UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2020

OR

For the transition period from                         to                         

Commission File Number: 001-39165

 

BLUE RIDGE BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Registrant’s telephone number, including area code: (540) 743-6521

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ☐    No  ☒

As of November 13, 2020, the registrant had 5,718,621 shares of common stock, no par value per share, outstanding.

 

 

 

 

 

---

 

 

 

 

2

---

PART I.    FINANCIAL INFORMATION

Item 1. Financial Statements

Blue Ridge Bankshares, Inc.

Consolidated Balance Sheets

(dollars in thousands, except share and per share data)

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3

---

Blue Ridge Bankshares, Inc.

Consolidated Statements of Income

(dollars in thousands, except per share data)

(Unaudited)

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4

---

 

Blue Ridge Bankshares, Inc.

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(Unaudited)

 

 

See accompanying notes to unaudited consolidated financial statements.

5

---

Blue Ridge Bankshares, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

(dollars in thousands, except share and per share data)

(Unaudited)

Three Months Ended September 30, 2020 and 2019

 

Nine Months Ended September 30, 2020 and 2019

 

See accompanying notes to unaudited consolidated financial statements.

 

6

---

Blue Ridge Bankshares, Inc.

Consolidated Statements of Cash Flows

For the Nine Months Ended September 30, 2020 and 2019

(dollars in thousands)

(Unaudited)

 

 

See accompanying notes to unaudited consolidated financial statements.

7

---

Notes to Consolidated Financial Statements (Unaudited)

Note 1 – Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements of Blue Ridge Bankshares, Inc. (the “Company” or “Blue Ridge”) include the accounts of Blue Ridge Bank, N.A. (the “Bank”), PVB Properties, LLC, VCB Services, LLC, and MoneyWise Payroll Solutions, Inc. (net of noncontrolling interest) and were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for the interim financial information. Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the quarter and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The accompanying unaudited consolidated financial statements include the accounts of the Company, the Bank and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

Nature of Operations

The Company operates under the supervision and regulation of the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Bureau of Financial Institutions of the Virginia State Corporation Commission, while the Bank operates under a national charter subject to the supervision and regulation of the Office of the Comptroller of the Currency (the “OCC”).  The Bank provides commercial banking services to customers located primarily in the Piedmont, Southside, and Shenandoah Valley regions of the Commonwealth of Virginia and also operates under the name Carolina State Bank in Greensboro, North Carolina. Mortgage lending services are provided in these regions as well with additional mortgage offices located in Northern Virginia, Maryland, North Carolina, Delaware, and South Carolina.

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, goodwill and intangibles, fair value, the valuation of deferred tax assets and liabilities, and valuation of foreclosed real estate. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for fair presentation of the results of operations in these financial statements, have been made.

 

Reclassification

Certain reclassifications have been made to prior period amounts to conform to current period presentation. None of these reclassifications are considered material and have no impact on net income.

 

Earnings Per Share

Accounting guidance specifies the computation, presentation and disclosure requirements for earnings per share (“EPS”) for entities with publicly held common stock or potential common stock such as options, warrants, convertible securities or contingent stock agreements if those securities trade in a public market. Employee Stock Ownership Plan (“ESOP”) shares are considered outstanding for this calculation. Basic EPS is computed by dividing net income by the weighted average number of common shares outstanding. Diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive common shares had been issued. The Company had no dilutive common shares outstanding at September 30, 2020 and 2019. The following table sets forth the computation of basic and diluted earnings per share for the three months and nine months ended September 30, 2020 and 2019.

 

 

8

---

Note 1 – Summary of Significant Accounting Policies, continued

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU, among other things, require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. As a “smaller reporting company” under Securities and Exchange Commission (“SEC”) rules, the Company will be required to apply the guidance for fiscal years, and interim periods within those years, beginning after December 15, 2022. The Company has identified a third-party vendor to assist in the measurement of expected credit losses under this standard. The Company is currently evaluating the implementation of ASU 2016-13 due to the change in implementation dates for smaller reporting companies. 

 

Effective November 25, 2019, the SEC adopted Staff Accounting Bulletin (“SAB”) 119. SAB 119 updated portions of SEC interpretative guidance to align with FASB Accounting Standards Codification (“ASC”) 326, “Financial Instruments – Credit Losses.” It covers topics including (1) measuring current expected credit losses; (2) development, governance, and documentation of a systematic methodology; (3) documenting the results of a systematic methodology; and (4) validating a systematic methodology.  The Company is currently assessing the impact SAB 119 will have on its consolidated financial statements.

 

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740) – Simplifying the Accounting for Income Taxes.” The ASU is expected to reduce cost and complexity related to the accounting for income taxes by removing specific exceptions to general principles in Topic 740 (eliminating the need for an organization to analyze whether certain exceptions apply in a given period) and improving financial statement preparers’ application of certain income tax-related guidance. This ASU is part of the FASB’s simplification initiative to make narrow-scope simplifications and improvements to accounting standards through a series of short-term projects. For public business entities, such as the Company, the amendments are effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact that ASU 2019-12 will have on its consolidated financial statements.

 

In January 2020, the FASB issued ASU 2020-01, “Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) – Clarifying the Interactions between Topic 321, Topic 323, and Topic 815.” The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. For public business entities, the amendments in the ASU are effective for fiscal years beginning after December 31, 2020, and interim periods within those fiscal years. Early adoption is permitted The Company is currently assessing the impact that ASU 2020-01 will have on its consolidated financial statements.

 

In March 2020, the FASB issued ASU No. 2020-04 “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” These amendments provide temporary optional guidance to ease the potential burden in accounting for reference rate reform. The ASU provides optional expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. It is intended to help stakeholders during the global market-wide reference rate transition period. The guidance is effective for all entities as of March 12, 2020 through December 31, 2022. To facilitate an orderly transition from interbank offered rates (“IBORs”) and other benchmark rates to alternative reference rates (“ARRs”), the Company has established an enterprise-wide initiative led by senior management. The objective of this initiative is to identify, assess and monitor risks associated with the expected discontinuation or unavailability of benchmarks, including LIBOR, achieve operational readiness and engage impacted clients in connection with the transition to ARRs. The Company is assessing ASU 2020-04 and its impact on the Company’s transition away from LIBOR for its loan and other financial instruments.

 

 

 

 

 

 

 

 

 

9

---

 

Note 1 – Summary of Significant Accounting Policies, continued

 

On March 12, 2020, the SEC finalized amendments to the definitions of its “accelerated filer” and “large accelerated filer” definitions. The amendments increase the threshold criteria for meeting these filer classifications and are effective on April 27, 2020. Any changes in filer status are to be applied beginning with the filer’s first annual report filed with the SEC subsequent to the effective date.  The rule change expands the definition of “smaller reporting companies” to include entities with public float of less than $700 million and less than $100 million in annual revenues.  The Company meets this expanded category of small reporting company.  If the Company’s annual revenues exceed $100 million, its category will change to “accelerated filer”.  The classifications of “accelerated filer” and “large accelerated filer” require a public company to obtain an auditor attestation concerning the effectiveness of internal control over financial reporting (“ICFR”) and include the opinion on ICFR in its annual report on Form 10-K.  Smaller reporting companies also have additional time to file quarterly and annual financial statements.  All public companies are required to obtain and file annual financial statement audits, as well as provide management’s assertion on effectiveness of ICFR, but the external auditor attestation of ICFR is not required for smaller reporting companies. 

The COVID-19 pandemic has negatively impacted the global economy.  In response to this crisis, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020.  Section 4013 of the CARES Act provides that a financial institution may elect to suspend the requirements under GAAP for certain loan modifications that would otherwise be categorized as a TDR.

Also in response to the COVID-19 pandemic, in March 2020, various regulatory agencies, including the Federal Reserve and the OCC, (the agencies), issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. Under ASC 310-40, “Receivables – Troubled Debt Restructurings by Creditors,” a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. This includes short-term (e.g., six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. Depending on the demonstrated need of the client, the Company is deferring either the full loan payment or the principal component of the loan payment generally for 90 days.  As of November 5, 2020, the Company has executed 553 of these deferrals on outstanding loan balances of $109.9 million, or 16.4% of the held-for-investment loan portfolio, excluding loans made under the U.S. Small Business Administration’s Paycheck Protection Program.  A majority of these loans are now past the initial deferment period and are back on normal payment schedules.  As of November 5, 2020, the Company was aware of five borrowers with loan balances totaling $6.5 million that were either already deferred for an additional period of three months or are in the process of requesting an additional deferral for a period of three months.

 

 

 

Note 2 – Acquisition

On December 15, 2019, the Company completed the acquisition of Virginia Community Bankshares, Inc. (“VCB”), the holding company for Virginia Community Bank, pursuant to the terms of the Agreement and Plan of Reorganization, dated May 13, 2019, between the Company and VCB.  Under the agreement, VCB’s shareholders had the right to receive, at the holder’s election, either $58.00 per share in cash or 3.05 shares of the Company’s common stock, subject to the allocation and proration procedures set forth in the agreement, plus cash in lieu of fractional shares.  

10

---

Note 2 – Acquisition, continued

A summary of the assets received and liabilities assumed and related adjustments are as follows:

 

 

 

A summary of the consideration paid is as follows:

 

 

On August 12, 2020, the Company entered into a definitive merger agreement to acquire Bay Banks of Virginia, Inc., in an all-stock transaction (the “merger agreement”).  Subject to the terms and conditions stated in the merger agreement, upon the consummation of the merger each share of Bay Banks common stock will be converted into the right to receive 0.5000 shares of the Company’s common stock.  The transaction is expected to close in the first quarter of 2021.  Refer to Part II, Item 1A “Risk Factors” for additional information.

11

---

Note 3 – Investment Securities

Investment securities available for sale are carried in the consolidated balance sheets at their fair value and investment securities held to maturity are carried in the consolidated balance sheets at their amortized cost. The amortized cost and fair values of investment securities at September 30, 2020 and December 31, 2019 are as follows:

 

The amortized cost and fair value of securities at September 30, 2020, by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

 

12

---

Note 3 – Investment Securities, continued

 

A summary of unrealized losses (in thousands) and the length of time in a continuous loss position, by security type at September 30, 2020 and December 31, 2019 is as follows:

 

 

Other investments (in thousands) at September 30, 2020 consist of stock in the Federal Home Loan Bank of Atlanta (the “FHLB”) (carrying basis $5,752), Federal Reserve Bank of Richmond (“FRB”) stock (carrying basis $2,205), and various other investments (carrying basis $1,484). These investments are classified as restricted equity securities on the consolidated balance sheet.

The Company had pledged securities (in thousands) of $40,645 and $68,255 at September 30, 2020 and December 31, 2019, respectively to the FHLB and the Treasury Board of Virginia at the Community Bankers’ Bank to secure public deposits.

