Blue Ridge Bankshares, Inc. — Form 10-Q Summary
Business context and reporting period
Blue Ridge Bankshares, Inc. is a Virginia bank holding company operating primarily through Blue Ridge Bank, N.A. and BRB Financial Group, Inc. Its reportable segments are commercial banking, mortgage banking, and parent-company activities. The filing covers the three and six months ended June 30, 2022, with comparative periods ended June 30, 2021. Financial statements are unaudited.
The company sold its majority interest in MoneyWise Payroll Solutions, Inc. during the first quarter of 2022; MoneyWise is reported as discontinued operations. The company also changed its mortgage servicing rights accounting method from amortization to fair value measurement effective January 1, 2022.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Net interest income | $24.1 million | $30.5 million | $47.8 million | $50.5 million |
| Provision for loan losses | $7.5 million | $0 | $10.0 million | $0 |
| Noninterest income | $10.2 million | $36.2 million | $34.3 million | $51.8 million |
| Noninterest expense | $25.3 million | $30.3 million | $48.0 million | $60.5 million |
| Net income from continuing operations | $1.1 million | $28.7 million | $18.5 million | $32.9 million |
| EPS from continuing operations | $0.06 | $1.54 | $0.99 | $1.95 |
| Net interest margin | 3.89% | 3.82% | 3.88% | 3.66% |
- Total assets were $2.80 billion at June 30, 2022, compared with $2.67 billion at December 31, 2021.
- Loans held for investment, excluding PPP loans, were $2.05 billion, up $271.2 million, or 30.5% annualized, from year-end 2021. Commercial and industrial loans increased to $497.0 million from $320.8 million.
- Total deposits were $2.34 billion on the consolidated balance sheet, up $37.9 million from year-end 2021. Management separately describes deposits as approximately $2.36 billion in the MD&A; investors should reconcile this presentation difference.
- Noninterest-bearing demand deposits increased $79.7 million, primarily from fintech partnerships. Deposits attributed to fintech partners were approximately $395 million, compared with approximately $189 million at year-end 2021.
- The allowance for loan losses increased to $17.2 million from $12.1 million. Net charge-offs were $2.3 million in the second quarter and $4.9 million for the first six months.
- Nonperforming loans declined to $12.2 million from $16.1 million at year-end, while nonperforming assets declined to $12.3 million from $16.3 million. The allowance-to-loans ratio was 0.84%; allowance coverage of nonperforming loans was 141.5%.
- Available-for-sale securities had a fair value of $381.5 million and gross unrealized losses of $48.3 million at June 30, 2022. The after-tax accumulated other comprehensive loss from securities was $37.9 million, contributing to a $15.5 million decline in total stockholders’ equity to $261.7 million.
- Cash and due from banks declined to $75.2 million from $130.5 million at year-end. Six-month operating cash flow was $110.1 million, investing cash flow was negative $306.9 million, and financing cash flow was positive $141.4 million, producing a $55.4 million net decrease in cash.
- FHLB borrowings increased to $135.0 million from $10.1 million; the June 30, 2022 borrowing carried a 1.82% rate and matured May 8, 2023. FRB borrowings declined to $60 thousand from $17.9 million. Subordinated notes were approximately $40.0 million.
- The Bank was categorized as well capitalized. At June 30, 2022, total risk-based capital was 12.13%, common equity tier 1 capital was 11.35%, and the tier 1 leverage ratio was 10.02%.
Material changes versus the prior comparable period
- Second-quarter continuing-operations earnings fell 96% year over year, primarily because the prior-year quarter included a $24.3 million gain on the sale of PPP loans. First-half 2022 earnings also reflected $9.3 million of fair-value gains on equity investments, while first-half 2021 included the PPP loan-sale gain.
- Net interest income declined 20.9% in the second quarter and 5.4% for the first six months, largely because PPP loan balances and related fee income were substantially lower. The net interest margin nevertheless improved because of higher loan and securities yields and lower funding costs.
- Mortgage banking income declined as mortgage production fell to $269.2 million in the first half of 2022 from $658.2 million, reflecting higher market interest rates.
- Noninterest expense declined 16.3% in the quarter and 20.6% for the first half. The comparison benefited from sharply lower merger-related expenses: $0.05 million in the first half of 2022 versus $10.3 million in the first half of 2021.
- The company recorded $7.5 million of loan-loss provision in the second quarter and $10.0 million year to date, versus no provision in the comparable 2021 periods. Management attributed the provision primarily to loan growth, economic-factor adjustments, and higher specific reserves.
- Mortgage servicing rights increased to $29.3 million after adoption of fair value accounting, compared with $16.5 million under the prior amortization method at December 31, 2021. The accounting change produced a $3.5 million after-tax cumulative-effect increase to equity.
- Accumulated other comprehensive loss increased substantially because of rising interest rates and unrealized losses on available-for-sale securities. Management stated that it did not intend, and did not believe it would be required, to sell the temporarily impaired securities before recovery of amortized cost.
Outlook, risks, contingencies, and unusual items
- The filing provides no formal earnings or revenue guidance. Management states that reported results are not necessarily indicative of the remainder of 2022.
- The company expects to adopt the current expected credit loss standard for fiscal years and interim periods beginning after December 15, 2022. It expects a one-time cumulative adjustment to the allowance and equity but cannot yet estimate the amount.
- Major risks include economic and real-estate conditions, interest-rate changes, credit losses, deposit and liquidity outflows, regulatory changes, cybersecurity and fraud, fintech-partner performance, mortgage-market conditions, acquisition integration, and geopolitical or catastrophic events.
- Liquidity included approximately $73.8 million of remaining FHLB borrowing availability after advances and letters of credit, plus $44.0 million of undrawn unsecured correspondent-bank lines. Management believes liquidity and capital are adequate.
- Outstanding commitments to extend credit were $620.1 million, financial standby letters of credit were $6.3 million, and unfunded investment commitments totaled $21.0 million, consisting of $9.7 million for fintech-related investments and $11.3 million for SBIC funds.
- A previously disclosed VCB employee stock ownership plan lawsuit remains unresolved. The complaint alleges damages that approach or exceed $12 million; the company believes the claims are without merit and has accrued no loss.
- Interest-rate sensitivity modeling estimated that a 400-basis-point instantaneous increase would increase first-year net interest income by 9.2%, while a 200-basis-point decrease would reduce it by 10.0%. Management cautions that these scenarios are not forecasts of actual performance.
- The board declared a quarterly dividend of $0.1225 per share on July 7, 2022, paid July 29, 2022.
Important facts for investors to verify
- Reconcile the consolidated balance-sheet deposit figure of $2.335 billion with the MD&A discussion referring to approximately $2.36 billion.
- Assess the sustainability and valuation volatility of fintech-related equity investments, fair-value gains, and fintech-derived deposits.
- Review the $10.0 million year-to-date loan-loss provision, increased commercial lending exposure, charge-offs, and the pending transition to expected-credit-loss accounting.
- Evaluate the effect of $48.3 million of gross unrealized securities losses and related accumulated other comprehensive loss on tangible capital and liquidity flexibility.
- Monitor mortgage banking volume and MSR fair values as interest rates and prepayment speeds change.
- Review the VCB ESOP litigation, unfunded investment commitments, credit commitments, FHLB collateral availability, and the company’s ability to maintain well-capitalized status.