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Item 2. Management’s Discussion and Analysis

2025-05-07 compared with 2024-11-06 · 248 added, 363 removed, 371 unchanged (62% of the section changed)

1 unchanged sentence

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.

Results of operations for the three months ended March 31, 2025 are not necessarily indicative of the results of operations for the balance of 2025, 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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• 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 Company’s ability to manage its fintech relationships, including implementing enhanced controls, complying with the OCC directives and applicable laws and regulations, and managing the final phases of the wind down 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;

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• 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;

• the ability of the Company to implement cost-saving initiatives and efficiency measures, as well as increase earning assets, in order to yield acceptable levels of profitability;

• the ability to generate sufficient future taxable income for the Company to realize its deferred tax assets, including the net operating loss carryforward;

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

• changes in consumer spending and savings habits;

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• 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;

• adverse developments in the financial industry generally, such as bank failures, responsive measures to mitigate and manage such developments, 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 impact of changes in financial services policies, laws, and regulations, including laws, regulations, and policies concerning taxes, banking, securities, real estate and insurance, the application thereof by bank regulatory bodies, and the three branches of the federal government;

• the effect of changes in accounting standards, policies, and practices as may be adopted from time to time;

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• 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 economic impact of duties, tariffs, or other barriers or restrictions on trade, any retaliatory counter measures, and the volatility and uncertainty arising therefrom;

• the occurrence or continuation of widespread health emergencies or pandemics, significant natural disasters, severe weather conditions, floods, and other catastrophic events;

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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.

Sale of Mortgage Division

The Company’s previously announced sale of its mortgage division operating as Monarch Mortgage to an unrelated third-party mortgage company was completed on March 27, 2025.

The sale, which included the transfer of certain assets and leases, resulted in a $0.2 million loss, primarily due to the write-off of fixed assets and lease impairment, and is reported in other noninterest income.

The Company has continued to fulfill its obligations to borrowers with respect to loans in process and will manage such loans toward closing and funding in the ordinary course of business.

This transaction did not meet the criteria for classification as a discontinued operation under Accounting Standards Codification ("ASC") 205-20, Presentation of Financial Statements – Discontinued Operations, and is therefore reported within continuing operations as of and for all periods stated herein.

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.

On January 24, 2024, the Bank consented to the issuance of the Consent Order by the OCC ("Consent Order").

The Consent Order generally incorporates the provisions of the formal written agreement (the "Written Agreement") entered into between the Bank and the OCC on August 29, 2022, as well as adding new provisions.

The Written Agreement principally concerned the Bank’s fintech operations and required the Bank to continue enhancing its controls for assessing and managing the third-party, Bank Secrecy Act/Anti-Money Laundering,

and information technology 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.

As of March 31, 2025 and December 31, 2024, the Bank’s capital ratios exceeded these minimum capital ratios.

The Company believes it has made significant progress towards meeting the requirements of the Consent Order.

Complete copies of the Written Agreement and the Consent Order are included as Exhibits 10.9 and 10.10, respectively, of the 2024 Form 10-K.

Private Placements

On April 3, 2024 and June 13, 2024, the Company closed private placements in which it issued and sold shares of its common and preferred stock for gross proceeds of $150.0 million and $11.6 million, respectively (collectively, the "Private Placements").

At a special meeting of shareholders held June 20, 2024, the Company’s shareholders approved 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.

In the second quarter of 2024, the Company closed private placements in which it issued and sold shares of its common and preferred stock for gross proceeds of $161.6 million (collectively, the "Private Placements").

At a special meeting of shareholders held June 20, 2024, the Company’s shareholders approved the Private Placements and an amendment to the Company's articles of incorporation authorizing the issuance of additional shares of common stock, thus enabling the conversion of the preferred shares issued in the Private Placements into shares of the Company’s common stock.

