Blue Ridge Bankshares Exploring Capital Raise
OCC imposes heightened capital requirements on bank subsidiary
Yesterday after markets closed Blue Ridge Bankshares, Inc. (BRBS), the parent company of Blue Ridge Bank, N.A., filed its delayed 10-Q for the quarter ended September 30, 2023.
The updated 10-Q discloses, among other things, that the Office of the Comptroller of the Currency has notified Blue Ridge Bank of the OCC’s determination that Blue Ridge Bank should be subject to capital requirements higher than those generally applicable to national banks. Faced with these enhanced requirements, BRBS says that it is “exploring options for raising additional capital.”
More details on this below, but first for context this post lays out an abbreviated timeline of recent events.
Timeline of Recent Events
February 1, 2021: BRBS announces that it has completed its previously announced merger with Bay Banks of Virginia. The combined company has approximately $2.8 billion in assets.
July 14, 2021: BRBS and FVCBankcorp, parent company of FVCbank, announce a “transformational combination” — a proposed merger of equals that would create what the parties call the fourth largest Virginia-headquartered community bank. The transaction is expected to close “in the fourth quarter of 2021 or early first quarter 2022,” subject to regulatory approvals and satisfaction of other closing conditions.
November 4, 2021: BRBS releases results for the third quarter of 2021. As part of that press release, BRBS says it “has learned that [the OCC] identified certain regulatory concerns with Blue Ridge Bank that could impact the application process and timing of the FVCB Merger.” BRBS says that work to address the OCC’s concerns is underway and that closing of the FVCB transaction is now expected in the second or third quarter of 2023.
Also of note in the November 2021 earnings press release is this description by BRBS of its fintech partnerships:
The Company continues to grow its partnerships with fintech providers and ended the third quarter of 2021 with active partnerships, including Unit, Flexible Finance, Increase, Upgrade, Kashable, Jaris, Aeldra, Grow Credit, MentorWorks, and Marlette. Loans and deposits related to fintech relationships were approximately $40.7 million and $76.6 million, respectively, as of September 30, 2021, compared to $10.3 million and $35.3 million, respectively, as of December 31, 2020.
January 20, 2022: BRBS and FVCB announce that they have mutually agreed to terminate their previously announced merger agreement.
September 1, 2022: BRBS files an 8-K disclosing that Blue Ridge Bank, N.A. has entered into a written agreement with the OCC. Among other things, the agreement requires that, before the bank may “onboard[] new third-party fintech relationship partners, sign[] a contract with a new fintech partner, or offer[] new products or services or conduct[] new activities with or through existing third-party fintech relationship partners,” it must obtain a non-objection from the OCC.
October 27, 2022: BRBS releases results for the third quarter of 2022. As part of that earnings release, BRBS says that it “is actively working to bring the Bank’s fintech policies, procedures, and operations into conformity with OCC directives and believes its work to date has been delivered on schedule.” BRBS also provides this update on its fintech partnerships:
The Company’s fintech partnerships include Unit, Flexible Finance, Increase, Upgrade, Kashable, Jaris, Grow Credit, MentorWorks, and Marlette. Deposits related to fintech relationships were approximately $529 million as of September 30, 2022, up from approximately $189 million as of December 31, 2021.
May 8, 2023: BRBS announces that G. William (“Billy”) Beale has been appointed as CEO of Blue Ridge Bank, N.A. The company also announces that Brian K. Plum, formerly in charge of both BRBS and Blue Ridge Bank, will continue in his role as President and CEO of BRBS, and in that capacity will “focus on broader strategy, technology and business line initiatives to further advance the Company’s Strategy Statement.”
July 12, 2023: Brian K. Plum resigns from his role as President and CEO of BRBS. A few days later, the company files an 8-K disclosing the resignation and saying that Billy Beale, CEO of the bank since May, would now also become President and CEO of BRBS.
July 13, 2023: BRBS files another 8-K disclosing that its board of directors, also on July 12, 2023, determined the company will not pay a dividend to common shareholders in Q3 2023. The 8-K attributes the decision to a “desire to preserve capital and available cash.”
July 31, 2023: BRBS releases results for the second quarter of 2023. For the quarter the company reports a net loss of $19.5 million, which it attributes primarily to “higher provision expense and the associated reversal of interest income related to loans that were placed on nonaccrual during the quarter.”
A statement from new CEO Billy Beale elaborates:
This group of loans, totaling $58.1 million at quarter-end, were sourced by a former lender, and is best described as specialty finance that we deemed to be not in keeping with our desired risk profile. I don’t believe this asset quality matter is pervasive within our loan portfolio, and excluding these loans, measures of asset quality were generally stable as compared to the prior quarter.
October 16, 2023: The American Banker publishes a story about the ongoing efforts by BRBS and Blue Ridge Bank CEO Billy Beale to get the company and the bank “out of the penalty box.”
The story includes a statement from Beale that Blue Ridge Bank at one point had “more than 70” BaaS partners, that the number was down to around 40 by the time he arrived, and that the “bank is now aiming to reduce that number to between six and 10 clients.”
October 31, 2023: BRBS makes a series of announcements.
Quarterly Loss
In its announcement of results for the third quarter of 2023, the company reports a net loss of $41.4 million for the quarter, which it describes as follows:
The net loss from continuing operations for the third quarter of 2023 included a non-cash, after-tax goodwill impairment charge of $26.8 million, which was the entirety of the goodwill balance, and a $6.0 million settlement reserve for the previously disclosed Employee Stock Ownership Plan (“ESOP”) litigation assumed in the 2019 acquisition of Virginia Community Bankshares, Inc. (“VCB”) . . . Excluding the impact of the goodwill impairment charge, the ESOP settlement reserve, and regulatory remediation costs, third quarter 2023 net loss from continuing operations was slightly improved from the second quarter of 2023. The goodwill impairment charge does not impact the Bank’s regulatory capital position.
