# Blue Ridge Bankshares, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Blue Ridge Bankshares, Inc.](/companies/brbs.md) (CIK 842717)
- Form: 10-Q
- Filed: 2023-11-14
- Accepted by EDGAR: Nov 14, 2023, 16:37 ET
- Period: 2023-09-30
- Accession: 0000950170-23-063784
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/842717/000095017023063784/brbs-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/842717/000095017023063784/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $20.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $54.6m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | −$4.7m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | −$5.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | −$41.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$46.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | −$2.18 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.43 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | −$2.18 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$2.43 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 19,014,883 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 18,907,921 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $23.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $713.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $4.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Total assets | at 2023-09-30 | $3.26bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $3.08bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $182.8m | us-gaap:StockholdersEquityIncludingPortionAttributableToNoncontrollingInterest |

## Management's discussion and analysis

As filed, 78,101 characters.

*The following presents management’s discussion and analysis of the Company’s consolidated financial condition and the results of our operations. This discussion should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included in this Form 10-Q and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K/A for the year ended December 31, 2022 (the “2022 Form 10-K/A”). Results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results of operations for the balance of 2023, or for any other period. As used in this report, the terms “the Company,” “we,” “us,” and “our” refer to Blue Ridge Bankshares, Inc. and its consolidated subsidiaries. The term “Bank” refers to Blue Ridge Bank, National Association.*

### Cautionary Note About Forward-Looking Statements

The Company makes certain forward-looking statements in this Form 10-Q that are subject to risks and uncertainties. These forward-looking statements represent plans, estimates, objectives, goals, guidelines, expectations, intentions, projections, and statements of management’s beliefs concerning future events, business plans, objectives, expected operating results, and the assumptions upon which those statements are based. Forward-looking statements include without limitation, any statement that may predict, forecast, indicate, or imply future results, performance or achievements, and are typically identified with words such as “may,” “could,” “should,” “will,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “aim,” “intend,” “plan,” or words or phases of similar meaning. The Company cautions that the forward-looking statements are based largely on management’s expectations and are subject to a number of known and unknown risks and uncertainties that are subject to change based on factors which are, in many instances, beyond its control. Actual results, performance, or achievements could differ materially from those contemplated, expressed, or implied by the forward-looking statements.

The following factors, among others, could cause the Company’s financial performance to differ materially from that expressed in such forward-looking statements: (i) the strength of the United States economy in general and the strength of the local economies in which the Company conducts operations; (ii) geopolitical conditions, including acts or threats of terrorism and/or military conflicts, or actions taken by the United States or other governments in response to acts or threats of terrorism and/or military conflicts, which could impact business and economic conditions in the United States and abroad; (iii) the residual effects of the COVID-19 pandemic, including the adverse impact on the Company’s business and operations and on the Company’s customers which may result, among other things, in increased delinquencies, defaults, foreclosures and losses on loans; (iv) the occurrence of significant natural disasters, including severe weather conditions, floods, health related issues, and other catastrophic events; (v) the Company’s management of risks inherent in its loan portfolio, the credit quality of its borrowers, and the risk of a prolonged downturn in the real estate market, which could impair the value of the Company’s collateral and its ability to sell collateral upon any foreclosure; (vi) changes in consumer spending and savings habits; (vii) deposit out flows; (viii) technological and social media changes; (ix) the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, inflation, interest rate, market and monetary fluctuations; (x) changing bank regulatory conditions, policies or programs, whether arising as new legislation or regulatory initiatives, that could lead to restrictions on activities of banks generally, or the Company’s subsidiary bank in particular, more restrictive regulatory capital requirements, increased costs, including deposit insurance premiums, regulation or prohibition of certain income producing activities or changes in the secondary market for loans and other products; (xi) the impact of changes in financial services policies, laws, and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies; (xii) the impact of, and the ability to comply with, the terms of the formal written agreement between the Bank and the Office of the Comptroller of the Currency (the “OCC”); (xiii) the impact of changes in laws, regulations, and policies affecting the real estate industry; (xiv) the effect of changes in accounting policies and practices, as may be adopted from time to time by bank regulatory agencies, the Securities and Exchange Commission (the “SEC”), the Public Company Accounting Oversight Board, the Financial Accounting Standards Board or other accounting standards setting bodies; (xv) the timely development of competitive new products and services and the acceptance of these products and services by new and existing customers; (xvi) the willingness of users to substitute competitors’ products and services for the Company’s products and services; (xvii) the outcome of any legal proceedings that may be instituted against the Company; (xviii) reputational risk and potential adverse reactions of the Company’s customers, suppliers, employees, or other business partners; (xix) the ability to maintain adequate liquidity by retaining deposit customers and secondary funding sources, especially if the Company's or industry's reputation become damaged; (xx) maintaining capital levels adequate to support the Company's business and to remain well-capitalized under regulatory standards; (xxi) the effects of acquisitions the Company may make, including, without limitation, the failure to achieve the expected revenue growth and/or expense savings from such transactions; (xxii) changes in the level of the Company’s nonperforming assets and charge-offs; (xxiii) the Company’s involvement, from time to time, in legal proceedings and examination and remedial actions by regulators; (xxiv) adverse developments in the financial industry generally, such as recent bank failures, responsive measures to mitigate and manage such developments, related supervisory and regulatory actions and costs, and related impacts on customer and client behavior; (xxv) potential exposure to fraud, negligence, computer theft, and cyber-crime; (xxvi) the Company’s ability to pay dividends; (xxvii) the ability to manage the Company's fintech relationships, including implementing enhanced controls and maintaining deposit levels and the quality of loans associated with these relationships; (xxviii) the Company’s involvement as a participating lender in the Paycheck Protection Program (“PPP”) as administered through the U.S. Small Business Administration; and (xxix) other risks and factors identified in the “Risk Factors” sections and elsewhere in documents the Company files from time to time with the SEC.

The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in the 2022 Form 10-K/A and this Form 10-Q, including those discussed in the sections entitled “Risk Factors.” If one or more of the factors affecting forward-looking information and statements proves incorrect, then actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, the Company cautions not to place undue reliance on its forward-looking information and statements. The Company will not update the forward-looking statements to reflect actual results or changes in the factors affecting the forward-looking statements. New risks and uncertainties may emerge from time to time, and it is not possible for the Company to predict their occurrence or how these risks and uncertainties will affect it.

### Regulatory Matters

On August 29, 2022, the Bank entered into a formal written agreement (the “Written Agreement”) with the OCC, the Bank's primary federal banking regulator. The Written Agreement principally concerns the Bank’s fintech line of business and requires the Bank to continue enhancing its controls for assessing and managing the third-party, Bank Secrecy Act/Anti-Money Laundering, and information technology risks stemming from its fintech partnerships. A complete copy of the Written Agreement was filed as an exhibit to a Form 8-K filed with the SEC on September 1, 2022 and can be accessed on the SEC’s website (www.sec.gov) and the Company’s website (www.blueridgebankshares.com).

The Company is actively working to bring the Bank’s fintech policies, procedures, and operations into conformity with OCC directives. Although work is progressing, many aspects of the Written Agreement require considerable time for completion, implementation, validation, and sustainability problems, and weaknesses in the Bank’s BSA compliance program remain, which could subject the Bank to additional compliance costs and further regulatory enforcement actions and/or civil monetary penalties. If the Company does not comply with the Written Agreement, or the OCC imposes additional measures, the Company could be subject to additional regulatory requirements or directives, including developing and maintaining capital plans, asset sales, loan reserves or impairments, limitations on growth, further regulatory sanctions, and/or other regulatory enforcement actions.

### Sale of LenderSelect Mortgage Group

On May 15, 2023, the Company sold its wholesale mortgage business operating as LenderSelect Mortgage Group (“LSMG”) to a third-party for $250 thousand in cash. The Company recorded a loss on the sale of LSMG of $553 thousand, which is reported in other noninterest income in the consolidated statements of operations for the three and nine months ended September 30, 2023.

### Sale of MoneyWise Payroll Solutions, Inc.

The Company sold its majority interest in MoneyWise Payroll Solutions, Inc. (“MoneyWise”) to the holder of the minority interest in MoneyWise in the first quarter of 2022. Income statement amounts related to MoneyWise are reported as discontinued operations for all periods presented.

### General

There were no changes to the Critical Accounting Policies disclosed in Item 7 of the 2022 Form 10-K/A, except as noted in Part I, Note 2 - Adoption of New Accounting Standard of this Form 10-Q, which describes the Company's adoption of Accounting Standards Codification (“ASC”) 326 - Financial Instruments – Credit Losses (referred herein as “ASC 326” or “CECL”), effective January 1, 2023.

Certain amounts presented in the consolidated financial statements of prior periods have been reclassified to conform to current year presentations. The reclassifications had no effect on net income, net income per share, total assets, total liabilities, or stockholders’ equity as previously reported.

### Comparison of Financial Condition as of September 30, 2023 and December 31, 2022

Total assets were $3.26 billion as of September 30, 2023, an increase of $132.2 million from $3.13 billion as of December 31, 2022. Most of this increase was attributable to higher cash and due from banks balances, which increased $161.3 million to $238.6 million as of September 30, 2023 from $77.3 million as of December 31, 2022. Loans held for investment, excluding PPP loans, increased $40.9 million to $2.44 billion as of September 30, 2023 from $2.40 billion at December 31, 2022. The allowance for credit losses (“ACL”) increased $18.9 million to $49.6 million as of September 30, 2023 from $30.7 million as of December 31, 2022. Most of this increase was attributable to specific reserves for specialty finance loans, reported in commercial and industrial loans, while $7.4 million of the year-to-date increase was due to the adoption of ASC 326 on January 1, 2023.

Total deposits as of September 30, 2023 were $2.78 billion, an increase of $273.6 million from December 31, 2022. The increase in the first nine months of 2023 was primarily due to an increase of $336.3 million in time deposit balances, of which $409.5 million was attributable to brokered time deposits. Partially offsetting this increase were lower noninterest-bearing demand deposit balances of $67.1 million. Deposits related to fintech relationships increased by $30.6 million from December 31, 2022, to $720.8 million as of September 30, 2023. Fintech related deposits represented 26.0% and 27.6% of total deposits as of September 30, 2023 and December 31, 2022, respectively.

Total stockholders’ equity decreased by $66.0 million to $182.8 million as of September 30, 2023 compared to $248.8 million at December 31, 2022. Of the decrease, $46.0 million was due to a net loss for the first nine months of 2023, while $8.1 million was attributable to the after-tax adoption of ASC 326. The fair value of the Company’s portfolio of securities available for sale (“AFS”) decreased in the first nine months of 2023, primarily as a result of a modest increase in market longer-term interest rates, resulting in an after-tax decrease in stockholders’ equity of $8.7 million. The Company had no investment securities classified as held to maturity as of September 30, 2023 or December 31, 2022.

### Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

For the three months ended September 30, 2023, the Company reported a net loss from continuing operations of $41.4 million, or $2.18 per diluted common share, compared to net income from continuing operations of $2.7 million, or $0.15 per diluted common share, for the three months ended September 30, 2022.

For the nine months ended September 30, 2023, the Company reported a net loss from continuing operations of $46.0 million, or $2.43 per diluted common share, compared to net income from continuing operations of $21.3 million, or $1.13 per diluted common share, for the nine months ended September 30, 2022.

The loss from continuing operations before income taxes for the three and nine months ended September 30, 2023 included a $26.8 million non-cash, after-tax charge for goodwill impairment related to the Company's stock performance and a provision for credit losses on loans of $11.6 million and $21.1 million, respectively, most of which was attributable to specific reserves on specialty finance loans. The Company recorded a $6.0 million settlement reserve in the third quarter of 2023 for the previously disclosed Employee Stock Ownership Plan ("ESOP") litigation assumed in the 2019 acquisition of Virginia Community Bankshares, Inc. ("VCB"). Also contributing to the decline in income from continuing operations before income taxes from the year-ago periods was $9.2 million of fair value adjustments for the Company's equity investments, primarily in certain fintech companies, reported in the 2022 periods. For the three and nine months ended September 30, 2023, income from continuing operations before income taxes included $3.8 million and $7.3 million, respectively, of costs incurred primarily for professional services and staff augmentation related to regulatory remediation efforts in connection with the Written Agreement, compared to $4.6 million for the same respective periods of 2022.

*Net Interest Income.* Net interest income is the amount by which interest earned on assets exceeds the interest paid on interest-bearing liabilities and is the Company’s primary revenue source. Net interest income is thereby affected by overall balance sheet growth, changes in interest rates, and changes in the mix of investments, loans, deposits, and borrowings. The Company’s principal interest-earning assets are loans to businesses, real estate investors, and individuals and its investment securities portfolio. Interest-bearing liabilities consist primarily of negotiable order of withdrawal and savings accounts, money market accounts, certificates of deposit, and Federal Home Loan Bank of Atlanta (“FHLB”) and Federal Reserve Bank of Richmond (“FRB”) advances. A common net interest income measure is net interest margin. Net interest margin represents the difference between interest income and interest expense calculated as a percentage of average interest-earning assets.

The following table presents the average balance sheets for the three months ended September 30, 2023 and 2022. Also shown are the amounts of interest earned on interest-earning assets, with related tax-equivalent yields, and interest expense on interest-bearing liabilities, with related rates, as well as a volume and rate analysis of changes in net interest income for the periods stated.

*(Dollars in thousands)*

| Average Assets | Average Balances, Income and Expense, Yields and Rates For the three months ended September 30, 2023 Average Balance | Interest | Yield/ Rate (1) | 2022 Average Balance | Interest | Yield/ Rate (1) | Total Increase/ (Decrease) | Increase/(Decrease) Due to Volume (2) | Rate (2) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable securities | $355,373 | $2,493 | 2.81% | $394,235 | $2,337 | 2.37% | $156 | $(230) | $386 |
| Tax-exempt securities (3) | 15,383 | 93 | 2.42% | 20,783 | 103 | 1.98% | (10) | (27) | 17 |
| Total securities | 370,756 | 2,586 | 2.79% | 415,018 | 2,440 | 2.35% | 146 | (257) | 403 |
| Interest-earning deposits in other banks | 126,660 | 1,312 | 4.14% | 82,935 | 352 | 1.70% | 960 | 186 | 774 |
| Federal funds sold | 4,270 | 57 | 5.34% | 31,192 | 171 | 2.19% | (114) | (148) | 34 |
| Loans held for sale | 67,021 | 446 | 2.66% | 29,985 | 213 | 2.84% | 233 | 263 | (30) |
| Paycheck Protection Program loans (4) | 6,744 | 13 | 0.77% | 14,060 | 40 | 1.14% | (27) | (21) | (6) |
| Loans held for investment (4,5,6) | 2,463,344 | 38,092 | 6.19% | 2,113,186 | 29,950 | 5.67% | 8,142 | 4,963 | 3,179 |
| Total average interest-earning assets | 3,038,795 | 42,506 | 5.60% | 2,686,376 | 33,166 | 4.94% | 9,340 | 4,986 | 4,354 |
| Less: allowance for credit losses | (41,034) |  |  | (18,251) |  |  |  |  |  |
| Total noninterest-earning assets | 251,468 |  |  | 235,322 |  |  |  |  |  |
| Total average assets | $3,249,229 |  |  | $2,903,447 |  |  |  |  |  |
| **Average Liabilities and Stockholders’ Equity:** |  |  |  |  |  |  |  |  |  |
| Interest-bearing demand, money market deposits, and savings | $1,349,336 | $10,038 | 2.98% | $1,198,555 | $2,219 | 0.74% | $7,819 | $279 | $7,540 |
| Time deposits (7) | 643,449 | 6,077 | 3.78% | 382,961 | 814 | 0.85% | 5,263 | 554 | 4,709 |
| Total interest-bearing deposits | 1,992,785 | 16,115 | 3.23% | 1,581,516 | 3,033 | 0.77% | 13,082 | 833 | 12,249 |
| FHLB borrowings | 256,668 | 2,836 | 4.42% | 149,711 | 866 | 2.31% | 1,970 | 619 | 1,351 |
| FRB borrowings | 65,000 | 777 | 4.78% | 58 | — | — | 777 | — | — |
| Subordinated notes and other borrowings (8) | 39,906 | 566 | 5.67% | 39,961 | 570 | 5.71% | (4) | (1) | (3) |
| Total average interest-bearing liabilities | 2,354,359 | 20,294 | 3.45% | 1,771,246 | 4,469 | 1.01% | 15,825 | 1,451 | 13,597 |
| Noninterest-bearing demand deposits | 624,202 |  |  | 835,389 |  |  |  |  |  |
| Other noninterest-bearing liabilities | 32,138 |  |  | 29,755 |  |  |  |  |  |
| Stockholders' equity | 238,530 |  |  | 267,057 |  |  |  |  |  |
| Total average liabilities and stockholders’ equity | $3,249,229 |  |  | $2,903,447 |  |  |  |  |  |
| Net interest income and margin (9) |  | $22,212 | 2.92% |  | $28,697 | 4.27% | $(6,485) | $3,535 | $(9,243) |
| Cost of funds (10) |  |  | 2.73% |  |  | 0.69% |  |  |  |
| Net interest spread (11) |  |  | 2.15% |  |  | 3.93% |  |  |  |
| (1) Annualized. |  |  |  |  |  |  |  |  |  |
| (2) Change in income/expense due to both volume and rate has been allocated in proportion to the absolute dollar amounts of the change in each. |  |  |  |  |  |  |  |  |  |
| (3) Computed on a fully taxable equivalent basis assuming a 22.65% and 21% income tax rate for the three months ended September 30, 2023 and 2022, respectively. |  |  |  |  |  |  |  |  |  |
| (4) Includes deferred loan fees/costs. |  |  |  |  |  |  |  |  |  |
| (5) Non-accrual loans have been included in the computations of average loan balances. |  |  |  |  |  |  |  |  |  |
| (6) Includes accretion of fair value adjustments (discounts) on acquired loans of $624 thousand and $758 thousand for the three months ended September 30, 2023 and 2022, respectively. |  |  |  |  |  |  |  |  |  |
| (7) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $160 thousand and $336 thousand for the three months ended September 30, 2023 and 2022, respectively. |  |  |  |  |  |  |  |  |  |
| (8) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $25 thousand for both the three months ended September 30, 2023 and 2022. |  |  |  |  |  |  |  |  |  |
| (9) Net interest margin is net interest income divided by average interest-earning assets. |  |  |  |  |  |  |  |  |  |
| (10) Cost of funds is total interest expense divided by total interest-bearing liabilities and non-interest bearing demand deposits. |  |  |  |  |  |  |  |  |  |
| (11) Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities. |  |  |  |  |  |  |  |  |  |

Average interest-earning assets were $3.04 billion for the three months ended September 30, 2023 compared to $2.69 billion for the same period of 2022, a $352.4 million increase. This increase was primarily attributable to growth in average balances of loans held for investment, which were greater by $350.2 million in the 2023 period compared to the 2022 period. Total interest income (on a taxable equivalent basis) increased $9.3 million for the three-month period ended September 30, 2023 from the same period of 2022. This increase was primarily due to higher average balances and yields, including fee income, on loans held for investment, and interest earning deposits in other banks. Higher yields in the 2023 period were primarily attributable the re-pricing of variable rate loans and new loan production in the higher interest rate environment. Interest income for the three months ended September 30, 2023 and 2022 included accretion of discounts on acquired loans of $624 thousand and $758 thousand, respectively.

Average interest-bearing liabilities were $2.35 billion for the three months ended September 30, 2023 compared to $1.77 billion for the same period of 2022, a $583.1 million increase. Of this increase, $260.5 million was attributable to higher average balances of time deposits, primarily brokered time deposits, while $107.0 million was attributable to higher average balances of FHLB advances. Interest expense increased by $15.8 million to $20.3 million for the three months ended September 30, 2023 compared to the same period of 2022. Cost of interest-bearing liabilities increased to 3.45% for the third quarter of 2023 from 1.01% for the third quarter of 2022, while cost of funds were 2.73% and 0.69% for the same respective periods. Higher cost of funds in the 2023 period was primarily due to higher market interest rates and a shift in the mix of average liabilities, including higher cost wholesale funding. Interest expense in the third quarters of 2023 and 2022 included the amortization of fair value adjustments (premium) on assumed time deposits of $160 thousand and $336 thousand, respectively, which was a reduction to interest expense.

Net interest income (on a taxable equivalent basis) for the three months ended September 30, 2023 was $22.2 million compared to $28.7 million for the same period in 2022, a decrease of $6.5 million. Net interest margin was 2.92% and 4.27% for the third quarters of 2023 and 2022, respectively. Accretion and amortization of purchase accounting adjustments had a 11 and 17 basis point positive effect on net interest margin for the same respective periods.

The following table presents the average balance sheets for the nine months ended September 30, 2023 and 2022. Also shown are the amounts of interest earned on interest-earning assets, with related tax-equivalent yields, and interest expense on interest-bearing liabilities, with related rates, as well as a volume and rate analysis of changes in net interest income for the periods stated.