Note 4 – Loans

Loans held for investment outstanding at September 30, 2020 and December 31, 2019 are summarized as follows:

 

 

The Company has pledged loans held for investment (in thousands) as collateral for borrowings with the FHLB totaling $183,383 and $146,075 as of September 30, 2020 and December 31, 2019, respectively.

 

13

---

Note 4 – Loans, continued

 

In December 2019, as a result of the Company’s acquisition of VCB, the acquired loan portfolio was initially measured at fair value and subsequently accounted for under either ASC Topic 310-30 or ASC 310-20.  The outstanding principal balance and related carrying amount of these acquired loans included in the consolidated statement of condition as of September 30, 2020 and December 31, 2019 is as follows:

 

The following table presents changes for the nine months and year ended September 30, 2020 and December 31, 2019, respectively, in the accretable yield on the VCB purchased credit impaired loans for which the Company applies ASC 310-30:

 

The following table presents the aging of the recorded investment in past due loans as of September 30, 2020 and December 31, 2019:

 

14

---

Note 4 – Loans, continued

 

 

Note 5 – Allowance for Loans Losses

A summary of changes in the allowance for loans losses for the nine months ended September 30, 2020 and year ended December 31, 2019 is as follows:

 

 

15

---

Note 5 – Allowance for Loans Losses, continued

 

 

The following table presents information related to impaired loans, by portfolio segment, at the dates presented.

 

 

16

---

Note 5 – Allowance for Loans Losses, continued

 

 

Purchased loans from the 2016 River Bancorp, Inc. acquisition had remaining balances (in thousands) of $13,787 and 19,686 as of September 30, 2020 and December 31, 2019, respectively. Of these balances, three loan relationships were considered specifically impaired purchased credit-impaired loans. One of these relationships was resolved during 2018 and the Company recovered $200 of the balance previously written-off. During the first quarter of 2019, another loan relationship was resolved and the Company recovered $200 of the balance previously written-off. At September 30, 2020, the remaining specifically impaired purchased-credit impaired loans totaled $2,159 with a specific impairment of $190. The following table presents the recorded investment in the segments of the River Bancorp, Inc. purchased loans as of September 30, 2020 and December 31, 2019 (in thousands):

 

 

17

---

Note 5 – Allowance for Loans Losses, continued

The following table presents the Company’s loan portfolio by internal loan grade (in thousands) as of September 30, 2020 and December 31, 2019:

 

 

The Company also utilizes the grades 8 (Doubtful) and 9 (Loss). There were no loans classified in these categories at September 30, 2020 and December 31, 2019.

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, collateral adequacy, credit documentation, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis typically includes larger, non-homogeneous loans such as commercial real estate and commercial and industrial loans. This analysis is performed on an ongoing basis as new information is obtained. The Company uses the following definitions for risk ratings:

 

Risk Grade 1 – Prime Loans:  This grade is reserved for only the strongest of loans. These loans are to individuals or corporations that are well known to the bank and are always secured with an almost guaranteed source of repayment such as a lien on a bank certificate of deposit or savings account. Character, credit history, and ability of individuals or company principals are excellent and unquestioned. Source of income and industry of borrower appears stable. High liquidity, minimum risk, good ratios and low handling cost.

 

Risk Grade 2 – Desirable Loans:  This grade is reserved for new loans that are within guidelines and where the borrowers have documented significant overall financial strength. A liquid financial statement is generally a financial statement with substantial liquid assets, particularly relative to the debts. These loans have excellent sources of repayment, with no significant identifiable risk of collection, and conform in all respects to policy, guidelines, underwriting standards, and federal and state regulations (no exceptions of any kind).

 

 

18

---

Note 5 – Allowance for Loans Losses, continued

 

Risk Grade 3 – Good Loans: This grade is reserved for loans which exhibit satisfactory credit risk. These loans have adequate sources of repayment, with little identifiable risk of collection. Generally, loans assigned this risk grade will demonstrate the following characteristics: (1) conformity in all respects with policy, guidelines, underwriting standards, and federal and state regulations (no exceptions of any kind), (2) documented historical cash flow that meets or exceeds required minimum Blue Ridge Bank guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

 

Risk Grade 4 – Acceptable Loans: This grade is given to satisfactory loans containing more risk than Risk Grade 3 loans. These loans have adequate sources of repayment, with little identifiable risk of collection. Loans assigned this risk grade will demonstrate the following characteristics: (1) general conformity to Blue Ridge Bank's underwriting requirements, with limited exceptions to policy, product or underwriting guidelines. All exceptions noted have documented mitigating factors that offset any additional risk associated with the exceptions noted, (2) documented historical cash flow that meets or exceeds required minimum guidelines, or that can be supplemented with verifiable cash flow from other sources, and (3) adequate secondary sources to liquidate the debt, including combinations of liquidity, liquidation of collateral, or liquidation value to the net worth of the borrower or guarantor.

 

Risk Grade 5 – Pass/Watch Loans:  This grade is for satisfactory loans containing acceptable but elevated risk. These loans are characterized by borrowers who have a marginal cash flow, marginal profitability, or have experienced an unprofitable year and declining financial condition. The borrower has in the past satisfactorily handled debts with the bank, but in recent months has either been late, delinquent in making payments, or made sporadic payments. While the bank continues to be adequately secured, margins have decreased or are decreasing, despite the borrower’s continued satisfactory condition. These loans require more diligent monitoring due to characteristics such as:  (1) additional exceptions to Blue Ridge Bank's policy requirements, product guidelines or underwriting standards that present a higher degree of risk, (2) unproved, insufficient or marginal primary sources of repayment that appear sufficient to service the debt at this time, and (3) marginal or unproven secondary sources to liquidate the debt, including combinations of liquidation of collateral and liquidation value to the net worth of the borrower or guarantor.

 

Risk Grade 6 – Special Mention:  This grade is for loans classified as Special Mention. They have potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution's credit position at some future date. Special Mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Special mention credits typically exhibit underwriting guideline tolerances and/or exceptions with no mitigating factors, or emerging weaknesses that may or may not be cured as time passes.

 

Risk Grade 7 – Substandard:  A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt; they are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to: (1) high debt to worth ratios, (2) declining or negative earnings trends, (3) declining or inadequate liquidity, (4) improper loan structure, (5) questionable repayment sources, (6) lack of well-defined secondary repayment source, and (7) unfavorable competitive comparisons. Such loans are no longer considered to be adequately protected due to the borrower's declining net worth, lack of earnings capacity, declining collateral margins and/or unperfected collateral positions. A possibility of loss of a portion of the loan balance cannot be ruled out. The repayment ability of the borrower is marginal or weak and the loan may have exhibited excessive overdue status or extensions and/or renewals.

 

Risk Grade 8 – Doubtful:  Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are: (1) injection of capital, (2) alternative financing, (3) liquidation of assets or the pledging of additional collateral, and (4) the ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

 

Risk Grade 9 – Loss:  Loans classified Loss are considered uncollectable and of such little value that their  continuance as assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this worthless loan even though partial recovery may be effected in the future. Probable Loss portions of Doubtful assets should be charged against the reserve for loan losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.

19

---

 

 

Note 6 – Goodwill and Intangibles

The balance in goodwill is the result of a branch acquisition in Charlottesville, Virginia in 2011, the acquisition of River Bancorp, Inc. in 2016, the acquisition of a mortgage line of business in 2018, the 35% ownership acquisition in Hammond Insurance Agency, Inc. in 2019, and the acquisition of VCB in 2019.  The purpose of these acquisitions was to expand the geographic service area by targeting attractive markets with potential to provide continued balance sheet growth and new opportunities for the Company. Management evaluates at least annually the recorded value of goodwill.  Goodwill is not an amortizing intangible.  In the event the asset suffers a decline in value based on criteria established in governing accounting standards, an impairment will be recorded.

 

 

Information concerning amortizable intangibles included in other assets on the balance sheet is as follows:

 

 

Beginning the second quarter of 2020, the Company began recording mortgage servicing rights.  At September 30, 2020, the Company was servicing approximately $435.4 million of loans originated by the mortgage division and sold to the secondary market.  The initial recording of the mortgage servicing rights was at fair value and occurred in June 2020 and resulted in both an asset and mortgage loan servicing income of $1.6 million. Subsequently, the mortgage servicing asset is being measured using the amortization method and evaluated for impairment each quarter end. At September 30, 2020, the mortgage servicing asset was $3.2 million.

 

Note 7 - Derivative Financial Instruments and Hedging Activities

During the first quarter of 2019, the Company entered into an interest rate swap agreement (‘‘swap agreement’’) to facilitate the risk management strategies needed in order to accommodate the needs of its banking customers. The Company mitigates the risk of entering into these loan agreements by entering into equal and offsetting swap agreements with a highly rated third-party financial institution. This back-to-back swap agreement is a free-standing derivative and is recorded at fair value in the Company’s consolidated balance sheets (asset positions are included in other assets and liability positions are included in other liabilities) as of September 30, 2020.

 

20

---

Note 7 - Derivative Financial Instruments and Hedging Activities, continued

 

The Company has entered into various cash flow hedges as defined by ASC 815-20 during 2019 and 2020.  The objective of this interest rate swap was to hedge the risk of variability in its cash flows attributable to changes in the 3-month LIBOR benchmark rate component of forecasted 3-month fixed rate funding advances from the FHLB.  The hedging objective was to reduce the interest rate risk associated with the Company’s fixed rate advances from the designation date and going through the maturity date.  The identified hedge layers are summarized as follows, (in thousands):

 

 

Each hedge layer identified in the table above has a variable receive leg of 3-month LIBOR and a fixed pay leg of 1.80%.

At the time the hedges identified in the table above expire, new hedges will begin summarized as follows (in thousands):

Each hedge layer identified in the table above has a variable receive leg of 3-month LIBOR and a fixed pay leg ranging from 0.92% to 0.95%.  

Beginning in 2020, the Company entered into three additional hedges summarized as follows (in thousands):

Each hedge layer identified in the table above has a variable receive leg of 3-month LIBOR and a fixed pay leg ranging from 0.83% to 0.86%.  

The Company had cash collateral with the counterparty of these hedges of $6.0 million as of September 30, 2020.

The Bank also participates in a “mandatory” delivery program for its government guaranteed and conventional mortgage loans held for sale. Under the mandatory delivery system, loans with interest rate locks are paired with the sale of a to be announced mortgage-backed security bearing similar attributes. Under the mandatory delivery program, the Bank commits to deliver loans to an investor at an agreed upon price prior to the close of such loans. This differs from a “best efforts” delivery, which sets the sale price with the investor on a loan-by-loan basis when each loan is locked.

