Business Context and Reporting Period
Blue Ridge Bankshares, Inc. is a Virginia-based bank holding company operating primarily through Blue Ridge Bank, N.A. and a wealth and trust management subsidiary. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, with comparisons to September 30, 2021 and December 31, 2021. The company operates through commercial banking, mortgage banking, and holding company segments.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total interest income | $33.1 million | $23.8 million | $85.2 million | $80.1 million |
| Net interest income | $28.7 million | $21.1 million | $76.4 million | $71.6 million |
| Net interest margin | 4.27% | 3.32% | 4.02% | 3.55% |
| Provision for loan losses | $3.9 million | None | $13.9 million | None |
| Noninterest income | $8.0 million | $13.3 million | $42.3 million | $65.0 million |
| Noninterest expense | $29.2 million | $25.3 million | $77.2 million | $85.8 million |
| Net income from continuing operations | $2.7 million | $6.9 million | $21.3 million | $39.8 million |
| Net income attributable to the company | $2.7 million | $6.8 million | $21.6 million | $39.7 million |
| Diluted EPS from continuing operations | $0.15 | $0.36 | $1.13 | $2.27 |
Q3 2022 pre-tax margin was approximately 3.5%, compared with approximately 9.1% in Q3 2021. Nine-month pre-tax margin was approximately 1.0%, compared with approximately 2.0% in the prior-year period. These calculations use income from continuing operations before income taxes divided by total interest income plus noninterest income.
- Total assets were $2.88 billion at September 30, 2022, up $216.3 million from December 31, 2021.
- Loans held for investment, excluding PPP loans, were $2.16 billion, up $381.2 million, or an annualized 28.6%, from year-end 2021.
- Total deposits were $2.41 billion, up $111.7 million from year-end 2021. Fintech-related deposits were approximately $529 million, compared with approximately $189 million at year-end 2021.
- The allowance for loan losses was $20.5 million, or 0.95% of loans held for investment excluding PPP loans, compared with $12.1 million, or 0.68%, at December 31, 2021.
- Nonperforming loans were $10.1 million and nonperforming assets were $10.3 million, representing 0.47% of loans and 0.36% of total assets, respectively.
- Stockholders’ equity was $250.5 million, down from $277.1 million at year-end 2021, primarily because of a $45.7 million after-tax decline in accumulated other comprehensive income from available-for-sale securities.
- Cash and due from banks totaled $98.3 million at September 30, 2022. Operating activities provided $123.1 million of cash during the first nine months, while investing activities used $383.7 million and financing activities provided $228.3 million.
- FHLB borrowings were $150.1 million, FRB borrowings were $55 thousand, and subordinated notes were $39.9 million at September 30, 2022.
- FHLB borrowing capacity was $434.3 million, with $199.1 million remaining after advances and letters of credit. Unsecured correspondent-bank federal funds lines totaled $34.0 million and were undrawn.
- The Bank remained classified as well capitalized. September 30, 2022 ratios included total risk-based capital of 12.36%, common equity tier 1 capital of 11.44%, and tier 1 leverage of 9.43%.
Material Changes Versus Prior Comparable Period
- Net interest income increased 35.7% in Q3 and 6.7% for the first nine months, driven by loan growth, higher yields, variable-rate loan repricing, and acquisition-related loan discount accretion.
- Net interest margin expanded by 95 basis points in Q3 and 47 basis points for the first nine months. However, funding costs increased as deposit and FHLB borrowing rates rose.
- Provision expense increased to $3.9 million in Q3 and $13.9 million for the first nine months, reflecting loan growth, economic-factor adjustments, and higher specific reserves.
- Noninterest income declined 40.1% in Q3 and 35.0% for the first nine months. The primary drivers were lower mortgage banking activity and the absence of the $24.3 million PPP-loan sale gain recorded in 2021. The decline was partly offset by $9.2 million of fair-value gains on other equity investments in 2022.
- Residential mortgage volume declined to $83.0 million in Q3 2022 from $234.5 million in Q3 2021 and to $352.2 million for the first nine months from $1.02 billion.
- Noninterest expense increased 15.2% in Q3, primarily because of $4.0 million of regulatory remediation costs. For the first nine months, expense declined 10.0%, as the $11.7 million of 2021 merger-related costs largely exceeded 2022 regulatory remediation expense of $4.6 million.
- Accumulated other comprehensive loss increased substantially because of higher interest rates and unrealized losses on the securities portfolio. Unrealized losses on available-for-sale securities were $63.3 million at September 30, 2022, compared with $6.7 million at year-end 2021. Management stated that the securities were predominantly investment grade and that losses were primarily rate-related rather than credit-related.
- The company sold its majority interest in MoneyWise Payroll Solutions during the first quarter of 2022. Its results are presented as discontinued operations, including a $337 thousand gain for the first nine months of 2022.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No quantitative earnings or revenue guidance was provided. Management stated that current-period results are not necessarily indicative of full-year or future results.
- On August 29, 2022, the Bank entered into a formal written agreement with the OCC concerning fintech partnerships. The agreement requires enhanced third-party risk management, Bank Secrecy Act and anti-money-laundering controls, information-technology controls, and prior OCC non-objection for certain new fintech partners, products, services, or activities.
- Management reported that remediation work was proceeding on schedule, but warned that compliance will require significant resources, could increase noninterest expense, and could reduce fintech-related income if relationships or products are changed or terminated. Noncompliance could result in additional regulatory action.
- The company is evaluating adoption of the current expected credit loss standard, which it expects to apply beginning in 2023. The filing does not provide a clear estimate of the resulting cumulative adjustment or overall effect.
- Outstanding commitments to extend credit were $654.2 million. Financial standby letters of credit totaled $29.8 million, and reserves for unfunded commitments were $1.4 million.
- Future commitments related to fintech-focused investments totaled $10.8 million, with an additional $10.7 million of remaining SBIC capital commitments.
- A previously disclosed VCB ESOP lawsuit alleges damages that approach or exceed $12 million. The company believes the claims are without merit and has accrued no loss; the outcome remains uncertain.
- Interest-rate sensitivity modeling indicated that a hypothetical immediate 200-basis-point rate decline could reduce modeled net interest income by $7.3 million in year one and $12.2 million in year two. The filing cautions that these scenarios are stress tests, not forecasts.
- The board declared a quarterly dividend of $0.1225 per share on October 11, 2022, paid October 31, 2022.
Important Facts for Investors to Verify
- Review the OCC written agreement and subsequent remediation milestones, including any restrictions on fintech activities and related compliance costs.
- Assess the sustainability of loan growth, fintech-related deposits, and the higher net interest margin as deposit and wholesale funding costs continue to rise.
- Monitor credit quality, charge-offs, nonperforming assets, and the allowance for loan losses following the $13.9 million provision recorded in the first nine months.
- Evaluate the effect of continued interest-rate changes on the $359.5 million securities portfolio, accumulated other comprehensive loss, capital, liquidity, and future earnings.
- Determine whether mortgage banking and other noninterest income can offset the absence of 2021 PPP-sale gains and the decline in mortgage volumes.
- Confirm the expected effect and implementation timing of the current expected credit loss standard.
- Review the VCB ESOP litigation, off-balance-sheet commitments, investment fund obligations, and any additional regulatory or legal developments.
- Reconcile the MD&A narrative’s reported Q3 diluted EPS of $0.14 with the financial statements’ reported diluted EPS from continuing operations of $0.15.