On June 28, 2024, and November 7, 2024, all outstanding shares of the Company’s Mandatorily Convertible Cumulative Perpetual Preferred Stock, Series B and Mandatorily Convertible Cumulative Perpetual Preferred Stock, Series C (together the "preferred stock"), were converted or exchanged for shares of the Company’s common stock.

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.

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.

The Private Placements also included the issuance of warrants to purchase common stock and the preferred stock.

Warrants for the preferred stock were converted to warrants for common stock upon the conversion or exchange of the preferred stock to common stock.

The table below presents information pertaining to warrants to purchase the Company’s common stock as of and for the period stated.

As of and for the three months ended March 31, 2025

Warrants with an Exercise Price of $2.50 per Share

Warrants with an Exercise Price of $2.36 per Share

Total Warrants Outstanding

Balance at beginning of period

Warrants exercised during the period

Balance at end of period

Remaining exercise term (years)

There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2024 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 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.

Comparison of Financial Condition as of March 31, 2025 and December 31, 2024

Total assets were $2.69 billion as of March 31, 2025, a decrease of $52.2 million from $2.74 billion as of December 31, 2024.

Most of this decrease was attributable to a decline in loans held for investment, which decreased $52.1 million to $2.06 billion as of March 31, 2025, from $2.11 billion as of December 31, 2024.

The decline in loans held for investment was partially due to a continuation of the Company purposefully and selectively reducing balances of loans where borrowers did not represent in-market relationships.

The allowance for credit losses ("ACL") was $23.1 million and $23.0 million as of March 31, 2025 and December 31, 2024, respectively.

Total deposits were $2.13 billion as of March 31, 2025, a net decrease of $50.0 million from December 31, 2024.

The decline in the first three months of 2025 was primarily due to a $63.4 million decrease in brokered time deposits.

Total stockholders’ equity increased by $10.5 million to $338.3 million as of March 31, 2025, compared to $327.8 million at December 31, 2024, primarily due to additional capital of $6.9 million from the exercise of warrants to purchase common stock and a $3.8 million decrease in after-tax unrealized losses in the Company’s portfolio of securities available for sale.

Comparison of Results of Operations for the Three Months Ended March 31, 2025 and 2024

For the three months ended March 31, 2025, the Company reported a net loss of $0.4 million, or $0.01 per diluted common share, compared to a net loss of $2.9 million, or $0.15 per diluted common share, for the three months ended March 31, 2024.

Net loss for the first quarter of 2025 included after-tax severance costs of $0.5 million and an after-tax $0.2 million loss on the sale of the mortgage division.

After-tax regulatory remediation expenses in connection with the Consent Order for the first quarter of 2025 were $0, compared to $2.1 million for first quarter of 2024.

Net interest income for the three months ended March 31, 2025 was $19.0 million, a decline of $1.4 million from the same period in 2024, primarily due a decline in average loan balances.

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 the excess of interest earned on loans, investments, and other interest-earning assets less the interest paid on deposits and borrowings 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.

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,

Increase/(Decrease)

(Dollars in thousands)

Average Assets

Taxable securities

Tax-exempt securities (3)

Total securities

Interest-earning deposits in other banks

Federal funds sold

Loans held for sale

Loans held for investment (4,5,6)

Total average interest-earning assets

allowance for credit losses

Total noninterest-earning assets

Total average assets

Average Liabilities and Stockholders’ Equity:

Interest-bearing demand, money market, and savings

Total interest-bearing deposits

FHLB borrowings

FRB borrowings

Subordinated notes and other borrowings (8)

Total average interest-bearing liabilities

Noninterest-bearing demand deposits

Other noninterest-bearing liabilities

Stockholders' equity

Total average liabilities and stockholders’ equity

Net interest income and margin (9)

Cost of funds (10)

Net interest spread (11)

(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

$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.

The following table presents the average balance sheets for the three months ended March 31, 2025 and 2024.