*(Dollars in thousands)*

| Average Assets | Average Balances, Income and Expense, Yields and Rates For the nine months ended September 30, 2023 Average Balance | Interest | Yield/ Rate (1) | 2022 Average Balance | Interest | Yield/ Rate (1) | Total Increase/ (Decrease) | Increase/(Decrease) Due to Volume (2) | Rate (2) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Taxable securities | $365,802 | $7,663 | 2.79% | $391,144 | $6,236 | 2.13% | $1,427 | $(404) | $1,831 |
| Tax-exempt securities (3) | 18,921 | 331 | 2.33% | 20,502 | 310 | 2.02% | 21 | (24) | 45 |
| Total securities | 384,723 | 7,994 | 2.77% | 411,646 | 6,546 | 2.12% | 1,448 | (428) | 1,876 |
| Interest-earning deposits in other banks | 118,576 | 3,705 | 4.17% | 85,073 | 535 | 0.84% | 3,170 | 211 | 2,959 |
| Federal funds sold | 5,549 | 201 | 4.83% | 42,469 | 283 | 0.89% | (82) | (246) | 164 |
| Loans held for sale | 54,481 | 1,124 | 2.75% | 48,724 | 1,183 | 3.24% | (59) | 140 | (199) |
| Paycheck Protection Program loans (4) | 8,190 | 49 | 0.80% | 20,136 | 497 | 3.29% | (448) | (295) | (153) |
| Loans held for investment (4,5,6) | 2,481,518 | 112,836 | 6.06% | 1,932,315 | 76,211 | 5.26% | 36,625 | 21,661 | 14,964 |
| Total average interest-earning assets | 3,053,037 | 125,909 | 5.50% | 2,540,363 | 85,255 | 4.47% | 40,654 | 21,043 | 19,611 |
| Less: allowance for credit losses | (37,992) |  |  | (14,667) |  |  |  |  |  |
| Total noninterest-earning assets | 242,886 |  |  | 233,896 |  |  |  |  |  |
| Total average assets | $3,257,931 |  |  | $2,759,592 |  |  |  |  |  |
| **Average Liabilities and Stockholders’ Equity:** |  |  |  |  |  |  |  |  |  |
| Interest-bearing demand, money market deposits, and savings | $1,328,450 | $27,157 | 2.73% | $1,142,330 | $3,494 | 0.41% | $23,663 | $569 | $23,094 |
| Time deposits (7) | 606,592 | 14,913 | 3.28% | 426,970 | 2,635 | 0.82% | 12,278 | 1,109 | 11,169 |
| Total interest-bearing deposits | 1,935,042 | 42,070 | 2.90% | 1,569,300 | 6,129 | 0.52% | 35,941 | 1,678 | 34,263 |
| FHLB borrowings (8) | 282,150 | 9,604 | 4.54% | 61,770 | 845 | 1.82% | 8,759 | 3,015 | 5,744 |
| FRB borrowings | 33,811 | 1,216 | 4.80% | 6,508 | 114 | 2.34% | 1,102 | 478 | 624 |
| Subordinated notes and other borrowings (9) | 39,908 | 1,666 | 5.57% | 39,961 | 1,668 | 5.57% | (2) | (2) | 0 |
| Total average interest-bearing liabilities | 2,290,911 | 54,556 | 3.18% | 1,677,539 | 8,756 | 0.70% | 45,800 | 5,169 | 40,631 |
| Noninterest-bearing demand deposits | 690,117 |  |  | 775,440 |  |  |  |  |  |
| Other noninterest-bearing liabilities | 38,373 |  |  | 39,482 |  |  |  |  |  |
| Stockholders' equity | 238,530 |  |  | 267,131 |  |  |  |  |  |
| Total average liabilities and stockholders’ equity | $3,257,931 |  |  | $2,759,592 |  |  |  |  |  |
| Net interest income and margin (10) |  | $71,353 | 3.12% |  | $76,499 | 4.02% | $(5,146) | $15,874 | $(21,020) |
| Cost of funds (11) |  |  | 2.44% |  |  | 0.48% |  |  |  |
| Net interest spread (12) |  |  | 2.32% |  |  | 3.78% |  |  |  |
| (1) Annualized. |  |  |  |  |  |  |  |  |  |
| (2) Change in income/expense due to both volume and rate has been allocated in proportion to the absolute dollar amounts of the change in each. |  |  |  |  |  |  |  |  |  |
| (3) Computed on a fully taxable equivalent basis assuming a 22.65% and 21% income tax rate for the nine months ended September 30, 2023 and 2022, respectively. |  |  |  |  |  |  |  |  |  |
| (4) Includes deferred loan fees/costs. |  |  |  |  |  |  |  |  |  |
| (5) Non-accrual loans have been included in the computations of average loan balances. |  |  |  |  |  |  |  |  |  |
| (6) Includes accretion of fair value adjustments (discounts) on acquired loans of $1.8 million and $4.8 million for the nine months ended September 30, 2023 and 2022, respectively. |  |  |  |  |  |  |  |  |  |
| (7) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $666 thousand and $1.2 million for the nine months ended September 30, 2023 and 2022, respectively. |  |  |  |  |  |  |  |  |  |
| (8) Includes amortization of fair value adjustments (premiums) on assumed FHLB borrowings of $111 thousand for the nine months ended September 30, 2022. |  |  |  |  |  |  |  |  |  |
| (9) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $75 thousand for both the nine months ended September 30, 2023 and 2022. |  |  |  |  |  |  |  |  |  |
| (10) Net interest margin is net interest income divided by average interest-earning assets. |  |  |  |  |  |  |  |  |  |
| (11) Cost of funds is total interest expense divided by total interest-bearing liabilities and non-interest bearing demand deposits. |  |  |  |  |  |  |  |  |  |
| (12) Net interest spread is the yield on average interest-earning assets less the cost of average interest-bearing liabilities. |  |  |  |  |  |  |  |  |  |

Average interest-earning assets were $3.05 billion for the nine months ended September 30, 2023 compared to $2.54 billion for the same period of 2022, a $512.7 million increase. This increase was primarily attributable to growth in average balances of loans held for investment, which increased $549.2 million in the 2023 period compared to the 2022 period, partially offset by lower average balances of taxable securities, federal funds sold, loans held for sale, and PPP loans. Total interest income (on a taxable equivalent basis) increased $40.7 million for the nine-month period ended September 30, 2023 from the same period of 2022. This increase was primarily due to higher average balances and yields, including fee income on loans held for investment and interest-earning deposits in other banks. Higher yields in the 2023 period were primarily attributable to the re-pricing of variable rate loans and new loan production in the higher interest rate environment, partially offset by lower accretion of purchase accounting adjustments (discounts) on acquired loans. Interest income for the nine months ended September 30, 2023 and 2022 included accretion of discounts on acquired loans of $1.8 million thousand and $4.8 million, respectively.

Average interest-bearing liabilities were $2.29 billion for the nine months ended September 30, 2023 compared to $1.68 billion for the same period of 2022, a $613.4 million increase. Interest expense increased by $45.8 million to $54.6 million for the nine months ended September 30, 2023 compared to the same period of 2022. Cost of interest-bearing liabilities increased to 3.18% for the first nine months of 2023 from 0.70% for the same period of 2022, while cost of funds were 2.44% and 0.48% for the same respective periods. Higher cost of funds in the 2023 period was primarily due to higher market interest rates and a shift in the mix of average liabilities, including higher cost wholesale funding. Interest expense in the first nine months of 2023 and 2022 included the amortization of fair value adjustments (premium) on assumed time deposits of $666 thousand and $1.2 million, respectively, which was a reduction to interest expense.

Net interest income (on a taxable equivalent basis) for the nine months ended September 30, 2023 was $71.4 million as compared to $76.5 for the same period in 2022. Net interest margin was 3.12% and 4.02% for the nine months ended September 30, 2023 and 2022, respectively. Accretion and amortization of purchase accounting adjustments had a 11 basis point and 32 basis point positive effect on net interest margin for the same respective periods.

*Provision for Credit Losses.* The Company recorded a provision for credit losses of $11.1 million in the third quarter of 2023 compared to $3.9 million in the third quarter of 2022. Provision for credit losses for the first nine months of 2023 and 2022 was $19.6 million and $13.9 million, respectively. Provision for credit losses in the 2023 periods were primarily attributable to specific reserves on the previously noted group of specialty finance loans, partially offset by a credit to provision for credit losses on unfunded commitments.

*Noninterest Income*. The following table presents a summary of noninterest income and the dollar and percentage change for the periods presented.

*(Dollars in thousands)*

|  | For the three months ended September 30, 2023 | September 30, 2022 | Change $ | Change % |
| --- | ---: | ---: | ---: | ---: |
| Fair value adjustments of other equity investments | $55 | $(50) | $105 | (210.0%) |
| Residential mortgage banking income, including MSRs | 3,811 | 3,167 | 644 | 20.3% |
| Gain on sale of guaranteed government loans | 6 | 1,565 | (1,559) | (99.6%) |
| Wealth and trust management | 462 | 513 | (51) | (9.9%) |
| Service charges on deposit accounts | 365 | 354 | 11 | 3.1% |
| Increase in cash surrender value of bank owned life insurance | 311 | 398 | (87) | (21.9%) |
| Bank and purchase card, net | 357 | 353 | 4 | 1.1% |
| Loss on sale of securities available for sale | (649) | — | (649) | 100.0% |
| Other | 2,697 | 1,668 | 1,029 | 61.7% |
| Total noninterest income | $7,415 | $7,968 | $(553) | (6.9%) |

*(Dollars in thousands)*

|  | For the nine months ended September 30, 2023 | September 30, 2022 | Change $ | Change % |
| --- | ---: | ---: | ---: | ---: |
| Fair value adjustments of other equity investments | $(277) | $9,228 | $(9,505) | (103.0%) |
| Residential mortgage banking income, including MSRs | 9,409 | 18,686 | (9,277) | (49.6%) |
| Gain on sale of guaranteed government loans | 4,799 | 4,530 | 269 | 5.9% |
| Wealth and trust management | 1,356 | 1,318 | 38 | 2.9% |
| Service charges on deposit accounts | 1,057 | 996 | 61 | 6.1% |
| Increase in cash surrender value of bank owned life insurance | 885 | 946 | (61) | (6.4%) |
| Bank and purchase card, net | 1,257 | 1,374 | (117) | (8.5%) |
| Loss on sale of securities available for sale | (649) | — | (649) | 100.0% |
| Other | 6,597 | 5,174 | 1,423 | 27.5% |
| Total noninterest income | $24,434 | $42,252 | $(17,818) | (42.2%) |

Lower noninterest income in the third quarter of 2023 compared to the same period of 2022 was primarily attributable to a lower gain on sale of guaranteed government loans, partially offset by higher residential mortgage banking income, including mortgage servicing rights (“MSRs”) and an increase in noninterest income from other investments.

