Anchorage Digital Bank Reports Loss For 2022

Plus brief notes on results for Grasshopper, Blue Ridge Bank, USAA, Cenlar, Column and B2

Last week this blog discussed 2022 results for Moonstone Bank and for Varo, Square and Nelnet. This post discusses results released yesterday from a number of other banks that, for one reason or another, are interesting from a bank regulatory perspective. All data comes from call reports, found here.¹

After Making Money in 2021, Anchorage Digital Bank Reports Loss for 2022, Driven by Decline in Fiduciary Income, Increased Expenses

Anchorage Digital Bank is a non-depository trust company that, currently, is the only crypto-focused custody bank with an operational national bank charter. This charter was granted by the OCC in early 2021 following Anchorage’s application to convert from the South Dakota state charter it had held since 2019.

Unlike some other fintech banks, Anchorage quickly generated a profit in its first year as a national bank, making around $11.4 million in 2021.² 

2022 was tougher. Overall for the year Anchorage posted a loss of around $4.6 million. This loss was driven by a decrease in what is essentially the bank’s only source of income, fiduciary income (down from $27 million in 2021 to $21.7 million last year), as well as an increase in expenses. 

I assume the decline in fiduciary income is tied to a decline in assets under custody (which in turn, I assume, is in large part a function of the downturn in crypto prices). At year-end 2021, Anchorage reported $11.2 billion in custody assets held in 1,540 different accounts, as shown below. 

By the end of the end of the second quarter of 2022 Anchorage reported that although it now was providing custody services to 1,826 different accounts, it had only $4.2 billion in assets under custody.

The latest numbers, shown below, indicate that assets under custody ticked up since their mid-year low, ending the year at $6.7 billion, but are still a ways short of the year-end 2021 figure. Total accounts increased significantly, however, up to 5,082 by the end of the year.

As for the expense side of the ledger, a notable but likely expected source of growth has been employee salaries and benefits, which are up from $4.6 million as of year-end 2021 to $13.6 million as of the end of the most recent year. The bank’s headcount at December 31, 2021 was 33. This more than doubled over the course of 2022 as the bank ended the year with 69 full-time equivalent employees.

Maybe less expected at the start of 2022 was the 35% year-over-year expense increase tied to legal, consulting and advisory fees. In 2022 these fees totaled $6.6 million, up from $4.9 million in 2021.

Much of this increase is likely attributable to work Anchorage has had to do in response to a consent order the OCC imposed in April 2022. That order requires Anchorage to take a series of actions to remediate its “failure to adopt and implement a compliance program that adequately covers the required Bank Secrecy Act/anti-money laundering (BSA/AML) program elements.”

SBA Lending, Yachts Help Grasshopper Diversify its Business Model, Cut Its Annual Loss

Grasshopper Bank is a New York City bank chartered by the OCC in 2019.³ Less well known than some of its neobank peers, Grasshopper’s original plan was to be a “community bank for New York City digital entrepreneurs, from tiny players to larger startups seeking their first rounds of investor funding from venture capitalists."

Grasshopper’s initial focus on lending to early stage tech companies was (and may still be) subject to conditions imposed by the OCC.⁴ Whether for that reason or other reasons, the company has since made changes to diversify its focus, particularly after bringing in a new CEO, Mike Butler, previously the President and CEO of Radius Bank before it sold to LendingClub:

“We’re kind of the ‘25% people’ here,” says Butler, a veteran banker. By that he means that he doesn’t intend for any lending area to become more than 25% of his asset mix. … Butler has refined tech lending to focus more on the venture capital community that serves fintech companies. In addition, that lending is just one line for the bank now, rather than being the centerpiece of its lending.

In connection with a capital raise completed by the company last summer, BankingDive wrote:

Since joining the bank, Butler, the former Radius Bank CEO, has revamped Grasshopper’s tech stack to enable it to offer BaaS, and has expanded the bank’s focus to serve small-business clients. Under Butler, the financial institution has also expanded into commercial real estate lending, Small Business Administration lending and yacht financing— areas the bank said are aimed at supporting the small- and medium-sized business market.

The SBA lending is probably a bigger deal, but it is indeed true that Grasshopper’s executive team includes a Head of Yacht Lending who, according to his bio, “has been financing Yachts since 1979.”⁵

More recently, Grasshopper announced a partnership with Ramp to issue a small-business corporate card. The partnership may expand to cover “the bank’s growing banking-as-a-service business.”

Inching Toward Profitability 

Grasshopper has yet to turn a profit, but this is not necessarily unusual for de novos and there are signs the bank is making progress. In 2022 Grasshopper cut its net loss to slightly less than $13 million, compared to net losses of $27.1 million, $22.2 million and $25.8 million in 2019, 2020 and 2021, respectively.

Total assets are now up to approximately $621 million, compared to $298.9 million at year-end 2021. Deposit levels and total loans and leases also continue to increase from $251.3 million and $124.8 million, respectively, at year-end 2021, to $550.7 million and $454.1 million, respectively, at the end of 2022.

Equity capital at December 31, 2022 was $50 million, up from $43.3 million at year-end 2021. Losses made by Grasshopper during the year, including other comprehensive income losses that are reflected in equity capital but not regulatory capital, were offset by around $30 million of proceeds from stock sales, as well as a $2 million capital injection from the bank’s parent company.

The bank ended the year with 95 employees, up from 67 at the end of 2021.

