BLUE RIDGE BANKSHARES INC

Previous wording

the impact of, and the ability to comply with, the terms of the Consent Order with the OCC, including the heightened capital requirements and other restrictions therein, and other regulatory directives;

Current wording

the impact of, and the ability to comply with, the terms of the Consent Order, as defined below, with the OCC, including the heightened capital requirements and other restrictions therein, and other regulatory directives;

Previous wording

the Company’s ability to manage its fintech operations, including implementing enhanced controls and procedures, complying with the Consent Order, other regulatory directives and applicable laws and regulations, maintaining the quality of loans associated with these relationships, and, in certain cases, winding down certain of these partnerships;

Current wording

the Company’s ability to manage its fintech relationships, including implementing enhanced controls and procedures, complying with the OCC directives and applicable laws and regulations, and managing the wind down of these partnerships;

Previous wording

changes in the level of the Company’s nonperforming assets and charge-offs;

Current wording

the quality and composition of the Company’s loan and investment portfolios, including changes in the level of the Company’s nonperforming assets and charge-offs;

Previous wording

the ability to maintain adequate liquidity by growing and retaining deposits and secondary funding sources, especially if the Company's or industry's reputation become damaged;

Current wording

the ability to maintain adequate liquidity by growing and retaining deposits and secondary funding sources, especially if the Company's or its industry's reputation become damaged;

Previous wording

the ability to attain and maintain capital levels adequate to support the Company's business and to comply with the Consent Order and other regulatory directives placed upon the Bank;

Current wording

the ability to maintain capital levels adequate to support the Company's business and to comply with the Consent Order directives;

Previous wording

changes in technological and social media;

Current wording

technological and social media changes;

Previous wording

the impact of changes in financial services policies, laws, and regulations, including laws, regulations and policies concerning taxes, banking, securities, real estate and insurance, and the application thereof by regulatory bodies;

Current wording

the impact of changes in financial services policies, laws, and regulations, including laws, regulations and policies concerning taxes, banking, securities, real estate and insurance, the application thereof by bank regulatory bodies, and the three branches of the federal government;

Previous wording

the occurrence or continuation of widespread health emergencies or pandemics, significant natural disasters, severe weather conditions, floods and other catastrophic events; and

Current wording

the occurrence or continuation of widespread health emergencies or pandemics, significant natural disasters, severe weather conditions, floods, and other catastrophic events;

Previous wording

The allowance for credit losses is maintained at a level believed to be adequate to absorb lifetime expected credit losses in the Company's portfolio of loans held for investment and is based on an evaluation of the composition of the loan portfolio, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors. Loans are charged-off against the ACL when management believes the loan balance is no longer collectible. Subsequent recoveries of previously charged-off amounts (recoveries) are recorded as increases to the ACL. The provision for credit losses is an amount sufficient to bring the ACL to an estimated balance that management considers adequate to absorb lifetime expected losses in the Company’s held for investment loan portfolio. The ACL is a valuation account that is deducted from the loans’ recorded investment to present the net amount expected to be collected on the loans.

Current wording

The allowance for credit losses represents management’s best estimate of credit losses over the remaining life of the loan portfolio. Loans are charged-off against the ACL when management believes the loan balance is no longer collectible. Subsequent recoveries of previously charged-off amounts (recoveries) are recorded as increases to the ACL. The provision for credit losses is an amount sufficient to bring the ACL to an estimated balance that management considers adequate to absorb lifetime expected losses in the Company’s held for investment loan portfolio. The ACL is a valuation account that is deducted from the loans’ recorded investment to present the net amount expected to be collected on the loans. In accordance with Accounting Standards Codification ("ASC") 326, Credit Losses, the Company elected to exclude accrued interest from the recorded investment basis in its determination of the ACL for loans held for investment, and instead reverses accrued but unpaid interest through interest income in the period in which the loan is placed on nonaccrual status.

Previous wording

The Company uses a third-party model in estimating the ACL on a quarterly basis. Loans with similar risk characteristics are collectively assessed within pools (or segments). Loss estimates within the collectively assessed population are based on a combination of pooled assumptions and loan-level characteristics. The Company has determined that using federal call codes is an appropriate loan segmentation methodology, as it is generally based on risk characteristics of a loan’s underlying collateral. Using federal call codes also allows the Company to utilize publicly-available external information when developing its estimate of the ACL. The discounted cash flow ("DCF") method is the primary credit loss estimation methodology used by the Company and involves estimating future cash flows for each individual loan and discounting them back to their present value using the loan’s contractual interest rate, which is adjusted for any net deferred fees, costs, premiums, or discounts existing at the loan’s origination or acquisition date (also referred to as the effective interest rate). The DCF method also considers factors such as loan term, prepayment or curtailment assumptions, and other relevant economic factors that could affect future cash flows. By discounting the cash flows, this method incorporates the time value of money and reflects the credit risk inherent in the loan.

