percent Commercial real estate – owner occupied $ 201,149 23.0 % $ 210,233 24.1 % Commercial real estate – non-owner occupied Multifamily 188,193 21.5 % 162,888 18.7 % Hospitality 126,067 14.4 % 136,679 15.7 % Retail 108,767 12.4 % 118,638 13.6 % Office 76,603 8.8 % 71,717 8.2 % Mixed use 49,880 5.7 % 54,590 6.3 % Warehouse and industrial 41,035 4.7 % 40,643 4.7 % Other 82,027 9.4 % 75,152 8.6 % Total real estate – commercial $ 873,721 100.0 % $ 870,540 100.0 % 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. 46 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 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 $ 378,922 $ 92,609 $ 152,712 $ 125,804 $ 25,308 $ 1,600 $ 133,601 $ 49,784 $ 65,195 $ 18,622 Real estate – construction, commercial 116,276 21,785 74,876 15,787 15,305 43,784 19,615 18,530 1,027 58 Real estate – construction, residential 43,322 29,989 3,007 2,635 60 312 10,326 75 — 10,251 Real estate – commercial 873,721 82,472 465,070 86,979 198,228 179,863 326,179 196,487 120,149 9,543 Real estate – residential 713,442 17,272 409,299 12,007 78,770 318,522 286,871 34,321 33,540 219,010 Real estate – farmland 5,619 698 2,086 164 239 1,683 2,835 1,808 310 717 Consumer loans 48,206 2,183 6,879 6,783 96 — 39,144 28,415 10,728 1 Gross loans $ 2,179,508 $ 247,008 $ 1,113,929 $ 250,159 $ 318,006 $ 545,764 $ 818,571 $ 329,420 $ 230,949 $ 258,202 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 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. 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 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 nine months ended (Dollars in thousands) September 30, 2024 September 30, 2023 September 30, 2024 September 30, 2023 Allowance for credit losses, beginning of period $ 28,036 $ 38,567 $ 35,893 $ 30,740 Impact of ASC 326 adoption — — — 7,418 Charge-offs Commercial and industrial (6,001 ) (1,832 ) (19,940 ) (9,927 ) Real estate – construction, commercial — — — (28 ) Real estate – construction, residential — — (39 ) — Real estate – commercial (1,109 ) — (1,109 ) — Real estate – residential (30 ) — (74 ) (1,255 ) Consumer (773 ) (749 ) (2,063 ) (1,699 ) Total charge-offs (7,913 ) (2,581 ) (23,225 ) (12,909 ) Recoveries Commercial and industrial 11,095 1,596 14,455 2,327 Real estate – construction, commercial — 5 — 15 Real estate – construction, residential — 132 — 132 Real estate – commercial — — — 263 Real estate – residential 60 126 76 145 Consumer 175 186 654 397 Total recoveries 11,330 2,045 15,185 3,279 Net recoveries (charge-offs) 3,417 (536 ) (8,040 ) (9,630 ) (Recovery of) provision for credit losses - loans (6,000 ) 11,600 (2,400 ) 21,103 Allowance for credit losses, end of period $ 25,453 $ 49,631 $ 25,453 $ 49,631 Ratio of net recoveries (charge-offs) to average loans outstanding during period: Commercial and industrial 4.91 % (0.16 )% (4.67 )% (5.05 )% Real estate – construction, commercial — % 0.01 % — % (0.03 )% Real estate – construction, residential — % 0.66 % (0.25 )% 0.65 % Real estate – commercial (0.53 )% — % (0.52 )% 0.12 % Real estate – residential 0.02 % 0.07 % — % (0.66 )% Consumer (4.51 )% (3.65 )% (10.06 )% (8.68 )% Total 0.61 % (0.09 )% (1.38 )% (1.58 )% 47 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, 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; 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 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 (Dollars in thousands) ACL Amount % of Loans ACL Amount % of Loans Commercial and industrial $ 5,951 17.4 % $ 13,787 21.0 % Real estate – construction, commercial 3,143 5.3 % 4,024 7.4 % Real estate – construction, residential 660 2.0 % 1,094 3.1 % Real estate – commercial 9,084 40.1 % 9,929 35.8 % Real estate – residential 6,029 32.7 % 6,286 30.1 % Real estate – farmland 19 0.3 % 15 0.2 % Consumer 567 2.2 % 758 2.4 % Total $ 25,453 100.0 % $ 35,893 100.0 % Nonperforming Assets. The following table presents a summary of nonperforming assets and various measures as of the dates stated. (Dollars in thousands) September 30, 2024 December 31, 2023 Nonaccrual loans held for investment $ 28,349 $ 60,026 Loans past due 90 days and still accruing 3,725 3,037 Total nonperforming loans $ 32,074 $ 63,063 OREO (1) 100 — Total nonperforming assets $ 32,174 $ 63,063 Loans held for sale $ 22,082 $ 46,337 Loans held for investment 2,180,413 2,430,947 Total loans $ 2,202,495 $ 2,477,284 Total assets $ 2,944,691 $ 3,117,554 ACL $ 25,453 $ 35,893 ACL to total loans held for investment 1.17 % 1.48 % ACL to nonaccrual loans 89.78 % 59.80 % ACL to nonperforming loans 79.36 % 56.92 % Nonaccrual loans to total loans 1.29 % 2.42 % Nonperforming loans to total loans 1.46 % 2.55 % Nonperforming loans to total assets 1.09 % 2.02 % Nonperforming assets to total assets 1.09 % 2.02 % (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. 48 Investment Securities. The investment portfolio is used as a source of interest income, credit risk diversification, and liquidity, as well as to provide collateral for borrowings. Securities in the investment portfolio classified as securities AFS may be sold in response to changes in market interest rates, changes in the security's prepayment risk, general liquidity needs, such as funding loans and deposits, and other similar factors, and are carried at estimated fair value. The fair value of the Company’s AFS investment securities portfolio was $314.8 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 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 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 $4.5 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. 