Looking More Closely at the 2022 Performance of De Novos
Plus, Anchorage Digital Bank makes new appointments to senior roles
Looking More Closely at the 2022 Performance of De Novos
Over the past week or so this blog has featured posts about 2022 results for various banks as reflected in their call reports. Some of the results discussed have included losses made by recently chartered banks like Varo or Grasshopper, in which context I observed that it is not unusual for de novos to lose money in their first few years of operation.
A reader rightly challenged me on that, pointing out that as summarized by S&P Global Market Intelligence in 2020, on average since 2000 it has taken de novos around 7-9 quarters to make a profit.1 S&P Global Market Intelligence also released a similar analysis last year, noting that two-thirds of 2017-2019 de novos turned a profit in 2021.
So, in trying to be fair to Varo and Grasshopper and to avoid implying that they would never succeed, I may have overcorrected too far in the other direction and understated the degree to which these banks are outliers among their peers.
In any case, in the spirit of the S&P Global post from last year, this led me to take a more complete look at the 2022 results for banks that opened for business between 2018 and 2022.2 The highlights of that review are summarized here.
Overall Results
Based on the overall results above, Grasshopper does indeed look like more of an outlier for the 2019 class, although, to be fair, with a very different business model than many of its community bank classmates.
For Varo I could see the argument either way. On the one hand, the majority of de novos in the 2020 class are not yet profitable on a full-year basis. On the other hand, compared to the other loss-making banks in the 2020 class, obviously the magnitude of Varo’s losses is significantly higher. Moreover, as discussed below, most of the 2020 banks that did not turn a full year profit in 2022 did, unlike Varo, at least make quarterly profits later in the year.
2018 and 2019 Classes
Every bank on my list that opened in 2018 made a profit over the course of 2022, and in fact each bank made a profit in every quarter in 2022. Eleven of thirteen banks in the 2019 class made an annual profit in 2022. The banks that did not are Grasshopper Bank and Piermont Bank, although Piermont Bank did make a profit in the first half of the year.
2020 Class
Two of the six banks in the 2020 de novo class were profitable in 2022 on a full-year basis. Four, including Varo, were not. Note, though, that roughly consistent with the 7-9 quarter timeline for initial profitability mentioned earlier, the three banks other than Varo wound up making profits in one or both quarters in the second half of the year.
2021 and 2022 Classes
Unsurprisingly given the shorter periods of time in which they have been in operation and the uncertain environment in which they have been operating, banks in the 2021 and 2022 de novo classes did not post profits for 2022.3 Two banks in the 2021 class that made losses for 2022 as a whole did, however, turn toward profitability in Q3 or Q4.
Anchorage Announces New Phase
Yesterday Anchorage Digital Bank issued a news release saying it was making changes that would “reinforc[e] our commitment to strong regulatory standards and controls … by ushering in new leadership and capabilities that advance a forward-thinking path for regulated crypto.”
Among other things, the bank announced:
The addition from outside the organization of a new Chief Compliance and Risk Officer (pending supervisory non-objection from the OCC)
The shift of the bank’s current Chief Risk Officer to Chief Operating Officer (pending supervisory non-objection from the OCC)
The addition from outside the organization of an Interim Bank Secrecy Act Officer
In addition to changes to the leadership team, Anchorage also described other enhancements that it has made:
[W]e’ve revamped our BSA/AML and Compliance programs including policies, procedures, and processes to keep pace with the complexity of the ecosystem and our compliance requirements. We’ve also taken specific steps to enhance technology capabilities to enable monitoring transactions in a programmatic, scalable way. With our new technology platform, these hires and our continued investment in staff, we will ensure that our institutional platform continues to maintain the security-first approach that has differentiated us from the beginning.
Context
Mentioned nowhere in the announcement, but still I think useful context, are a series of agreements to which Anchorage Digital Bank has entered into with the OCC.
Operating Agreement
The OCC’s grant of a charter in January 2021 was conditioned upon Anchorage Digital Bank entering into an Operating Agreement. As relevant to the above announcement, the Operating Agreement required Anchorage to do the following:
Within 60 days of entering into the Operating Agreement, appoint “a qualified individual to serve as the Bank’s Chief Compliance Officer, who shall be subject to the OCC’s written supervisory non-objection”
Within 60 days of entering into the Operating Agreement, “designate a qualified BSA/AML Officer, subject to the OCC’s written supervisory nonobjection.”