Current wording

Management’s determination of the adequacy of the ACL under ASC 326 is based on an evaluation of the composition of the loan portfolio, current economic conditions, historical loan loss experience, reasonable and supportable forecasts, and other risk factors. The Company uses a third-party model in estimating the ACL on a quarterly basis. Loans with similar risk characteristics are collectively assessed within pools (or segments). Loss estimates within the collectively assessed population are based on a combination of pooled assumptions and loan-level characteristics. The Company determined that using federal call codes is generally an appropriate loan segmentation methodology, as it is generally based on risk characteristics of a loan's underlying collateral. Using federal call codes also allows the Company to utilize publicly-available external information when developing its estimate of the ACL. The discounted cash flow ("DCF") method is the primary credit loss estimation methodology used by the Company and involves estimating future cash flows for each individual loan and discounting them back to their present value using the loan's contractual interest rate, which is adjusted for any net deferred fees, costs, premiums, or discounts existing at the loan's origination or acquisition date (also referred to as the effective interest rate). The DCF method also considers factors such as loan term, prepayment or curtailment assumptions, accrual status, and other relevant economic factors that could affect future cash flows. By discounting the cash flows, this method incorporates the time value of money and reflects the credit risk inherent in the loan.

Previous wording

In applying future economic forecasts, the Company utilizes a forecast period of one year and then reverts to the mean of historical loss rates on a straight-line basis over the following one-year period. The Company considers economic forecasts of national gross domestic product and unemployment rates from the Federal Open Market Committee to inform the model for loss estimation. Historical loss rates used in the quantitative model are derived using both the Bank’s and peer bank data obtained from publicly-available sources (i.e., federal call reports). The Bank’s peer group utilized is comprised of financial institutions of relatively similar size (i.e., $3 - $5 billion of total assets) and in similar markets. Management also considers qualitative adjustments when estimating loan losses to take into account the model’s quantitative limitations. Qualitative adjustments to quantitative loss factors, either negative or positive, may include considerations of trends in delinquencies, nonaccrual loans, charged-off loans, changes in volume and terms of loans, effects of changes in lending policy, experience and depth of management, regional and local economic trends and conditions, concentrations of credit, competition, and loan review results.

Current wording

In applying future economic forecasts, the Company utilizes a forecast period of one year and then reverts to the mean of historical loss rates on a straight-line basis over the following one-year period. The Company considers economic forecasts of national gross domestic product and unemployment rates from the Federal Open Market Committee to inform the model for loss estimation. Historical loss rates used in the quantitative model are derived using both the Bank’s and peer bank data obtained from publicly-available sources (i.e., federal call reports). The Bank’s peer group utilized is comprised of financial institutions of relatively similar size (i.e., $1 - $5 billion of total assets) and in similar markets. Management also considers qualitative adjustments when estimating loan losses to take into account the model’s quantitative limitations. Qualitative adjustments to quantitative loss factors, either negative or positive, may include considerations of trends in delinquencies, changes in volume and terms of loans, effects of changes in lending policy, experience and depth of management, regional and local economic trends and conditions, concentrations of credit, and loan review results.

Previous wording

For those loans that do not share similar risk characteristics, the Company evaluates the ACL needs on an individual (or loan-by-loan) basis. This population of individually evaluated loans (or loan relationships with the same primary source of repayment) is determined on a quarterly basis and is based on whether (1) the risk grade of the loan is substandard or worse and the balance exceeds $500,000, (2) the risk grade of the loan is special mention and the balance exceeds $1,000,000, or (3) the loan’s terms differ significantly from other pooled loans. Measurement of credit loss is based on the expected future cash flows of an individually evaluated loan, discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, or the estimated market value of the collateral underlying the loan discounted for estimated costs to sell the collateral for collateral-dependent loans. If the net value applying these measures is less than the loan’s amortized cost, a specific reserve is recorded in the ACL and charged-off in the period when management believes the loan balance is no longer collectible.

Current wording

For those loans that do not share similar risk characteristics, the Company evaluates the ACL needs on an individual (or loan-by-loan) basis. This population of individually evaluated loans (or loan relationships with the same primary source of repayment) is determined on a quarterly basis and is based on whether (1) the risk grade of the loan is substandard or worse and the balance exceeds $500,000, (2) the risk grade of the loan is special mention and the balance exceeds $1,000,000, or (3) the loan’s terms differ significantly from other pooled loans. Measurement of credit loss is based on the expected future cash flows of an individually evaluated loan, discounted at the loan’s effective interest rate, or measured on an observable market value, if one exists, or the estimated market value of the collateral underlying the loan discounted for estimated costs to sell the collateral for collateral-dependent loans. In limited circumstances, the collateral value for a collateral-dependent loan may be based on the enterprise value of a company. The enterprise value method involves assessing the borrower’s ability to repay the loan by estimating the total value of its business, including both debt and equity. This approach is typically used where the recoverable value is based on the fair value of the company as a going concern, adjusted for the priority of the Company's claim. If the net value applying these measures is less than the loan’s amortized cost, a specific reserve is recorded in the ACL and charged-off in the period when management believes the loan balance is no longer collectible.

