Blue Ridge Bank, once a major player in the banking-as-a-service space, is shrinking its portfolio of fintech partners as it looks to regain favor with regulators after a 2022 consent order identified issues with its fintech partnership program.
The Charlottesville, Virginia-based firm said in an investor presentation last Thursday that it is in the process of offboarding about a dozen of its roughly 50 BaaS partners.
The lender said it expects to reduce fintech exposure to a limited number of core BaaS partners with a commercial focus or strong consumer traction.
The move comes as the bank’s BaaS program attracted regulatory scrutiny last year. The Office of the Comptroller of the Currency ordered the bank to improve its oversight of third-party fintech partnerships, as well as bolster its anti-money laundering risk management, suspicious activity reporting and information technology controls after it found “unsafe or unsound practice(s).”
Since receiving the order, Blue Ridge has been restricted from entering into any new contracts with fintech partners or adding new products in cooperation with existing partners without prior approval from the OCC.
Meanwhile, Blue Ridge disclosed in a regulatory filing last week that the OCC is subjecting the firm to higher capital requirements.
“Specifically, the Bank is required to maintain a leverage ratio of 10.00% and a total capital ratio of 13.00%,” the bank disclosed in the filing.
According to the firm’s most recent call report, Blue Ridge had a leverage ratio of 7.63% and a total capital ratio of 10.44% at the end of September.
In light of the higher capital requirements, the bank said it is “exploring options for raising additional capital, which could be substantially dilutive to current shareholders.”
Not a surprise
Given the bank’s history of regulatory concerns and the imposition of higher capital requirements, Blue Ridge’s decision to offload its fintech partners and step away from BaaS is not surprising, said Konrad Alt, a partner at financial services advisory and investment firm Klaros Group.
“Blue Ridge is doing what it needs to do to lower its risk profile and meet the requirements of its regulators,” Alt said.
In the year since the OCC order, the bank’s former CEO Brian Plum resigned, and the firm’s new chief executive has said it is taking a step back from its emphasis on BaaS to refocus on community banking.
“Blue Ridge grew very quickly,” CEO Billy Beale told S&P Global in August. “There were some mistakes made along the way, and so I’m here to fix those mistakes. That’s my priority.”
Complying with all of the requirements in the OCC order will be a significant challenge for Blue Ridge’s management and board, Alt said. z
“I expect the most challenging by far, though, will be the requirement to achieve and maintain the higher capital levels the order requires,” he said. “The message from the OCC to national banks is clear. If you want to be in BaaS, your risk management and compliance operations need to be top flight. Any sloppiness in that area could be grounds for materially higher capital requirements.”