Banks Dealing With OCC Enforcement Actions

Blue Ridge Bank

In August 2022 the OCC entered into a formal agreement with Blue Ridge Bank of Martinsville, Virginia. The introductory clauses to the formal agreement say that the OCC found a number of unsafe and unsound practices, including in relation to third-party risk management, BSA/AML risk management, suspicious activity reporting, information technology control and risk governance. (This came after a merger announced in 2021 was delayed in response to “certain regulatory concerns” raised by the OCC and then ultimately called off in early 2022.)

Among other required remediation work, the formal agreement requires Blue Ridge to receive prior OCC non-objection before “onboarding new third-party fintech relationship partners, signing a contract with a new fintech partner, or offering new products or services or conducting new activities with or through existing third-party fintech relationship partners.”

According to results for the bank in its call report posted yesterday,⁶ in 2022 Blue Ridge Bank had net income of around $23.8 million, down from $51.2 million in 2021. Some of this may be attributable to costs in relation to the consent order -- the bank reported $7.4 million in "Regulatory Remediation Expenses" for 2022, after reporting no such expenses in 2021.

On the other hand, total non-interest expenses were actually down year-over-year. The bigger factor driving Blue Ridge Bank’s reduced profitability in 2021 was a decline in non-interest income from $78.3 million to $37.5 million, with the difference attributable in part to the fact that Blue Ridge in 2021 had generated a significant gain from selling loans originated under the PPP program.

Incidentally, the bank reported $3.7 million of “Income From Fintech Partnerships” in 2022, after not itemizing anything in this regard in 2021.⁷

USAA FSB

Last year USAA FSB reported a net loss of $386 million for 2021, due in significant part to a $430.7 million non-interest expense line item it ascribed to “Remediations.” (The bank has been subject to a series of consent orders and other enforcement actions brought by the OCC, FinCEN and other regulators.)

This week, USAA FSB reported that it had swung back to a profit for 2022 of $192 million.

The bank may not be fully out of the woods, yet, however, as the OCC recently disclosed that USAA FSB in 2022 received its second failing Community Reinvestment Act grade in a row. The OCC based this decision on evidence that USAA had committed thousands of UDAP violations and a conclusion that USAA management had failed to “improve the bank’s CRA performance with respect to compliance risk management from the last evaluation in 2018.”

Cenlar FSB

In October 2021, Cenlar FSB, the largest mortgage subservicer in the country and the second largest servicer overall, entered into a consent order with the OCC stemming from Cenlar’s failure to establish effective internal controls and risk management processes. The OCC later in February 2022 took the unusual step of directing Cenlar, by February 2024, to comply with the OCC’s Heightened Standards under 12 CF Part 30, Appendix D. These requirements usually apply only to much larger banks.

For 2022, Cenlar reports that it lost $22.5 million, mostly due to decreased income from subservicing fees. This compares to 2021 net income of around $19 million.

Quick Notes on Fintech Founder Acquisitions

Finally, I find it interesting to follow acquisitions of banks by fintech founders in their individual capacities (as opposed to the fintech itself making the acquisition and becoming a bank holding company). Very brief notes on two:

• Column, the Chico, California-based national bank acquired in 2021 by William and Annie Hockey, reported a net loss for 2022 of $1.8 million compared to 2021 net income of $217,000. The bank’s website says, “We are 100% founder and employee owned, profitable, and we don't hire a lot.” While not hiring a lot, the bank did grow from 39 employees at year-end 2021 to 66 employees at year-end 2022, and non-interest expenses increased commensurately.

• B2 Bank, the Minnesota-based bank formerly known as the First National Bank of Buhl, reported a net loss of $524,000 compared to net income of $17,000 a year earlier. B2 is owned by Brian Barnes, the founder of M1 Finance. The bank increased its overall headcount by around 63% in 2022, but don’t take this too seriously - the bank went from 11 employees to 18.

Thanks for reading! Thoughts, challenges, criticisms are always welcome at bankregblog@gmail.com

1. Because this post is based on call report data, the financial data discussed is for the bank only. It does not take into account any operations of the bank’s parent company or any affiliates that are not subsidiaries of the bank.

2. I think this is clear from footnote 1, but just to stress: the results discussed in this post are not results for Anchor Labs as a whole. 

3. The bank is named after Grace Hopper, the naval officer and computer pioneer.

4. The OCC in its final approval order conditioned its grant of a charter on Grasshopper Bank agreeing not to take on “any credit risk with respect to any venture loan.” Further, Grasshopper Bank was required to commit that each venture loan would (1) be fully secured by cash collateral in an amount equal to the sum of (a) the loan commitment and (b) at least three (3) to six (6) months of the borrower’s cash burn; (2) receive a regulatory risk rating of pass at origination; (3) be subject to a Net Remaining Months Liquidity (NRML) covenant; and (4) include an enforceable sweep clause in case of an event of default, which includes non-adherence to the NRML covenant.

For these purposes, venture loan was defined as “any loan to a borrower that is pre-product, pre-revenue, pre-positive operating cash flow, pre-profit, or that has an incomplete management team or infrastructure.”

Unlike some other conditions in the approval order, this one was not expressly time limited to the bank’s first three years of operations, and it is not clear based on publicly available information whether the restriction remains in effect.

5. Presumably one of this person’s responsibilities is knowing the answer to the old question, “Where Are the Customers’ Yachts?”.

6. The bank’s parent company, Blue Ridge Bankshares, is a public company, but has not yet posted full-year 2022 results. Again to stress, these are consolidated results for the bank only.

7. A bank is required to break out individual items of other non-interest income only if income attributable to such individual item is more than 7% of total other non-interest income.