Previous wording

Credit losses are an inherent part of the Company’s business. The Company has an ACL management "work group", which includes the Chief Financial Officer, Chief Credit Officer, Chief Accounting Officer, and head of the Bank's special assets group, who approve the key methodologies and assumptions, as well as the final ACL. While management uses available information at the time of estimation to determine expected lifetime credit losses on loans, future changes in the ACL may be necessary based on changes in portfolio composition, portfolio credit quality, changes in underlying facts for individually evaluated loans, and/or changes in current and forecasted economic conditions. In addition, bank regulatory agencies periodically review its ACL and may require an increase in the ACL or the recognition of further loan charge-offs, based on their judgment of the facts at the time of their review, that may differ than that of management. Additional provisions for such losses, if necessary, would be recorded as a charge to earnings.

Current wording

Credit losses are an inherent part of the Company’s business. The Company has an ACL management "work group", which includes executive and senior management of the accounting and credit administration teams, who approve the key methodologies and assumptions, as well as the final ACL. While management uses available information at the time of estimation to determine expected lifetime credit losses on loans, future changes in the ACL may be necessary based on changes in portfolio composition, portfolio credit quality, changes in underlying facts for individually evaluated loans, and/or changes in current and forecasted economic conditions. In addition, bank regulatory agencies and the Company's independent auditors periodically review its ACL and may require an increase in the ACL or the recognition of further loan charge-offs, based on judgments that are different than those of management. Additional provisions for such losses, if necessary, would be recorded as a charge to earnings.

Previous wording

MSR assets represent the economic value associated with servicing a borrower during the life of the mortgage. The assets are separate from the underlying mortgage and may be retained or sold by the Company when the related mortgage is sold. In accordance with ASC 860-50, Transfers and Servicing, MSR assets are initially recognized at fair value and subsequently accounted for using either the amortization method or the fair value measurement method. On January 1, 2022, the Company changed its accounting method for MSR assets from the amortization method to the fair value measurement method. This change in accounting method, which was an irrevocable election, was prospective in nature and resulted in an after-tax difference in carrying values of its MSR assets under the two methods at the beginning of the year. Consequently, a positive $3.5 million after-tax cumulative effect adjustment was recorded to stockholders' equity as of January 1, 2022.

Current wording

MSR assets represent the economic value associated with servicing a mortgage loan during the life of the loan. The Company retains servicing rights on mortgages originated and sold to the secondary market. The assets are separate from the underlying mortgage and may be retained or sold by the Company when the related mortgage is sold. Under ASC 860, Transfers and Servicing, MSR assets are initially recognized at fair value and subsequently accounted for using either the amortization method or the fair value measurement method. Beginning January 1, 2022, the Company elected the fair value measurement method for accounting for MSR assets; prior to this, MSR assets were recorded under the amortization method. This change in accounting method, which was an irrevocable election, was prospective in nature and resulted in an after-tax difference in carrying values of its MSR assets under the two methods at the beginning of 2022. Consequently, a positive $3.5 million cumulative effect adjustment was recorded to stockholders’ equity as of January 1, 2022. MSR assets and servicing income are reported on the Company’s consolidated balance sheets and consolidated statements of operations, respectively.

Previous wording

defer tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or federal income tax returns. A net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book (i.e., financial statement) and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. Temporary differences are reversed in the period in which an amount or amounts become taxable or deductible. Interest and penalties, if any, related to uncertain tax positions are reported in income tax expense in the consolidated statements of operations.

Current wording

Income taxes are accounted for using the balance sheet method in accordance with ASC 740, Accounting for Income Taxes. Per ASC 740, the objective is to (a) recognize the amount of taxes payable or refundable for the current year, and (b) defer tax liabilities and assets for the future tax consequences of events that have been recognized in the financial statements or federal income tax returns. Deferred tax assets and liabilities are determined based on the tax effects of the temporary differences between the book (i.e., financial statement) and tax bases of the various balance sheet assets and liabilities, and give current recognition to changes in tax rates and laws. Temporary differences are reversed in the period in which an amount or amounts become taxable or deductible.

Previous wording

A deferred tax liability is recognized for all temporary differences that will result in future taxable income; a deferred tax asset is recognized for all temporary differences that will result in future tax deductions, potentially reduced by a valuation allowance. A valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making this assessment, all sources of taxable income available to realize the deferred tax asset are considered, including future releases of existing temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards. The predictability that future taxable income, exclusive of reversing temporary differences, will occur is the most subjective of these four sources. Additionally, cumulative losses in recent years, if any, are considered negative evidence that may be difficult to overcome to support a conclusion that future taxable income, exclusive of reversing temporary differences and carryforwards, is sufficient to realize a deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. The evaluation of the recoverability of deferred tax assets requires management to make significant judgments regarding the releases of temporary differences and future profitability, among other items. The Company concluded that, as of December 31, 2023, no valuation allowance was required on the Company's deferred tax asset.

