Executive Summary / Key Takeaways

• Blue Ridge Bankshares is undergoing a significant strategic transition, divesting non-core assets like its mortgage division and exiting fintech BaaS operations to focus on traditional community banking.
• Recent financial performance shows improvement in net loss and net interest margin, driven by reduced operating expenses (especially regulatory remediation and salaries) and lower funding costs from shedding high-cost deposits.
• The company has strengthened its capital position through a 2024 private placement and is actively managing its balance sheet, including reducing brokered deposits and planning subordinated debt redemption to lower interest expense.
• Regulatory oversight via the OCC Consent Order remains a key factor, requiring adherence to heightened capital ratios and operational enhancements, though progress is reported.
• Key risks include the challenging commercial real estate environment, potential future regulatory requirements, and the ability to successfully execute the transition while facing competition from larger, more technologically advanced institutions.

Blue Ridge Bankshares: Charting a Course Through Transition

Blue Ridge Bankshares, Inc. (NYSE American: BRBS) is a regional bank holding company operating primarily through its subsidiary, Blue Ridge Bank, National Association, and its wealth and trust management arm, BRB Financial Group, Inc. The company has historically pursued growth through a mix of traditional commercial and consumer banking, mortgage lending, and, more recently, fintech partnerships, including Banking-as-a-Service (BaaS) activities. This diversified approach fueled significant asset and revenue growth in the years leading up to 2022.

However, this period of rapid expansion, particularly in the fintech space, attracted heightened regulatory scrutiny. A formal written agreement with the OCC in August 2022, followed by a comprehensive Consent Order in January 2024, mandated significant enhancements to risk management controls, particularly concerning third-party relationships, BSA/AML compliance, and IT risks. These regulatory directives have fundamentally reshaped the company's strategic direction, prompting a deliberate pivot away from certain non-core, higher-risk activities and a renewed focus on its foundational community banking roots.

In response to these challenges and strategic imperatives, Blue Ridge Bankshares has undertaken decisive actions. The most notable recent move was the sale of its entire mortgage division, Monarch Mortgage, completed on March 27, 2025. This divestiture, while resulting in a $0.2 million loss reported in other noninterest income in the first quarter of 2025, streamlines the business and reduces exposure to the volatile mortgage market. This follows the successful exit from fintech BaaS deposit operations in the fourth quarter of 2024, which significantly reduced the company's reliance on these higher-cost, potentially higher-risk funding sources.

The company's operational efficiency and technological infrastructure are critical components of its strategy, particularly as it simplifies its business model. While the company appears to lack a single, unique technological differentiator, its investment in technology and communication is evident in its expense structure ($2.8 million in Q1 2025). The competitive landscape analysis highlights that larger competitors like Truist Financial (TFC) leverage scale and digital platforms for significant efficiency gains, offering faster transaction processing and lower operating costs per unit (e.g., TFC's digital platforms offer 20-30% faster processing speeds for mobile banking transactions and 15% lower operating costs per unit compared to BRBS). Atlantic Union Bankshares (AUB) also demonstrates quantifiable efficiency advantages through its merger strategy (10-15% greater efficiency in cost structures).

Blue Ridge Bankshares' competitive positioning is rooted in its extensive branch network and local ties, particularly in Virginia and North Carolina. This local presence fosters customer loyalty, which can translate to higher recurring revenue from deposits (potentially 10-15% higher). This localized approach helps counter the pricing strengths of competitors like Carter Bankshares (CBTX), which uses loyalty-based discounts. While BRBS may lag in overall operational efficiency compared to larger players (with 10-15% higher costs per unit than CBTX), its community focus allows for targeted lending and personalized service. The company also possesses specialized expertise in mortgage origination, including third-party services, which offers faster processing (20% faster) and helps it compete in niche markets against the scale of larger institutions. However, the company's smaller scale and technological lags (systems are noted as 20% slower in processing compared to some competitors) remain vulnerabilities that could impact profitability and market share, especially as competitors continue to invest in digital capabilities.

Recent financial performance reflects the early impacts of this strategic shift and ongoing efforts to address regulatory requirements. For the three months ended March 31, 2025, the company reported a net loss of $0.4 million, a significant improvement from the $2.9 million net loss in the same period of 2024. This improvement occurred despite a $1.4 million decline in net interest income, primarily attributable to lower average loan balances as the company selectively reduced non-in-market relationships. The yield on average loans held for investment decreased from 6.02% in Q1 2024 to 5.70% in Q1 2025, also influenced by the exit of higher-rate, non-in-market loans.