For the first three years after entering into the Operating Agreement, receive the OCC’s prior written non-objection before appointing any individual as a “senior executive officer” or to the Board of Directors.4
Consent Order
In April 2022, the OCC issued a consent order against Anchorage Digital Bank based on the bank’s failure to meet certain BSA/AML requirements. As relevant here, the consent order required Anchorage to do the following:
Immediately “ensure that the Bank has a qualified BSA Officer vested with sufficient independence, authority, and resources to fulfill the duties and responsibilities of the position and ensure compliance with the requirements of the Bank Secrecy Act”
“In the event that the position is vacated, the Board shall promptly appoint a new BSA Officer.”
Within 30 days submit for supervisory non-objection a BSA/AML action plan and, once non-objection is received, implement such plan.
Within 90 days, develop, implement, and adhere to “an acceptable, written suspicious activity monitoring and reporting program to ensure the timely and appropriate review and disposition of suspicious activity alerts and case investigations, and the filing of SARs.”
“[C]omplete a transaction monitoring coverage assessment to determine if existing monitoring systems settings adequately monitor money laundering, terrorist financing and other illicit financing risks, red flags/typologies, and unhosted wallet risk.”
Develop, implement and adhere to “effective data governance processes to help ensure that risk management related management information systems are reliable, including information such as transaction volumes, customer risk ratings, customer business types, and suspicious activity monitoring data including alert volumes.”
What (If Anything) is the Connection Between Yesterday’s Announcement and the OCC Agreements?
Based on what we know about the requirements previously imposed on Anchorage Digital Bank by the OCC, yesterday’s announcement left me with the following questions, all of which are admittedly speculative.
One: What happened to the existing Chief Compliance Officer, who the bank was supposed to have appointed by March 2021?
Two: What is the story behind the difficulty in finding and keeping a BSA Officer? The January 2021 Operating Agreement specifically directed the bank to designate one, but then that either did not happen or something else went wrong, given that the OCC in April 2022 ordered Anchorage to “immediately” put someone in the role with sufficient independence, authority and resources. Even now in February, the appointee for unexplained reasons still has an interim title.
Three: I think the subtext to yesterday’s statement is “We believe we have complied with the consent order.” Or, at least, “We believe we are making significant progress in complying with the consent order.” What is the OCC’s view on this question, though? Does the below statement from the Anchorage press release hint at a possible answer?
From the start, we’ve set out to meet the highest regulatory requirements, and we are committed to continuing to work aggressively to do so. We believe there is a workable, regulated path forward to ensure we best serve our clients and the crypto ecosystem at large.
Obligatory to be sure paragraph: To be sure, the answers to all of the above questions could be pretty boring. People leave their roles for all sorts of reasons completely unrelated to regulatory developments. And once the roles were vacated, it is not necessarily surprising that it took a bit of time, even after the consent order, to get them filled with individuals with the right experience and the appetite for taking on the role. As for question three, maybe the statements were not made primarily with the consent order or the OCC in mind, but rather were made to demonstrate to potential clients that Anchorage Digital Bank is different, and not prone to the issues that have plagued other companies in this space recently.
All that seems plausible enough, and this positive “leveling up” narrative is the story that very good banking reporters - who for sure know better than I do - are writing as well.
Even so, I’d be curious one day to hear the full story behind these changes and, more to the point, why they were announced this week.
Thanks for reading! Thoughts, challenges, criticisms are always welcome at bankregblog@gmail.com
Specifically, as of October 2020, “It took an average of 8.6 quarters to turn a profit for the 1,046 de novos established from 2000 to 2009. For the 30 de novos launched since 2010, it has taken an average of 6.8 quarters.”
This list is of newly insured banks only. Note also that, similar to the approach taken by S&P Global, I am excluding trust banks, banks that were spun off from existing banks, and ILCs. This means that the following banks to which the FDIC granted deposit insurance over the time period at issue are not included in the data in this post: Stifel Trust Company Delaware, N.A., Generations Commercial Bank, GS&L Municipal Bank, Charles Schwab Trust Bank, Square Financial Services and Nelnet Bank.
Q1, Q2 and Q3 data comes from the FDIC’s BankFind Suite. Q4 data comes from call reports.
As per footnote 2, GS&L Municipal Bank, which opened in fall 2022 and immediately made a profit, is not included in this list. It is sort of a weird bank in that it is a commercial bank wholly owned by a savings and loan association. The new bank was formed to be able to handle municipal deposits and does not engage in lending activities.
The Operating Agreement also provides that “the Bank may request that one or more individuals assume positions of senior executive officer or director on an interim basis by submitting such request, in writing, to the OCC. If the OCC grants the Bank’s request, then the proposed individual or individuals may assume the specified position or positions on an interim basis. Thereafter, within thirty (30) days, the Bank shall submit to the OCC the information required [to receive a formal supervisory non-objection]. If the Bank fails to submit such information within thirty (30) days, then the proposed individual(s) shall resign his/their position(s).”