Current wording

A deferred tax liability is recognized for all temporary differences that will result in future taxable income; a deferred tax asset is recognized for all temporary differences that will result in future tax deductions, potentially reduced by a valuation allowance. A valuation allowance is recognized if, based on an analysis of available evidence, management determines that it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making this assessment, all sources of taxable income available to realize the deferred tax asset are considered including future releases of existing temporary differences, tax planning strategies, and future taxable income exclusive of reversing temporary differences and carryforwards. The predictability that future taxable income, exclusive of reversing temporary differences, will occur is the most subjective of these four sources. Additionally, cumulative losses in recent years, if any, are considered negative evidence that may be difficult to overcome to support a conclusion that future taxable income, exclusive of reversing temporary differences and carryforwards, is sufficient to realize a deferred tax asset. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. The evaluation of the recoverability of deferred tax assets requires management to make significant judgments regarding the releases of temporary differences and future profitability, among other items.

Previous wording

The net loss of $51.8 million for the year ended December 31, 2023 included an after-tax goodwill impairment charge of $26.8 million and a $4.8 million after-tax settlement reserve for the ESOP litigation assumed in the 2019 acquisition of VCB.

Current wording

For the year ended December 31, 2024, the Company reported a net loss of $15.4 million compared to a net loss of $51.8 million for 2023. Basic and diluted loss per share were ($0.31) for 2024 compared to ($2.73) for 2023. The net loss of $51.8 million for the year ended December 31, 2023 included an after-tax goodwill impairment charge of $26.8 million and a $4.7 million after-tax settlement reserve for the the previously disclosed Employee Stock Ownership Plan ("ESOP") litigation assumed in the 2019 acquisition of Virginia Community Bankshares, Inc. ("VCB"). After-tax regulatory remediation expenses for 2024 and 2023 were $3.6 million and $8.1 million, respectively.

Previous wording

Net Interest Income. Net interest income is the excess of interest earned on loans, investments, and other interest-earning assets over the interest paid on deposits and borrowings and is the Company’s primary revenue source. Net interest income is thereby affected by overall balance sheet growth, changes in interest rates, and changes in the mix of investments, loans, deposits, and borrowings.

Current wording

Net Interest Income. Net interest income is the excess of interest earned on loans, investments, and other interest-earning assets over the interest paid on deposits and borrowings and is the Company’s primary revenue source. Net interest income is thereby affected by overall balance sheet size, changes in interest rates, and changes in the mix of investments, loans, deposits, and borrowings.

Previous wording

(1) Computed on a fully taxable equivalent basis assuming a 21% federal income tax rate.

Current wording

(1) Computed on a fully taxable equivalent basis assuming a 22.32% and 22.65% income tax rate for the years ended December 31, 2024 and 2023, respectively.

Previous wording

(4) Includes accretion of fair value adjustments (discounts) on acquired loans of $2.6 million, $7.4 million, and $2.0 million for the years ended December 31, 2023, 2022, and 2021, respectively.

Current wording

(4) Includes accretion of fair value adjustments (discounts) on acquired loans of $1.1 million and $2.6 million for the years ended December 31, 2024 and 2023, respectively.

Previous wording

(5) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $0.8 million, $1.5 million, and $3.2 million for the years ended December 31, 2023, 2022, and 2021, respectively.

Current wording

(5) Includes amortization of fair value adjustments (premiums) on assumed time deposits of $0.3 million and $0.8 million for the years ended December 31, 2024 and 2023, respectively.

Previous wording

(7) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $100 thousand, $101 thousand, and $176 thousand for the years ended December 31, 2023, 2022, and 2021, respectively.

Current wording

(6) Includes amortization of fair value adjustments (premiums) on assumed subordinated notes of $100 thousand for both years ended December 31, 2024 and 2023.

Previous wording

Average interest-earning assets were $3.03 billion for the year ended December 31, 2023 compared to $2.62 billion for the same period of 2022, a $418.0 million increase. This increase was primarily attributable to growth in average balances of loans held for investment, excluding PPP loans, which increased $441.0 million in the 2023 period compared to the 2022 period, partially offset by lower average balances of federal funds sold and total securities. Total interest income (on a taxable equivalent basis) increased by $47.3 million to $169.1 million for the year ended December 31, 2023 compared to the year ended 2022. This increase was primarily due to higher average balances of and yields on loans held for investments, excluding PPP loans. Interest income in 2023 and 2022 included accretion of fair value adjustments (discounts) on acquired loans of $2.6 million and $7.4 million, respectively.