Note 8 – Employee Benefit Plan

The Company has a 401(k) Profit Sharing Plan that covers eligible employees. Employees may make voluntary contributions subject to certain limits based on federal tax laws. The Bank matches 100% of an employee’s contribution up to 5% of his or her salary following one year of continuous service and the benefits vest immediately. The Company’s Board of Directors may make additional contributions at its discretion. Employees become eligible to participate in the discretionary contributions after one year of continuous service and the benefits vest over a five-year period. For the three months ended September 30, 2020 and 2019, total expenses attributable to this plan were $356,642 and $182,091, respectively.  For the nine months ended September 30, 2020 and 2019, total expenses attributable to this plan were $686,291 and $454,439, respectively.

 

 

21

---

Note 8 – Employee Benefit Plan, continued

 

In 2013, the Company established an ESOP that covers eligible employees. Benefits in the ESOP vest over a five-year period. Contributions to the plan are made at the discretion of the Board of Directors and may include both the matching component to employees’ elective deferrals into the 401(k) plan and discretionary profit contributions. The ESOP held 104,058 and 79,800 total shares of Company’s common stock at September 30, 2020 and December 31, 2019, respectively. All shares issued to and held by the ESOP are considered outstanding in the computation of earnings per share. The plan or the Company is required to purchase shares from separated employees at a price determined by an established securities market, otherwise a third-party valuation is required.

Note 9 – Stock-Based Compensation

The Company has granted restricted stock awards to employees under the Blue Ridge Bankshares, Inc. Equity Incentive Plan. The restricted stock awards are considered fixed awards as the number of shares and fair value is known at the date of grant and the fair value at the grant date is amortized over the vesting period. Non-cash compensation expense recognized in the Consolidated Statements of Income related to restricted stock awards, net of forfeitures, was $203 thousand and $41 thousand for the three months ended September 30, 2020 and 2019, respectively, and $352 thousand and $160 thousand for the nine months ended September 30, 2020 and 2019, respectively.  The grant date fair value of restricted stock awards outstanding at September 30, 2020 and December 31, 2019 was $1.1 million and $1.3 million, respectively.

Note 10 – Fair Value

The fair value of a financial instrument is the current amount that would be exchanged between willing parties in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.

Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The Company records fair value adjustments to certain assets and liabilities and determines fair value disclosures utilizing a definition of fair value of assets and liabilities that states that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Additional considerations are involved to determine the fair value of financial assets in markets that are not active.

The Company uses a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. The three levels of the fair value hierarchy based on these two types of inputs are as follows:

 

 

The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements:

Securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy. The carrying value of restricted FRB and FHLB stock approximates fair value based upon the redemption provisions of each entity and is therefore excluded from the following table.

22

---

Note 10– Fair Value, continued

The following tables present the balances of financial assets measured at fair value on a recurring basis:

 

 

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with U.S. GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used by the Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements.

Loans Held for Sale

Mortgage loans originated or purchased and intended for sale in the secondary market are carried at the lower of cost or estimated market value in the aggregate. The agreed upon sales price is considered fair value as all of these loans are under agreements to sell to investors at the time of origination. This amount is generally the loan’s principal amount. Changes in fair value are recognized in the Gain on Sale of Mortgages on the Consolidated Statements of Income.

Other Real Estate Owned

Certain assets such as OREO are measured at fair value less cost to sell. Valuation of OREO is determined using current appraisals from independent parties, a level 2 input. If current appraisals cannot be obtained prior to reporting dates, or if declines in value are identified after a recent appraisal is received, appraisal values are discounted, resulting in Level 3 estimates. If the Company markets the property with a realtor, estimated selling costs reduce the fair value, resulting in a valuation based on Level 3 inputs.

The Company markets OREO both independently and with local realtors. Properties marketed by realtors are discounted by selling costs. Properties that the Company markets independently are not discounted by selling costs.

The Company had no OREO at September 30, 2020 and December 31, 2019.

 

23

---

Note 11 – Disclosures About Fair Value of Financial Instruments

The estimated fair values, and related carrying amounts, of the Company’s financial instruments at the dates presented are as follows:

 

 

 

24

---

Note 12 – Business Segments

The Company utilizes its subsidiaries and divisions to provide multiple business segments including retail banking, mortgage banking, and payroll processing services. Revenues from retail banking operations consist primarily of interest earned on loans and investment securities and service charges on deposit accounts. Mortgage banking operating revenues consist principally of gains on sales of loans in the secondary market, loan origination fee income and interest earned on mortgage loans held for sale. Revenues from payroll services consist of fees charged to customers for payroll services.

The following tables present revenues and expenses by segment for the three and nine months ended September 30, 2020 and September 30, 2019.

 

25

---

Note 12 – Business Segments, continued

 

 

 

26

---

Note 12 – Business Segments, continued

 

27

---

 

Note 13 - Other Borrowed Funds

Other borrowings on the consolidated balance sheet include $115.0 million at September 30, 2020 composed of advances from the FHLB. The Company utilizes the FHLB advance programs to fund loan growth and provide liquidity. FHLB borrowings decreased $9.8 million from $124.8 million at December 31, 2019.

 

Other borrowings on the consolidated balance sheet also includes $344.5 million of borrowed funds from the Federal Reserve Paycheck Protection Program Liquidity Facility.  These funds were solely used to provide funding under the Paycheck Protection Program and bear an interest rate of 0.35%.  The funds are expected to pay down as loans to the Bank’s borrowers are forgiven under the program.

 

Note 14 - Subordinated Debt

On November 20, 2015, the Company entered into a Subordinated Note Purchase Agreement with 14 institutional accredited investors under which the Company issued an aggregate of $10,000,000 of subordinated notes (the “2015 Notes”) to the institutional accredited investors. The 2015 Notes have a maturity date of December 1, 2025. The 2015 Notes bear interest, payable on the 1^st of June and December of each year, commencing June 1, 2016, at a fixed rate of 6.75% per year for the first five years, and thereafter will bear a floating interest rate of LIBOR plus 512.8 basis points. The 2015 Notes are not convertible into common stock or preferred stock and are not callable by the holders. The Company has the right to redeem the 2015 Notes, in whole or in part, without premium or penalty, at any interest payment date on or after December 1, 2020 and prior to the maturity date, but in all cases in a principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. If an event of default occurs, such as the bankruptcy of the Company, the holder of a 2015 Note may declare the principal amount of the note to be due and immediately payable. The 2015 Notes are unsecured, subordinated obligations of the Company and rank junior in right of payment to the Company’s existing and future senior indebtedness. The 2015 Notes qualify as Tier 2 capital for regulatory reporting.

 

On May 28, 2020, the Company entered into a Subordinated Note Purchase Agreement with an institutional investor under which the Company issued a subordinated note with a principal amount of $15,000,000 (the “2020 Note”). The 2020 Note has a maturity date of June 1, 2030. The 2020 Note bears interest, payable on the 1^st of June and December of each year, commencing December 1, 2020, at a fixed rate of 6.00% per year for the first five years, and thereafter will bear a floating interest rate of SOFR (as defined in the note) plus 587 basis points.  The 2020 Note is not convertible into common stock or preferred stock and is not callable by the holder. The Company has the right to redeem the 2020 Note, in whole or in part, without premium or penalty, at any interest payment date on or after June 1, 2025 and prior to the maturity date, but in all cases in a principal amount with integral multiples of $1,000, plus interest accrued and unpaid through the date of redemption. If an event of default occurs, such as the bankruptcy of the Company, the holder of the 2020 Note may declare the principal amount of the 2020 Note to be due and immediately payable. The 2020 Note is an unsecured, subordinated obligation of the Company and will rank junior in right of payment to the Company’s existing and future senior indebtedness. The 2020 Note qualifies as Tier 2 capital for regulatory reporting.

 

28

---

Note 14 - Subordinated Debt, continued

As part of these transactions, the Company incurred issuance costs totaling $687,500. These costs are being amortized over the life of the Notes. The following table summarizes the balance of the Notes and related issuance costs at September 30, 2020 and December 31, 2019:

 

 

Note 15 - Revenue from Contracts with Customers

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is a comprehensive revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.

Interest income, loan fees, realized securities gains and losses, bank owned life insurance income, small business investment company income, and mortgage banking revenue are not in the scope of ASC Topic 606. All of the Company’s revenue from contracts with customers in the scope of ASC 606 is recognized within noninterest income in the consolidated statements of income. Incremental costs of obtaining a contract are expensed when incurred when the amortization period is one year or less.

A description of the Company’s significant sources of revenue accounted for under ASC 606 is as follows:

Service fees on deposit accounts are fees charged to deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which are earned based on specific transactions or customer activity within a customer’s deposit account, are recognized at the time the related transaction or activity occurs, as it is at this point when the customer’s request has been fulfilled. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, representing the period over which the performance obligation was satisfied. Overdraft fees are recognized when the overdraft occurs. Service fees on deposit accounts are paid through a direct charge to the customer’s account.

Bank card revenue is comprised of interchange revenue and automated teller machine (“ATM”) fees. Interchange revenue is earned when bank debit and credit cardholders conduct transactions through VISA, MasterCard, and other payment networks. Interchange fees represent a percentage of the underlying cardholder’s transaction value and are generally recognized daily, concurrent with the transaction processing services provided to the cardholder. ATM fees are earned when a non-Bank cardholder uses a Bank ATM. ATM fees are recognized daily, as the related ATM transactions are settled.

Payroll processing income is comprised of fees charged to customers for payroll services through MoneyWise Payroll Solutions, Inc., of which the Bank owns a controlling interest.

The following table (in thousands) illustrates our total non-interest income segregated by revenues within the scope of ASC Topic 606 and those which are within the scope of other ASC Topics:

 

 

29

---

Note 16 – Leases

On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases (Topic 842)” and all subsequent ASUs that modified Topic 842. The Company elected the prospective application approach provided by ASU 2018-11 and did not adjust prior periods for ASC 842. The Company also elected certain practical expedients within the standard and consistent with such elections did not reassess whether any expired or existing contracts are or contain leases, did not reassess the lease classification for any expired or existing leases, and did not reassess any initial direct costs for existing leases. The implementation of the new standard resulted in recognition of a right-of-use asset and lease liability of $7.0 million at the date of adoption, which is related to the Company’s lease of premises used in operations. The right-of-use asset and lease liability are included in other assets and other liabilities, respectively, in the Consolidated Balance Sheets.

Lease liabilities represent the Company’s obligation to make lease payments and are presented at each reporting date as the net present value of the remaining contractual cash flows. Cash flows are discounted at the Company’s incremental borrowing rate in effect at the commencement date of the lease. Right-of-use assets represent the Company’s right to use the underlying asset for the lease term and are calculated as the sum of the lease liability and if applicable, prepaid rent, initial direct costs and any incentives received from the lessor.