Average Balances, Income and Expense, Yields and Rates

For the nine months ended September 30,

For the three months

ended March 31,

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 21.89% and 22.65% income tax rate for the nine months ended September 30, 2024 and 2023, respectively.

(3) Computed on a fully taxable equivalent basis assuming a 22.32% and 22.35% income tax rate for the three months ended March 31, 2025 and 2024, 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.

(6) Includes accretion of fair value adjustments (discounts) on acquired loans of $366 thousand and $329 thousand for the three months ended March 31, 2025 and 2024, respectively.

(7) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $35 thousand and $97 thousand for the three months ended March 31, 2025 and 2024, respectively.

(8) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $25 thousand for both the three months ended March 31, 2025 and 2024, respectively.

(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 $2.88 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.

Average balances of interest-earning assets decreased $345.8 million to $2.62 billion for the first quarter of 2025 compared to $2.97 billion for the same period of 2024.

Relative to the year-ago period, this decrease reflected primarily lower average balances of loans held for investment.

The yield on average loans held for investment was 5.70% for the first quarter of 2025 compared to 6.02% for the first quarter of 2024.

The decline in loan yield was primarily driven by the purposeful and selective exit of higher-rate loans to borrowers that did not represent in-market relationships.

Interest income for the three months ended March 31, 2025 and 2024 included accretion of discounts on acquired loans of $366 thousand and $329 thousand, respectively.

Average balances of interest-bearing liabilities decreased $512.4 million to $1.90 billion for the three months ended March 31, 2025 compared to $2.41 billion for the same period of 2024.

The decline relative to the comparative periods

was primarily due to the exit of fintech Banking-as-a-Service ("BaaS") deposit operations and the payoff of wholesale funding.

Cost of funds was 2.78% for the first quarter of 2025 compared to 3.03% for the first quarter of 2024, while cost of deposits was 2.62% and 2.84%, for the same respective periods.

Lower cost of funds in the first quarter of 2025 was primarily due to the exit of higher cost fintech BaaS deposit operations and lower average balances of wholesale funding, relative to the year-ago period, partially offset by the higher variable cost of $25.0 million of the Company’s subordinated debt, which increased the cost of funds by 3 basis points.

Cost of deposits, excluding wholesale deposits, was 1.34% for the first quarter of 2025 compared to 2.52% for the first quarter of 2024.

The first quarter of 2025 decline from the comparative period of 2024 was primarily due to lower average balances of higher cost fintech-related deposits.

Net interest income (on a taxable equivalent basis) for the three months ended March 31, 2025 was $19.0 million compared to $20.4 million for the same period in 2024.

The decline in the first quarter of 2025 compared to the first quarter of 2024 was primarily attributable to lower interest and fee income on loans due to lower average balances.

This decline was partially offset by lower average balances and rates paid on interest-bearing demand accounts and lower average balances of wholesale funding.

The majority of fintech BaaS deposits were in interest-bearing demand accounts.

Net interest margin was 2.90% and 2.75% for the first quarter of 2025 and 2024, respectively.

Accretion and amortization of purchase accounting adjustments had a 6 basis point positive effect on net interest margin for both 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.

No provision for credit losses was reported for the first quarter of 2025 compared to a recovery of credit losses of $1.0 million for the first quarter of 2024.

Lower allowance for credit losses ("ACL") needs due to loan portfolio balance reductions were offset by higher reserve needs on pooled loans, primarily due to marginal changes in certain qualitative risk factors, resulting in no provision for the 2025 period.

The recovery of credit losses in the 2024 period was attributable to lower balances of unfunded loan commitments.

Noninterest Income .