Current wording

Average interest-earning assets were $2.85 billion for the year ended December 31, 2024 compared to $3.03 billion for the same period of 2023, a $188.1 million decrease. This decrease was primarily attributable to lower average balances of loans held for investment and securities, which decreased $190.7 million and $36.5 million, respectively, partially offset by higher average balances of interest-earning deposits in other banks. The Company selectively reduced its loan portfolio, primarily loans outside of the Bank's geographic market, in order to meet the liquidity needs to exit fintech BaaS depository operations. Total interest income (on a taxable equivalent basis) decreased by $8.7 million to $160.4 million for the year ended December 31, 2024 compared to the year ended 2023. This decrease was primarily due to lower average balances of loans held for investment. Interest income in 2024 and 2023 included accretion of fair value adjustments (discounts) on acquired loans of $1.1 million and $2.6 million, respectively.

Previous wording

Average interest-bearing liabilities were $2.31 billion for the year ended December 31, 2023 compared to $1.70 billion for the same period of 2022, a $606.3 million increase. Of this increase, $419.8 million was attributable to higher average balances of interest-bearing deposits including time deposits, of which $116.4 million was attributable to average balances of brokered deposits, while $149.8 million was attributable to higher average balances of FHLB advances. Average fintech-related deposit balances were $653.2 million and $395.9 million for the years ended December 31, 2023 and December 31, 2022, respectively. Interest expense increased by $58.9 million to $76.0 million for the year ended December 31, 2023 compared to the 2022 period. Higher interest expense was primarily attributable to higher rates paid on interest-bearing liabilities (except for subordinated notes), particularly deposits related to the Bank's fintech operations, due to significant increases in market interest rates throughout 2023. The interest rate for the majority of the fintech-related accounts are index-priced, with the index being the federal funds rate. The cost of fintech-related deposits was 3.82% in 2023, while the cost of core deposits (also excluding brokered deposits) was 2.03% in the same period. Brokered time deposits also contributed to the higher interest expense in the 2023 period in the amount of $14.5 million. The cost of average interest-bearing liabilities increased to 3.29% in 2023 from 1.00% in 2022, while the cost of funds increased to 2.56% in 2023 from 0.68% in 2022. Interest expense in the 2023 and 2022 periods included the amortization of fair value adjustments (premium) on assumed time deposits of $0.8 million and $1.5 million, respectively, which was a reduction to interest expense.

Current wording

Average interest-bearing liabilities were $2.20 billion for the year ended December 31, 2024 compared to $2.31 billion for the same period of 2023, a $114.0 million decrease. Of this decrease, $50.3 million was attributable to lower average balances of FHLB advances, while $45.0 million was attributable to lower average balances of interest-bearing deposits, primarily due to a decline in fintech BaaS deposits. Average fintech-related deposit balances were $260.0 million and $653.2 million for the years ended December 31, 2024 and December 31, 2023, respectively. Interest expense increased by $5.7 million to $81.7 million for the year ended December 31, 2024 compared to the 2023 period. Higher interest expense was primarily attributable to higher rates paid on interest-bearing deposits, primarily time deposits, partially offset by a decline in deposits related to the Bank's fintech operations. These changes reflect the balance sheet repositioning that facilitated the exit of fintech BaaS depository operations and towards a more traditional community bank model. The interest rates for the majority of the fintech-related accounts are index-priced, with the index being the federal funds rate. The cost of fintech-related deposits was 3.86% in 2024, while the cost of deposits of customers in the Bank's primary markets (also excluding brokered deposits) was 3.15% in the same period. Brokered time deposits also contributed to the higher interest expense in the 2024 period in the amount of $23.9 million. The cost of average interest-bearing liabilities increased to 3.72% in 2024 from 3.29% in 2023, while the cost of funds increased to 3.04% in 2024 from 2.56% in 2023. Interest expense in the 2024 and 2023 periods included the amortization of fair value adjustments (premium) on assumed time deposits of $0.3 million and $0.8 million, respectively, which was a reduction to interest expense.

Previous wording

Net interest income (on a taxable equivalent basis) was $93.1 million for the year ended December 31, 2023 compared to $104.7 million for the year ended December 31, 2022, while net interest margin was 3.07% and 4.00% for the same respective periods. Accretion and amortization of purchase accounting adjustments had a 12 basis point and 35 basis point positive effect on net interest margin for the same respective periods. The decrease in net interest income in 2023 was primarily due higher rates on deposits, primarily fintech-related accounts and brokered deposits. The Company anticipates that funding costs will continue to rise in 2024, as net interest income and net interest margin will be negatively affected by two likely events. The Company expects potential repricing of existing core time deposits in a higher interest rate environment. Additionally, the Company anticipates higher funding costs as the Company substantially exits its fintech BaaS operations and seeks to attract core deposits in an extremely competitive market.