The Company’s long-term lease agreements are classified as operating leases. Certain of these leases offer the option to extend the lease term and the Company has included such extensions in its calculation of the lease liabilities to the extent the options are reasonably assured of being exercised. The lease agreements do not provide for residual value guarantees and have no restrictions or covenants that would impact dividends or require incurring additional financial obligations.

The following tables present information about the Company’s leases:

 

 

 

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total of operating lease liabilities is as follows:

 

 

30

---

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following presents management’s discussion and analysis of our 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 for the year ended December 31, 2019. Results of operations for the three and nine month periods ended September 30, 2020 are not necessarily indicative of the results of operations for the balance of 2020, or for any other period.  As used in this report, the terms “Blue Ridge,” “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

We make 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 our 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. We caution that the forward-looking statements are based largely on our 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 our 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 our financial performance to differ materially from that expressed in such forward-looking statements:

 

 

 

 

 

 

 

 

 

 

 

 

31

---

 

 

 

 

 

 

 

On August 12, 2020, the Company entered into an Agreement and Plan of Reorganization (the “Merger Agreement”) with Bay Banks of Virginia, Inc. (“Bay Banks”), pursuant to which the Company will acquire Bay Banks in a merger transaction. In addition to the factors described above, the Company’s operations, performance, business strategy and results may be affected by the following factors:

 

 

The COVID-19 pandemic is having a significant impact on the economy.  Recognizing this impact, in March 2020, the Company quickly pivoted to an aggressive borrower outreach campaign to discuss immediate and foreseeable effects on businesses in its market areas.  These efforts continued throughout the second and third quarters of 2020.  The significant uncertainty surrounding a return to normal consumer and business behavior make the ultimate outcomes difficult to predict, but the Company is managing its efforts around a worst-case scenario.  The Company has undertaken substantial efforts to reduce noninterest expense levels, including personnel costs, where feasible.  The Company also continually reviews market and division line profitability. The Company took advantage of the decline in interest rates triggered by COVID-19 to reduce cost of funds and to restructure and extend liability pricing. Branch operations were redirected to drive-thru and digital channels across the Bank in mid-March and resumed normalized branch operations, following appropriate hygienic and distancing guidelines, in early July 2020 .  Lending focus shifted from loan originations to portfolio maintenance and protection, which includes working with borrowers on loan deferrals.

 

The Company is evaluating the possible long-term implications of the response to COVID-19 to its operations, and to the financial services industry as a whole.  The Company believes that the sudden then sustained shift in the conduct of banking business away from branch locations will accelerate the move to digital channels by users of financial services.  The potential direction of this consumer behavior will likely generate a substantive impact on the Company’s strategic planning, and it is reasonable to expect that the value of bricks and mortar locations will likely decline as preferences shift in a world impacted by social distancing.

 

In April 2020, the Company received Small Business Administration (“SBA”) approval to administer loans in the Paycheck Protection Program (“PPP”) and is expected to earn SBA processing fees of approximately $11.5 million over the life of the loans.  

 

The foregoing factors should not be considered exhaustive and should be read together with other cautionary statements that are included in this Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2019. We caution you not to place undue reliance on our forward-looking information and statements. We 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 us to predict their occurrence or how they will affect us.

32

---

 

Critical Accounting Policies

General

The accounting principles Blue Ridge applies under accounting principles generally accepted in the United States of America (“U.S. GAAP”) are complex and require management to apply significant judgment to various accounting, reporting and disclosure matters. Management must use assumptions, judgments and estimates when applying these principles where precise measurements are not possible or practical. These policies are critical because they are highly dependent upon subjective or complex judgments, assumptions and estimates. Changes in such judgments, assumptions and estimates may have a significant impact on the consolidated financial statements. Actual results, in fact, could differ from initial estimates.

The accounting policies Blue Ridge views as critical are those relating to judgments, assumptions and estimates regarding the determination of the allowance for loan losses, the fair value measurements of certain assets and liabilities, and accounting for other real estate owned.

Allowance for Loan Losses

The allowance for loan losses is maintained at a level believed to be adequate by Blue Ridge to absorb probable losses inherent in the portfolio and is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans and actual loss experience, current economic events in specific industries and other pertinent factors such as regulatory guidance and general economic conditions.  The allowance is established through a provision for loan losses charged to earnings.  Loans identified as losses and deemed uncollectible by management are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as impaired, for which an allowance is established when the fair value of the loan is lower than its carrying value. The general component covers non-impaired loans and is based on historical loss experience adjusted for qualitative factors. Historical losses are categorized into risk-similar loan pools and a loss ratio factor is applied to each group’s loan balances to determine the allocation.

Qualitative and environmental factors include external risk factors that Blue Ridge believes affects its  overall lending environment. Environmental factors that Blue Ridge routinely analyzes include levels and trends in delinquencies and impaired loans, levels and trends in charge-offs and recoveries, trends in volume and terms of loans, effects of changes in risk selection and underwriting practices, experience, ability, depth of lending management and staff, national and local economic trends, conditions such as unemployment rates, housing statistics, banking industry conditions, and the effect of changes in credit concentrations.  Determination of the allowance is inherently subjective as it requires significant estimates, including the amounts and timing of expected future cash flows on impaired loans, estimated losses on pools of homogeneous loans based on historical loss experience and consideration of current economic trends, all of which may be susceptible to significant change.        

Credit losses are an inherent part of the Company’s business and, although Blue Ridge believes the methodologies for determining the allowance for loan losses and the current level of the allowance are appropriate, it is possible that there may be unidentified losses in the portfolio at any particular time that may become evident at a future date pursuant to additional internal analysis or regulatory comment, including the adverse impact COVID-19 could have on the loan portfolio which is difficult to assess at this time. Additional provisions for such losses, if necessary, would be recorded, and would negatively impact earnings.

Allowance for Loan Losses—Acquired Loans

    Acquired loans accounted for under Accounting Standards Codification (“ASC”) 310-30

For our acquired loans, to the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our previously described allowance methodology.

   Acquired loans accounted for under ASC 310-20

Subsequent to the acquisition date, we establish our allowance for loan losses through a provision for loan losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other factors, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.

33

---

Purchased Credit-Impaired Loans

Purchased credit-impaired ("PCI") loans, which are the loans acquired in our acquisition of Virginia Community Bank, are loans acquired at a discount (that is due, in part, to credit quality). These loans are initially recorded at fair value (as determined by the present value of expected future cash flows) with no allowance for loan losses. We account for interest income on all loans acquired at a discount (that is due, in part, to credit quality) based on the acquired loans' expected cash flows. The acquired loans may be aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flow. The difference between the cash flows expected at acquisition and the investment in the loans, or the "accretable yield," is recognized as interest income utilizing the level-yield method over the life of each pool. Increases in expected cash flows subsequent to the acquisition are recognized prospectively through adjustment of the yield on the pool over its remaining life, while decreases in expected cash flows are recognized as impairment through a loss provision and an increase in the allowance for loan losses. Therefore, the allowance for loan losses on these impaired pools reflect only losses incurred after the acquisition (representing the present value of all cash flows that were expected at acquisition but currently are not expected to be received).

We periodically evaluate the remaining contractual required payments due and estimates of cash flows expected to be collected. These evaluations, performed quarterly, require the continued use of key assumptions and estimates, similar to the initial estimate of fair value. Changes in the contractual required payments due and estimated cash flows expected to be collected may result in changes in the accretable yield and non-accretable difference or reclassifications between accretable yield and the non-accretable difference. On an aggregate basis, if the acquired pools of PCI loans perform better than originally expected, we would expect to receive more future cash flows than originally modeled at the acquisition date. For the pools with better than expected cash flows, the forecasted increase would be recorded as an additional accretable yield that is recognized as a prospective increase to our interest income on loans.

 

Fair Value Measurements

 

Blue Ridge determines the fair values of financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value. Depending on the availability of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values presented may not represent future fair values and may not be realizable.

 

Investment Securities Available-for-Sale

 

Investment securities available-for-sale are recorded at fair value using reliable and unbiased evaluations by an industry-wide valuation service. This service uses evaluated pricing models that vary based on asset class and include available trade, bid, and other market information. Generally, the methodology includes broker quotes, proprietary models, vast descriptive terms and conditions databases, as well as extensive quality control programs.

Other Real Estate Owned

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at fair value of the property, less estimated disposal costs, if any. Any excess of cost over the fair value less costs to sell at the time of acquisition is charged to the allowance for loan losses. The fair value is reviewed periodically by management and any write downs are charged against current earnings.

Emerging Growth Company

Blue Ridge qualifies as an “emerging growth company,” as defined in the federal securities laws. For as long as it continues to be an emerging growth company, Blue Ridge may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, as an emerging growth company, Blue Ridge has elected to take advantage of the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to a company that is not an issuer (as defined under Section 2(a) of the Sarbanes-Oxley Act), if such standards apply to companies that are not issuers.  This may make the Company’s financial statements not comparable with other public companies that are not emerging growth companies or that are emerging growth companies that have opted out of the extended transition period because of the potential differences in accounting standards used. Blue Ridge could be an emerging growth company for up to five years, although it could lose that status sooner if its gross revenues exceed $1.07 billion, if it issues more than $1.0 billion in non-convertible debt in a three-year period, or if the market value of its common stock held by non-affiliates exceeds $700 million as of any June 30 before that time, in which case Blue Ridge would no longer be an emerging growth company as of the following December 31.

 

34

---

Announced Merger

On August 13, 2020, the Company and Bay Banks (OTC: BAYK) announced the signing of the Merger Agreement pursuant to which the companies will combine in an all-stock merger with the Company as the surviving company.  At or immediately following consummation of the merger, Virginia Commonwealth Bank, the wholly-owned commercial banking subsidiary of Bay Banks, will be merged with and into the Bank, with the Bank as the surviving bank. Under the terms of the Merger Agreement, Bay Banks shareholders will receive 0.5000 shares of the Company’s common stock for each share of Bay Banks common stock they own.  Bay Banks shareholders will own approximately 54% and the Blue Ridge shareholders will own approximately 46% of the combined company.  The combined company and bank will operate under the Blue Ridge name and will trade under the ticker symbol “BRBS” on the NYSE American stock exchange. Subject to customary closing conditions, including regulatory and shareholder approvals, the merger is expected to close in the first quarter of 2020.  Additional information on the merger can be found in Blue Ridge’s Current Report on Form 8-K filed with the SEC on August 13, 2020.