Contributing to the decline in the nine month period ended September 30, 2023 compared to the 2022 period was higher income from fair value adjustments of other equity investments in the 2022 period attributable to the Company's equity investments, primarily in certain fintech companies. The Company records certain equity investments at fair value when an observable market event occurs, such as the issuance or transfer of shares of substantially similar investments. Also contributing to the decline was lower residential mortgage banking income primarily due to a significant decline in mortgage production and sales in the 2023 period ($149.5 million) compared to the 2022 period ($352.2 million).

*Noninterest Expense.* The following tables present a summary of noninterest expense and the dollar and percentage change for the periods stated.

*(Dollars in thousands)*

|  | For the three months ended September 30, 2023 | September 30, 2022 | Change $ | Change % |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $14,640 | $14,174 | $466 | 3.3% |
| Occupancy and equipment | 1,475 | 1,422 | 53 | 3.7% |
| Data processing | 1,710 | 1,332 | 378 | 28.4% |
| Legal, issuer, and regulatory filing | 912 | 804 | 108 | 13.4% |
| Advertising and marketing | 350 | 302 | 48 | 15.9% |
| Communications | 1,181 | 932 | 249 | 26.7% |
| Audit and accounting fees | 791 | 308 | 483 | 156.8% |
| FDIC insurance | 1,322 | 460 | 862 | 187.4% |
| Intangible amortization | 308 | 377 | (69) | (18.3%) |
| Other contractual services | 1,492 | 703 | 789 | 112.2% |
| Other taxes and assessments | 802 | 711 | 91 | 12.8% |
| Regulatory remediation | 3,782 | 4,025 | (243) | (6.0%) |
| Goodwill impairment | 26,826 | — | 26,826 | 100.0% |
| ESOP litigation | 6,000 | — | 6,000 | 100.0% |
| Other | 3,030 | 3,658 | (628) | (17.2%) |
| Total noninterest expense | $64,621 | $29,208 | $35,413 | 121.2% |

*(Dollars in thousands)*

|  | For the nine months ended September 30, 2023 | September 30, 2022 | Change $ | Change % |
| --- | ---: | ---: | ---: | ---: |
| Salaries and employee benefits | $44,447 | $44,143 | $304 | 0.7% |
| Occupancy and equipment | 4,957 | 4,407 | 550 | 12.5% |
| Data processing | 4,187 | 3,152 | 1,035 | 32.8% |
| Legal, issuer, and regulatory filing | 4,899 | 1,704 | 3,195 | 187.5% |
| Advertising and marketing | 973 | 1,142 | (169) | (14.8%) |
| Communications | 3,483 | 2,761 | 722 | 26.1% |
| Audit and accounting fees | 1,440 | 828 | 612 | 73.9% |
| FDIC insurance | 3,297 | 797 | 2,500 | 313.7% |
| Intangible amortization | 998 | 1,160 | (162) | (14.0%) |
| Other contractual services | 5,649 | 1,803 | 3,846 | 213.3% |
| Other taxes and assessments | 2,407 | 1,952 | 455 | 23.3% |
| Regulatory remediation | 7,304 | 4,558 | 2,746 | 60.2% |
| Merger-related | — | 50 | (50) | (100.0%) |
| Goodwill impairment | 26,826 | — | 26,826 | 100.0% |
| ESOP litigation | 6,000 | — | 6,000 | 100.0% |
| Other | 10,653 | 8,767 | 1,886 | 21.5% |
| Total noninterest expense | $127,520 | $77,224 | $50,296 | 65.1% |

Excluding the $26.8 million goodwill impairment charge, the $6.0 million reserve for a proposed settlement of the VCB ESOP litigation, and regulatory remediation, noninterest expense increased $2.7 million (or 11.2%) and $14.8 million (20.3%) for the three and nine months ended September 30, 2023, respectively, compared to the same periods of 2022. Regulatory remediation expenses include consulting, legal, and other costs incurred as part of the Company's efforts to remediate the findings in the Written Agreement. Higher other contractual services expense in the 2023 periods was primarily due to outsourced BSA/AML compliance services as the Bank continues to augment its compliance staff, while higher legal expense was primarily attributable to corporate, employee benefit plans, and other employment matters. Included in legal expense is $3.2 million incurred during 2023 in defense of the VCB ESOP litigation. Higher FDIC insurance expense relative to the prior periods was primarily due to balance sheet growth and other factors such as lower profitability and regulatory capital levels, which increase the assessment rate.

*Income Tax (Benefit) Expense*. Income tax benefit from continuing operations for the three months ended September 30, 2023 was $4.7 million compared to income tax expense of $801 thousand for the same period of 2022, resulting in an effective income tax rate of 10.2% and 22.6% for the same respective periods. Income tax benefit from continuing operations for the nine months ended September 30, 2023 was $5.3 million compared to income tax expense of $6.3 million for the same period of 2022, resulting in an effective income tax rate of 10.4% and 22.8% for the same respective periods. The lower effective tax rates in the 2023 periods was primarily attributable to the goodwill impairment charge of $26.8 million, which has no tax effect, thus resulting in a lower income tax benefit.

### Analysis of Financial Condition

All loan portfolio and ACL information presented as of and for the three and nine months ended September 30, 2023 is in accordance with ASC 326. All loan information presented prior to this period is presented in accordance with previously applicable GAAP. As a result, the presentation of information pre-ASC 326 and post-ASC 326 adoption will not be comparable for most disclosures.

*Loan Portfolio.* The Company makes loans to commercial entities and to individuals. Loan terms vary as to interest rate, repayment, and collateral requirements based on the type of loan and the creditworthiness of the borrower. Credit risk tends to be geographically concentrated in that a majority of the loans are to borrowers located in the markets served by the Company; however, the loans contributing to the increase in nonperforming assets and the ACL in the first nine months of 2023 were primarily to borrowers outside of the Company's primary geographic footprint. All loans are underwritten within specific lending policy guidelines that are designed to maximize the Company’s profitability within an acceptable level of business risk.

The following table presents the Company’s loan portfolio by category of loan and the percentage of loans in each category to total loans as of the dates stated.

*(Dollars in thousands)*

|  | September 30, 2023 Amount | Percent | December 31, 2022 Amount | Percent |
| --- | ---: | ---: | ---: | ---: |
| Commercial and industrial | $532,999 | 21.8% | $590,049 | 24.4% |
| Paycheck Protection Program | 6,414 | 0.3% | 11,967 | 0.5% |
| Real estate – construction, commercial | 162,860 | 6.7% | 183,301 | 7.6% |
| Real estate – construction, residential | 76,896 | 3.1% | 76,599 | 3.2% |
| Real estate – mortgage, commercial | 879,655 | 36.0% | 864,989 | 35.8% |
| Real estate – mortgage, residential | 721,383 | 29.4% | 631,772 | 26.2% |
| Real estate – mortgage, farmland | 6,150 | 0.3% | 6,599 | 0.3% |
| Consumer | 59,528 | 2.4% | 47,423 | 2.0% |
| Gross loans | 2,445,885 | 100.0% | 2,412,699 | 100.0% |
| Less: deferred loan fees, net of costs | 485 |  | (1,640) |  |
| Gross loans, net of deferred loans fees and costs | 2,446,370 |  | 2,411,059 |  |
| Less: allowance for credit losses | (49,631) |  | (30,740) |  |
| Loans held for investment, net | $2,396,739 |  | $2,380,319 |  |
| Loans held for sale (not included in totals above) | $69,640 |  | $69,534 |  |

The following table presents the remaining maturities, based on contractual maturity, by loan type and by rate type (variable or fixed), as of September 30, 2023.

*(Dollars in thousands)*

|  | Total Maturities | One Year or Less | Variable rate Total | 1-5 years | 5-15 years | More than 15 years | Fixed rate Total | 1-5 years | 5-15 years | More than 15 years |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $532,999 | $120,839 | $226,630 | $197,065 | $28,524 | $1,041 | $185,530 | $77,163 | $89,839 | $18,528 |
| Paycheck Protection Program | 6,414 | — | — | — | — | — | 6,414 | 6,414 | — | — |
| Real estate – construction, commercial | 162,860 | 49,536 | 74,755 | 27,642 | 18,268 | 28,845 | 38,569 | 35,595 | 1,568 | 1,406 |
| Real estate – construction, residential | 76,896 | 23,710 | 8,657 | 7,156 | 69 | 1,432 | 44,529 | 9,052 | — | 35,477 |
| Real estate – mortgage, commercial | 879,655 | 65,141 | 457,346 | 71,149 | 198,240 | 187,957 | 357,168 | 203,824 | 144,759 | 8,585 |
| Real estate – mortgage, residential | 721,383 | 14,698 | 414,177 | 11,504 | 76,876 | 325,797 | 292,508 | 45,496 | 37,024 | 209,988 |
| Real estate – mortgage, farmland | 6,150 | 151 | 2,162 | 57 | 257 | 1,848 | 3,837 | 2,709 | 399 | 729 |
| Consumer loans | 59,528 | 3,032 | 9,758 | 9,599 | 159 | — | 46,738 | 24,741 | 21,990 | 7 |
| Gross loans | $2,445,885 | $277,107 | $1,193,485 | $324,172 | $322,393 | $546,920 | $975,293 | $404,994 | $295,579 | $274,720 |

50

*Allowance for Credit Losses*. Management makes estimates based on facts available at the time the ACL is determined. Such estimation requires significant judgment at the time made. Management believes that the Company’s ACL was adequate as of September 30, 2023 and December 31, 2022. There can be no assurance, however, that adjustments to the ACL will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments; adverse developments in the economy, on a national basis or in the Company’s market area; and changes in the circumstances of particular borrowers are criteria, among others, that could increase the level of the ACL required, resulting in charges to the provision for credit losses for loans. In addition, bank regulatory agencies periodically review the Bank's ACL and may require the Bank to increase the ACL or the recognition of loan charge-offs, based on judgments different than those of management.

The following table presents an analysis of the change in the ACL by loan type as of and for the periods stated.