Current wording

Net interest income (on a taxable equivalent basis) was $78.7 million for the year ended December 31, 2024 compared to $93.1 million for the year ended December 31, 2023, while net interest margin was 2.77% and 3.07% for the same respective periods. Accretion and amortization of purchase accounting adjustments had a 5 basis point and 12 basis point positive effect on net interest margin for the same respective periods. The decrease in net interest income in 2024 was primarily due to lower average balances of loans held for investment and higher rates on deposits, primarily time deposits. The Company anticipates that future net interest income and net interest margin will be positively affected as it anticipates loan balance declines to stabilize with new and renewed loans at higher market rates and a further reduction in higher cost brokered deposits.

Previous wording

Provision for Credit Losses. The provision for credit losses was $22.3 million for the year ended December 31, 2023 compared to $25.7 million for the year ended December 31, 2022, a decrease of $3.4 million. Provision for credit losses in the 2023 period was primarily composed of specific reserves on the previously noted group of specialty finance loans, partially offset by a credit to provision for credit losses on unfunded commitments, as the Company actively worked to reduce these balances. Provision for credit losses in the 2022 period was primarily due to reserves for loan growth, excluding PPP loans, of $621.9 million, specific reserves on specialty finance loans, and qualitative loss factor adjustments, primarily due to changes in economic conditions.

Current wording

(Recovery of ) Provision for Credit Losses. The Company recorded a recovery of credit losses of $5.1 million for the year ended December 31, 2024 compared to a provision for credit losses of $22.3 million for the year ended December 31, 2023, a decrease of $27.4 million. The recovery of credit losses in 2024 was primarily attributable to an $8.4 million recovery from the sale of a specialty finance loan reserved for in 2023 and 2022 and lower reserve needs due to loan portfolio balance reductions, partially offset by higher specific reserves for certain purchased loans. Provision for credit losses in 2023 was primarily composed of specific reserves on the previously reported group of specialty finance loans, partially offset by a credit to provision for credit losses on unfunded commitments, as the Company actively worked to reduce these balances.

Previous wording

Income Tax Expense. For the year ended December 31, 2023, the Company recorded an income tax benefit of $7.1 million (effective income tax rate of 12.0%) compared to income tax expense of $5.3 million (effective income tax rate of 23.3%) for the same period of 2022. The lower effective income tax rate in the 2023 period was primarily attributable to the $26.8 million goodwill impairment charge, which was not tax deductible.

Current wording

Income Tax Expense. For the year ended December 31, 2024, the Company recorded an income tax benefit of $1.1 million (effective income tax rate of 6.8%) compared to income tax benefit of $7.1 million (effective income tax rate of 12.0%) for the same period of 2023. The effective income tax rate in the 2024 period was primarily attributable to the surrender of the majority of the Company's investment in bank owned life insurance, which resulted in a taxable gain and nondeductible penalties. The effective income tax rate in the 2023 period was primarily attributable to the $26.8 million goodwill impairment charge, which was not tax deductible.

Previous wording

Loan Portfolio. The Company makes loans to individuals and commercial entities. Loan terms vary as to interest rate and repayment and collateral requirements based on the type of loan requested and the creditworthiness of the borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by the Company; however, the loans contributing to the increase in nonperforming assets and the ACL beginning in 2022 were primarily to borrowers outside of the Company's primary geographic footprint. All loans are underwritten within specific lending policy guidelines that are designed to maximize the Company’s profitability within an acceptable level of credit and business risk.

Current wording

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

Previous wording

The following table presents the Company’s portfolio of commercial real estate mortgages by property type as of the date stated.

Current wording

The following table presents the Company’s portfolio of commercial real estate mortgages by property type as of the dates stated.

Previous wording

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

Current wording

Allowance for Credit Losses. In determining the adequacy of the Company’s ACL, management makes estimates based on facts available at the time the ACL is determined. Such estimation requires significant judgment at the time made. Management believes that the Company’s ACL was adequate as of December 31, 2024 and December 31, 2023. There can be no assurance, however, that adjustments to the ACL will not be required in the future. Changes in the economic assumptions underlying management’s estimates and judgments, adverse developments in the economy, on a national basis or in the Company’s market area, and changes in the circumstances of particular borrowers are criteria, among others, that could increase the level of the ACL required, resulting in charges to the provision for credit losses for loans. In addition, bank regulatory agencies periodically review the Bank's ACL and may, on occasion, require an increase in the ACL or the recognition of further loan charge-offs, based on their judgment of the facts at the time of their review that may differ than that of management.

Previous wording

The adoption of ASC 326 on January 1, 2023 resulted in a $7.4 million increase in the ACL. Provision for credit losses in both the 2023 and 2022 periods were primarily attributable to specific reserves for specialty finance loans that were originated in 2022. The Company ceased making loans identified as specialty finance in late 2022. As of December 31, 2023 and 2022, carrying values of specialty finance loans totaled $34.2 million and $65.7 million, respectively, with specific reserves of $9.6 million and $11.4 million, respectively, as of the same dates. Net loan charge-offs were $27.0 million for the year ended December 31, 2023, compared to $7.1 million for the year ended December 31, 2022. The increase in net charge-offs in the 2023 period was primarily attributable to charge-offs of specialty finance loans.