Comparison of Financial Condition at September 30, 2020 and December 31, 2019

Total assets at September 30, 2020 were $1.5 billion, an increase of $562.5 million or 58.5%, from $960.8 million at December 31, 2019. The increase in assets was primarily driven by growth in both the loans held for sale and loans held for investment portfolios, in addition to increases in cash and due from banks and other assets. Loans held for sale totaled $193.1 million as of September 30, 2020, an increase of $137.5 million, or 247.1% compared to $55.6 million at December 31, 2019.  This growth was driven by increased origination volume in the mortgage division due to a lower rate environment, expansion of the retail mortgage business line, and the addition of the wholesale mortgage business line in late 2019.  Loans held for investment totaled $1.04 billion as of September 30, 2020, an increase of $392.3 million, or 60.7% compared to $646.8 million at December 31, 2019. This increase was due to loans originated as part of the PPP beginning in the second quarter of 2020, which totaled $362 million at September 30, 2020. Cash and due from banks increased $17.6 million to $77.6 million at September 30, 2020 compared to $60.0 million at December 31, 2019. Other assets totaled $49.3 million at September 30, 2020, an increase of $27.8 million, or 129.6% compared to $21.5 million as of December 31, 2019. Investment securities decreased $5.6 million, or 4.3%, to $123.3 million at September 30, 2020 compared to $128.9 million at December 31, 2019.  The decrease is attributable to paydowns in the bond portfolio.  

The allowance for loan losses increased by $7.6 million during the first nine months of 2020 to $12.1 million, or 1.2% of total loans held for investment as of September 30, 2020, compared to $4.6 million, or 0.71% of total loans held for investment as of December 31, 2019. Imbedded in the loans held for investment balance is the credit mark on the loan portfolio acquired in the Company’s merger with Virginia Community Bankshares, Inc. (“VCB”) as part of the acquisition accounting.  This credit mark totaled $1.3 million and $2.2 million at September 30, 2020 and December 31, 2019, respectively.  

At September 30, 2020, total liabilities were $1.4 billion, an increase of $554.9 million, or 63.9% compared to $868.5 million at December 31, 2019. The increase in liabilities was concentrated in total deposit growth of $193.2 million, or 26.8%, to $915.3 million as of September 30, 2020 compared to $722.0 million at December 31, 2019. Included in this deposit growth are funds retained from customers as part of the PPP.  Additionally, other borrowings increased $334.7 million, or 268.2% to $459.5 million as of September 30, 2020 compared to $124.8 million at December 31, 2019. This increase was due to borrowings from the Federal Reserve Paycheck Protection Program Liquidity Facility to fund loans originated under the PPP.  Other liabilities totaled $24.0 million as of September 30, 2020, an increase of $12.2 million, or 102.7%, compared to $11.8 million at December 31, 2019.

Total shareholders’ equity increased by $7.6 million to $99.9 million at September 30, 2020 compared to $92.3 million at December 31, 2019. The increase is attributable to net income during the first nine months of 2020 partially offset by changes in other comprehensive income related to unrealized losses in the securities portfolio as well as unrealized losses related to interest rate swaps.  

Comparison of Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019

For the three months ended September 30, 2020, Blue Ridge reported net income of $5.0 million, equal to basic and diluted income per common share of $0.88. For the three months ended September 30, 2019, net income was $1.3 million and both basic and diluted earnings per share were $0.29.

For the nine months ended September 30, 2020, Blue Ridge reported net income of $12.1 million, equal to basic and diluted income per common share of $2.13.  For the nine months ended September 30, 2019, net income was $4.1 million, equal to basic and diluted income per common share of $1.01.

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 Blue Ridge’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. Blue Ridge’s principal interest earning assets are loans to individuals, businesses, and real estate investors, as well as its investment securities portfolio. Interest-bearing liabilities consist primarily of negotiable order of withdrawal and savings accounts, money market accounts, certificates of deposit, and FHLB advances. Generally, changes in net interest income are measured by the net interest rate spread and the net interest margin. The net interest rate

35

---

spread is equal to the difference between the average rate earned on interest earning assets and the average rate incurred on interest-bearing liabilities. The net interest margin represents the difference between interest income and interest expense calculated as a percentage of average earning assets.

The following table shows the average balance sheets for the three months ended September 30, 2020 compared to the three months ended September 30, 2019. Also shown are the amounts of interest earned on interest-earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates.

 

36

---

The following table shows the average balance sheets for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Also shown are the amounts of interest earned on interest-earning assets, with related yields, and interest expense on interest-bearing liabilities, with related rates.

 

The increase in average interest-earning assets was primarily driven by an increase in average loans held for investment from the acquisition of VCB in the latter part of the fourth quarter of 2019, in addition to loans originated as part of the PPP beginning in the second quarter of 2020.  Additionally, there was a significant increase in interest-bearing deposits in other banks due to obtaining additional liquidity during the uncertainty surrounding COVID-19, in addition to funds retained from customers as a result of the PPP.  Total interest income increased by $6.3 million, or 77.9% for the three-month period ended September 30, 2020 as compared to the three-month period ended September 30, 2019, and increased $15.6 million, or 69.6%, for the nine-month period ended September 30, 2020 as compared to the same period in 2019.

Interest expense decreased by $67 thousand, or 2.5%, to $2.6 million for the three months ended September 30, 2020 as compared to $2.7 million during the three months ended September 30, 2019.  Interest expense for the nine-month period ended September 30, 2020 increased $594 thousand, or 8.6%, compared to the nine-month period ended September 30, 2019. Average interest bearing-liabilities increased 104.4% for the three-month period ended September 30, 2020, as compared to the same period in 2019. This increase was primarily due to obtaining borrowings under the Federal Reserve Paycheck Protection Program Liquidity Facility, which were used to fund loans originated under the PPP.  Average interest bearing-liabilities increased by 90.6% for the nine-month period ended September 30, 2020, as compared to the same period in 2019.  

Net interest income for the three-month period ended September 30, 2020 was $11.8 million as compared to $5.4 million for the same period in 2019, an increase of $6.4 million, or 117.6%. Net interest income for the nine-month period ended September 30, 2020 was $30.5 million as compared to $15.5 million for the same period in 2019, an increase of $15.0 million, or 96.9%.  The increase in net interest income during the period is primarily attributable to an increase in average earning assets from the acquisition of VCB in late 2019, and significant efforts to realign the balance sheet as a result of downward rate movements that occurred in 2020.  Additionally, included in net interest income are net fees recognized for PPP, which are being recognized over the estimated expected lives of the PPP loans.  Average earning assets increased $602.5 million to $1.2 billion for the nine-month period ended September 30, 2020 compared

37

---

to $615.2 million for the nine month period ended September 30, 2019.  Interest income and expense are affected by changes in interest rates, by changes in the volumes of earning assets and interest-bearing liabilities, and by changes in the mix of these assets and liabilities. The following rate-volume variance analysis shows the year-to-date changes in the components of net interest income for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.

 

 

Provision for Loan Losses. The provision for loan losses was $4.0 million and $8.1 million for the three and nine month periods ended September 30, 2020, respectively. In comparison, the provision for loan losses was $570 thousand and $1.5 million during the three and nine month periods ended September 30, 2019, respectively.  Net charge-offs amounted to $83 thousand and $524 thousand for the three and nine month periods ended September 30, 2020, respectively, and $219 thousand and $640 thousand for the three and nine month periods ended September 30, 2019, respectively. The increased provisioning in 2020 is related to the continued uncertainty surrounding COVID-19 deferred loans and borrower ability to resume repayment once the deferral period ends.

Non-Interest Income. Blue Ridge’s non-interest income sources include deposit service charges and other fees, residential mortgage banking income, gains on sale of U.S. Department of Agriculture guaranteed loans, and income from bank-owned life insurance. Non-interest income totaled $17.8 million for the three months ended September 30, 2020, compared to $5.0 million for the like period in 2019, an increase of $12.8 million, or 256.9%.  Non-interest income increased $25.0 million, or 175.5%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019.  The increase in non-interest income was primarily due to increased volume at the mortgage division resulting in the recognition of $16.0 million in income related to the origination and sale of held for sale mortgages for the three months ended September 30, 2020 compared to $3.9 million for the three months ended September 30, 2019, an increase of $12.1 million, or 306.9%.  The Company recognized $35.2 million in income related to the origination and sale of held for sale mortgages for the nine months ended September 30, 2020 compared to $11.0 million for the nine months ended September 30, 2019, an increase of $24.2 million, or 221.1%.  Included in mortgage income beginning in 2020 is income recognized as part of retaining mortgage servicing rights, which amounted to $1.6 million and $3.2 million for the three and nine month periods ended September 30, 2020, respectively.  

Non-Interest Expense. Non-interest expense totaled $18.8 million and $46.0 million for the three and nine months ended September 30, 2020, respectively, as compared to $8.2 million and $23.2 million for three and nine months ended September 30, 2019, respectively, an increase of $10.6 million, or 129.2%, and $22.7 million, or 97.9%, respectively. These increases were primarily due to an increase in salaries and employee benefits of $6.8 million, or 133.9%, for the three month period ended September 30, 2020 compared to the three month period ended September 30, 2019, and an increase of $15.9 million, or 113.0%, for the nine month period ended September 30, 2020 compared to the nine month period ended September 30, 2019.  The primary driver of these increases relates to the employees retained in the acquisitions of VCB and LenderSelect Mortgage Group, a wholesale mortgage business, at the end of 2019 in addition to the additional hires needed to keep up with increased mortgage demand.  Increased mortgage volume has also resulted in increased commission expense being recognized in 2020 as compared to like periods in 2019. Occupancy expenses increased $295 thousand to $922 thousand for the three-month period ended September 30, 2020, compared to $627 thousand for the three-month period ended September 30, 2019, an increase of 46.9%. Occupancy expenses increased $786 thousand, or 42.1%, for the nine months ended September 30, 2020 compared to the nine months ended September 30, 2019. Increased occupancy expenses are primarily a result of additional leased locations to support the mortgage division. Data processing costs increased $262 thousand to $675 thousand for the three-month period ended September 30, 2020 as compared to $413 thousand for the same period in 2019, an increase of 63.5%. Data

38

---

processing costs increased $731 thousand to $1.8 million for the nine-month period ended September 30, 2020 as compared to $1.1 million for the same period in 2019.  These increases in data processing costs are due to additional core processing expenses related to onboarding the VCB customer base in the merger, carryover core integration expenses related to the acquisition of VCB, and additional data processing costs associated with increased volume in the mortgage division. Legal, issuer, and regulatory filing fees increased $1.2 million and $1.1 million for the three and nine month periods ended September 30, 2020.  These increases are largely due to merger related expenses associated with the pending merger with Bay Banks.  

Income Tax Expense. During the three and nine months ended September 30, 2020, Blue Ridge recognized a provision for income taxes of $1.7 million and $3.6 million, respectively, for an effective tax rate of 25.2% and 23.0%, as compared to a provision of $379 thousand and $989 thousand for the three and nine months ended September 30, 2019, for an effective tax rate of 23.2% and 19.6%, respectively.  The higher tax rates in 2020 are due to merger expenses, a portion of which are considered non-deductible.  The lower tax rate for the nine months ended September 2019 was due to nontaxable proceeds from bank owned life insurance policies received in second quarter 2019.

