BLUE RIDGE BANKSHARES, INC. quarterly report, Q3 FY2020

Blue Ridge Bankshares, Inc. — Form 10-Q Summary

Business context and reporting period

Blue Ridge Bankshares, Inc. is a Virginia-based bank holding company whose subsidiaries provide commercial banking, mortgage banking and payroll-processing services in Virginia and selected neighboring states. The Bank operates under a national charter and also conducts business as Carolina State Bank. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods and balance-sheet comparisons to December 31, 2019.

Key financial metrics

Metric	Three months ended September 30	Nine months ended September 30
Total interest income	$14.4 million, versus $8.1 million	$38.0 million, versus $22.4 million
Net interest income	$11.8 million, versus $5.4 million	$30.5 million, versus $15.5 million
Provision for loan losses	$4.0 million, versus $0.6 million	$8.1 million, versus $1.5 million
Non-interest income	$17.7 million, versus $5.0 million	$39.3 million, versus $14.3 million
Income before taxes	$6.8 million, versus $1.6 million	$15.7 million, versus $5.1 million
Net income attributable to Blue Ridge	$5.1 million, versus $1.3 million	$12.1 million, versus $4.1 million
Basic and diluted EPS	$0.88, versus $0.29	$2.13, versus $1.01
Net interest margin	3.26%, versus 3.16%	3.34%, versus 3.36%

Based on reported income before taxes and net income, the approximate net-income margin on total income was 15.7% for the quarter and 15.7% year to date, compared with approximately 9.6% and 11.1% in the respective 2019 periods.

Total assets were $1.523 billion at September 30, 2020, up 58.5% from December 31, 2019.
Loans held for investment were $1.039 billion, up 60.7%; loans held for sale were $193.1 million, up 247.1%.
PPP loans totaled approximately $362 million and were substantially funded through the Federal Reserve PPP Liquidity Facility.
Total deposits were $915.3 million, up 26.8%. Noninterest-bearing deposits were $278.6 million.
Other borrowings were $459.5 million, including $344.5 million of PPP Liquidity Facility borrowings and $115.0 million of FHLB advances.
Subordinated debt, net, was $24.5 million after issuance of a $15.0 million subordinated note in May 2020.
Stockholders’ equity was $99.9 million, compared with $92.3 million at year-end 2019.
Cash and due from banks were $77.6 million. The Bank reported $340.1 million of remaining FHLB credit availability and $38.0 million of unsecured federal-funds lines, of which $135 thousand was outstanding.
The allowance for loan losses was $12.1 million, or 1.17% of held-for-investment loans, versus $4.6 million, or 0.71%, at year-end.
Nonperforming loans were $4.5 million, or 0.43% of held-for-investment loans, versus $5.2 million, or 0.80%, at year-end. There was no other real estate owned.
The Bank’s September 30 capital ratios were 12.60% total risk-based capital, 11.35% Tier 1 risk-based capital, 7.88% Tier 1 leverage and 11.35% CET1. Management stated that the Bank was well capitalized.
Net cash used in operating activities was $117.4 million and net cash used in investing activities was $405.3 million, partly offset by $540.3 million of financing cash inflows. Cash increased $17.6 million during the first nine months.

Material changes versus prior comparable periods

Net income attributable to Blue Ridge increased 305% for the quarter and 199% year to date, primarily reflecting balance-sheet expansion following the VCB acquisition, PPP activity and substantially higher mortgage production.
Mortgage banking income increased to $16.0 million for the quarter and $35.2 million year to date, compared with $3.9 million and $11.0 million, respectively, in 2019. The 2020 amounts include mortgage servicing-rights income; the Company was servicing approximately $435.4 million of sold mortgage loans and reported a $3.2 million servicing asset at September 30.
Net interest income increased 117.6% for the quarter and 96.9% year to date, although the year-to-date net interest margin declined modestly to 3.34% from 3.36%.
Non-interest expense increased 129.2% for the quarter and 97.9% year to date. Salaries and benefits were the principal driver, reflecting acquired employees, mortgage hiring and higher mortgage commissions. Legal, issuer and regulatory filing costs also increased due largely to the pending Bay Banks merger.
Provision expense rose materially because of uncertainty surrounding COVID-19-related loan deferrals and borrowers’ ability to resume payments. Net charge-offs remained low at $83 thousand for the quarter and $524 thousand year to date.
Commercial and industrial loans increased to $444.7 million from $77.7 million at year-end, largely reflecting PPP lending. The loan portfolio shifted toward commercial and industrial lending, which represented 42.5% of gross loans at September 30 versus 12.0% at year-end.
The Company transferred $11.0 million of held-to-maturity securities to available-for-sale securities during the period; no held-to-maturity securities remained at September 30.

Guidance, outlook, commentary, risks and unusual items

Management provided no formal earnings or revenue guidance. It stated that interim results are not necessarily indicative of full-year or future-period results.
Management described COVID-19 as creating significant uncertainty and said it was managing under a worst-case scenario, reducing noninterest expenses where feasible, lowering funding costs and emphasizing portfolio maintenance and borrower support.
As of November 5, 2020, the Company had executed 553 COVID-19 loan deferrals covering $109.9 million, or 16.4% of the held-for-investment portfolio excluding PPP loans. Most had returned to normal payment schedules; five borrowers totaling $6.5 million had additional or requested three-month deferrals.
The Company expected to earn approximately $11.5 million of SBA processing fees over the life of PPP loans. The timing and ultimate amount of recognition depend on loan forgiveness and other program developments.
On August 12, 2020, Blue Ridge entered into an all-stock agreement to acquire Bay Banks of Virginia. Bay Banks shareholders would receive 0.5000 Blue Ridge shares per Bay Banks share, and the transaction was expected to close in the first quarter of 2021, subject to shareholder and regulatory approvals. The filing’s MD&A contains an apparent inconsistent reference to a first-quarter 2020 closing date; the correct timing should be verified against the merger agreement and subsequent filings.
Merger risks include integration difficulties, loss of customers or employees, higher-than-expected costs, regulatory or shareholder approval delays, failure to realize synergies and possible termination. The merger agreement includes a potential $4.0 million termination fee under specified circumstances.
The Company assumed liability for a VCB-related ESOP class action alleging damages that “approach or exceed $12 million.” Management believes the claims are without merit; the filing does not provide a clear recorded liability or loss estimate.
Principal risks include COVID-19-related credit deterioration, collateral declines, margin pressure, PPP-related liability and litigation, liquidity disruptions, cyber and payment fraud, interest-rate changes, regulatory changes, acquisition execution and geographic concentration in Virginia markets.
The Company is evaluating the future current-expected-credit-loss standard, income-tax and equity-investment accounting changes, and reference-rate reform. It has established an initiative to manage the transition away from LIBOR.

Most important facts for investors to verify

Whether PPP loan forgiveness, SBA fees and PPP Liquidity Facility repayments occur as expected and how they affect future earnings, liquidity and balance-sheet size.
The performance of COVID-19-deferred loans after payment deferrals expire, including additional deferrals, delinquencies, charge-offs and required allowance increases.
The sustainability of unusually strong mortgage banking income and the related staffing, commission and servicing-rights economics.
The precise status, approval requirements, expected closing date, consideration and integration costs of the Bay Banks merger; reconcile the filing’s apparent date inconsistency.
Actual regulatory capital, liquidity availability and borrowing capacity after continued asset growth and merger activity.
The potential exposure and accounting treatment of the VCB ESOP litigation and any other merger-related or regulatory contingencies.
The effect of low interest rates, LIBOR transition and the Company’s asset-sensitive position on future net interest margin and earnings.