*(Dollars in thousands)*

|  | As of and for the three months ended September 30, 2023 | September 30, 2022 | As of and for the nine months ended September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: | ---: | ---: |
| ACL, beginning of period | $38,567 | $17,242 | $30,740 | $12,121 |
| Impact of ASC 326 adoption | — | — | 7,418 | — |
| Charge-offs |  |  |  |  |
| Commercial and industrial | (1,832) | (31) | (9,955) | (4,959) |
| Consumer | (749) | (716) | (2,954) | (1,355) |
| Total charge-offs | (2,581) | (747) | (12,909) | (6,314) |
| Recoveries |  |  |  |  |
| Commercial and industrial | 1,600 | 6 | 2,605 | 430 |
| Consumer | 445 | 133 | 674 | 403 |
| Total recoveries | 2,045 | 139 | 3,279 | 833 |
| Net charge-offs | (536) | (608) | (9,630) | (5,481) |
| Provision for credit losses - loans | 11,600 | 3,900 | 21,103 | 13,894 |
| ACL, end of period | $49,631 | $20,534 | $49,631 | $20,534 |
| Ratio of net charge-offs to average loans outstanding during period: |  |  |  |  |
| Commercial | 0.04% | 0.00% | 0.61% | 0.49% |
| Consumer | 1.45% | 2.89% | 5.45% | 2.89% |
| Total loans | 0.09% | 0.12% | 0.78% | 0.57% |

The ACL includes specific reserves for individually evaluated loans and a general allowance applicable to all loan categories; however, management has allocated the ACL by loan type to provide an indication of the relative risk characteristics of the loan portfolio. The allocation is an estimate and should not be interpreted as an indication that charge-offs will occur in these amounts or that the allocation indicates future trends, and does not restrict the usage of the allowance for any specific loan or category. The following table presents the allocation of the ACL by loan category and the percentage of loans in each category to total loans as of the dates stated.

*(Dollars in thousands)*

|  | September 30, 2023 $% of Loans |  | December 31, 2022 $% of Loans |  |
| --- | ---: | ---: | ---: | ---: |
| Commercial and industrial | $27,822 | 21.8% | $23,073 | 24.4% |
| Paycheck Protection Program | — | 0.3% | — | 0.5% |
| Real estate – construction, commercial | 3,778 | 6.7% | 1,637 | 7.6% |
| Real estate – construction, residential | 1,476 | 3.1% | 628 | 3.2% |
| Real estate – mortgage, commercial | 9,412 | 36.0% | 2,356 | 35.8% |
| Real estate – mortgage, residential | 5,622 | 29.4% | 1,760 | 26.2% |
| Real estate – mortgage, farmland | 15 | 0.3% | 4 | 0.3% |
| Consumer | 1,506 | 2.4% | 1,282 | 2.0% |
| Total | $49,631 | 100.0% | $30,740 | 100.0% |

The information in the table above excludes PPP loans, which carry no ACL as they are fully guaranteed by the U.S. government.

*Nonperforming Assets.* Nonperforming assets consist of nonaccrual loans, loans past due 90 days and still accruing interest, and other real estate owned (“OREO”).

OREO includes properties that have been substantively repossessed or acquired in complete or partial satisfaction of a loan. Such properties, which are held for resale, are carried at the lower of cost or fair market value, including a reduction for the estimated selling expenses.

The following table presents summary information pertaining to nonperforming assets and certain asset quality ratios as of the dates stated.

*(Dollars in thousands)*

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Nonaccrual loans | $77,858 | $76,050 |
| Loans past due 90 days and still accruing | 3,923 | 8,260 |
| Total nonperforming loans | $81,781 | $84,310 |
| OREO | — | 195 |
| Total nonperforming assets | $81,781 | $84,505 |
| ACL | $49,631 | $30,740 |
| Loans held for investment, including PPP loans | $2,446,370 | $2,411,059 |
| Loans held for investment, excluding PPP loans | $2,439,956 | $2,399,092 |
| Total assets | $3,262,713 | $3,130,465 |
| ACL to total loans held for investment, including PPP loans | 2.03% | 1.27% |
| ACL to total loans held for investment, excluding PPP loans | 2.03% | 1.28% |
| ACL to nonperforming loans | 60.69% | 36.46% |
| Nonperforming loans to total loans held for investment, including PPP loans | 3.34% | 3.50% |
| Nonperforming loans to total loans held for investment, excluding PPP loans | 3.35% | 3.51% |
| Nonperforming assets to total assets | 2.51% | 2.70% |

The increase in the ratio of ACL to total loans held for investment, excluding PPP loans, at September 30, 2023 compared to December 31, 2022 was primarily attributable to specific reserves associated with the aforementioned group of specialty finance loans, while $7.4 million was due to the adoption of ASC 326 on January 1, 2023. The ACL as of September 30, 2023 includes $21.8 million of specific reserves on $48.2 million of specialty finance loans. The remaining purchase accounting adjustments (discounts) related to loans acquired in the Bay Banks of Virginia, Inc. merger in 2021 and earlier acquisitions by the Company were $5.8 million and $7.9 million at September 30, 2023 and December 31, 2022, respectively.

Over the last several quarters, the Company tightened its credit risk management practices, including, but not limited to, 1) restructuring the composition of its management loan committee to include greater credit personnel participation, 2) reducing lending approval limits, and 3) reducing lending commitments on borrower relationships.

*Modified Loans.* The Company granted certain loan modifications to borrowers experiencing financial difficulties during the nine months ended September 30, 2023. The total amortized cost of these modified loans was $51.0 million, or 2.08% of gross loans held for investment, as of September 30, 2023, of which $48.1 million were on nonaccrual status as of the same date.

*Investment Securities.* The investment portfolio is used as a source of interest income, credit risk diversification, and liquidity, as well as to manage rate sensitivity and provide collateral for borrowings. Securities in the investment portfolio classified as securities AFS may be sold in response to changes in market interest rates, changes in the securities’ prepayment risk, increased loan demand, general liquidity needs, and other similar factors, and are carried at estimated fair value. The fair value of the Company’s AFS investment securities was $313.9 million as of September 30, 2023, a decrease from $354.3 million at December 31, 2022, primarily due to decline in fair market value and the amortization of securities. As a result of an increase in market longer-term interest rates in the first nine months of 2023, the Company’s portfolio of AFS securities had an unrealized loss of approximately $11.2 million in the same period.

As of September 30, 2023 and December 31, 2022, the majority of the investment securities portfolio consisted of securities rated as investment grade by a leading rating agency. Investment grade securities are judged to have a low risk of default. At September 30, 2023 and December 31, 2022, securities with a fair value of $25.0 million and $241.9 million, respectively, were pledged to secure the Bank’s borrowing facility with the FHLB. As of September 30, 2023, the Company pledged securities with $267.0 million of par value (amortized cost and fair value of $269.0 million and $216.0 million, respectively) as collateral for the Bank Term Funding Program (“BTFP”), established by the Board of Governors of the Federal Reserve System. The Company also pledged securities with a fair value of $11.2 million (amortized cost of $13.4 million) as of September 30, 2023 for access to the FRB Discount Window.

The Company reviews its AFS investment securities portfolio for potential credit losses no less than quarterly. AFS investment securities with unrealized losses are generally a result of pricing changes due to changes in the current interest rate environment and not as a result of permanent credit impairment. The Company does not intend to sell, nor does it believe that it will be required to sell, any of its temporarily impaired AFS securities prior to the recovery of the amortized cost. No ACL has been recognized for AFS securities as of September 30, 2023.

Restricted equity investments consisted of stock in the FHLB (carrying basis $9.4 million and $14.7 million at September 30, 2023 and December 31, 2022, respectively), stock in the FRB (carrying basis of $6.1 million at both September 30, 2023 and December 31, 2022, respectively), and stock in the Company’s correspondent bank (carrying basis of $468 thousand at both September 30, 2023 and December 31, 2022). Restricted equity investments are carried at cost. The Company holds various other equity investments, including shares in other financial institutions and fintech companies, totaling $22.1 million and $23.8 million as of September 30, 2023 and December 31, 2022, respectively, which are carried at fair value with any gain or loss reported in the consolidated statements of operations each reporting period.

The following table presents the amortized cost of the investment portfolio by contractual maturities, as well as the weighted average yields for each of the maturity ranges as of and for the period stated. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

*(Dollars in thousands)*

| Securities available for sale | September 30, 2023 Within One Year Amortized Cost | Weighted Average Yield | One to Five Years Amortized Cost | Weighted Average Yield | Five to Ten Years Amortized Cost | Weighted Average Yield | Over Ten Years Amortized Cost | Weighted Average Yield | Total Amortized Cost |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| State and municipal | $— | —% | $4,337 | 2.83% | $33,956 | 1.98% | $12,829 | 2.51% | $51,122 |
| U. S. Treasury and agencies | 2 | —% | 26,985 | 1.05% | 38,076 | 2.01% | 7,000 | 2.11% | 72,063 |
| Mortgage backed securities | — | —% | 3,067 | 0.52% | 29,378 | 2.26% | 191,193 | 1.89% | 223,638 |
| Corporate bonds | — | —% | 6,300 | 6.75% | 30,108 | 4.35% | 500 | 4.00% | 36,908 |
| Total | $2 |  | $40,689 |  | $131,518 |  | $211,522 |  | $383,731 |

*Deposits.* The principal sources of funds for the Company are core deposits (demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits, and certificates of deposit), primarily from its geographic market area. The Company’s deposit base includes transaction accounts, time and savings accounts, and other accounts that customers use for cash management purposes and which provide a source of fee income and cross-marketing opportunities as well as a source of funds. Time and savings accounts, including money market deposit accounts, also provide a relatively stable source of funding.

Total deposits as of September 30, 2023 were $2.78 billion, an increase of $273.6 million from December 31, 2022, of which $409.5 million was due to higher time deposits, primarily brokered time deposits, which increased $364.2 million in 2023. The Company's relationships with fintech partners have resulted in approximately $720.8 million of deposits as of September 30, 2023, up from $690.2 million as of December 31, 2022. Estimated uninsured deposits totaled approximately $864.8 million as of September 30, 2023, or 31% of total deposits, compared to $1.14 billion, or 46% of total deposits, as of December 31, 2022. Excluding fintech-related deposits, estimated uninsured deposits were 28% and 31% of total deposits as of September 30, 2023 and December 31, 2022, respectively.

Approximately 20.6% of total deposits as of September 30, 2023 were composed of noninterest-bearing demand deposits compared to 25.6% as of December 31, 2022. In contrast, approximately 26.2% of total deposits as of September 30, 2023 were composed of time deposits compared to 15.6% as of December 31, 2022, which was primarily due to the addition of brokered time deposits in the first and third quarters of 2023 in response to industry events in

March 2023. Brokered time deposits represented approximately 14.8% and 1.97% of total deposits as of September 30, 2023 and December 31, 2022, respectively.

Deposits, excluding brokered deposits and fintech-related deposits, declined $121.2 million in the nine months ended September 30, 2023; however, deposits grew 0.06% (annual rate of 2.40%) in the third quarter of 2023.

The following table presents maturities of time deposits for certificate of deposits of $250 thousand or greater as of the dates stated.

*(Dollars in thousands)*

| Maturing in: | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| 3 months or less | $15,710 | $10,642 |
| Over 3 months through 6 months | 30,619 | 14,699 |
| Over 6 months through 12 months | 25,262 | 15,423 |
| Over 12 months | 8,493 | 35,075 |
|  | $80,084 | $75,839 |

*Borrowings.* The following tables present information on the balances and interest rates on borrowings as of and for the periods stated.