Analysis of Financial Condition

Loan Portfolio. Blue Ridge makes loans to individuals as well as to commercial entities. Specific loan terms vary as to interest rate, repayment and collateral requirements based on the type of loan requested and the creditworthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by Blue Ridge. All loans are underwritten within specific lending policy guidelines that are designed to maximize Blue Ridge’s profitability within an acceptable level of business risk.

The following table sets forth the distribution of Blue Ridge’s loan portfolio at the dates indicated by category of loan and the percentage of loans in each category to total loans.

 

 

The following table sets forth the repricing characteristics and sensitivity to interest rate changes of our loan portfolio at September 30, 2020 and December 31, 2019 (dollars in thousands).

 

39

---

 

 

Blue Ridge prepares a quarterly analysis of the allowance for loan losses, with the objective of quantifying portfolio risk into a dollar amount of inherent losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged against income and decreased by loans charged-off (net of recoveries, if any). Management’s periodic evaluation of the adequacy of the allowance is based on past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. While management uses the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used. The allowance consists of specific and general components. The specific component relates to loans that are identified as impaired. For loans that are classified as impaired, an allowance is established when the discounted cash flows or the net realizable value, which is equal to the estimated fair value less estimated costs to sell, of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and those loans classified that are not impaired and is based on historical loss experience adjusted for other internal or external influences on credit quality that are not fully reflected in the historical data.

 

Blue Ridge follows applicable guidance issued by FASB. This guidance requires that losses be accrued when they are probable of occurring and can be estimated. It also requires that impaired loans, within its scope, be measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

 

Loans are evaluated for non-accrual status when principal or interest is delinquent for 90 days or more and are placed on non-accrual status when a loan is specifically determined to be impaired. Any unpaid interest previously accrued on those loans is reversed from income. Any interest payments subsequently received are recognized as income or amortized over the life of the loan depending on the specific circumstances. Interest payments received on loans, where management believes a potential for loss remains, are applied as a reduction of the loan principal balance.

 

Management believes that the allowance for loan losses is adequate. There can be no assurance, however, that adjustments to the provision for loan losses 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; the impact of COVID-19; or changes in the circumstances of particular borrowers are criteria that could change and make adjustments to the provision for loan losses necessary.

40

---

The following table presents a summary of the provision and allowance for loan losses for the periods indicated:

 

 

The allowance for loan losses includes specific and additional allowances for impaired loans and a general allowance applicable to all loan categories; however, management has allocated the allowance 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 allocation of the allowance at September 30, 2020 and December 31, 2019, and as a percent of the applicable loan segment, is as follows:

 

 

Non-performing Assets. Non-performing assets consist of non-accrual loans; loans past due 90 days and still accruing interest, and other real estate owned (foreclosed properties). The level of non-performing assets decreased by $661 thousand during the first nine months of 2020 to $4.5 million as of September 30, 2020, compared to $5.2 million at December 31, 2019. Blue Ridge has established specific loan loss reserves on impaired loans equal to the estimated collateral deficiency (if any), plus the cost of sale of the underlying collateral, as applicable.

Loans are placed in non-accrual status when in the opinion of management the collection of additional interest is unlikely or a specific loan meets the criteria for non-accrual status established by regulatory authorities. No interest is taken into income on non-accrual loans. A loan remains on non-accrual status until the loan is current as to both principal and interest or the borrower demonstrates the ability to pay and remain current, or both.

41

---

Foreclosed real properties include properties that have been substantively repossessed or acquired in complete or partial satisfaction of debt. Such properties, which are held for resale, are carried at fair value, including a reduction for the estimated selling expenses.

The following is a summary of information pertaining to risk elements and non-performing assets:

 

 

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 short-term borrowings. Securities in the investment portfolio classified as securities available-for-sale 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 Blue Ridge’s investment securities available-for-sale was $113.9 million at September 30, 2020, an increase of $5.3 million, or 4.9% from $108.6 million at December 31, 2019. Investment securities held-to-maturity totaled $12.2 million at December 31, 2019.  The Company had no investment securities held-to-maturity at September 30, 2020, as all such securities were transferred to available-for-sale in the second quarter of 2020.

As of September 30, 2020 and December 31, 2019, the majority of the investment securities portfolio consisted of securities rated A to AAA by a leading rating agency. Investment securities which carry a AAA rating are judged to be of the best quality and carry the smallest degree of investment risk. Investment securities that were pledged to secure public deposits totaled $13.3 million and $11.8 million at September 30, 2020 and December 31, 2019, respectively.

Blue Ridge completes reviews for other-than-temporary impairment at least quarterly. At September 30, 2020 and December 31, 2019, only investment grade securities were in an unrealized loss position. Investment securities with unrealized losses are a result of pricing changes due to recent and negative conditions in the current market environment and not as a result of permanent credit impairment. Contractual cash flows for the agency mortgage-backed securities are guaranteed and/or funded by the U.S. government. Municipal securities show no indication that the contractual cash flows will not be received when due. Blue Ridge does not intend to sell nor does it believe that it will be required to sell any of its temporarily impaired securities prior to the recovery of the amortized cost.

No other-than-temporary impairment has been recognized for the securities in Blue Ridge’s investment portfolio as of September 30, 2020 and December 31, 2019.

Blue Ridge holds restricted investments in equities of the Federal Reserve Bank of Richmond (“FRB”), FHLB, and through its correspondent bank, Community Bankers’ Bank (“CBB”). At September 30, 2020, Blue Ridge owned $5.8 million of FHLB stock, $2.2 million of FRB stock, and $248 thousand of CBB stock. At December 31, 2019, Blue Ridge owned $6.0 million of FHLB stock, $963 thousand of FRB stock, and $248 thousand of CBB stock.

The following table reflects the composition of Blue Ridge’s investment portfolio, at amortized cost, at September 30, 2020 and December 31, 2019.

 

42

---

 

The following tables present the amortized cost of Blue Ridge’s investment portfolio by their stated maturities, as well as the weighted average yields for each of the maturity ranges at September 30, 2020 and December 31, 2019.

 

 

 

Deposits. The principal sources of funds for Blue Ridge are core deposits (demand deposits, interest-bearing transaction accounts, money market accounts, savings deposits and certificates of deposit), primarily from its market area. Blue Ridge’s deposit base includes transaction accounts, time and savings accounts and other accounts that customers use for cash management purposes and which provide Blue Ridge with a source of fee income and cross-marketing opportunities as well as a low-cost source of funds. Time and savings accounts, including money market deposit accounts, also provide a relatively stable low-cost source of funding. Please refer to the average balance tables under “Net Interest Income” for information regarding the average balance of deposits, and average rates paid.

Approximately 28.5% of Blue Ridge’s deposits at September 30, 2020 were made up of time deposits, which are generally the most expensive form of deposit because of their fixed rate and term, as compared to 36.1% at December 31, 2019.

The following tables provide a summary of Blue Ridge’s deposit base at September 30, 2020 and December 31, 2019 and the maturity distribution of certificates of deposit of $100,000 or more as of September 30, 2020 and December 31, 2019:

 

 

43

---

Maturities of Time Deposits ($100,000 or greater)

 

 

Brokered and listing service deposits made up of both certificate of deposits and money market demand accounts totaled $52.0 million at September 30, 2020, an increase of $2.2 million from $49.8 million at December 31, 2019.

Borrowings: The following table provides information on the balances and interest rates on total borrowings at September 30, 2020 and December 31, 2019:

 

 

FHLB advances are secured by collateral consisting of a blanket lien on qualifying loans in Blue Ridge’s residential, multifamily and commercial real estate mortgage loan portfolios as well as selected investment portfolio securities.

 

Federal Reserve borrowings through the Paycheck Protection Program Liquidity Facility are secured by loans the Bank originated under the PPP.  

Liquidity. Liquidity in the banking industry is defined as the ability to meet the demand for funds of both depositors and borrowers. Blue Ridge must be able to meet these needs by obtaining funding from depositors or other lenders or by converting non-cash items into cash. The objective of Blue Ridge’s liquidity management program is to ensure that it always has sufficient resources to meet the demands of depositors and borrowers. Stable core deposits and a strong capital position provide the base for Blue Ridge’s liquidity position. Blue Ridge believes it has demonstrated its ability to attract deposits because of Blue Ridge’s convenient branch locations, personal service, technology and pricing.

In addition to deposits, Blue Ridge has access to the different wholesale funding markets. These markets include the brokered certificate of deposit market, listing service deposit market, and the federal funds market. Blue Ridge is a member of the Promontory Interfinancial Network (“Promontory”), which allows banking customers to access Federal Deposit Insurance Corporation (the “FDIC”) insurance protection on deposits through Blue Ridge which exceed FDIC insurance limits. Blue Ridge also has one-way authority with Promontory for both their Certificate of Deposit Account Registry Service and Insured Cash Sweep products which provides Blue Ridge the ability to access additional wholesale funding as needed. Blue Ridge also maintains secured lines of credit with the FRB and the FHLB for which Blue Ridge can borrow up to the allowable amount for the collateral pledged. Having diverse funding alternatives reduces Blue Ridge’s reliance on any one source for funding.

44

---

Cash flow from amortizing assets or maturing assets provides funding to meet the needs of depositors and cash flow from amortizing assets or maturing assets also provides funding to meet the needs of depositors and borrowers.

Blue Ridge has established a formal liquidity contingency plan which provides guidelines for liquidity management. For Blue Ridge’s liquidity management program, it first determines current liquidity position and then forecasts liquidity based on anticipated changes in the balance sheet. In this forecast, Blue Ridge expects to maintain a liquidity cushion. Blue Ridge also stress tests its 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. Blue Ridge believes that it has sufficient resources to meet its liquidity needs.

Blue Ridge had a credit line available of $475.1 million with the FHLB with an outstanding balance of $135.0 million, including $115.0 million in advances and $20.0 million representing a letter of credit for use as pledging to the Commonwealth of Virginia to secure public deposits, as of September 30, 2020, leaving the remaining credit availability of $340.1 million at September 30, 2020. As of December 31, 2019, the outstanding balance of borrowings with the FHLB totaled $124.8 million.

Blue Ridge utilized the Federal Reserve Paycheck Protection Program Liquidity Facility to fully fund loans originated under the PPP, which are used as collateral for the liquidity facility.  The balance of these borrowings was $344.5 million at September 30, 2020.

Blue Ridge had four unsecured federal fund lines available with correspondent banks for overnight borrowing totaling $38.0 million and $21.0 million at September 30, 2020 and December 31, 2019, respectively. The outstanding balance on these lines was $135 thousand and zero at September 30, 2020 and December 31, 2019, respectively.

