Blue Ridge Bankshares, Inc. — Fiscal 2022 Form 10-K Summary
Business Context and Reporting Period
Blue Ridge Bankshares, Inc. is a Virginia bank holding company headquartered in Charlottesville. Its principal subsidiaries are Blue Ridge Bank, National Association, and BRB Financial Group, Inc. The Bank provides commercial and consumer banking, mortgage banking, government-guaranteed lending, wealth and trust services, employee benefit services, insurance, and banking-as-a-service through fintech partnerships. The Bank operated 27 full-service offices at December 31, 2022.
This filing covers the fiscal year ended December 31, 2022, with comparative results for 2021 and 2020. The consolidated financial statements were audited by Elliott Davis, PLLC, which issued an unqualified opinion. Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022.
Key Financial Metrics
| Metric | 2022 | 2021 | Change or Comment |
|---|---|---|---|
| Total assets | $3.141 billion | $2.665 billion | 18% increase |
| Gross loans | $2.413 billion | $1.808 billion | 33% increase |
| Total deposits | $2.503 billion | $2.298 billion | 9% increase |
| Stockholders’ equity | $259.4 million | $277.1 million | Decrease primarily from accumulated securities losses |
| Net interest income | $110.4 million | $92.5 million | 19% increase |
| Provision for loan losses | $17.9 million | $0.1 million | Material increase |
| Noninterest income | $48.1 million | $87.0 million | 45% decrease |
| Noninterest expense | $104.8 million | $111.0 million | 6% decrease |
| Net income from continuing operations | $27.6 million | $52.6 million | 48% decrease |
| Net income attributable to the Company | $27.9 million | $52.5 million | 47% decrease |
| Diluted EPS from continuing operations | $1.46 | $2.95 | 49% decrease |
| Net interest margin | 4.22% | 3.51% | 71 basis-point expansion |
| Return on average assets | 0.99% | 1.86% | Declined |
| Return on average equity | 10.58% | 21.50% | Declined |
| Efficiency ratio | 66.11% | 62.15% | Worsened |
- Interest income and margin: Total interest income increased to $127.5 million from $103.5 million, driven by loan growth, higher yields, and $7.4 million of acquired-loan discount accretion. Net interest margin improved to 4.22%, but management expects higher funding costs to pressure net interest income and margin in 2023.
- Credit costs: The provision for loan losses rose to $17.9 million from $117 thousand. The allowance for loan losses increased to $22.9 million, or 0.96% of loans held for investment excluding PPP loans, from $12.1 million, or 0.68%.
- Asset quality: Nonperforming assets were $18.8 million, or 0.60% of total assets, compared with $16.3 million, or 0.61%, in 2021. Net charge-offs increased to $7.1 million from $1.8 million. A substantial portion of the increase in impaired loans related to one commercial and industrial borrower.
- Loan mix and concentration: Commercial and industrial loans increased to $590.0 million from $320.8 million. Commercial real estate mortgage loans totaled $865.0 million, or 35.8% of gross loans. Approximately 73.1% of loans were secured by real estate, and construction and land development loans totaled approximately $259.9 million, or 10.8% of the portfolio.
- Noninterest income: The decline primarily reflected lower mortgage banking income, which fell to $12.6 million from $28.6 million as mortgage production declined to $404.7 million from $1.18 billion. The 2021 period also included a $24.3 million gain on PPP loan sales and a $6.2 million gain on termination of interest rate swaps.
- Operating expenses: Noninterest expense included $7.4 million of regulatory remediation costs related primarily to the OCC Written Agreement. Excluding merger-related and regulatory remediation expenses, noninterest expense decreased $1.8 million.
- Cash flow: Operating activities provided $93.9 million, investing activities used $628.2 million, and financing activities provided $481.0 million. The principal investing use was $631.8 million of net loan growth. Cash and due from banks declined to $77.3 million from $130.5 million.
- Debt and funding: FHLB borrowings increased to $311.7 million from $10.1 million. Subordinated notes were $39.9 million. The Bank had $128.3 million of available FHLB credit after outstanding advances and letters of credit. Unsecured overnight correspondent lines totaled $28.0 million and were undrawn.
- Deposit profile: Fintech-related deposits increased to approximately $690 million, or 27.6% of deposits, from $189 million, or 8.2%. Estimated uninsured deposits were $1.14 billion, or approximately 45.5% of total deposits. Brokered deposits totaled $49.5 million.
- Marketable securities: Available-for-sale securities had a fair value of $354.3 million and gross unrealized losses of $58.8 million at year-end. The after-tax unrealized loss recorded in accumulated other comprehensive income was $45.1 million, compared with $3.6 million in 2021.
