Blue Ridge Bankshares Inc. must assure investors it has ring-fenced its regulatory issues and moved to improve its financial performance if it wants to execute a capital raise to meet newly imposed, heightened regulatory requirements.
The embattled Charlottesville, Va.-based company is mulling a capital raise after the Office of the Comptroller of the Currency (OCC) established individual minimum capital ratios (IMCRs) for bank subsidiary Blue Ridge Bank NA. The OCC imposed the heightened capital requirements because of the company's current consent order regarding its Bank Secrecy Act/Anti-Money Laundering (BSA/AML) controls and banking-as-a-service (BaaS) partnerships.
The IMCR is "kind of a continuation of the written agreement" with the OCC, Blue Ridge President and CEO G. William Beale said in an interview.
"All banks should have capital levels commensurate with the risk on their balance sheet," Beale added. "The OCC determined that Blue Ridge did not have capital levels commensurate to the risk on its balance sheet, and this primarily had to do with our banking as a service line of business."
BaaS and working with fintech companies had been a focus for Blue Ridge, which had at least 50 various fintech partnerships at one time, according to an analysis by S&P Global Market Intelligence. The bank is winding down its fintech partnerships, and that could impact its earnings, liquidity and capital, according to its latest Form 10-Q.
Blue Ridge is taking other steps — such as shrinking its balance sheet — to bolster its capital levels, but an equity raise is the best and fastest option right now, Beale said. "The capital raise is the quickest way to get to those levels," he said.
Capital raising is not easy in the current environment. Investors are less inclined to invest in the bank space as they await clarity on the operating environment, and the task is more difficult for a bank like Blue Ridge given its ongoing regulatory and performance struggles, industry advisers told Market Intelligence. However, if the bank can effectively communicate a plan for improvement, it should attract investors, they said.
Deep due diligence
Blue Ridge's challenges muddy the waters for a potential capital raise and limit the company's options.
It is unlikely that investors will feel comfortable putting money into the company through a traditional public common equity offering, given that "there's a lot of unknown," Dave Larson, a managing director at Artisan Advisors, said in an interview.
Instead, a private equity investment is the most likely solution for Blue Ridge, multiple advisers said. In private equity-style deals, the investors can perform a thorough and deliberate due diligence process, unlike a public offering where the information provided is more limited.
"The big question for somebody putting money in is: 'What's the plan?'" a depository investment banker told Market Intelligence in an interview. "This is going to take a lot of time and probably be a very detailed process of due diligence."
Another possibility is that Blue Ridge receives backing from a local investor who cares about the bank and the communities it serves, said Brad Rinschler, managing partner and portfolio manager at Down Range Capital Management.
Regardless of the investor, Blue Ridge will need to provide more information on its operating plans and its consent order regarding its BSA/AML controls and BaaS partnerships, advisers said.
An investment "depends a lot on their ability to really tell their story and provide a compelling vision for investors to understand how the fintech business will fit with the core bank over time," Larson said.
Explaining how fintech fits into the bank's future is important because heightened requirements are likely a new reality for banks playing in BaaS.
"For a while, regulators were, just as they were with crypto, they were trying to get a handle on what the actual risks would look like with BaaS partnerships," said Sam Haskell, managing member of Colarion Partners. "And now they're starting to crystallize their thoughts around that, one of the conclusions that they're coming to is that more compliance spending and higher capital ratios are a reasonable default stance for a bank with heavy BaaS partnerships."
Investors will also want answers about the company's plans to improve its performance. Blue Ridge has reported net losses in three of the past four
"To the extent that those operating losses were to continue the regulators may be seeking some to get ahead of that," Larson said.
Other metrics have also trended in the wrong direction.
Since the beginning of 2022, the company's efficiency ratio has nearly doubled to 99.41% in the third quarter from 56.36% in the first quarter of 2022. The increase is partly driven by noninterest expenses, which have nearly tripled since the first quarter of 2022.
Its net interest margin (NIM) has come under pressure as well, thanks to factors such as a surge in its cost of funds. The bank reported a NIM of 2.94% in the third quarter, down from 3.92% in the first quarter of 2022, and a cost of funds of 3.38%, compared to just 0.28% for the quarter ended March 31, 2022.
Blue Ridge has also reported some deterioration in its credit quality, with its nonperforming-loan-to-total-loan ratio spiking in the fourth quarter of 2022 and standing at 3.09% as of Sept. 30.
"Not only are they challenged on the fintech side, they're challenged on the core side there," Larson said. "Where is that value creation going to come from?"
Time on their side
Still, regulators are likely to give Blue Ridge time in part because the bank is considered well capitalized by typical regulatory standards.
As of Sept. 30, Blue Ridge Bank had a leverage ratio of 7.63% and total capital ratio of 10.44%, compared to well-capitalized standards of 5% and 10%, respectively. The heightened requirements from the OCC will require Blue Ridge to boost its leverage ratio to 10% and its total capital ratio to 13%.
As long as the bank stays well capitalized, "they absolutely will have time" to find a way to get to those increased levels, Larson with Artisan Advisors said.
Having an industry veteran at the helm can also help Blue Ridge in the eyes of regulators. Beale, who became CEO of the holding company in July after being named CEO of the banking subsidiary in May, has spent decades working as an executive in the industry. From November 2018 to July 2020, Beale was president and CEO of Community Bankers' Bank, and from 1989 to 2017, he was with Union Bankshares Corp., now known as Atlantic Union Bankshares Corp., where he was named CEO in 1991.
"Management is experienced and has a lot of credibility with regulators over the years," Colarion Partners' Haskell said. "That should allow them some room with which to work."
Haskell added that it is the role of regulators to require higher standards for banks "that put themselves in a difficult position." However, Haskell doubts that regulators will move quickly to make a drastic move regarding Blue Ridge.
"It's not necessarily in [regulators'] best interest to drive a company like this into desperate straits," Haskell said. "I suspect that they will give them time to run a process."
If the bank does not meet the heightened requirements, it could find itself subject to more regulatory requirements such as submitting capital plans, asset sales, growth limitations and more enforcement actions, according to the 10-Q filing.
M&A possibilities
Selling is another option for the bank.
"The core aspect of them as a community bank would certainly be interesting to acquirers," Artisan Advisors' Larson said.
Particularly, the bank's core deposit base in its Virginia footprint is attractive, Colarion Partners' Haskell said. Blue Ridge reported $2.78 billion in total deposits at Sept. 30, with about $720.8 million, or 26%, related to fintech partnerships. About 70% of its fintech-related deposits reprice with changes in federal funds rates, leading to a higher cost of funds, the company said in the 10-Q filing.
While the bank's community banking business appears attractive to potential acquirers, its fintech business line, consent order and credit quality could deter prospective buyers.
Moreover, some buyers have been turned off of deals because the regulatory approval process has become elongated. But often, regulators are agreeable to acquisitions in which a stronger bank is acquiring a weaker one on regulators' radar.
Regulators would be open to a Blue Ridge deal if a strong buyer with plentiful capital and proper governance controls could provide assurance "that the problems will be addressed," Larson said.
However, Blue Ridge's CEO thinks regulators might not be open to the company finding a partner right now.
"It would take a rare set of circumstances for a bank to be able to get approval to acquire us because of that written agreement," Beale said.