Liquidity is essential to Blue Ridge’s business. Blue Ridge’s liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash, including deposits. This situation may arise due to circumstances that Blue Ridge may be unable to control, such as general market disruption, negative views about the financial services industry generally, or an operational problem that affects a third party or Blue Ridge. Blue Ridge’s ability to borrow from other financial institutions on favorable terms or at all could be adversely affected by disruptions in the capital markets or other events. Blue Ridge monitors its liquidity position daily through cash flow forecasting and monthly testing against minimum policy ratios and believes its level of liquidity and capital is adequate to conduct the business of Blue Ridge.

Capital. Capital adequacy is an important measure of financial stability and performance. Blue Ridge’s objectives are to maintain a level of capitalization that is sufficient to sustain asset growth and promote depositor and investor confidence.

Regulatory agencies measure capital adequacy utilizing a formula that considers the individual risk profile of the financial institution. The minimum capital requirements for the Bank are: (i) a common equity Tier 1 (“CET1”) capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total risk-based capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. Additionally, a capital conservation buffer requirement of 2.5% of risk-weighted assets is designed to absorb losses during periods of economic stress and is applicable to the Bank’s CET1 capital, Tier 1 capital and total capital ratios. Including the conservation buffer, the Bank’s minimum capital ratios are as follows:  7.00% for CET1; 8.50% for Tier 1 capital; and 10.50% for Total Risk-Based capital.   Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation.  The Bank was considered “well capitalized” for regulatory purposes at September 30, 2020 and December 31, 2019.  

As noted above, regulatory capital levels for the Bank meet those established for “well capitalized” institutions. While the Bank is currently considered “well capitalized,” we may from time to time find it necessary to access the capital markets to meet Blue Ridge’s growth objectives or capitalize on specific business opportunities.

45

---

The following table shows the minimum capital requirement and the capital position at September 30, 2020 and December 31, 2019 for the Bank.

 

 

Off-Balance Sheet Activities

Standby letters of credit are conditional commitments issued by Blue Ridge to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements and, generally, have terms of one year or less. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers; Blue Ridge generally holds collateral supporting these commitments. In the event the customer does not perform in accordance with the terms of the agreement with the third party, Blue Ridge would be required to fund the commitment. The maximum potential amount of future payments Blue Ridge could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, Blue Ridge would be entitled to seek recovery from the customer. The maximum potential amount of future advances on standby letters of credit available through Blue Ridge at September 30, 2020 and December 31, 2019, totaled $6.5 million and $641 thousand, respectively.

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. Blue Ridge evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by Blue Ridge upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include real estate and income producing commercial properties.  The approved commitments to extend credit that was available but unused at September 30, 2020 and December 31, 2019 totaled $139.1 million and $107.7 million, respectively.

 

Interest Rate Risk Management

As a financial institution, Blue Ridge 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 LIBOR. Blue Ridge’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 Blue Ridge maintains. Blue Ridge manages interest rate risk through an asset and liability committee (“ALCO”). ALCO is responsible for managing Blue Ridge’s interest rate risk in conjunction with liquidity and capital management.

Blue Ridge employs an independent consulting firm to model its interest rate sensitivity. Blue Ridge uses a net interest income simulation model as its primary tool to measure interest rate sensitivity. Many assumptions 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 Blue Ridge expects 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 then produces an expected level of net interest income assuming that market rates remain unchanged. This is considered the base case. Next, the model determines what net interest income would be based on specific changes in interest rates. The rate simulations are performed for a two-year period

46

---

and include rate changes of down 100 basis points to 300 basis points and up 100 basis points to 400 basis points. In both the up and down scenarios, the model assumes a parallel shift in the yield curve. The results of these simulations are then compared to the base case.

Stress testing the balance sheet and net interest income using instantaneous parallel shock movements in the yield curve of 100 to 400 basis points 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 Blue Ridge’s interest rate risk position over a historical time frame for comparison purposes.  At September 30, 2020, Blue Ridge’s asset/liability position was considered to be asset sensitive based on its interest rate sensitivity model.

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

Not required.

Item 4.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, 2020 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.

47

---

PART II. OTHER INFORMATION

Item 1.Legal Proceedings

 

In the ordinary course of its operations, the Company is a party to various legal proceedings. As of the date of this report, there are no pending or threatened proceedings against the Company, other than as set forth below, that, if determined adversely, would have a material effect on the business, results of operations, or financial position of the Company.

 

On August 12, 2019, a former employee of VCB and participant in its ESOP filed a class action complaint against VCB, Virginia Community Bank, and certain individuals associated with the ESOP in the U.S. District Court for the Western District of Virginia, Charlottesville Division (Case No. 3:19-cv-00045-GEC). The complaint alleges, among other things, that the defendants breached their fiduciary duties to ESOP participants in violation of the Employee Retirement Income Security Act of 1974, as amended. The complaint alleges that the ESOP incurred damages “that approach or exceed $12 million.” The Company automatically assumed any liability of VCB in connection with this litigation as a result of the Company’s acquisition of VCB.  The Company believes the claims are without merit.

 

Item 1A.  Risk Factors

 

In addition to the other information contained in this Form 10-Q, the following risk factors update and supplement, should be read together with, the risk factors previously disclosed in our Annual Report on Form 10- K for the year ended December 31, 2019.  Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our 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.

 

The ongoing COVID-19 pandemic and measures intended to prevent its spread may adversely affect our business, financial condition and operations; the extent of such impacts are highly uncertain and difficult to predict.

Global health and economic concerns relating to the COVID-19 outbreak and government actions taken to reduce the spread of the virus have had a material adverse impact on the macroeconomic environment, and the outbreak has significantly increased economic uncertainty. The pandemic has resulted in federal, state and local authorities, including those who govern the markets in which we operate, implementing numerous measures to try to contain the virus.  These measures, including shelter-in-place orders and business limitations and shutdowns, have significantly contributed to rising unemployment and negatively impacted consumer and business spending.

 

The COVID-19 outbreak has adversely impacted and is likely to continue to adversely impact our workforce and operations and the operations of our customers and business partners. In particular, we may experience adverse effects due to a number of operational factors impacting us or our customers or business partners, including but not limited to:

 

The extent to which the pandemic impacts our business, liquidity, financial condition and operations will depend on future developments, which are highly uncertain and are difficult to predict, including, but not limited to, its duration and severity, the actions to contain it or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.  In addition, the rapidly changing and unprecedented nature of COVID-19 heightens the inherent uncertainty of forecasting future economic conditions and their impact on our loan portfolio, thereby increasing the risk that the assumptions, judgments and estimates used to determine the allowance for loan losses and other estimates are incorrect.  Further, our loan deferral program could delay or make it

48

---

difficult to identify the extent of asset quality deterioration.  As a result of these and other conditions, the ultimate impact of the pandemic is highly uncertain and subject to change, and we cannot predict the full extent of the impacts on our business, our operations or the global economy as a whole.  To the extent any of the foregoing risks or other factors that develop as a result of COVID-19 materialize, it could exacerbate the risk factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2019, or otherwise materially and adversely affect our business, liquidity, financial condition and results of operations.

Risks Related to the Merger

 

Combining Blue Ridge and Bay Banks may be more difficult, costly or time-consuming than we expect.

On August 12, 2020, the Company entered into a definitive merger agreement to acquire Bay Banks in an all-stock transaction. Subject to the terms and conditions stated in the merger agreement, upon the consummation of the merger Bay Banks will be merged into the Company, with the Company as the surviving corporation (the “merger”), and each share of Bay Banks common stock will be converted into the right to receive 0.5000 shares of the Company’s common stock.  At or immediately following consummation of the merger, Bay Bank’s wholly-owned banking subsidiary, Virginia Commonwealth Bank, will be merged with and into the Company’s wholly-owned national bank subsidiary, Blue Ridge Bank, with Blue Ridge Bank as the surviving bank (the “bank merger”).  The transactions are expected to close in the first quarter of 2021.

 

The success of the merger will depend, in part, on Blue Ridge’s ability to realize the anticipated benefits and cost savings from combining the businesses of Blue Ridge and Bay Banks. To realize such anticipated benefits and cost savings, Blue Ridge must successfully combine the businesses of Blue Ridge and Bay Banks in a manner that permits growth opportunities and cost savings to be realized without materially disrupting the existing customer relationships of Bay Banks or Blue Ridge or decreasing revenues due to loss of customers. If Blue Ridge is not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully, or at all, or may take longer to realize than expected.

 

Blue Ridge and Bay Banks have operated, and, until the completion of the merger, will continue to operate, independently, and after the completion of the merger, Blue Ridge will integrate Bay Banks’ business into its own. The integration process in the merger could result in the loss of key employees, the disruption of each party’s ongoing business, inconsistencies in standards, controls, procedures and policies that may adversely affect either party’s ability to maintain relationships with customers and employees or achieve the anticipated benefits of the merger. The loss of key employees could adversely affect Blue Ridge’s ability to successfully conduct its business in the markets in which Bay Banks now operates, which could have an adverse effect on Blue Ridge’s financial results and the value of its common stock. If Blue Ridge experiences difficulties with the integration process, the anticipated benefits of the merger may not be realized, fully or at all, or may take longer to realize than expected. As with any merger of financial institutions, there also may be disruptions that cause Blue Ridge and Bay Banks to lose customers or cause customers to withdraw their deposits from Blue Ridge’s or Bay Banks’ banking subsidiaries, or other unintended consequences that could have a material adverse effect on Blue Ridge’s results of operations or financial condition after the merger. These integration matters could have an adverse effect on each of Blue Ridge and Bay Banks during this transition period and for an undetermined period after consummation of the merger.

 

The COVID-19 pandemic could have a material adverse effect on the merger.

 

The spread of COVID-19 throughout the United States, and the measures taken by national, state and local governmental authorities in the United States attempting to contain the spread and impact of COVID-19, such as travel bans and restrictions, quarantines, shelter-in-place orders, and limitations on business activity, including closures, are, among other things, restricting economic activity in the United States and the banking markets in which Blue Ridge and Bay Banks operate. These measures have disrupted national and regional supply chains and resulted in declines in asset valuations, increases in unemployment and underemployment levels, declines in liquidity in markets for certain securities, and increases in volatility and periods of disruption in the financial markets, and may continue to have similar effects in the future. It is difficult to predict the impact of the COVID-19 pandemic on the businesses of Blue Ridge and Bay Banks, and there is no guarantee that efforts by Blue Ridge or Bay Banks to address the adverse impacts of the COVID-19 pandemic will be effective. The extent of such impact will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the continued severity of COVID-19 and actions taken to contain COVID-19 or its impact, among others.

 

The COVID-19 pandemic could delay and adversely affect the completion of the merger. Each of Blue Ridge and Bay Banks may be required to incur additional costs to remedy disruptions caused by the COVID-19 pandemic. Additional time may be required to process Blue Ridge’s regulatory applications, and the federal bank regulatory agencies may impose additional requirements on Blue Ridge or Bay Banks that must be satisfied prior to completion of the merger.