*(Dollars in thousands)*

|  | As of and for the nine months ended September 30, 2023 Period-End Balance | Highest Month-End Balance | Average Balance | Weighted Average Rate |
| --- | ---: | ---: | ---: | ---: |
| FHLB borrowings | $150,000 | $310,800 | $282,150 | 4.54% |
| FRB borrowings | 65,000 | 65,000 | 33,811 | 4.80% |
|  | **As of and for the year ended December 31, 2022** |  |  |  |
| (Dollars in thousands) | **Period-End Balance** | **Highest Month-End Balance** | **Average Balance** | **Weighted Average Rate** |
| FHLB borrowings | $311,700 | $311,700 | $113,478 | 3.08% |
| FRB borrowings | 51 | 17,197 | 4,881 | 2.34% |

FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in the Company’s residential, multi-family, and commercial real estate mortgage loan portfolios, as well as select investment securities.

Subordinated notes, net, totaled $39.9 million as of both September 30, 2023 and December 31, 2022.

*Liquidity*. Liquidity is essential to the Company’s business. The Company’s liquidity could be impaired by unforeseen outflows of cash, including deposits, or the inability to access the capital and/or wholesale funding markets. This situation may arise due to circumstances that the Company may be unable to control, such as general market disruption, negative views about the Company or the financial services industry generally, or an operational problem that affects the Company or a third party. The Company’s ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the markets in which they operate or other events.

The Company has established a formal liquidity contingency plan that provides guidelines for liquidity management. Pursuant to the Company’s liquidity management program, it first determines its current liquidity position and then forecasts liquidity based on anticipated changes in the balance sheet. In this forecast, the Company expects to maintain a liquidity cushion. Management then stress tests the Company’s liquidity position under several different stress scenarios, from moderate to severe. Guidelines for the forecasted liquidity cushion and for liquidity cushions for each stress scenario have been established. Management also monitors the Company’s liquidity position through cash flow forecasting and believes its level of liquidity is adequate to conduct the business of the Company.

Deposits are the primary source of the Company’s liquidity. Cash flow from amortizing assets or maturing assets provides funding to meet the needs of depositors and borrowers. The Bank had unsecured federal fund lines available with correspondent banks for overnight borrowing totaling $25.0 million and $28.0 million as of September 30, 2023 and December 31, 2022, respectively. These lines bear interest at the prevailing rates for such loan and are cancelable any time by the correspondent bank. As of September 30, 2023 and December 31, 2022, none of these lines of credit with correspondent banks were drawn upon.

In addition to deposits and federal funds lines, the Company has access to various wholesale funding markets. These markets include the brokered certificate of deposit market, listing service deposit market, and the federal funds market. The Company is a member of the IntraFi Network (formerly, Promontory Interfinancial Network), which allows banking customers to access Federal Deposit Insurance Corporation (the “FDIC”) insurance protection through the Bank on deposits that exceed FDIC insurance limits. The Company also has one-way authority with the IntraFi Network for both Certificate of Deposit Account Registry Service and Insured Cash Sweep products, which provides the Company the ability to access additional wholesale funding as needed.

The Company maintains secured lines of credit with the FHLB under which the Company can borrow up to the allowable amount for the collateral pledged. As of September 30, 2023, the Company had a credit line available of $532.7 million with the FHLB with outstanding advances totaling $150.0 million and letters of credit totaling $100.1 million, leaving the remaining credit availability of $282.6 million as of the same date. The letters of credit are for the benefit of the Treasury Board of the Commonwealth of Virginia to secure public deposits.

The BTFP provides banks with additional liquidity via a secured line of credit collateralized by eligible pledged securities. Available credit is equal to the current par value of the pledged securities. Advances under the BTFP are up to a one-year term and are priced at the one-year overnight index swap rate plus 10 basis points, which is fixed for the term on the advance date. Advances can be repaid at any time without penalty. The Company had an available line of credit through the BTFP of $267.0 million as of September 30, 2023, of which the Company had drawn one advance for $65.0 million, maturing May 10, 2024, with a fixed interest rate of 4.74%, leaving the remaining credit availability of $202.0 million as of the same date.

The Company maintains access to the FRB Discount Window, under which the Company can borrow up to the allowable amount for the securities pledged as collateral. As of September 30, 2023, availability under the FRB Discount Window was $11.1 million. The Company had no outstanding borrowings through the FRB Discount Window as of September 30, 2023 or December 31, 2022,.

The Company utilized the FRB Paycheck Protection Program Liquidity Facility to partially fund PPP loans, which collateralize the advances. As of September 30, 2023 and December 31, 2022, FRB borrowings under this facility totaled $0 and $51 thousand, respectively.

Subsequent to the financial industry events in early March 2023, the Company has undertaken efforts to increase its borrowing capacity by pledging additional eligible collateral with the FHLB, adding borrowing capacity by participating in the BTFP, and more actively sourcing brokered deposits to enhance its liquidity position. The Company has increased its secured borrowing capacity by $552.2 million from $525.1 million at December 31, 2022 to $1.08 billion at September 30, 2023. The Company also added a treasury management resource to provide additional oversight to the Company's liquidity position.

*Capital.* Capital adequacy is an important measure of financial stability and performance. The Company’s objectives are to maintain a level of capitalization that is sufficient to support the Company's strategic objectives.

Banks and bank holding companies are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, financial institutions must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. A financial institution's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Pursuant to the Basel Committee on Banking Supervision's capital guidelines for U.S.

banks (the “Basel III rules”), the Bank must hold a capital conservation buffer of 2.50% above the adequately capitalized risk-based capital ratios for all ratios, except the tier 1 leverage ratio. If a banking organization dips into its capital conservation buffer, it is subject to limitations on certain activities, including payment of dividends, share repurchases, and discretionary compensation to certain officers. The Bank's primary regulators may place certain restrictions on dividends paid by the Bank. The total amount of dividends which may be paid at any date is generally limited to retained earnings of the Bank.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized; although, these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

As of September 30, 2023 and December 31, 2022, the Bank met the capital requirements to be classified as well capitalized; however, the Bank's total risk based capital dropped below the capital conservation buffer as of September 30, 2023, subjecting the Bank to limitations on certain activities, including payment of dividends, share repurchases, and discretionary compensation to certain officers. There have been no conditions or events since these dates that management believes have changed the institution's categorization.

If the Bank were fail to meet the capital adequacy guidelines for a “well-capitalized” bank, it could be required to pay higher insurance premiums to the FDIC or subject to increased regulatory scrutiny. In addition, the Bank would not be able to renew or accept brokered deposits without prior regulatory approval and would be subject to interest rate restrictions on its deposit accounts.

As previously noted, the Company adopted CECL effective January 1, 2023. Federal and state banking regulations allow financial institutions to irrevocably elect to phase-in the after-tax cumulative effect adjustment at adoption to retained earnings ("CECL Transitional Amount") over a three-year period. The three-year phase-in of the CECL Transitional Amount to regulatory capital will be 25%, 50%, and 25% in 2023, 2024, and 2025, respectively. The Bank made this irrevocable election effective with its first quarter 2023 call report.

The following tables present the Company's capital position as of the dates stated.

*(Dollars in thousands)*

| Total risk based capital (To risk-weighted assets) | September 30, 2023 Actual Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | To Be Well Capitalized Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Blue Ridge Bank, N.A. | $284,407 | 10.44% | $286,055 | 10.50% | $272,434 | 10.00% |
| Tier 1 capital |  |  |  |  |  |  |
| (To risk-weighted assets) |  |  |  |  |  |  |
| Blue Ridge Bank, N.A. | $250,210 | 9.18% | $231,567 | 8.50% | $217,946 | 8.00% |
| Common equity tier 1 capital |  |  |  |  |  |  |
| (To risk-weighted assets) |  |  |  |  |  |  |
| Blue Ridge Bank, N.A. | $250,210 | 9.18% | $190,703 | 7.00% | $177,081 | 6.50% |
| Tier 1 leverage |  |  |  |  |  |  |
| (To average assets) |  |  |  |  |  |  |
| Blue Ridge Bank, N.A. | $250,210 | 7.63% | $131,175 | 4.00% | $163,969 | 5.00% |

56

*(Dollars in thousands)*

| Total risk based capital (To risk-weighted assets) | December 31, 2022 Actual Amount | Ratio | For Capital Adequacy Purposes Amount | Ratio | To Be Well Capitalized Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Blue Ridge Bank, N.A. | $301,097 | 10.93% | $289,246 | 10.50% | $275,473 | 10.00% |
| Tier 1 capital |  |  |  |  |  |  |
| (To risk-weighted assets) |  |  |  |  |  |  |
| Blue Ridge Bank, N.A. | $268,545 | 9.75% | $234,152 | 8.50% | $220,379 | 8.00% |
| Common equity tier 1 capital |  |  |  |  |  |  |
| (To risk-weighted assets) |  |  |  |  |  |  |
| Blue Ridge Bank, N.A. | $268,545 | 9.75% | $192,831 | 7.00% | $179,058 | 6.50% |
| Tier 1 leverage |  |  |  |  |  |  |
| (To average assets) |  |  |  |  |  |  |
| Blue Ridge Bank, N.A. | $268,545 | 8.90% | $120,644 | 4.00% | $150,805 | 5.00% |

In addition to the foregoing capital requirements, the OCC has notified the Bank of its decision to establish IMCR for the Bank that are higher than those required for capital adequacy purposes generally. Specifically, the Bank is required to maintain a leverage ratio of 10.00% and a total capital ratio of 13.00%. As of September 30, 2023, the Bank did not meet these IMCR requirements,which could subject the Bank to additional regulatory requirements or directives, including developing and maintaining capital plans, asset sales, limitations on growth, further regulatory sanctions and/or other regulatory enforcement actions. In light of these enhanced requirements, the Company is exploring options for raising additional capital, which could be substantially dilutive to current shareholders.

### Off-Balance Sheet Activities

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis, in a manner similar to that if underwriting a loan. The approved commitments to extend credit that were available but unused as of September 30, 2023 and December 31, 2022 totaled $590.1 million and $736.1 million, respectively.

Conditional commitments are issued by the Company in the form of financial stand-by letters of credit, which guarantee payment to the underlying beneficiary (i.e., third party) if the customer fails to meet its designated financial obligation. As of September 30, 2023 and December 31, 2022, commitments under outstanding financial stand-by letters of credit totaled $23.3 million and $29.8 million, respectively. The credit risk of issuing stand-by letters of credit can be greater than the risk involved in extending loans to customers.

Upon the adoption of ASC 326 on January 1, 2023, the Company recorded an increase to its reserve for unfunded commitments of $3.7 million. For the nine months ended September 30, 2023, the Company recorded a reduction to the provision for credit losses for unfunded commitments of $1.6 million, which was primarily attributable to lower balances of loan commitments. As of September 30, 2023, the reserve for unfunded commitments was $4.0 million compared to $1.8 million as of December 31, 2022.

