Blue Ridge returns to community bank roots after failed fintech foray

A Virginia bank that emerged as a poster child for fintech-related dysfunction has definitively exited the banking-as-a-service strategy that landed it in hot water with regulators. 

The $2.9 billion-asset Blue Ridge Bankshares terminated its final remaining partnership over the weekend, bringing closure to a process that began in January, according to CEO Billy Beale. The Charlottesville-based company had approximately 70 fintech partnerships in place in May 2023 when Beale took the helm at Blue Ridge Bank, he said. 

Blue Ridge abandoned its BaaS program after regulators determined the bank had weak anti-money-laundering controls related to its fintech partnerships. Elevated compliance costs created hurdles that proved too high for the strategy to achieve profitability. 

Now, with the disastrous foray into BaaS receding into the rear-view mirror, Blue Ridge plans to devote more resources to repositioning itself as a traditional community bank.

“I am seeing that more and more of our internal resources, our people and our dollars, are being spent toward rejuvenating the community bank that is Blue Ridge, as opposed to spending energy and time trying to get out of a consent order and get rid of the banking-as-a-service,” Beale said last week during a presentation at an Under the Radar Virtual Bank Conference.

The Office of the Comptroller of the Currency lodged two separate enforcement orders against Blue Ridge, prompted by the company’s involvement with third-party fintech partners. Blue Ridge began its BaaS strategy in 2020, during the tenure of Beale’s predecessor, Brian Plum, and quickly expanded its client list to include dozens of partners. 

Blue Ridge grew rapidly during Plum’s five years as CEO. In December 2019, it completed an acquisition of $251.5 million-asset Virginia Community Bankshares in Louisa, pushing its asset size to just under $1 billion. A deal in February 2021 with the $1.2 billion-asset Richmond-based Bay Banks of Virginia — along with the entry into BaaS — supercharged growth. Assets topped $2.7 billion midway through 2021. 

In July 2021, Blue Ridge struck a $307 million deal to acquire FVC BankCorp in Fairfax, Virginia, potentially creating a $5 billion bank, only to see the transaction called off after disclosure of OCC’s regulatory concerns. Credit quality had become a problem. Nonperforming assets began ticking up in 2021. By the end of 2022, they had spiked to 2.69% of total assets. 

Heavy lifting

While Blue Ridge has been strategically shrinking its loan portfolio in response to deposit runoff associated with the fintech exit, Beale said he’d like to see the bank begin reversing gears. 

“Almost every month we become less dependent on brokered CDs, less dependent on borrowings” and “there’s more cash on hand,” Beale said. “We’d actually like to take some of that cash on hand and start lending it.”

Blue Ridge would likely lean more toward the commercial-and-industrial category than commercial real estate lending, Beale said Monday in an interview. Business loans, Beale said, “give you a better loan-to-deposit ratio than CRE, which tends to have larger loan sizes and less cash in the bank.”

Since opting to exit banking-as-a-service in January, Blue Ridge has remixed its balance sheet, addressed credit-quality issues and worked to remediate a January 2024 cease and desist order with the OCC focused on its fintech partnerships, as well as problems related to its Bank Secrecy Act-Anti-Money Laundering compliance. That order superseded an August 2022 written agreement with the OCC. 

Beale, however, said Blue Ridge has made progress meeting regulatory requirements. He said compliance costs, which totaled about $10 million in 2023, have been reduced significantly. Beale believes an OCC exam scheduled for January will move Blue Ridge closer to a resolution, and that termination could come in mid-2026.

“That’s our best guess,” Beale said.

What Beale described as “offboarding” the fintech relationships has allowed Blue Ridge to scale back consulting costs and staffing. By the numbers, Blue Ridge has contracted staff size by 52 positions through Sept. 30, with another 10 to 12 expected to be cut during the fourth quarter, Beale added in the interview. 

“Our goal is to reduce headcount and reduce expenses — take about $57 million worth of noninterest expenses compared to 2023’s run rate to where we want to be at the end of 2026,” Beale said at the investor conference. Blue Ridge reported operating costs totaling $158.1 million in 2023. They totaled $88.3 million through the first nine months of 2024.

At the same time, Blue Ridge has reduced reliance on brokered certificates of deposit and Federal Home Loan Bank borrowings. FHLB advances, which totaled $312 million at the end of 2022, had fallen to $190 million on Sept. 30. Another $65 million borrowed from the Federal Reserve had been eliminated altogether. 

 Blue Ridge sold mortgage servicing rights to boost capital and generate liquidity. In April, the company raised more than $150 million in an equity offering, providing critical wherewithal to continue its transformation.

Bottom line progress

The work seems to be paying off. Blue Ridge reported net income of $946,000 for the three months ending Sept. 30 — just its second profitable quarter in the past two years.  

“If you look at our balance sheet, you’ll see some pretty significant changes,” Beale said. “The team has done miraculous things…There is a really good core community bank that was ignored by my predecessor because he was more interested in growing with fintechs.” 

Plum, who was Blue Ridge’s CEO from 2018 to 2023, declined to comment. The 74-year-old Beale, a veteran Virginia community banker, took over as CEO of Blue Ridge Bancshares following Plum’s departure in July 2023. Beale served as CEO at Richmond-based Union Bancshares Corp. — which rebranded as Atlantic Union in 2019 — from 1991 to 2017.  

At least one analyst, Janney Montgomery Scott’s Jake Civiello, now views Blue Ridge as a potential takeout target. Civiello included Blue Ridge on a list of 22 likely merger-and-acquisition candidates in a research note last week. Beale’s age, along with Blue Ridge’s relatively strong ratio of core deposits to total deposits are attractive considerations for buyers, according to Civiello.