 

49

---

In addition, some economists and major investment banks have expressed concern that the COVID-19 pandemic could lead to a significant economic recession in the United States. Such a recession and other disruptions in economic and financial markets caused by the COVID-19 pandemic may negatively affect financial institutions for an extended period of time. If such conditions or disruptions continue following completion of the merger, the business, results of operation, financial condition, liquidity and prospects of Blue Ridge as the surviving corporation in the merger may be adversely affected.

 

Blue Ridge may not be able to effectively integrate the operations of Bay Banks into the operations of Blue Ridge.

The future operating performance of the Bank and Virginia Commonwealth Bank as the continuing bank following the bank merger will depend, in part, on the success of the bank merger, which is expected to occur as soon as practicable after the merger. The success of the bank merger will, in turn, depend on a number of factors, including Blue Ridge’s ability to (i) integrate the operations and branches of Bay Banks and Blue Ridge, (ii) retain the deposits and customers of Bay Banks and Blue Ridge, (iii) control the incremental increase in noninterest expense arising from the merger in a manner that enables the Bank as the continuing bank to improve its overall operating efficiencies and (iv) retain and integrate the appropriate personnel of Bay Banks within the operations of Blue Ridge. The integration of Virginia Commonwealth Bank into the Bank following the bank merger will require the dedication of the time and resources of the banks’ management teams and may temporarily distract the management teams’ attention from the day-to-day business of the banks. If the Bank and Virginia Commonwealth Bank are unable to successfully integrate, Blue Ridge may not be able to realize expected operating efficiencies and eliminate redundant costs.

 

Blue Ridge and Bay Banks will incur significant transaction and merger-related integration costs in connection with the merger.

 

Blue Ridge and Bay Banks expect to incur significant costs associated with completing the merger and integrating the operations of the two companies. Blue Ridge and Bay Banks are continuing to assess the impact of these costs. Although Blue Ridge and Bay Banks believe that the elimination of duplicate costs, as well as the realization of other efficiencies related to the integration of the businesses, will offset incremental transaction and merger-related costs over time, this net benefit may not be achieved in the near term, or at all. If the merger is not completed, the parties would have to recognize these expenses without realizing any of the expected benefits of the merger.

 

Regulatory approvals may not be received, may take longer than expected or may impose conditions that are burdensome on Blue Ridge or Bay Banks, not presently anticipated or cannot be met.

 

Before the transactions contemplated by the merger agreement may be completed, various approvals or waivers must be obtained from bank regulatory authorities, including the Federal Reserve, the OCC, and the Virginia Bureau of Financial Institutions. In determining whether to grant these approvals, the applicable regulatory agencies consider a variety of factors, including the competitive impact of the proposal in the relevant geographic and banking markets; financial, managerial and other supervisory considerations of each party; convenience and needs of the communities to be served and the record of insured depository institution subsidiaries under the Community Reinvestment Act of 1977 and related regulations (the “Community Reinvestment Act”); and the effectiveness of the parties in combating money laundering activities. These regulators may impose conditions on the granting of such approvals or request changes to the terms of the merger. Such conditions or changes and the process of obtaining regulatory approvals or waivers could have the effect of delaying completion of the merger or of imposing additional costs or limitations on Blue Ridge following the merger. The regulatory approvals or waivers may not be received at all, may not be received in a timely fashion or may contain conditions on the completion of the merger that are onerous on Blue Ridge or Bay Banks, not anticipated or cannot be met. Furthermore, such conditions or changes may constitute or be reasonably likely to result in a burdensome condition that may allow Blue Ridge to terminate the merger agreement. If the necessary governmental approvals or waivers contain such conditions, the business, financial condition and results of operations of Blue Ridge following the merger may be materially adversely affected. If the consummation of the merger is delayed, including by a delay in receipt of necessary regulatory approvals or waivers, the business, financial condition and results of operations of Blue Ridge and Bay Banks may be materially adversely affected.

 

Failure of the merger to be completed, the termination of the merger agreement, or a significant delay in completing the merger could negatively impact Blue Ridge and Bay Banks.

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the merger. These conditions to the consummation of the merger may not be fulfilled and, accordingly, the merger may not be completed. In addition, if the merger is not completed by July 31, 2021, either Blue Ridge or Bay Banks may terminate the merger agreement at any time after that date if the failure of the effective time to occur on or before that date is not caused by any breach of the merger agreement by the party electing to terminate the merger agreement, before or after shareholder approval.

 

50

---

Any delay in completion of the merger may have a material adverse effect on Blue Ridge’s and Bay Banks’s business during the pendency of the merger, and on Blue Ridge’s business and results of operations following the merger, due to potential diversion of management attention from other opportunities, constraints contained in the merger agreement on Bay Banks’ and Blue Ridge’s respective businesses during the pendency of the merger, the incurrence of additional merger-related expenses, and negative reactions by markets and customers. If the merger is not completed, the ongoing business, financial condition and results of operations of each party may be materially adversely affected and the market price of each party’s common stock may decline significantly, particularly to the extent that the current market price reflects a market assumption that the merger will be completed.

 

In addition, Blue Ridge’s or Bay Banks’ business may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. If the merger agreement is terminated and a party’s board of directors seeks another merger or business combination, such party’s shareholders cannot be certain that such party will be able to find another company willing to engage in a merger or business combination on more attractive terms than the merger.

 

Blue Ridge and Bay Banks will be subject to business uncertainties and contractual restrictions while the merger is pending.

Uncertainty about the effect of the merger on employees, customers (including depositors and borrowers), suppliers and vendors may have an adverse effect on the business, financial condition and results of operations of Blue Ridge and Bay Banks. These uncertainties may impair Blue Ridge’s or Bay Banks’ ability to attract, retain and motivate key personnel and customers (including depositors and borrowers) pending the completion of the merger, as such personnel and customers may experience uncertainty about their future roles and relationships with Blue Ridge or the Bank following the merger and the bank merger. Additionally, these uncertainties could cause customers (including depositors and borrowers) to seek to change existing business relationships with Bay Banks or Blue Ridge or fail to extend an existing relationship with Bay Banks or Blue Ridge. Further, competitors may target each party’s existing customers by highlighting potential uncertainties and integration difficulties that may result from the merger and the bank merger.

 

The merger agreement restricts Blue Ridge and Bay Banks from taking certain actions without the other party’s consent while the merger is pending. These restrictions could have a material adverse effect on each party’s business, financial condition and results of operations, including by limiting the actions that Blue Ridge or Bay Banks may take to address a business uncertainty while the merger is pending.

 

The opinions of Raymond James and Piper Sandler delivered to the respective boards of directors of Blue Ridge and Bay Banks prior to the signing of the amendment to the merger agreement will not reflect changes in circumstances after the dates of the opinions.

Prior to the execution of the merger agreement, each of the Blue Ridge board of directors and the Bay Banks board of directors, received an opinion, dated August 12, 2020, as to the fairness of the merger consideration from a financial point of view. Such opinions were as of their respective dates and subject to the limitations and assumptions contained therein. Subsequent changes in the operations and prospects of Blue Ridge or Bay Banks, general market and economic conditions and other factors beyond the control of Blue Ridge or Bay Banks, may significantly alter the value of Blue Ridge or Bay Banks, including the market prices of each party’s common stock, or the value of the merger consideration at the effective time of the merger. The opinions do not speak as of the effective time or as of any date other than the date of such opinions.

 

The merger agreement limits the ability of Bay Banks and Blue Ridge to pursue alternatives to the merger and might discourage competing offers for a higher price or premium.

 

The merger agreement contains “no-shop” provisions that, subject to limited exceptions, limit the ability of each of Bay Banks and Blue Ridge to discuss, solicit, facilitate or commit to competing third-party proposals to acquire all or a significant part of Bay Banks or Blue Ridge. In addition, under certain circumstances, if the merger agreement is terminated and either party, subject to certain restrictions, consummates a similar transaction other than the merger, that party must pay the other party a termination fee of $4.00 million.

 

Each of the members of the Blue Ridge board of directors and the Bay Banks board of directors, in their capacities as shareholders of Blue Ridge or Bay Banks, respectively, entered into affiliate agreements and agreed to vote their shares of Blue Ridge common stock and Bay Banks common stock, as applicable, in favor of the Blue Ridge merger proposal, in the case of Blue Ridge, and in favor of the Bay Banks merger proposal, in the case of Bay Banks, and in each case against alternative transactions. As of August 12, 2020, shares constituting 11.89% of Blue Ridge common stock and 3.74% of the Bay Banks common stock are subject to the affiliate agreements.

 

Litigation against Bay Banks or Blue Ridge, or the members of the Bay Banks or Blue Ridge board of directors, could prevent or delay the completion of the merger.

 

51

---

Purported shareholder plaintiffs may assert legal claims related to the merger. The results of any such potential legal proceeding would be difficult to predict and such legal proceedings could delay or prevent the merger from being completed in a timely manner. The existence of litigation related to the merger could affect the likelihood of obtaining the required approval from Blue Ridge’s and Bay Banks’ shareholders. Moreover, any litigation could be time consuming and expensive, and could divert attention of Blue Ridge’s and Bay Banks’ respective management teams away from their companies’ regular business. Any lawsuit adversely resolved against Bay Banks, Blue Ridge or members of the Bay Banks or Blue Ridge board of directors, could have a material adverse effect on each party’s business, financial condition and results of operations.

 

One of the conditions to the consummation of the merger is the absence of any law, order, decree or injunction (whether temporary, preliminary or permanent) or other action taken by the governmental authority of competent jurisdiction that restricts, enjoins or prohibits or makes illegal the consummation of the transactions contemplated by the merger agreement, including the merger. Consequently, if a settlement or other resolution is not reached in any lawsuit that is filed or any regulatory proceeding and a claimant secures injunctive or other relief or a governmental authority issues an order or other directive restricting, prohibiting or making illegal the completion of the transactions contemplated by the merger agreement, including the merger, then such injunctive or other relief may prevent the merger from being completed in a timely manner or at all.

 

If the merger is completed, Blue Ridge shareholders will have less influence on the management and policies of Blue Ridge following the merger than they had on Blue Ridge prior to the merger.

 

After the merger is complete, it is anticipated that approximately 56% of the shares of Blue Ridge common stock will be held by former shareholders of Bay Banks. In addition, upon consummation of the merger, Blue Ridge will have 15 directors, seven of whom will be former directors of Bay Banks. Consequently, shareholders of Blue Ridge will have less influence on the management and policies of Blue Ridge after the merger than they now have on the management and policies of Blue Ridge .

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.Defaults Upon Senior Securities

None

Item 4.Mine Safety Disclosures

None

Item 5.Other Information

None

Item 6.Exhibits

 

 

 

52

---

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

53