Current wording

The adoption of ASC 326 on January 1, 2023 resulted in a $7.4 million increase in the ACL. Provision for credit losses in the 2023 period was primarily attributable to specific reserves for specialty finance loans that were originated in 2022. The Company ceased making loans identified as specialty finance in late 2022. As of December 31, 2024 and 2023, carrying values of specialty finance loans totaled $0 and $34.2 million, respectively, with specific reserves of $0 and $9.6 million, respectively, as of the same dates. Net loan charge-offs were $10.0 million for the year ended December 31, 2024, compared to $27.0 million for the year ended December 31, 2023. The decline in net charge-offs in 2024 compared to 2023 was primarily due to $19.5 million in specialty finance loan charge-offs recorded in 2023 compared to $1.0 million in 2024. Net charge-offs of the nonguaranteed portion of government-guaranteed loans totaled $2.0 million and $1.1 million for 2024 and 2023, respectively.

Previous wording

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

Current wording

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

Previous wording

Nonperforming loans, which include nonaccrual loans and loans past due 90 days and still accruing interest, decreased $21.2 million from prior year end, to $63.1 million as of December 31, 2023. Nonaccrual loans as of December 31, 2023 and 2022 included specialty finance loans with carrying values totaling $34.2 million and $65.7 million, respectively.

Current wording

Nonperforming loans, which include nonaccrual loans and loans past due 90 days and still accruing interest, decreased $37.6 million from prior year end, to $25.4 million as of December 31, 2024. This decline primarily reflects the sale of the previously noted specialty finance loan, which had a $32.8 million carrying value and specific reserve of $9.6 million at December 31, 2023. The decline in nonperforming loans positively affected the asset quality measures above.

Previous wording

Investment Securities. The investment portfolio is used as a source of interest income, credit risk diversification, and liquidity, as well as to manage interest 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, securities’ prepayment risk, liquidity needs, and other similar factors, and are carried at estimated fair value. The fair value of the Company’s investment securities available for sale was $321.1 million and $354.3 million at December 31, 2023 and

Current wording

Investment Securities. The investment portfolio is used as a source of interest income, credit risk diversification, and liquidity, as well as to manage interest 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, securities’ prepayment risk, liquidity needs, and other similar factors, and are carried at estimated fair value. The fair value of the Company’s investment securities available for sale was $312.0 million and $321.1 million at December 31, 2024 and 2023, respectively. Primarily as a result of market interest rates in the year ended December 31, 2024, the Company’s portfolio of securities available for sale had a net unrealized loss of approximately $55.5 million as of the same date. Of the unrealized loss in the portfolio at December 31, 2024, approximately 81.0% was related to securities backed by U.S. government agencies.

Previous wording

As of December 31, 2023 and 2022, the majority of the investment securities portfolio consisted of securities rated investment grade by a leading rating agency. Investment grade securities are judged to have a low risk of default, to be of the best quality and carry the smallest degree of investment risk. At December 31, 2023 and 2022, securities with a fair value of $35.8 million and $241.9 million, respectively, were pledged to secure the Bank's borrowing facility with the FHLB. As of December 31, 2023, the Company had pledged securities with a total par value of $260.9 million (amortized cost and fair value of $262.7 million and $218.7 million, respectively) as collateral for the Bank Term Funding Program ("BTFP"), established by the Federal Reserve.

Current wording

As of December 31, 2024 and 2023, the majority of the investment securities portfolio consisted of securities rated investment grade by a leading rating agency. Investment grade securities are judged to have a low risk of default, to be of the best quality and carry the smallest degree of investment risk. At December 31, 2024 and 2023, securities with a fair value of $268.9 million and $35.8 million, respectively, were pledged to secure the Bank's borrowing facility with the FHLB. As of December 31, 2024, the Company had pledged securities with a fair value of $16.3 million as collateral for the FRB Discount Window, and as of December 31, 2023, the Company had pledged $260.9 million as collateral for the FRB Bank Term Funding Program (“BTFP”).

Previous wording

The Company reviews its available for sale investment securities portfolio for potential credit losses at least quarterly. At December 31, 2023 and 2022, the majority of securities in an unrealized loss position were of investment grade; however, a few did not have a third-party investment grade available. These ungraded securities were primarily subordinated debt instruments issued by bank holding companies and are classified as corporate bonds. Investment securities with unrealized losses are generally a result of pricing changes due to changes in the interest rate environment since purchase and not as a result of permanent credit impairment. Contractual cash flows for mortgage backed and U.S. Treasury and agencies securities are guaranteed and/or funded by the U.S. government. Municipal securities with unrealized losses showed no indication that the contractual cash flows will not be received when due. The Company 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 ACL has been recognized for investment securities as of December 31, 2023.