2 unchanged sentences

(Dollars in thousands)

September 30, 2024

September 30, 2023

Fair value adjustments of other equity investments

Residential mortgage banking income

Mortgage servicing rights

Loss on sale of mortgage servicing rights

Gain on sale of guaranteed government loans

Wealth and trust management

Service charges on deposit accounts

Increase in cash surrender value of bank owned life insurance

Bank and purchase card, net

Loss on sale of securities available for sale

Total noninterest income

For the nine months ended

(Dollars in thousands)

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

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

Wealth and trust management

2 unchanged sentences

Bank and purchase card, net

Loss on sale of securities available for sale

Total noninterest income

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.

The decline in mortgage banking income in the first quarter of 2025 compared to the same period of 2024 was due to a combination of lower mortgage volumes and lower servicing income, with the latter attributable to the sale of the majority of mortgage servicing rights assets ("MSR") portfolio in the third and fourth quarters of 2024.

The decline in other noninterest income was driven by the decrease in the number of fintech indirect lending relationships, which contributed $0.2 million and $1.4 million of noninterest income in the first quarters of 2025 and 2024, respectively.

Additionally, other noninterest income in the 2025 period included a $0.2 million loss on the sale of the mortgage division.

A recently completed review of the Bank’s deposit products and services led to a more streamlined and competitive offering, which the Company expects will result in higher service charges on deposit accounts in the subsequent periods.

Noninterest Expense.

The following tables present a summary of noninterest expense and the dollar and percentage change for the periods stated.

The following table presents 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

Salaries and employee benefits

Occupancy and equipment

Technology and communications

Legal and regulatory filings

Advertising and marketing

FDIC insurance

Intangible amortization

Other contractual services

Other taxes and assessments

Regulatory remediation

Goodwill impairment

ESOP litigation

Total noninterest expense

For the nine months ended

(Dollars in thousands)

September 30, 2024

September 30, 2023

March 31, 2025

March 31, 2024

Salaries and employee benefits

Occupancy and equipment

Technology and communications

Technology and communication

Legal and regulatory filings

5 unchanged sentences

Regulatory remediation

Goodwill impairment

ESOP litigation

Total noninterest expense

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.

Excluding regulatory remediation, noninterest expense decreased $6.8 million for the three months ended March 31, 2025 compared to the same period of 2024.

The decline relative to the prior period was primarily due to lower expenses for salaries and employee benefits.

The decline in salaries and employee benefits in the first quarter of 2025 reflected a reduction in headcount as the Company continues to right-size its workforce, as it completes certain regulatory directives and transitions to a more traditional community banking model.

As of March 31, 2025 and 2024, the Company had 351 and 519 employees, respectively.

Also included in salaries and employee benefits expense were severance costs of $0.7 million and $0, for the 2025 and 2024 periods, respectively.

Lower regulatory remediation costs and contractual services and audit fees in the 2025 period reflect a reduction in the use of outside consulting services, also due to the completion of certain regulatory directives.

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.

Income tax benefit for the three months ended March 31, 2025 was $0.5 million compared to an income tax benefit of $0.4 million for the same period of 2024, resulting in effective income tax rates of 51.2% and 12.3%, respectively.

The higher effective income tax rate in the 2025 period was primarily driven by a $0.3 million favorable adjustment related to a change in the state tax rate applied to the accumulated unrealized loss on the available for sale securities portfolio.

Excluding this adjustment, the effective income tax rate for the quarter was 22.7%.

The lower effective income tax rate in the 2024 period was primarily attributable to tax-exempt income, primarily from bank owned life insurance and tax-exempt securities and loans, relative to income subject to statutory tax rates.

Analysis of Financial Condition

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.

September 30, 2024

March 31, 2025

December 31, 2024

13 unchanged sentences

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

September 30, 2024

March 31, 2025

December 31, 2024

6 unchanged sentences

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.

As these loans mature, they may be repriced at significantly higher interest rates, leading to increased debt service costs that can strain borrowers' ability to meet payment obligations.

In some cases, the higher cost of refinancing may lead to loan defaults, particularly if property cash flows have not increased proportionally.

Additionally, collateral values overall may be impaired by higher capitalization rates, further complicating refinancing efforts and increasing credit risk to the Bank.