With respect to fintech partnerships, CEO Billy Beale states that fintech “remains an important focus for Blue Ridge.” Beale notes that the company has recently “[s]ignificantly narrowed our base of [BaaS] customer accounts by closing accounts that were inactive or lacked proper documentation” and has “[d]eveloped a strategic road map for refining and rationalizing our Fintech/BaaS line of business.”
The company also discloses that deposits related to fintech relationships were $721 million at September 30, 2023, representing 28.8% of total deposits.
Dividend Suspension
In a separate 8-K, BRBS discloses that the company’s board, as it had done for the third quarter of 2023, has determined not to pay a dividend to common shareholders in the fourth quarter of 2023. Further, the board decided to “suspend future quarterly dividend payments until further notice.” This decision is attributed to a “desire to preserve capital.”
Restated Financials
Finally, BRBS also files a separate 8-K disclosing that it intends to restate its financial statements for the year ended December 31, 2022 and the quarters ended March 31, 2023 and June 30, 2023.
The company describes the restatement as being driven by a conclusion, “after consultation with the Company’s independent registered public accounting firm and its primary regulator,” that “certain specialty finance loans that, as previously disclosed, were placed on nonaccrual, reserved for, or charged off in the interim periods ended March 31, 2023 and June 30, 2023 should have been reported as nonaccrual, reserved for, or charged off in earlier periods.”
November 9, 2023: BRBS files a notice saying that it will not be able to timely file its 10-Q for Q3 2023. The company describes the delay as a consequence of the need to take time to complete the previously disclosed restatements noted above.
The Latest 10-Q
Yesterday BRBS filed its 10-Q. Notable new disclosures include the following.
Heightened Capital Requirements
The U.S. federal banking regulators, including the OCC, retain authority under their implementation of the Basel III capital rules to impose capital requirements on firms under their supervision that are higher than generally applicable capital requirements. The OCC refers to this as its authority to establish individual minimum capital ratios, or IMCRs.1
In the 10-Q filed yesterday, BRBS discloses:
In addition to the foregoing capital requirements, the OCC has notified the Bank of its decision to establish individual minimum capital ratios (“IMCR”) for the Bank that are higher than those required for capital adequacy purposes generally. Specifically, the Bank is required to maintain a leverage ratio of 10.00% and a total capital ratio of 13.00%.
In Blue Ridge Bank’s most recent call report for the quarter ended September 30, 2023,2 the bank reported a leverage ratio of 7.63% and a total capital ratio of 10.44% (both in excess of generally applicable minimum requirements, but shy of the new IMCR). The 10-Q thus goes on to disclose:
As of September 30, 2023, the Bank did not meet these IMCR requirements, which could subject the Bank to additional regulatory requirements or directives, including developing and maintaining capital plans, asset sales, limitations on growth, further regulatory sanctions and/or other regulatory enforcement actions.
In light of this, BRBS says it is “exploring options for raising additional capital, which could be substantially dilutive to current shareholders.”3
Remediation Work Related to 2022 Written Agreement
In its discussion of the 2022 written agreement, compared to its 10-Q for the previous quarter, BRBS made the changes marked here.
The 10-Q also includes an updated risk factor related to the written agreement that includes a substantially similar disclosure.
Fintech and BaaS Offerings
Also in the risk factors section of the 10-Q is a new one relating to the company’s fintech line of business. This risk factor includes details about the company’s BaaS deposits and associated end user accounts that I do not believe have been previously disclosed.
The Company’s business strategy over the past several years has included growing partnerships with fintech companies, which serve as a source of loan and deposit growth, fee income, and technology-related solutions for the Company. These fintech and banking-as-a-service ("BaaS") partnerships have resulted, among other things, in rapid growth in the Company’s deposit base. As of September 30, 2023 and December 31, 2022, fintech-related deposits accounted for $720.8 million and $690.2 million, respectively, of the Company's deposits. Of this, BaaS deposits of $537.2 million and $524.1 million were related to approximately 250,000 and 185,000 accounts of active end users as of September 30, 2023 and December 31, 2022, respectively.
BRBS says this rapid increase in deposit accounts has necessitated “enhanced operational and control systems and additional qualified personnel and to oversee and manage the increased operational and compliance burdens from these accounts.”
The company also notes that if it cannot “control the growth of new fintech deposits or implement and maintain improved systems to monitor and control these additional burdens,” it may be subject to additional supervisory actions and may experience other material adverse consequences.
See, for example, the OCC’s policies and procedures manual on bank enforcement actions.
The OCC is authorized under 12 USC 1464(s)(2), 12 USC 3907, and 12 CFR 3, subpart H, to establish higher IMCRs for a bank in light of its particular circumstances. When the OCC determines that higher capital ratios are necessary, it sends the bank a notice of intent to establish higher minimum capital ratios (IMCR notice). The IMCR notice includes the proposed capital ratios, the date they must be reached, and an explanation of why the OCC considers the proposed ratios necessary or appropriate for the bank.
This is Blue Ridge Bank, N.A., of Martinsville, Virginia, RSSD ID 233527.
Later on there is a risk factor including the typical cautionary warnings about how the company may not be able to raise capital on acceptable terms, or at all.