Blue Ridge Bankshares, Inc. — 2023 Q3 Form 10-Q Summary
Business context and reporting period
Blue Ridge Bankshares, Inc. is a bank holding company operating primarily through Blue Ridge Bank, National Association and a wealth and trust management subsidiary. The filing covers the three and nine months ended September 30, 2023. Financial statements are unaudited and reflect restatements of prior periods related to the timing of nonaccrual, reserve, and charge-off recognition for certain specialty finance loans.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Total interest income | $42.5 million | $33.1 million | $125.8 million | $85.2 million |
| Net interest income | $22.2 million | $28.7 million | $71.3 million | $76.4 million |
| Net interest margin | 2.92% | 4.27% | 3.12% | 4.02% |
| Provision for credit losses | $11.1 million | $3.9 million | $19.6 million | $13.9 million |
| Noninterest income | $7.4 million | $8.0 million | $24.4 million | $42.3 million |
| Noninterest expense | $64.6 million | $29.2 million | $127.5 million | $77.2 million |
| Net income attributable to shareholders | $(41.4) million | $2.7 million | $(46.0) million | $21.6 million |
| Diluted EPS | $(2.18) | $0.15 | $(2.43) | $1.15 |
Total assets were $3.26 billion at September 30, 2023, up from $3.13 billion at December 31, 2022. Loans held for investment, excluding PPP loans, were $2.44 billion, while net loans held for investment including PPP loans were approximately $2.40 billion after the allowance for credit losses. Total deposits were $2.78 billion, up $273.6 million from year-end, driven primarily by time deposits and brokered deposits.
Cash and due from banks increased to $238.6 million from $77.3 million at year-end. The company generated $23.6 million of operating cash flow, used $35.3 million in investing activities, and generated $173.0 million in financing activities during the first nine months. FHLB borrowings were $150.0 million and FRB borrowings were $65.0 million. Subordinated notes were $39.9 million.
Stockholders’ equity declined to $182.8 million from $248.8 million at year-end. Accumulated other comprehensive loss was $53.8 million, primarily reflecting unrealized losses on available-for-sale securities. The allowance for credit losses was $49.6 million, or 2.03% of loans held for investment, compared with $30.7 million, or 1.27%, at December 31, 2022.
Material changes versus prior comparable periods
- Net interest income declined despite higher interest income because interest expense increased sharply, particularly on deposits and borrowings. The third-quarter net interest margin fell to 2.92% from 4.27%.
- Interest expense increased to $20.3 million in Q3 from $4.5 million in the prior-year quarter, reflecting higher market rates, increased time deposits, brokered funding, and wholesale borrowings.
- Q3 and nine-month results included a $26.8 million noncash goodwill impairment charge, eliminating all reported goodwill.
- The company recorded a $6.0 million reserve for a proposed settlement of VCB ESOP litigation and incurred $3.8 million of regulatory remediation expense in Q3; nine-month regulatory remediation expense was $7.3 million.
- Credit-loss provisions increased because of specific reserves for specialty finance loans. Of the $49.6 million ACL at September 30, $21.8 million related to $48.2 million of specialty finance loans. Nine-month gross charge-offs were $12.9 million, including a $7.0 million commercial and industrial loan charge-off.
- Noninterest income declined 42.2% year to date, primarily because 2022 included $9.2 million of favorable equity-investment fair-value adjustments and mortgage production and sales declined to $149.5 million from $352.2 million.
- The company adopted CECL on January 1, 2023, increasing the ACL by $7.4 million and reducing retained earnings by $8.1 million after tax, including the reserve for unfunded commitments.
- The company sold LenderSelect Mortgage Group on May 15, 2023 for $250 thousand in cash and recorded a $553 thousand loss.
Outlook, management commentary, risks, and unusual items
No formal financial guidance was provided. Management stated that liquidity was adequate and expanded secured borrowing capacity to approximately $1.08 billion. At September 30, 2023, FHLB availability was approximately $282.7 million and remaining BTFP availability was approximately $202.0 million.
The Bank remained “well capitalized” under standard regulatory classifications, but its 10.44% total risk-based capital ratio was below the OCC-imposed 13.00% individual minimum capital ratio, and its 7.63% leverage ratio was below the 10.00% individual minimum. Management is exploring additional capital-raising alternatives, which could be substantially dilutive. The Bank’s total risk-based capital also fell below the capital conservation buffer, potentially limiting dividends, repurchases, and certain compensation.
The board elected not to declare a fourth-quarter 2023 cash dividend and suspended future quarterly dividends until further notice to preserve capital.
The Bank remains subject to an OCC Written Agreement concerning fintech partnerships, third-party risk, BSA/AML controls, and information technology risk. The filing states that weaknesses in the BSA compliance program remain and that further regulatory requirements, sanctions, civil monetary penalties, growth restrictions, asset sales, or additional reserves could result.
The company identified a material weakness in internal controls involving timely risk grading, nonaccrual classification, and ACL determination for specialty finance loans. Management reported completing a re-underwriting of that portfolio, establishing a credit policy and risk committee, and beginning to implement a revised loan-portfolio management philosophy.
Liquidity and earnings remain sensitive to deposit outflows, reliance on brokered and fintech-related deposits, rising funding costs, unrealized securities losses, credit deterioration, real estate collateral values, interest-rate movements, regulatory remediation costs, and the ability to raise capital. Fintech-related deposits totaled approximately $720.8 million, or 26.0% of total deposits, at September 30, 2023.
Important facts for investors to verify
- Progress and sustainability of remediation under the OCC Written Agreement, including BSA/AML and fintech controls.
- Resolution of the identified material weakness and the accuracy of risk grades, nonaccrual classifications, charge-offs, and reserves for specialty finance loans.
- Availability, cost, and potential dilution of any capital raise needed to satisfy the OCC’s 10.00% leverage and 13.00% total capital requirements.
- Deposit stability, particularly brokered and fintech-related deposits, uninsured deposit levels, and reliance on FHLB and BTFP funding.
- Future credit losses, collateral recoveries, and the adequacy of the $49.6 million ACL relative to $81.8 million of nonperforming loans.
- Potential realization of the $53.8 million after-tax accumulated other comprehensive loss if securities must be sold.
- Approval and payment timing of the proposed $6.0 million VCB ESOP settlement, including the expected $5.95 million payment after court approval.
- Whether and when common-stock dividends may resume.