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

In response to the heightened risk, in 2024, the Bank’s credit policy and risk committee conducted a targeted review 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.

This analysis is provided to the Bank's 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 March 31, 2025, 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 March 31, 2025.

Variable rate

13 unchanged sentences

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.

Management believes that the Company’s ACL was adequate as of March 31, 2025 and December 31, 2024.

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

Changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, on a national basis or in the Company’s market area, and changes in the circumstances of particular borrowers are criteria, among others, that could increase the level of the ACL required, resulting in charges to the provision for credit losses for loans.

In addition, bank regulatory agencies periodically review the Bank's ACL and may, on occasion, require an increase in the ACL or the recognition of further loan charge-offs, based on their judgment of the facts at the time of their review that may differ than that of management.

The following table presents an analysis of the change in the ACL by loan type as of and for the periods stated.

For the three months ended March 31, 2025

(Dollars in thousands)

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

3 unchanged sentences

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 recoveries (charge-offs)

Real estate – farmland

ACL, beginning of period

(Recovery of) provision for credit losses - loans

Allowance for credit losses, end of period

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

Net recoveries (charge-offs)

ACL, end of period

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

For the three months ended March 31, 2024

(Dollars in thousands)

Commercial and industrial

3 unchanged sentences

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.

Real estate – farmland

ACL, beginning of period

Provision for (recovery of) credit losses - loans

Net (charge-offs) recoveries

ACL, end of period

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

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 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

March 31, 2025

December 31, 2024

9 unchanged sentences

(Dollars in thousands)

September 30, 2024

March 31, 2025

December 31, 2024

2 unchanged sentences

Total nonperforming loans

Other real estate owned ("OREO") (1)

Total nonperforming assets

1 unchanged sentence

Loans held for investment

ACL to total loans held for investment

ACL on loans held for investment

ACL to loans held for investment

ACL to nonaccrual loans

ACL to nonperforming loans

Nonaccrual loans to total loans

Nonperforming loans to total loans

Nonaccrual loans to loans held for investment

Nonperforming loans to loans held for investment

Nonperforming loans to total assets

1 unchanged sentence

(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.

The 3 basis point increase in the ratio of ACL to loans held for investment in the first quarter of 2025 was primarily attributable to marginal changes to certain qualitative risk factors.

Loans are generally placed into nonaccrual status when they are past due 90 days or more as to either principal or interest or when, in the opinion of management, the collection of principal and/or interest is in doubt.

A loan remains in nonaccrual status until the loan is current as to payment of both principal and interest or past due less than 90 days and the borrower demonstrates the ability to pay and remain current.

When cash payments are received, they are applied to principal first, then to accrued interest.

It is the Company's policy not to record interest income on nonaccrual loans until principal has become current.

In certain instances, accruing loans that are past due 90 days or more as to principal or interest may not be placed on nonaccrual status, if the Company determines that the loans are well-secured and are in the process of collection.

OREO includes properties that have been substantively repossessed or acquired in complete or partial satisfaction of debt.

Such properties, which are held for resale, are initially stated at fair value, including a reduction for the estimated selling expenses, which becomes the carrying value.

In subsequent periods, such properties are stated at the lower of the restated carrying value or fair value.

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 investment portfolio is used as a source of interest income, credit risk diversification, and liquidity, as well as to manage interest rate sensitivity and provide collateral for short-term borrowings.

Securities in the investment portfolio classified as securities available for sale ("AFS") may be sold in response to changes in market

interest rates, securities’ prepayment risk, liquidity needs, and other similar factors, and are carried at estimated fair value.

The fair value of the Company’s AFS investment securities portfolio was $325.4 million as of March 31, 2025, an increase of $13.4 million from $312.0 million at December 31, 2024, of which $12.4 million was due to the purchase of securities in the first quarter of 2025.