- Capital: The Bank remained well capitalized. At December 31, 2022, total risk-based capital was 11.15%, Tier 1 capital was 10.25%, common equity Tier 1 capital was 10.25%, and Tier 1 leverage was 9.25%.
- Shareholder returns: The Company paid $0.49 per share in dividends during 2022. No common stock repurchases occurred. The December 31, 2022 closing share price was $12.49, compared with $17.78 at December 31, 2021.
Material Changes Versus the Prior Comparable Period
- Loan growth accelerated, with gross loans increasing by approximately $604.2 million, while deposits increased by approximately $204.7 million.
- Net interest income and net interest margin improved because of loan growth and higher market rates, but deposit and borrowing costs also increased materially.
- Profitability declined sharply because the prior year benefited from substantial PPP loan-sale income, higher mortgage production, and a gain on interest-rate-swap termination.
- Credit costs increased significantly, including higher provisions, charge-offs, and reserves associated with loan growth, economic conditions, and specific impaired credits.
- Regulatory remediation became a significant expense category in 2022 following the OCC Written Agreement.
- The Company changed its mortgage servicing rights accounting from the amortization method to the fair value method effective January 1, 2022, producing a $3.5 million after-tax increase to equity.
- The Company sold its majority interest in MoneyWise Payroll Solutions in the first quarter of 2022. Results are presented as discontinued operations.
- A $20.3 million 2021 deposit classification error was corrected between noninterest-bearing and interest-bearing demand deposits; total deposits, assets, earnings, and equity were unaffected.
Outlook, Risks, Contingencies, and Unusual Items
- OCC Written Agreement: Entered into August 29, 2022, the agreement requires enhanced oversight of fintech partnerships and improved third-party risk, BSA/AML, information technology, and related control frameworks. New fintech partners, products, or activities may require OCC non-objection. Noncompliance could result in more restrictive enforcement actions, higher expenses, reduced deposits, and lower noninterest income.
- Interest-rate outlook: The Federal Reserve increased the federal funds target range by 425 basis points during 2022. Management states that continued increases in funding costs could reduce 2023 net interest income and margin. Internal modeling indicated that an immediate 100-basis-point rate increase could reduce year-one net interest income by approximately 3.3%.
- CECL adoption: The Company adopted the current expected credit loss standard effective January 1, 2023. It estimated an $8.5 million to $9.5 million increase in the allowance for loan losses, a $3.5 million to $4.5 million increase in the unfunded-commitment liability, and aggregate after-tax retained-earnings reductions of approximately $8.8 million to $10.3 million. The Bank planned to elect a three-year regulatory capital phase-in.
- Liquidity risk: The Company relies substantially on deposits, including fintech-related deposits, and on FHLB borrowings. Deposit withdrawals, loss of fintech relationships, market disruption, or reduced access to wholesale funding could constrain loan growth and liquidity.
- Investment portfolio risk: Rising rates caused substantial unrealized losses in available-for-sale securities. Although management did not identify credit impairment and did not expect to be required to sell the securities, further rate increases or liquidity needs could affect capital and earnings.
- Legal contingency: The Company assumed liability for a VCB ESOP class action alleging ERISA fiduciary breaches. The complaint alleges damages approaching or exceeding $12 million. Management believes the claims are without merit, but the outcome is uncertain and no loss was accrued.
- LIBOR transition: Approximately $129.6 million of existing loan agreements were indexed to LIBOR at December 31, 2022. Transition to SOFR or another replacement rate could create operational, litigation, repricing, and customer-acceptance risks.
- Other principal risks: Commercial real estate and construction concentrations, borrower defaults, cybersecurity and third-party service-provider failures, regulatory and consumer-compliance obligations, mortgage-market cyclicality, competition, economic deterioration, and the ability to manage rapid growth and fintech partnerships.
- No specific earnings or revenue guidance was provided in the filing.
Important Facts Investors Should Verify
- Progress toward satisfying each requirement of the OCC Written Agreement, including required non-objections and the status of fintech relationships.
- Actual January 1, 2023 CECL adjustments compared with the estimated ranges and their effect on retained earnings, allowances, and capital ratios.
- Trends in uninsured and fintech-related deposits, deposit pricing, FHLB reliance, and available liquidity.
- Credit migration and resolution of the large impaired commercial and industrial loan, the matured commercial real estate loan, and related charge-off trends.
- Whether the $58.8 million gross unrealized securities loss and $45.1 million after-tax accumulated other comprehensive loss recover or create pressure on tangible capital.
- 2023 net interest margin sensitivity as interest-bearing deposits and wholesale borrowings reprice.
- Mortgage production, mortgage servicing rights valuations, and the sustainability of noninterest income after the 2022 decline.
- Developments in the VCB ESOP litigation and any related accrual, settlement, or additional claims.