Business Context and Reporting Period
Blue Ridge Bankshares, Inc. is a Virginia bank holding company operating primarily through Blue Ridge Bank, N.A. and its wealth and trust management subsidiary. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, with comparisons to September 30, 2020 and December 31, 2020.
Comparability is materially affected by the January 31, 2021 Bay Banks of Virginia merger. The 2021 balance sheet includes Bay Banks assets and liabilities, and 2021 operating results include Bay Banks results only after the merger date. The company also completed a 3-for-2 stock split effective April 30, 2021; prior-period share and per-share data were adjusted accordingly.
Financial Performance and Position
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 |
|---|---|---|---|---|
| Net interest income | $21.1 million | $11.8 million | $71.6 million | $30.5 million |
| Noninterest income | $13.5 million | $17.6 million | $65.8 million | $38.8 million |
| Income before tax | $9.0 million | $6.8 million | $50.7 million | $15.7 million |
| Net income attributable to the company | $6.8 million | $5.1 million | $39.7 million | $12.1 million |
| Diluted EPS | $0.36 | $0.59 | $2.26 | $1.42 |
| Net interest margin | 3.32% | 3.26% | 3.55% | 3.34% |
Net interest income increased primarily from balance-sheet growth following the Bay Banks merger and higher average loans and securities. Lower yields and reduced PPP fee contribution partially offset volume benefits. Nine-month 2021 results included a $24.3 million pretax gain on the sale of approximately $712.6 million of PPP loans.
- Assets: $2.70 billion at September 30, 2021, compared with $1.50 billion at December 31, 2020.
- Loans: Loans held for investment, net of deferred fees but before the allowance, were $1.799 billion; loans held for sale were $144.1 million. Commercial real estate mortgage loans represented 37.8% of gross loans and residential real estate mortgage loans represented 27.7%.
- Allowance and credit quality: The allowance for loan losses was $12.6 million, or 0.70% of loans including PPP loans and 0.72% excluding PPP loans. Nonperforming loans were $15.2 million and nonperforming assets were $15.4 million, representing 0.57% of total assets.
- Deposits: Total deposits were $2.20 billion, including $684.9 million of noninterest-bearing demand deposits and $542.0 million of time deposits.
- Capital: Stockholders’ equity was $269.7 million. Blue Ridge Bank reported total risk-based capital of 13.15%, common equity tier 1 capital of 12.51%, and tier 1 leverage capital of 9.72%; management stated that the Bank was well capitalized.
- Debt: FHLB borrowings were $125.1 million, FRB PPP Liquidity Facility borrowings were $33.9 million, and subordinated notes were $40.5 million. The company redeemed subordinated notes with aggregate initial principal amounts of $10.0 million and $7.0 million during the second and third quarters, respectively.
- Liquidity: Cash and due from banks were $53.1 million, federal funds sold were $144.4 million, and available-for-sale securities were $360.1 million. FHLB availability was $210.2 million after advances and letters of credit. Unsecured correspondent-bank lines totaled $64.0 million and were undrawn.
- Cash flow: For the nine months, operating activities provided $13.5 million, investing activities used $11.9 million, and financing activities used $66.4 million. Cash and due from banks declined by $64.9 million to $53.1 million.
Material Changes Versus Prior Comparable Period
- The Bay Banks merger added approximately $1.22 billion of assets, including approximately $1.03 billion of loans, and $1.03 billion of deposits. The transaction generated $7.2 million of goodwill and $11.7 million of merger-related expense was recognized in the first nine months.
- Nine-month net income increased to $39.7 million from $12.1 million, but included the nonrecurring $24.3 million PPP loan-sale gain. Pro forma nine-month net income, assuming the merger occurred at the beginning of the period, was $48.0 million for 2021.
- Third-quarter residential mortgage banking income declined 46.5% to $7.7 million, primarily due to pricing compression. Nine-month mortgage banking income declined 24.1% to $24.3 million, while mortgage servicing-rights income increased to $6.9 million from $3.2 million.
- Noninterest expense increased 90.6% for the first nine months to $86.7 million, driven by merger-related costs, personnel additions, incentive compensation, and higher operating expenses. The company also recorded a $1.5 million loss from duplicate PPP loan fundings and increased its unfunded-commitment reserve.
- The provision for loan losses was zero in 2021 versus $8.1 million in the first nine months of 2020. Net charge-offs were $1.2 million, and management attributed the lower allowance ratio primarily to acquired loans recorded at fair value without a carried-over allowance.
- During the third quarter, the company consolidated five branches and recorded $521 thousand of property write-down and lease-impairment costs.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expected the proposed all-stock merger with FVCBankcorp, Inc. to close in the second or third quarter of 2022, subject to shareholder and regulatory approvals. The OCC had identified regulatory concerns involving Blue Ridge Bank that could affect the application process and timing; the company stated that it had begun an initiative to address those concerns.
- The FVCB transaction involves an exchange ratio of 1.1492 Blue Ridge shares for each FVCB share. Risks include delayed or denied regulatory approval, additional conditions, integration costs, employee or customer losses, deposit withdrawals, and failure to achieve anticipated cost savings or revenue growth.
- COVID-19-related credit deterioration, changing economic conditions, interest-rate movements, deposit flows, loan concentrations, fintech relationships, fraud, cybersecurity, and regulatory developments could materially affect results.
- Only 16 modified loans totaling approximately $4.7 million remained in deferment at September 30, 2021. The company reported four performing troubled debt restructurings totaling $235 thousand.
- PPP loans outstanding totaled approximately $47.3 million, including $32.6 million of PPP 1 loans and approximately $14.7 million of PPP 2 principal. The company expects most PPP loans to be forgiven and paid under the U.S. government guarantee, but future allowance requirements could arise.
- Outstanding loan commitments were $384.9 million, performance letters of credit were $655 thousand, financial letters of credit were $3.6 million, and future commitments to fintech-related investment vehicles were $9.1 million. The reserve for unfunded commitments was $512 thousand.
- A previously disclosed VCB employee stock ownership plan lawsuit remains unresolved; the complaint alleges damages that approach or exceed $12 million, and no loss has been accrued. A separate overdraft-fee class action was settled for a nominal amount during the third quarter.
- Management concluded that disclosure controls were effective as of September 30, 2021 and reported no material change in internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- How much of reported 2021 earnings is recurring after removing the $24.3 million PPP-sale gain, merger-related costs, duplicate PPP funding loss, and branch-closure charges.
- Whether the OCC’s identified regulatory concerns are fully remediated and whether they affect the timing, conditions, or completion of the FVCB merger.
- The quality and performance of the approximately $1.03 billion of Bay Banks loans acquired at fair value, including the $17.0 million remaining purchase-accounting loan discount.
- Trends in nonperforming loans, particularly the $5.2 million commercial loan relationship placed on nonaccrual status, and the adequacy of the $12.6 million allowance.
- The sustainability of mortgage banking revenue, fintech-related deposit growth, PPP fee income, and the company’s elevated post-merger expense base.
- Liquidity under deposit outflow or market-disruption scenarios, including reliance on pledged collateral, FHLB capacity, and the remaining PPP-related FRB borrowings.