As a result of elevated market interest rates, the Company’s portfolio of AFS securities had an unrealized loss of approximately $50.3 million as of March 31, 2025, approximately 44.1% of which was related to securities backed by U.S.

government agencies.

As of March 31, 2025 and December 31, 2024, the majority of the investment securities portfolio consisted of securities rated investment grade by a leading ratings agency.

Investment grade securities are judged to have a low risk of default, to be of the best quality and carry the smallest degree of investment risk.

At March 31, 2025 and December 31, 2024, securities with a fair value of $174.5 million and $268.9 million, respectively, were pledged to secure the Bank’s borrowing facility with the Federal Home Loan Bank of Atlanta ("FHLB").

As of March 31, 2025 and December 31, 2024, the Company had pledged securities with a fair value of $0 and $16.3 million, respectively, as collateral for the Federal Reserve Bank of Richmond ("FRB") Discount Window.

The decline in pledged securities as of March 31, 2025 from December 31, 2024 at both FHLB and FRB reflects the release of securities held as collateral.

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).

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

No ACL has been recognized for AFS securities as of both March 31, 2025 and December 31, 2024.

Restricted equity investments consisted of stock in the FHLB (carrying basis $9.1 million and $9.4 million at March 31, 2025 and December 31, 2024, respectively), FRB stock (carrying value of $9.2 million and $9.4 million at March 31, 2025 and December 31, 2024, respectively), and stock in the Company’s correspondent bank (carrying value of $468 thousand at both March 31, 2025 and December 31, 2024).

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 Company has various other equity investments, including an investment in a fintech company and limited partnerships, totaling $4.7 million and $4.8 million as of March 31, 2025 and December 31, 2024, respectively.

The Company also holds investments in early-stage focused investment funds and low-income housing partnerships, which totaled $20.4 million and $19.4 million as of March 31, 2025 and December 31, 2024, respectively, and are reported in other investments on the consolidated balance sheets.

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

March 31, 2025

Within One Year

11 unchanged sentences

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.

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

In prior years, deposits sourced from fintech partnerships (“fintech-related deposits”), inclusive of fintech BaaS deposits, were a significant source of deposits for the Company.

Prior to 2024, deposits sourced from fintech BaaS providers comprised a significant portion of the Company’s fintech-related deposits.

In the fourth quarter of 2024, the Company completed the exit of its fintech BaaS deposit operations and substantially reduced its fintech-related deposit exposure to approximately 1.0% of deposits as of December 31, 2024, consisting of corporate accounts of a few companies in the fintech sector.

As of March 31, 2025 and December 31, 2024, fintech-related deposits totaled $14.4 million and $21.3 million, respectively, of which fintech BaaS deposits were $0.2 million for both respective periods.

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.

Brokered deposits were added throughout 2023 and early 2024 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 deposit operations.

Brokered deposits represented approximately 15.9% and 18.5% of total deposits as of March 31, 2025 and December 31, 2024, respectively, and were all time deposits at March 31, 2025.

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.

As noted, the Company issued brokered deposits as part of its liquidity management plan, and as a result, the Company's brokered deposit levels have approximated the high-end of the guideline.

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.

Total deposits decreased $50.0 million from $2.18 billion as of December 31, 2024 to $2.13 billion as of March 31, 2025, as:

• Deposits, excluding fintech-related and brokered deposits, increased $20.4 million from approximately $1.76 billion as of December 31, 2024 to approximately $1.78 billion as of March 31, 2025;

• Brokered deposits decreased $63.4 million from approximately $402.5 million, or 18.5% of total deposits, as of December 31, 2024 to approximately $339.1 million, or 15.9% of total deposits, as of March 31, 2025;

• Fintech-related deposits decreased $7.0 million from approximately $21.3 million as of December 31, 2024 to approximately $14.4 million as of March 31, 2025.

Of the decline, fintech BaaS deposits decreased $35 thousand from December 31, 2024.