The positive movement in the bottom line was largely driven by substantial reductions in noninterest expense, which fell by $9.5 million year-over-year. Excluding regulatory remediation costs (which dropped from $2.6 million in Q1 2024 to $0.0 million in Q1 2025), noninterest expense still decreased by $6.8 million. A key contributor was a $3.4 million reduction in salaries and employee benefits, reflecting a significant reduction in headcount (from 519 employees at March 31, 2024, to 351 at March 31, 2025) as the company right-sizes its workforce for a more traditional community banking model. Lower contractual services and audit fees also contributed to the expense reduction, tied to the completion of certain regulatory directives.

Funding costs also saw improvement. The cost of funds decreased from 3.03% in Q1 2024 to 2.78% in Q1 2025. This was primarily due to the successful exit of higher-cost fintech BaaS deposit operations and lower average balances of wholesale funding, partially offset by the increased variable cost of certain subordinated debt. Total deposits decreased by $50.0 million in Q1 2025, mainly due to a $63.4 million decrease in brokered time deposits, aligning with the company's stated goal to reduce brokered deposits to 10% or less of total deposits in future periods. Despite the overall decrease, deposits excluding fintech-related and brokered deposits increased by $20.4 million, indicating some success in growing core customer relationships.

Capital remains a critical focus, particularly under the OCC Consent Order, which requires the Bank to maintain a leverage ratio of 10.0% and a total capital ratio of 13.0%. As of March 31, 2025, the Bank exceeded these minimums with a leverage ratio of 12.33% and a total capital ratio of 17.93%. The company's total stockholders' equity increased by $10.5 million in Q1 2025, bolstered by $6.9 million from the exercise of warrants and a $3.8 million decrease in after-tax unrealized losses on available-for-sale securities. The company also received regulatory non-objection subsequent to quarter-end to redeem a significant portion of its subordinated debt, including the 2030 Note on June 1, 2025, which is expected to save over $2.0 million in annual interest expense.

While progress is being made, significant risks persist. The Consent Order continues to classify the Bank as less than well-capitalized (adequately capitalized), potentially leading to higher FDIC premiums, restrictions on expansion, and increased regulatory scrutiny until it is lifted. The current lending environment, particularly for commercial real estate (CRE), presents heightened risk due to higher interest rates and potential declines in property values and cash flows. The company has concentrations in CRE loans (40.6% of the portfolio) and is monitoring these exposures through targeted reviews and concentration limits. The portfolio also carries unrealized losses on available-for-sale securities ($50.3 million at March 31, 2025), though management does not intend to sell these prior to recovery. Legal proceedings, including a class action lawsuit related to prior accounting judgments and a former employee lawsuit, also represent potential liabilities, although the company is defending itself and expects insurance coverage for the class action settlement.

Looking ahead, management's commentary points to a continued focus on executing the strategic transition. The exit from non-core businesses and reduction in headcount signal a commitment to a more streamlined, traditional community banking model. Expected increases in service charges on deposit accounts from a recent product review and anticipated annual interest expense savings from the subordinated debt redemption are positive indicators for future profitability. The company's ability to successfully reduce brokered deposits while growing core customer deposits will be crucial for managing funding costs and liquidity. The vesting of performance-based stock awards granted to executive officers, contingent on achieving specified profitability thresholds, aligns management incentives with improving financial results.

Conclusion

Blue Ridge Bankshares is in the midst of a pivotal transition, shedding its higher-risk, non-core ventures to concentrate on building a more stable, traditional community bank. Recent results demonstrate tangible progress in expense reduction and funding cost management, contributing to a narrower net loss. The strengthening of the capital base and proactive steps to reduce future interest expense through debt redemption are positive signs. However, the path forward is not without challenges, including ongoing regulatory oversight, risks inherent in the CRE portfolio, and the need to compete effectively against larger, more efficient institutions. The investment thesis hinges on the successful execution of this strategic pivot – reducing risk, improving efficiency, and leveraging its local market presence to drive sustainable profitability in a competitive banking landscape. Investors should closely monitor the company's progress in meeting regulatory requirements, managing asset quality, and demonstrating consistent earnings improvement as the transition unfolds.