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., wealth and trust management, mortgage banking, payroll processing, and related businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021. Results include Bay Banks of Virginia, Inc. from its January 31, 2021 acquisition date; 2020 comparative balance-sheet amounts exclude Bay Banks.
The company completed a 3-for-2 stock split effective April 30, 2021. Shares and per-share data have been adjusted for the split.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Total interest income | $33.8 million | $13.2 million | $56.4 million | $23.6 million |
| Net interest income | $30.5 million | $10.6 million | $50.5 million | $18.7 million |
| Net interest margin | 3.82% | 3.19% | 3.66% | 3.40% |
| Noninterest income | $36.4 million | $16.4 million | $52.2 million | $21.2 million |
| Noninterest expense | $30.5 million | $15.6 million | $61.1 million | $26.8 million |
| Provision for loan losses | $0 | $3.5 million | $0 | $4.1 million |
| Net income attributable to the company | $28.6 million | $6.2 million | $32.9 million | $7.1 million |
| Diluted EPS | $1.54 | $0.73 | $1.94 | $0.83 |
- Assets and capital: Total assets were $2.765 billion at June 30, 2021, versus $1.498 billion at December 31, 2020. Stockholders’ equity was $266.8 million, compared with $108.2 million at year-end.
- Loans: Loans held for investment, net of deferred fees and before the allowance, were $1.860 billion, including $130.2 million of PPP loans. Loans held for sale were $147.0 million.
- Deposits: Total deposits were $2.191 billion, up from $945.1 million at December 31, 2020. Noninterest-bearing demand deposits were $660.9 million; time deposits were $573.0 million.
- Allowance and credit quality: The allowance for loan losses was $13.0 million, or 0.75% of loans held for investment excluding PPP loans. Nonperforming loans were $13.8 million and nonperforming assets were $14.3 million, representing 0.74% of loans and 0.52% of total assets, respectively.
- Cash flow: Six-month operating cash flow was $7.4 million, compared with $(84.5) million in 2020. Investing activities provided $174.4 million, principally reflecting PPP loan sales and cash acquired in the Bay Banks merger. Financing activities used $3.3 million. Cash and due from banks increased to $296.4 million.
- Debt and liquidity: FHLB borrowings were $125.1 million, FRB PPPLF borrowings were $97.4 million, and subordinated notes were $46.1 million. Available FHLB borrowing capacity was approximately $268.4 million after advances and letters of credit. Unused correspondent-bank federal-funds lines totaled $79.0 million.
- Regulatory capital: The bank was categorized as well capitalized. At June 30, 2021, total risk-based capital was 13.92%, common equity tier 1 capital was 13.24%, and the tier 1 leverage ratio was 9.23%.
Material changes versus comparable periods
- Net income increased 361% in the second quarter and 366% for the first six months compared with the respective 2020 periods. Growth primarily reflected the Bay Banks merger, higher loan balances, PPP fee income, and a $24.3 million pretax gain on the sale of PPP loans.
- The company sold approximately $712.6 million of PPP 2 loan principal on June 28, 2021 for gross proceeds of $705.9 million. The transaction generated the $24.3 million gain, including recognition of $30.9 million of net unamortized PPP fees and the sale discount.
- Residential mortgage banking income declined 47% in the second quarter to $7.3 million, primarily because of pricing compression, but increased mortgage servicing rights income partly offset the decline.
- Noninterest expense increased 95% in the second quarter and 128% for the first six months. The increase reflected Bay Banks integration, additional personnel, incentive compensation, higher operating costs, and merger-related expenses of $1.2 million in the quarter and $10.3 million year to date.
- The allowance declined from $13.8 million at year-end despite substantial loan growth, primarily because the company released a COVID-19 qualitative factor and acquired loans were recorded at fair value without a carried-over allowance. Net charge-offs were $395 thousand in the quarter and $820 thousand year to date.
- FRB borrowings declined $184.3 million from year-end, mainly because of PPP loan sales. The company also redeemed subordinated notes with an initial principal balance of $10.0 million.
Guidance, outlook, commentary, risks, and unusual items
- No quantitative earnings or revenue guidance is provided. Management states that interim results are not necessarily indicative of full-year results.
- Management believes liquidity and capital are adequate and that the allowance was adequate at June 30, 2021; however, future allowance adjustments could result from economic conditions, COVID-19 effects, borrower performance, or changes in assumptions.
- PPP loans are generally guaranteed by the U.S. government, but the company notes that future allowance requirements could arise. Approximately 600 PPP 2 loans totaling $15.7 million remained on balance sheet at June 30, 2021; no PPP 2 loans had been forgiven as of that date.
- Management disclosed a $1.5 million loss related to duplicate PPP loan fundings and stated that it is pursuing available recovery remedies.
- Nonperforming assets increased primarily because approximately $5.2 million of commercial loans to the same borrower relationship became nonaccrual in the second quarter.
- The company entered into an agreement announced July 14, 2021 to merge with FVCBankcorp, Inc. in an all-stock merger of equals. FVCB shareholders would receive 1.1492 company shares per FVCB share. Closing was expected in the fourth quarter of 2021 or first quarter of 2022, subject to shareholder and regulatory approvals.
- Risks associated with the proposed FVCB merger include failure or delay in obtaining approvals, integration difficulties, customer or employee attrition, higher-than-expected costs, litigation, and failure to achieve anticipated synergies.
- Other risks include COVID-19 effects, PPP execution and forgiveness, interest-rate changes, deposit flows, credit quality, concentration in real estate lending, competition, cybersecurity and fraud, regulatory changes, and technology risk.
- Legal matters include a previously disclosed VCB employee stock ownership plan action alleging damages approaching or exceeding $12 million and a June 2021 purported class action alleging improper overdraft fees, with claimed aggregate damages exceeding $5 million. Management believes the claims are without merit and has accrued no loss.
- Subsequent to quarter-end, the company declared a $0.12 per-share quarterly dividend and notified holders that approximately $6.1 million of 2025 Bay Banks subordinated notes would be redeemed on September 1, 2021.
Important facts for investors to verify
- How much recurring earnings remain after excluding the $24.3 million PPP loan-sale gain, PPP fee recognition, merger-related expenses, and the duplicate-funding loss.
- The sustainability of mortgage banking revenue, PPP-related income, and the 3.66% year-to-date net interest margin as PPP balances decline and interest rates change.
- Credit performance of the acquired Bay Banks portfolio, including the $17.0 million remaining purchase-accounting loan discount, higher nonperforming assets, and commercial real estate exposure.
- The adequacy of the $13.0 million allowance under the company’s incurred-loss methodology and the expected transition to the current expected credit loss standard after December 15, 2022.
- Progress, approval status, costs, dilution, and integration risks associated with the proposed FVCB merger.
- Outcomes and potential exposure from the VCB ESOP litigation and overdraft-fee class action.
- Liquidity sensitivity to deposit outflows, collateral availability, FHLB and PPPLF funding, and the redemption of subordinated notes.