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 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 in the second quarter of 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. September 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 $ 1,546 0.69 % $ — — $ 15,145 2.24 % $ 176,179 1.88 % $ 192,870 U. S. Treasury and agencies 1 — 35,205 1.14 % 38,950 2.14 % 5,272 1.97 % 79,428 State and municipal 495 4.58 % 5,632 2.51 % 34,012 2.03 % 10,156 2.53 % 50,295 Corporate bonds — — 8,375 7.47 % 28,008 4.27 % 500 4.00 % 36,883 Total $ 2,042 $ 49,212 $ 116,115 $ 192,107 $ 359,476 Deposits. 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. 49 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. 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. 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. 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. 50 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) September 30, 2024 December 31, 2023 Maturing in: 3 months or less $ 23,541 $ 30,547 Over 3 months through 6 months 36,096 19,961 Over 6 months through 12 months 58,778 36,254 Over 12 months 31,932 9,500 Total $ 150,347 $ 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 nine months ended September 30, 2024 (Dollars in thousands) Period-End Balance Highest Month-End Balance Average Balance Weighted Average Rate FHLB borrowings $ 190,000 $ 280,000 $ 226,117 4.34 % FRB borrowings — 65,000 30,839 4.67 % 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 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 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. 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. 51 Deposits are the primary source of the Company’s liquidity. 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. 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 $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 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. 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 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) Capacity Less: Outstanding Borrowings Available Balance Cash and due from banks $ 281,698 Fed funds sold 2,910 Unpledged securities available for sale 41,801 Total $ 326,409 Borrowings FHLB $ 680,109 $ 271,160 (1) $ 408,949 FRB 69,620 — 69,620 Unsecured line of credit 10,000 — 10,000 Total $ 759,729 $ 271,160 $ 488,569 Available liquidity as of September 30, 2024 $ 814,978 (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. 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. 52 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. 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 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, 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 the capital and capital ratios for the Bank as of the dates stated. Adequately capitalized ratios include the conversation buffer, if applicable. 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 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. $ 367,736 16.64 % $ 232,080 10.50 % $ 221,028 10.00 % $ 287,337 13.00 % Blue Ridge Bankshares, Inc. $ 427,441 19.26 % $ 177,546 8.00 % n/a n/a n/a n/a Tier 1 capital (to risk-weighted assets) Blue Ridge Bank, N.A. $ 346,545 15.68 % $ 187,875 8.50 % $ 176,823 8.00 % n/a n/a Blue Ridge Bankshares, Inc. $ 345,839 15.58 % $ 133,186 6.00 % n/a n/a n/a n/a Common equity tier 1 capital (to risk-weighted assets) Blue Ridge Bank, N.A. $ 346,545 15.68 % $ 154,720 7.00 % $ 143,669 6.50 % n/a n/a Blue Ridge Bankshares, Inc. $ 345,839 15.58 % $ 99,889 4.50 % n/a n/a n/a n/a Tier 1 leverage (to average assets) Blue Ridge Bank, N.A. $ 346,545 11.56 % $ 119,912 4.00 % $ 149,890 5.00 % $ 299,779 10.00 % Blue Ridge Bankshares, Inc. $ 345,839 11.46 % $ 120,712 4.00 % n/a n/a n/a n/a 53 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 % 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. 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 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 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 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 September 30, 2024, the Company had future commitments outstanding totaling $7.6 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 ALCO comprised of members of management. The ALCO is responsible for monitoring the Company’s 54 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. 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. September 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 $ 2,073 2.6 % $ 4,289 4.7 % +300 basis points 2,555 3.2 % 4,173 4.6 % +200 basis points 2,450 3.0 % 3,633 4.0 % +100 basis points 1,636 2.0 % 2,343 2.6 % Base case -100 basis points (2,927 ) (3.6 %) (3,867 ) (4.2 %) -200 basis points (6,327 ) (7.8 %) (8,870 ) (9.7 %) -300 basis points (9,826 ) (12.1 %) (13,929 ) (15.2 %) -400 basis points (13,306 ) (16.5 %) (18,624 ) (20.3 %) 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 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. 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. 55 Stress testing the balance sheet and net interest income using instantaneous parallel rate shock movements in the yield curve is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve. In addition, instantaneous parallel rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of the Company’s interest rate risk position over a historical time frame for comparison purposes. The asset and liability repricing characteristics of the Company’s assets and liabilities will have a significant impact on its future interest rate risk profile. Item 3. Quantitative and Qualitati ve Disclosures about Market Risk This information is incorporated herein by reference to the information in section "Interest Rate Risk Management" within Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q.