Estimated uninsured deposits totaled approximately $431.2 million as of March 31, 2025, or 19.8% of total deposits, compared to $399.3 million, or 18.0% of total deposits, as of December 31, 2024.

The following table presents a summary of average deposits and the weighted average rate paid for the periods stated.

March 31, 2025

March 31, 2024

(Dollars in thousands)

Noninterest-bearing demand

Interest-bearing:

Total interest-bearing

Total average 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)

September 30, 2024

March 31, 2025

December 31, 2024

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Over 12 months

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

The Company uses short-term and long-term borrowings from various sources, including FHLB advances and FRB advances, to fund assets and operations.

The following tables present information on the balances and interest rates on borrowings as of and for the periods stated.

March 31, 2025

(Dollars in thousands)

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FHLB borrowings

FRB borrowings

As of and for the year ended December 31, 2023

December 31, 2024

(Dollars in thousands)

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FRB borrowings

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.

FRB advances through the FRB Discount Window are secured by qualifying pledged construction and commercial and industrial loans, as well as selected investment portfolio securities.

Total borrowings were $150.0 million as of both March 31, 2025 and December 31, 2024.

Subordinated notes, net, totaled $39.8 million as of both March 31, 2025 and December 31, 2024.

The Company's subordinated notes are comprised of a $25 million issuance in October 2019 maturing October 15, 2029 (the “2029 Notes”) and a $15 million issuance in May 2020 maturing June 1, 2030 (the “2030 Note”).

The fixed rates on the 2029 Notes transitioned and the 2030 note will transition to variable rates based on the Secured Overnight Funding Rate ("SOFR") roughly five years from issue date.

The 2029 Notes can be paid off in whole or in part without penalty at any time and the 2030 Note can be paid off in whole or in part, without penalty, at any time after its initial reset date.

Due to the Consent Order, the Company must obtain approval to redeem its subordinated notes.

Subsequent to March 31, 2025, the Company received regulatory non-objection to redeem a significant portion of its subordinated debt, which the Company expects will save more than $2 million in interest expense annually.

The 2029 Notes bore interest at 5.625% per annum, through October 14, 2024, payable semi-annually in arrears.

On October 15, 2024, the rate on the 2029 Notes began to reset quarterly to the current three-month CME Term SOFR interest rate, which was 4.65%, plus 433.5 basis points at initial reset.

As of March 31, 2025, the 2029 Notes bore an annual interest rate of 8.64%.

For the three months ended March 31, 2025 and 2024, the effective interest rate on the 2029 Notes was 8.05% and 5.22%, respectively, inclusive of the amortization of the purchase accounting adjustment (premium).

The 2030 Note bears an interest rate of 6.0% per annum until June 1, 2025, at which date the rate will reset quarterly to the current three-month CME Term SOFR interest rate plus 587 basis points.

Interest on the 2030 Note is payable semi-annually in arrears.

For the three months ended March 31, 2025 and 2024, the effective interest rate on the 2030 Note was 6.31% and 6.32%, respectively.

Subsequent to March 31, 2025, the Company provided a notice of redemption to the holder of the 2030 Note to redeem the note at its initial redemption date, June 1, 2025.

Liquidity is essential to the Company’s business.

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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.

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

Deposits are sourced from the Bank’s customers and, as needed, through brokered deposit markets.

The brokered deposit 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 Bank also utilizes IntraFi's reciprocal deposit services to offer its high-value customers access to Federal Deposit Insurance Corporation ("FDIC") insurance through IntraFi's network of banks.

While subject to the Consent Order, the Bank may not be deemed to be “well capitalized,” which restricts it from accepting, renewing, or rolling over brokered deposits except in compliance with certain applicable restrictions under federal law.

During the third quarter of 2024, the Bank received approval from the FDIC allowing it to accept, renew, and rollover brokered deposits.

In the fourth quarter of 2024, the Bank received an extension of this approval.

