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Blue Ridge Bank focused on OCC agreement before expanding fintech partnerships

Blue Ridge Bank NA is prioritizing improving its internal controls over expanding its banking as a service business as it works to address regulatory requirements tied to financial technology partnerships, executives said.

The Martinsville, Va.-based bank, a unit of Charlottesville, Va.-based Blue Ridge Bankshares Inc., entered into a formal written agreement with the Office of the Comptroller of the Currency, or OCC, in August 2022 to improve its assessment and management of risks posed by third-party fintech partnerships.

Since then, Blue Ridge has been investing in talent and technology to enhance its capabilities to work with third parties, Brian Plum, the bank's CEO, and Kirsten Muetzel, the newly appointed president of the bank's financial technology division, said in a joint interview.

"We have the formal agreement and we're continuing to work through those items to ensure that on a go-forward basis, as we continue to invest in, grow and expand what we do in banking-as-a-service, we're doing it in a manner that is fully compliant and follows regulatory guidance expectations," Plum said.

OCC requirements

In the agreement, the OCC required the bank to adopt, implement and adhere to a written program to effectively assess and manage the risks posed by the bank's third-party fintech relationships. The bank must also secure a non-objection from the OCC for any future fintech partnerships. A number of additional requirements are centered on improving Bank Secrecy Act, or BSA, risk assessment and controls.

The agreement, which became effective Aug. 29, 2022, will remain in effect until it is amended by Blue Ridge Bank and the OCC, or the OCC modifies, waives or terminates the agreement.

Key hire

Muetzel's hiring in January is seen as a key part of the bank's effort to address the OCC's requirements. She previously spent over 10 years at the Federal Reserve in the fields of bank supervision and credit risk monitoring, where she joined in 2008 amid the subprime mortgage crisis.

"I think this team has already done a ton of the work that they need to do against this written agreement," Muetzel said. "They've shown a commitment to hire somebody like me who likes to do things in a very safe and sound [manner] with a regulatory prism in mind."

One project Muetzel has in the works is to assign relationship managers to each of the bank's fintech partners. Those managers will have access to all of the necessary resources to ensure the success of partnerships, she said. The bank is also strengthening the due diligence process to learn and monitor its fintech partners' compliance practices in anti-money laundering and consumer protection on a regular basis, as well as their financial conditions, she added.

Blue Ridge Bank reported $7.44 million in regulatory remediation expenses for 2022 with respect to the OCC enforcement action, according to the latest call report posted Jan. 30.

The long view

Executives said they view the costs associated with risk management and compliance as key to enabling Blue Ridge to run fintech partnerships on a larger scale. In the long term, the community bank remains committed to exploring the economic benefit of banking as a service, the executives said. The main driver has been the potential to grow deposits and noninterest income, Muetzel noted.

"We're constantly updating how we view it to make sure that we are managing the financial side in a way that it does properly reward us in the long run for the risk," Plum said. "As well evidenced by the formal agreement, there's risk we are absorbing for being on the frontlines of change in the industry, and you just want to make sure that you have proved that the economics work out when it's all said and done."

Fintech partners

Blue Ridge Bankshares' most recent annual Form 10-K filing from March 2022 disclosed 10 active fintech partnerships. In the interview, Plum declined to disclose how many active fintech partnerships the bank currently has.

Of the 10 disclosed in March 2022, at least one of those companies Aeldra Financial Inc. no longer operates. Around the same time as the OCC agreement, Aeldra's website stated the company was "winding down its operations" and terminating accounts associated with its partnership with Blue Ridge Bank.

Another one of its partnerships disclosed in the Form 10-K caught flak from a coalition of nonprofits. In an April 2021 letter to the OCC, the group of nonprofits expressed concerns about the bank's partnership with MentorWorks, a company that provides students with income share agreements, or ISAs. An ISA is an alternative to traditional student loans in which a student receives education funding in exchange for a portion of their income after graduation.

One of those signatories, the Student Borrower Protection Center, told S&P Global Market Intelligence in February 2022 that it met with the OCC in October 2021 to discuss ISAs.

Traditional partners

In addition to growing fintech partnerships in recent years, Blue Ridge Bank has also focused on traditional bank M&A. The company struck a merger-of-equals with Bay Banks of Virginia Inc. in August 2020 and followed that deal up with another merger-of-equals announcement in July 2021 with FVCBankcorp Inc. However, the FVCBankcorp deal fell through in January 2022, shortly after Blue Ridge Bank disclosed in November 2021 that the OCC identified regulatory concerns with it.

Now, Blue Ridge has pivoted to organic growth, with a focus on fulfilling the requirements of the OCC agreement.

"Our primary focus is to satisfy the formal agreement. So certainly there are broader opportunities that we would want to look at in the future as we continue to address the items in the formal agreement, but our focus is 100% on ensuring compliance with that, before beginning the process of expanding or exploring other areas," Plum said when asked if the bank plans to pursue any new banking as a service partnerships this year.