The Company invests in various partnerships, limited liability companies, and small business investment company funds. Pursuant to these investments, the Company commits to an investment amount that may be fulfilled in future periods. At September 30, 2023, the Company had future commitments outstanding totaling $16.6 million related to these investments.

### Interest Rate Risk Management

As a financial institution, the Company is exposed to various business risks, including interest rate risk. Interest rate risk is the risk to earnings and value arising from volatility in market interest rates. Interest rate risk arises from timing differences in the repricing and maturities of interest-earning assets and interest-bearing liabilities, changes in the expected maturities of assets and liabilities arising from embedded options, such as borrowers' ability to prepay loans and depositors' ability to redeem certificates of deposit before maturity, changes in the shape of the yield curve where interest rates increase or decrease in a nonparallel fashion, and changes in spread relationships between different yield curves, such as U.S. Treasuries and other market-based index rates. The Company’s goal is to maximize net interest income without incurring excessive interest rate risk. Management of net interest income and interest rate risk must be consistent with the level of capital and liquidity that the Bank maintains. The Company manages interest rate risk through an asset and liability committee comprised of members of its board of directors and management (the “ALCO”). The ALCO is responsible for monitoring the Company’s interest rate risk in conjunction with liquidity and capital management.

The Company employs an independent consulting firm to model its interest rate sensitivity that uses a net interest income simulation model as its primary tool to measure interest rate sensitivity. Assumptions for modeling are developed based on expected activity in the balance sheet. For maturing assets, assumptions are created for the redeployment of these assets. For maturing liabilities, assumptions are developed for the replacement of these funding sources. Assumptions are also developed for assets and liabilities that could reprice during the modeled time period. These assumptions also cover how management expects interest rates to change on non-maturity deposits such as interest checking, money market checking, savings accounts, as well as certificates of deposit. Based on inputs that include the current balance sheet, the current level of interest rates, and the developed assumptions, the model produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. The model then simulates the impact on net interest income based on specific changes in interest rates. The rate simulations are performed for a two-year period and include rapid rate changes of down 100 basis points to 400 basis points and up 100 basis points to 400 basis points. The results of these simulations are then compared to the base case.

The following table presents the estimated change in net interest income under various rate change scenarios. The scenarios assume rate changes occur instantaneous and in a parallel manner, which means the changes are the same on all points of the rate curve.

| Change in interest rates: | September 30, 2023 Instantaneous Parallel Rate Shock Scenario Change in Net Interest Income - Year 1 |  | Change in Net Interest Income - Year 2 |  |
| --- | ---: | ---: | ---: | ---: |
| +400 basis points | $(17,602) | (19.0%) | $(16,748) | (17.0%) |
| +300 basis points | (12,241) | (13.2%) | (11,520) | (11.7%) |
| +200 basis points | (7,440) | (8.1%) | (6,772) | (6.9%) |
| +100 basis points | (3,323) | (3.6%) | (2,844) | (2.9%) |
| Base case |  |  |  |  |
| -100 basis points | 2,061 | 2.2% | 1,320 | 1.3% |
| -200 basis points | 3,681 | 4.0% | 1,608 | 1.6% |
| -300 basis points | 5,032 | 5.4% | 986 | 1.0% |
| -400 basis points | 5,667 | 6.1% | (489) | (0.5%) |

The severity of the effect of instantaneous increases in interest rates as shown above is due to the timing of pricing change in the Company's interest-bearing liabilities compared to its interest-earning assets. As of September 30, 2023, approximately 70% of the Company's deposits through its fintech partnerships reprice with changes in federal funds rates. Therefore, an instantaneous change in this index rate results in a relative change in deposit costs. The Company contracts with its fintech partners and continually assesses the cost of these fintech-related deposits relative to sources of fees and other noninterest income earned from these partnerships.

Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve is a regulatory and banking industry practice. However, these stress tests may not represent a realistic forecast of future interest rate movements in the yield curve. In addition, instantaneous parallel interest rate shock modeling is not a predictor of actual future performance of earnings. It is a financial metric used to manage interest rate risk and track the movement of the Company’s interest rate risk position over a historical time frame for comparison purposes.

The asset and liability repricing characteristics of the Company’s assets and liabilities will have a significant impact on its future interest rate risk profile.

## Market risk

As filed, 244 characters.

This information is incorporated herein by reference to the information in section "Interest Rate Risk Management" within Part I, Item 2. "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q.

## Controls and procedures

As filed, 2,693 characters.

### Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods required by the SEC and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. An evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2023 was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based on and as of the date of such evaluation, the aforementioned officers concluded that the Company’s disclosure controls and procedures were effective, except as discussed below.

### Identification of Material Weakness

As previously disclosed in the Explanatory Note to the Consolidated Financial Statements included in the 2022 Form 10-K/A, the Company evaluated the effect of the facts leading to the restatement. Management concluded that a material weakness existed in the timely risk grading and placing of loans on nonaccrual status and, thus, in the determination of the adequacy of the allowance for credit losses for the specialty finance loans. It was further determined that such material weakness did not exist in the remainder of the loan portfolio.

Management, with oversight from the Audit Committee of the Company's Board of Directors, is currently remediating the foregoing material weakness and has taken the following steps in the third quarter of 2023:

- Completed a re-underwriting of all loans in the specialty finance loan portfolio, and believes risk grades and reserves are adequate and appropriately recorded;
- Established a credit policy and risk committee charged with drafting a new credit policy; and
- Began institutionalizing a new philosophy around loan portfolio management.

### Changes in Internal Control over Financial Reporting

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting. Except as noted in the preceding paragraphs, there have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

## Risk factors

As filed, 23,658 characters.

Other than as set forth below, there have been no material changes to the risk factors disclosed in the 2022 Form 10-K/A. The following risk factors supplement, and should be read together with, the risk factors disclosed in the 2022 Form 10-K/A. Additional risks not presently known to the Company, or that it currently deems immaterial, may also adversely affect the Company's business, financial condition, or results of operations. See also “Cautionary Note About Forward-Looking Statements,” included in Part 1, Item 2, of this Form 10-Q.

### Liquidity and Capital

***The Company’s liquidity needs could adversely affect results of operations and financial condition.***

The Company’s primary sources of funds are deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including, but not limited to, changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, availability of, and/or access to, sources of refinancing, business closings or lay-offs, pandemics or endemics, inclement weather, natural disasters and geopolitical uncertainty.

Additionally, deposit levels may be affected by a number of factors, including, but not limited to, rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to customers on alternative investments, and general economic conditions. Much of the Company’s recent deposit growth has been concentrated in its fintech relationships, which can be relatively high-cost and rate-sensitive, and which account for approximately $720.8 million, or 26.0%, of the Company’s deposits as of September 30, 2023. If market interest rates rise or the Company’s competitors raise the rates they pay on deposits, the Company’s funding costs may increase, either because the Company raises its rates to avoid losing deposits or because the Company must rely on more expensive sources of funding. Either of these factors could reduce the Company’s net interest margin and net interest income and could have an adverse effect on the Company’s business, financial condition, results of operations and cash flows from operations.

Further, if customer deposits are not sufficient to fund the Company’s normal operations and liquidity needs, the Company may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank of Atlanta (“FHLB”) advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as additional out-of-market time deposits and brokered deposits. While the Company believes that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if the Company experiences increasing loan demand or is unable to maintain its deposit base, including fintech deposits. Further, there can be no assurance that these arrangements will be available to the Company when needed, on favorable terms, or at all, or that they will be sufficient to meet future liquidity needs. For example, the Company’s ability to access borrowings from the FHLB will be dependent upon whether and the extent to which the Company can provide collateral to secure FHLB borrowings, and the Company’s use of brokered deposits may be limited or discouraged by our banking regulators. The Company may be required, among other things, to slow or discontinue loan growth, capital expenditures or other investments, or liquidate assets. If the Company is unable to access funding sufficient to support its business operations or is unable to access such funding on attractive terms, it may not be able to satisfy its obligations.

### The Company may not be able to raise capital on acceptable terms, or at all.

In light of the IMCR requirements discussed below, the Company is exploring options for raising additional capital. Access to sufficient capital is critical in order to enable the Company to implement its business plan, support its business, expand its operations, and meet applicable capital requirements. The inability to have sufficient capital, whether internally generated through earnings or raised in the capital markets, could adversely impact the Company’s ability to support and to grow its operations. Further, if the Company grows its operations faster than it generates capital internally, it will need to access the capital markets. The Company’s ability to raise additional capital will depend on, among other things, conditions in the capital markets, market perceptions of the banking industry generally and the Company in particular, and the Company’s financial condition and results of operations. Economic conditions and a loss of confidence in financial institutions may increase the Company’s cost of capital and limit access to some sources of capital. An inability to raise additional capital on acceptable terms when needed could have a material adverse impact on the Company’s business, financial condition, and capital ratios.

***Future issuances of the Company’s securities could adversely affect the market price of the common stock and could be dilutive.***

The Company’s board of directors, without the approval of shareholders, could from time to time decide to issue additional shares of common stock or shares of preferred stock, which may adversely affect the market price of the shares of common stock and could be substantially dilutive to the Company’s shareholders. Any sale of additional shares of the Company’s common stock may be at prices lower than the current market value of the Company’s shares. In addition, new investors may have rights, preferences, and privileges that are senior to, and that could adversely affect, the Company’s existing shareholders. For example, preferred stock would be senior to common stock in right of dividends and as to distributions in liquidation. The Company’s shareholders bear the risk of future offerings diluting their stock holdings, adversely affecting their rights as shareholders, and/or reducing the market price of the Company’s common stock.

***Regulatory capital standards require the Company and the Bank to maintain higher levels of capital, which could adversely affect the Company’s profitability and return on equity.***

The Company is subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital that the Company and the Bank must maintain. From time to time, regulators implement changes to these regulatory capital adequacy guidelines. If the Company or the Bank fails to meet these minimum capital guidelines and/or other regulatory requirements, its financial condition would be materially and adversely affected. The Basel III Capital Rules require bank holding companies and their subsidiaries to maintain significantly more capital as a result of higher required capital levels and more demanding regulatory capital risk weightings and calculations. The Bank must also comply with the capital requirements set forth in the “prompt corrective action” regulations pursuant to Section 38 of the FDI Act.

In addition to the foregoing capital requirements, the OCC has notified the Bank of IMCR requirements for the Bank that are higher than those required for capital adequacy purposes generally. Specifically, the Bank is required to maintain a leverage ratio of 10.00% and a total capital ratio of 13.00%. As of September 30, 2023, the Bank did not meet these IMCR requirements, which could subject the Bank to additional regulatory requirements or directives, including developing and maintaining capital plans, asset sales, limitations on growth, further regulatory sanctions and/or other regulatory enforcement actions.