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

The Company expects to continue to seek waivers of this prohibition in the future;

however, there is no assurance that such waivers will be approved or that the Company will be able to rely on brokered deposits as a source of funding in the future.

The Company has established a formal liquidity contingency plan that provides guidelines for liquidity management.

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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.

Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established and are reviewed by the Bank's ALCO.

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.

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

(Dollars in thousands)

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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.

Available liquidity as of March 31, 2025

(1) Outstanding borrowings are comprised of advances of $150.0 million and letters of credit totaling $51.2 million, of which $50.0 million served as collateral for public deposits with the Treasury Board of the Commonwealth of Virginia.

Uninsured deposits at March 31, 2025 were $431.2 million or 19.8% 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 borrowing capacity.

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.

The Company’s objectives are to maintain a level of capitalization that is sufficient to support the Company's strategic objectives.

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies.

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Specifically, the Bank is required to maintain a leverage ratio of 10.0% and a total capital ratio of 13.0%.

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.

As of March 31, 2025 and December 31, 2024, the Bank met these minimum capital ratios.

Until the Bank has been released from the Consent Order, 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.

The Company adopted ASC 326, Financial Instruments - Credit Losses (referred to 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.

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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

The CECL Transitional Amount was $8.1 million, of which $6.1 million and $4.1 million reduced the regulatory capital amounts and capital ratios as of March 31, 2025 and December 31, 2024, respectively.

March 31, 2025

Adequacy Purposes

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Blue Ridge Bank, N.A.

Blue Ridge Bankshares, Inc.

Tier 1 capital (to risk-weighted assets)

Blue Ridge Bank, N.A.

Blue Ridge Bankshares, Inc.

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

Blue Ridge Bank, N.A.

Blue Ridge Bankshares, Inc.

Tier 1 leverage (to average assets)

Blue Ridge Bank, N.A.

Blue Ridge Bankshares, Inc.

Commitments and Contingencies

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

As of March 31, 2025 and December 31, 2024, the Company had outstanding loan commitments of $274.3 million and $283.2 million, respectively.

Of these amounts, $110.6 million and $108.4 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.

As of March 31, 2025 and December 31, 2024, commitments under outstanding financial stand-by letters of credit totaled $11.3 million and $12.5 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.

No provision for credit losses was reported for the quarter ended March 31, 2025 compared to a recovery of credit losses of $1.0 million for the quarter ending March 31, 2024, which was primarily attributable to lower unfunded loan commitments.

As of both March 31, 2025 and December 31, 2024, the reserve for unfunded commitments was $0.9 million and is included in other liabilities on the consolidated balance sheets.

As part of the sale of substantially all of its MSR portfolio in 2024, the Company recorded a reserve for estimated putbacks, transition costs, and unearned sales proceeds.

The putbacks relate to industry-standard items, including prepayments or early delinquencies of the underlying mortgages, all of which are subject to term limits per the respective sales agreements.

The reserve for unearned sales proceeds relates to the Company providing certain documentation to the buyers.

As of March 31, 2025 and December 31, 2024, the reserve was $1.7 million and $1.8 million, respectively, and was included in the loss on sale of MSR assets and other liabilities on the consolidated statement of operations and consolidated balance sheet, respectively.

The Company has investments in various partnerships and limited liability companies.

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.

At March 31, 2025, the Company had future commitments outstanding totaling $6.2 million related to these investments.

Interest Rate Risk Management

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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.

Interest rate risk arises from timing differences in the repricing and cash flows of interest-earning assets and interest-bearing liabilities, changes in the expected cash flows 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.

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

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.

The Company manages interest rate risk through 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 employs an independent 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.

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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.

September 30, 2024

Estimated changes set forth below are dependent on material assumptions, such as those previously discussed.

March 31, 2025

Instantaneous Parallel Rate Shock Scenario

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-400 basis points

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.

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.

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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