Current wording

The Company reviews its available for sale investment securities portfolio for potential credit losses at least quarterly. At December 31, 2024 and 2023, the majority of securities in an unrealized loss position were of investment grade; however, a portion did not have a third-party investment grade available (securities with fair values of of $29.3 million and $20.5 million, respectively). These securities were primarily subordinated debt instruments issued by bank holding companies and are classified as corporate bonds. Investment securities with unrealized losses are generally a result of pricing changes due to changes in the interest rate environment since purchase and not as a result of permanent credit impairment. Contractual cash flows for mortgage backed and U.S. Treasury and agencies securities are guaranteed and/or funded by the U.S. government. Municipal securities with unrealized losses showed no indication that the contractual cash flows will not be received when due. The Company does not intend to sell nor does it believe that it will be required to sell, any of its impaired securities prior to the recovery of the amortized cost. No ACL has been recognized for investment securities as of December 31, 2024 and 2023.

Previous wording

Restricted equity investments consisted of stock in the FHLB (carrying basis $12.3 million and $14.7 million at December 31, 2023 and 2022, respectively), Federal Reserve Bank of Richmond ("FRB") stock (carrying basis of $5.9 million and $6.1 million at December 31, 2023 and 2022, respectively), and stock in the Company’s correspondent bank (carrying basis of $468 thousand at both December 31, 2023 and 2022). Restricted equity investments are carried at cost. The Company holds various other equity investments, including shares in other financial institutions and fintech companies, totaling $12.9 million and $23.8 million as of December 31, 2023 and 2022, respectively, which are carried at fair value with any gain or loss reported in the consolidated statements of operations each reporting period.

Current wording

Restricted equity investments consisted of stock in the FHLB (carrying basis $9.4 million and $12.3 million at December 31, 2024 and 2023, respectively), FRB stock (carrying basis of $9.4 million and $5.9 million at December 31, 2024 and 2023, respectively), and stock in the Company’s correspondent bank (carrying basis of $468 thousand at both December 31, 2024 and 2023). Restricted equity investments are carried at cost.

Previous wording

Deposits. The principal sources of funds for the Company are core deposits, which include transaction accounts (demand deposits and money market accounts), time deposits, and savings accounts, all of which provide the Bank a source of fee income and cross-marketing opportunities. Core deposits are generally a low-cost source of funding for the Bank and are preferred to brokered deposits. The Company's fintech partnerships have been a significant source of deposits and comprised approximately $466 million, or 18%, of the Company's deposits as of December 31, 2023, compared to approximately $690 million, or 28%, as of December 31, 2022.

Current wording

Deposits. The principal sources of funds for the Company are deposits, including transaction accounts (demand deposits and money market accounts), time deposits, and savings accounts, of customers in the Company’s primary geographic market area. Such customers provide the Bank a source of fee income and cross-marketing opportunities and are generally a lower cost source of funding for the Bank.

Previous wording

As a result of the Consent Order, subsequent to December 31, 2023, the Bank is prohibited from soliciting, accepting, renewing, or rolling over any brokered deposits, except in compliance with certain applicable restrictions under federal law, while subject to the Consent Order. In response and pursuant to 12 USC 1831f, 12 CFR 337.6(c) and 12 CFR 303.243(a), the Bank submitted to the FDIC an application for a waiver of the prohibition on the acceptance, renewal, or rollover of brokered deposits by an adequately capitalized insured depository institution.

Current wording

The Bank is prohibited from accepting, renewing, or rolling over any brokered deposits, except in compliance with certain applicable restrictions under federal law, while subject to the Consent Order. In response and pursuant to 12 USC 1831f, 12 CFR 337.6(c) and 12 CFR 303.243(a), the Bank submitted to the FDIC an application for a waiver of the prohibition on the acceptance, renewal, or rollover of brokered deposits by an adequately capitalized insured depository institution. During the third quarter of 2024, the Bank received approval from the FDIC allowing the Bank to accept, renew, and rollover brokered deposits for a six-month period and in the amount of maturities during this period. In late fourth quarter of 2024, the Bank received a six-month extension of this approval.

Previous wording

Total deposits include uninsured deposits of $573.9 million and $923.2 million as of December 31, 2023 and 2022, respectively, representing 22.3% and 46.0% of total deposits, respectively. Uninsured deposit amounts are based on estimates as of the reported date.

Current wording

Estimated uninsured deposits totaled approximately $399.3 million as of December 31, 2024, or 18.0% of total deposits, compared to $573.9 million, or 22.3% of total deposits, as of December 31, 2023. Excluding fintech BaaS deposits, estimated uninsured deposits were 18.1% and 18.2% of total deposits as of December 31, 2024 and 2023, respectively. Uninsured deposit amounts are based on estimates as of the reported date.