Business Context and Reporting Period
Blue Ridge Bankshares, Inc. is a Virginia bank holding company operating primarily through Blue Ridge Bank, N.A., with commercial banking and mortgage banking segments. This unaudited Form 10-Q covers the three months ended March 31, 2021. The January 31, 2021 Bay Banks of Virginia merger materially changed the reporting base: March 31 balances include Bay Banks, while 2021 operating results include Bay Banks only from January 31 through March 31, 2021. Share and per-share amounts reflect the 3-for-2 stock split effected April 30, 2021.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 or March 31, 2021 |
|---|---|---|
| Total income | $38.4 million | $15.3 million in Q1 2020 |
| Net interest income | $20.0 million | $8.0 million in Q1 2020 |
| Net interest margin | 3.43% | 3.71% in Q1 2020 |
| Noninterest income | $15.8 million | $4.8 million in Q1 2020 |
| Noninterest expense | $30.5 million | $11.2 million in Q1 2020 |
| Merger-related expense | $9.0 million | $269 thousand in Q1 2020 |
| Provision for loan losses | None | $575 thousand in Q1 2020 |
| Net income | $4.2 million | $841 thousand in Q1 2020 |
| Net income attributable to Blue Ridge | $4.2 million | $832 thousand in Q1 2020 |
| Diluted EPS | $0.28 | $0.10 in Q1 2020 |
| Net cash provided by operating activities | $35.7 million | $(45.5) million in Q1 2020 |
| Total assets | $3.17 billion | $1.50 billion at December 31, 2020 |
| Total deposits | $2.14 billion | $945.1 million at December 31, 2020 |
| Loans held for investment, net of allowance | $2.29 billion | $1.01 billion at December 31, 2020 |
| Stockholders’ equity | $239.7 million | $108.2 million at December 31, 2020 |
Profitability and Revenue Drivers
- Net income increased approximately fivefold year over year, despite substantially higher expenses from the Bay Banks merger.
- Net interest income rose primarily from balance-sheet growth, acquired loans and Paycheck Protection Program loans. Interest income included $3.3 million of net PPP fee amortization.
- Net interest margin declined to 3.43% from 3.71%, reflecting lower yields in the interest-rate environment, partly offset by lower funding costs.
- Noninterest income increased 227%, driven by residential mortgage banking income of $9.3 million, mortgage servicing rights income of $3.4 million, $1.1 million of gains on guaranteed USDA loan sales, and $602 thousand of wealth and trust management fees acquired with Bay Banks.
- Using reported total income as a revenue proxy, net income represented approximately 11.0% of Q1 2021 income versus approximately 5.5% in Q1 2020; this is not a company-defined margin.
Cash Flow, Liquidity and Capital
- Operating activities provided $35.7 million of cash. Investing activities used $304.1 million, principally from a $252.8 million increase in loans held for investment and $107.1 million of securities purchases. Financing activities provided $424.0 million, primarily from deposit growth and borrowings.
- Cash and due from banks increased to $273.5 million from $117.9 million at year-end. The company reported $426.8 million of FHLB borrowing capacity, with $183.1 million drawn and $59.0 million of letters of credit, leaving approximately $184.8 million available. Unsecured correspondent borrowing lines totaled $79.0 million and were undrawn.
- FRB PPPLF borrowings increased to $509.7 million from $281.7 million and were secured by PPP loans. FHLB borrowings increased to $183.1 million from $115.0 million. Subordinated notes increased to $54.6 million from $24.5 million.
- Management stated that liquidity and capital were adequate. The bank was categorized as well capitalized, with total risk-based capital of 13.67%, common equity tier 1 capital of 12.89%, and tier 1 leverage of 10.69% at March 31, 2021.
Material Changes Versus Prior Comparable Period
- The Bay Banks merger added approximately $1.22 billion of assets, $1.03 billion of loans and $1.03 billion of deposits at the merger date. Blue Ridge issued approximately 9.95 million post-split shares as consideration, with total consideration of $125.4 million and recognized $7.2 million of goodwill.
- Total assets increased $1.67 billion, or approximately 112%, from year-end 2020. Total deposits increased $1.20 billion, or approximately 126%.
- Gross loans increased to $2.32 billion from $1.03 billion. PPP loans increased to $608.7 million from $292.1 million, including approximately $348.0 million of PPP 2 originations through March 31, 2021.
- Mortgage originations increased to $361.4 million from $121.6 million in Q1 2020, supporting the increase in mortgage banking income.
- The allowance for loan losses declined to $13.4 million from $13.8 million, while net charge-offs were $425 thousand and no provision was recorded. The allowance-to-total-loans ratio declined to 0.58% from 1.35%, principally because acquired and PPP loans carried no or limited allowance under the applicable accounting treatment.
- Nonperforming loans declined to $5.4 million from $6.6 million, and nonperforming assets declined to $5.9 million from $6.6 million. The company had 30 loans totaling approximately $31.0 million still in COVID-19-related deferment at March 31, 2021.
Outlook, Risks, Contingencies and Unusual Items
- The filing does not provide quantitative earnings or revenue guidance. Management cautions that first-quarter results are not necessarily indicative of full-year results.
- Management expects most PPP 1 and PPP 2 loans to be forgiven and paid in full under the U.S. government guarantee. Future allowance requirements could increase if the guarantee, forgiveness process or credit performance differs from expectations.
- Principal risks include COVID-19 effects, credit quality and portfolio concentration, interest-rate changes, deposit flows, liquidity access, regulatory changes, cybersecurity and fraud, competition, and integration of Bay Banks.
- The company is exposed to significant commercial and residential real estate lending and had $2.30 billion of loans held for investment at quarter-end. Future economic deterioration could require additional provisions or charge-offs.
- An inherited VCB ESOP class action alleges damages that approach or exceed $12 million. The company believes the claims lack merit, but the outcome is uncertain and no loss has been accrued.
- The company corrected an immaterial classification error by moving $30.4 million of a loan arrangement from loans held for sale to loans held for investment at December 31, 2020; total assets, earnings and equity were unaffected.
- Accumulated other comprehensive income increased to $4.0 million, primarily from after-tax unrealized gains on interest-rate swaps, partly offset by unrealized securities losses.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Assess the sustainability of earnings after excluding the $9.0 million of merger-related costs, PPP fee amortization and other acquisition-related accretion or amortization.
- Monitor post-merger integration, expected expense savings, employee and customer retention, and the extent to which Bay Banks contributes to future-period revenue and earnings.
- Verify PPP forgiveness rates, remaining deferred fees, government-guarantee performance and the effect of PPP runoff on loan balances and net interest income.
- Evaluate credit quality in commercial and residential real estate portfolios, remaining COVID-19 deferrals, acquired loan marks and the adequacy of the $13.4 million allowance.
- Review funding concentration and liquidity, including $509.7 million of PPPLF borrowings, $183.1 million of FHLB borrowings, time-deposit maturities and available collateral capacity.
- Follow the VCB ESOP litigation and any related claims, for which the filing records no accrued loss despite the alleged damages.
- Confirm the impact of mortgage banking volumes, mortgage servicing-rights valuations and interest-rate movements on future noninterest income and accumulated other comprehensive income.