Satisfying these capital and IMCR requirements also may require the Bank to limit its banking operations and/or require the Company to raise additional capital to improve regulatory capital levels, which could negatively affect the business, financial condition, and results of operations of the Company.

***The Company and the Bank are subject to regulatory restrictions which limit their ability to pay dividends.***

The Company’s ability to make dividend payments on its common stock depends primarily on certain regulatory considerations and the receipt of dividends and other distributions from the Bank. In consideration of the IMCR requirements discussed above, the Company and the Bank plan to preserve capital and, in October 2023, the Company’s board of directors suspended payment of dividends on the Company’s common stock until further notice. As a result, the Company likely will not resume payments of dividends in the foreseeable future.

### Credit Risk

### The Company’s specialty finance loans may further increase its credit risk.

As of September 30, 2023, the Company’s nonperforming loans include a group of specialty finance loans totaling $48.2 million as of September 30, 2023. The Company’s ACL as of September 30, 2023 includes $21.8 million of specific reserves for this group of loans. While management believes that the ACL was adequate as of September 30, 2023 and that the credit deterioration of this group of loans is an isolated event within the Company’s loan portfolio, there can be no assurance that the Company will not experience further deterioration within this group of loans or other increases in nonperforming loans in the future. These specialty finance loans are of higher risk than other types of loans originated by the Company, due to the nature of the collateral, and as such, the Company’s ability to pursue collections could be delayed or protracted. Any of these factors could cause the Company to incur charge-offs to the ACL, lost interest income relating to these loans, and additional increases in the credit loss reserves, any of which may have a material adverse effect on earnings, liquidity, and capital.

### Regulatory and Operational

***The Bank’s formal Written Agreement with the OCC has required, and in the future will require, the Bank to devote significant resources to enhance its fintech policies, procedures, and operations, and the failure to comply with any provision of the agreement may cause the OCC to take further action against it.***

On August 29, 2022, the Bank entered into the Written Agreement with the OCC. The Written Agreement requires the Bank to, among other things, enhance oversight of its third-party fintech partnerships, improve its control framework related to BSA compliance and anti-money laundering and adopt, implement, and adhere to revised and expanded risk-based policies, procedures, and processes. While subject to the Written Agreement, the Bank will also be required to obtain an OCC non-objection prior to onboarding or signing a contract with a new third-party fintech partner or offering new products or services or conducting new activities with or through existing third-party fintech partners.

The Company’s management and boards of directors have devoted, and expect to continue to devote considerable time, attention, and resources on developing, implementing, and monitoring corrective actions to comply with the terms of the Written Agreement that otherwise would be directed to its business and operations. Any such distraction on the part of the Company’s management could affect the Company’s ability to service existing business and pursue its strategic objectives and may adversely affect the business and earnings of the Company. The Company is also utilizing third-party consultants and other advisors to assist in complying with the Written Agreement, and noninterest expense has increased, and may continue to increase, as a result.

While the Company is actively working to bring the Bank’s fintech policies, procedures, and operations into conformity with OCC directives, many aspects of the Written Agreement require considerable time for completion, implementation, validation, and sustainability, and weaknesses in the Bank’s BSA compliance program remain, which could subject the Bank to additional compliance costs and further regulatory enforcement actions, including civil monetary penalties and the imposition of material restrictions on the activities of the Bank. Moreover, failure to implement and maintain an effective BSA compliance program could have reputational consequences for the Company, prevent the Company from executing its business strategy, and negatively impact its business and the price of the Company’s common stock. Any of these results could have a material adverse effect on the Company's business, financial condition and results of operations.

If the Company does not comply with the Written Agreement, or the OCC imposes additional measures, the Company could be subject to additional regulatory requirements or directives, including developing and maintaining capital plans, asset sales, loan reserves or impairments, limitations on growth, further regulatory sanctions and/or other regulatory enforcement actions.

***The Company’s fintech line of business could subject it to increased operational, compliance, and other risks that could adversely affect the Company’s business, financial condition, and results of operations.***

The Company’s business strategy over the past several years has included growing partnerships with fintech companies, which serve as a source of loan and deposit growth, fee income, and technology-related solutions for the Company. These fintech and banking-as-a-service ("BaaS") partnerships have resulted, among other things, in rapid growth in the Company’s deposit base. As of September 30, 2023 and December 31, 2022, fintech-related deposits accounted for $720.8 million and $690.2 million, respectively, of the Company's deposits. Of this, BaaS deposits of $537.2 million and $524.1 million were related to approximately 250,000 and 185,000 accounts of active end users as of September 30, 2023 and December 31, 2022, respectively. This rapid increase in deposit accounts necessitates enhanced operational and control systems and additional qualified personnel and to oversee and manage the increased operational and compliance burdens from these accounts, including those resulting from increased account opening, suspicious activity monitoring, network security controls related to ACH and payment systems, protection of customer records and data confidentiality, and consumer compliance matters, among others. If the Company is not able to control the growth of new fintech deposits or implement and maintain improved systems to monitor and control these additional burdens, the Company could be subject to additional supervisory actions, operational and compliance risks, and reputational harm, and could experience material adverse consequences on its business, financial condition, and results of operations.

In consideration of the risk profile of the fintech line of business and the Written Agreement, the Company is in the process of winding down certain of its current fintech and BaaS partnerships. Termination of these relationships could cause the Company’s noninterest income and deposits to decrease, which could have an adverse effect on the Company’s liquidity, earnings, and capital. See “The Company’s liquidity needs could adversely affect results of operations and financial condition.”

In certain cases, the Company also has made and may continue to make investments in these third-party fintech companies, which may be unseasoned, unprofitable, or have limited established operating histories or earnings and may be more vulnerable to financial failure. Any failure to successfully manage these partnerships, or the failure of these fintech companies to perform, could subject the Company to a loss of its investment or other adverse effects on the Company’s business prospects, future financial condition, and results of operations.

***The soundness of other financial institutions could adversely affect the Company.***

The Company’s ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by the Company or by other institutions. Many of these transactions expose the Company to credit risk in the event of default of its counterparty or client. In addition, credit risk may be exacerbated when the collateral held cannot be realized upon or is liquidated at prices insufficient to recover the full amount of the financial instrument exposure due. There is no assurance that any such losses would not materially and adversely affect results of operations.

In addition, financial challenges at other banking institutions could lead to depositor concerns that spread within the banking industry. In March 2023, Silicon Valley Bank and Signature Bank experienced large deposit outflows coupled with insufficient liquidity to meet withdrawal demands, resulting in the institutions being placed into FDIC receiverships. In the aftermath, there was substantial market disruption and concern that diminished depositor confidence could spread across the banking industry, leading to deposit outflows that could destabilize other institutions. While public confidence in the banking system has stabilized, deposit outflows caused by reputational concerns or events affecting the banking industry generally could adversely affect the Company’s liquidity, financial condition, and results of operations.

### Market Conditions

***Changes in economic conditions, especially in the areas in which the Company conducts operations, could materially and negatively affect its business.***

The Company’s business is directly impacted by economic conditions, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond its control. Although the domestic and global economies have largely recovered from the COVID-19 pandemic, certain consequences of the pandemic continue to impact the macroeconomic environment and may persist for some time. For example, the COVID-19 pandemic could have long-lasting impacts on certain industries due to changes in consumer behavior and business practices, including remote work and business travel. Further, the growth in economic activity and in the demand for goods and services, coupled with labor shortages, supply chain disruptions and other factors, has contributed to rising inflationary pressures, the Federal Reserve’s responsive interest rate hikes, and the risk of recession. A deterioration in economic conditions, whether caused by global, national, or local concerns, especially within the Company’s market area, could result in, among other consequences, an increase in loan delinquencies, problem assets and foreclosures, a decline in demand for the Company’s products and services, a decrease in low cost or non-interest bearing deposits, and/or a deterioration in the value of collateral for loans, especially real estate loans, any of which could result in losses that materially and adversely affect the Company’s business.

### The Company may be adversely impacted by changes in market conditions.

The Company is directly and indirectly affected by changes in market conditions. Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. As a financial institution, market risk is inherent in the financial instruments associated with the Company’s operations and activities, including loans, deposits, securities, short-term borrowings, long-term debt, and trading account assets and liabilities. A few of the market conditions that may shift from time to time, thereby exposing the Company to market risk, include fluctuations in interest rates, equity and futures prices, and price deterioration or changes in value due to changes in market perception or actual credit quality of issuers. Any changes in these market conditions, in current accounting principles or interpretations of these principles could impact the Company’s assessment of fair value and thus the determination of other-than-temporary impairment of the securities in the investment securities portfolio, which could adversely affect the Company’s financial condition, capital ratios, and results of operations.

The Company’s investment securities portfolio, in particular, may be impacted by market conditions beyond its control, including rating agency downgrades of the securities, defaults of the issuers of the securities, lack of market pricing of the securities, inactivity or instability in the credit markets, and changes in market interest rates. For example, the Company carries its available for sale securities portfolio at estimated fair market value. As a result of rising interest rates during 2022 and 2023, the unrealized losses in the Company’s investment securities portfolio increased dramatically during 2022 and 2023 and thereby negatively impacted the Company’s accumulated other comprehensive income. These unrealized losses (net of income taxes) were approximately $53.8 million at September 30, 2023, compared to approximately $45.1 million and $3.6 million as of December 31, 2022 and 2021, respectively. Such losses could be realized into earnings should liquidity needs and/or business strategy necessitate the sales of securities in a loss position, which could adversely affect the Company’s financial condition, capital ratios, and results of operations.

***The Company’s business and earnings are impacted by governmental, fiscal, and monetary policy over which it has no control.***

The Company is affected by domestic monetary policy. The Federal Reserve regulates the supply of money and credit in the United States, and its policies determine in large part the Company’s cost of funds for lending, investing, and capital raising activities and the return it earns on those loans and investments, both of which affect the Company’s net interest margin. The actions of the Federal Reserve also can materially affect the value of financial instruments that the Company holds, such as loans and debt securities, and also can affect the Company’s borrowers, potentially increasing the risk that they may fail to repay their loans. The Federal Reserve increased the target federal funds rate by 425 basis points during 2022 to a range of 425 to 450 basis points as of December 31, 2022 and by another 100 basis points during 2023 to a range of 525 to 550 basis points at September 30, 2023. The Company’s business and earnings also are affected by the fiscal or other policies that are adopted by various regulatory authorities of the United States. Changes in fiscal or monetary policy are beyond the Company’s control and hard to predict.

Filed Nov 14, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-063784. Last ingested by Listed: Oct 26, 2026, 17:01 ET. No prices; not investment advice.