Varo Bank Reports 2022 Loss of $236.5 Million
But signs of progress may be visible
As we near the end-of-the-month deadline an increasing number of banks are filing their quarterly consolidated reports of condition and income, known as call reports. This post takes a quick look at the reports filed yesterday or today by three Utah-based banks.1
Varo Again Posts Large Annual Loss, But Sees Signs of Improvement
In 2020, Varo Bank received what it called “the first ever national bank charter granted to a US consumer fintech.” Acting Comptroller of the Currency Brian Brooks said that Varo’s opening as a national bank would represent “the evolution of banking and a new generation of banks that are born from innovation and built on technology intended to empower consumers and businesses.”
It is not unusual for de novo banks, whether fintech focused or otherwise, to lose money in their first few years of operation. So the fact that Varo Bank has not yet reached profitability is not necessarily on its own surprising or concerning.
At the same time, the scale of Varo’s early troubles has drawn attention, particularly in the wake of a first half of 2022 in which it continued to post heavy losses. Like many tech companies, Varo also conducted layoffs last year.
Despite all this, Varo sees signs of progress. CEO Colin Walsh said in an interview last fall that he expected the bank’s quarter-over-quarter loss to come down, and that he expected the bank to achieve profitability in the “next couple of years.” Walsh also mentioned that, in light of the fact that most of Varo’s assets are held in cash at other banks, “in a rising rate environment I am in some cases the only neobank celebrating every time the Fed raises rates 75 basis points.”
2022 Results
According to the results it published today, overall for 2022 as a whole Varo lost $236.5 million, an improvement from the $265.5 million loss the bank reported for 2021.
As Walsh predicted, things did start to look a little better in the second half of the year. In the fourth quarter Varo was able to pare its quarterly loss to $32.5 million, compared to a quarterly loss of $42.5 million in Q3 and a quarterly loss of $88.1 million in Q4 2021. Expenses were essentially flat year-over-year, with a decrease in marketing spend ($123.3 million in 2021, down to $84.5 million in 2022) offset by continued year-over-year growth in a few other expense areas.2
In comments accompanying the call report,3 Varo stated:
Q4 results reflect continued progress over Q3 with reduced net losses and increased revenue. While maintaining investment in product innovation, we continue to reduce our burn rate with lower expenses from cost reduction measures while driving significant growth in customer contribution margin year over year. Varo remains sufficiently capitalized to meet our strategic objectives, further diversify revenue, increase customer contribution margin and achieve profitable long-term growth. We continue to leverage our balance sheet and maintain our deposit sweep program. Charge-offs and provision expenses relate primarily to overdrawn deposit balances. Lending related charge-offs remain at low levels.
One focus of cost cutting measures has been a reduction in force. At year-end 2021 Varo according to its call report had 833 full-time equivalent employees. This number was down to 642 by the end of Q3 2022, and stood at 576 at the end of Q4 2022.
Varo ended the year with $148.7 million in equity capital, compared to $345.5 million at year-end 2021. Varo’s parent company injected $28 million in additional capital over the course of 2022, after making $518 million in cash contributions in 2021.
Results for Two Newish Industrial Banks
Square
Square Financial Services, Inc., the Utah ILC owned by the company now called Block, reported net income of $103.4 million in its second year of operations, up from the $38.9 million it made in 2021 after opening in March of that year.
Nelnet
Nelnet Bank, which like Square was able to sneak in under the wire during the limited window under FDIC Chairman McWilliams during which the FDIC was open to approving ILC applications,4 turned a profit for the first time since opening in November 2020. For 2022, the bank reported net income of $3.34 million, improving on a net loss of $617,000 in 2021.
As a condition to its grant of deposit insurance, Nelnet Bank is required by the FDIC to maintain a leverage ratio of at least 12%. At year-end 2022, Nelnet Bank’s leverage ratio stood at 13.33%, down from 22.39% a year earlier.
In Nelnet’s 10-K filed in late February 2022, it stated that “[b]ased on Nelnet Bank's business plan and current financial condition, the Company currently believes that the initial capital contribution of $100.0 million and pledged deposit of $40.0 million should provide sufficient capital and liquidity to Nelnet Bank for the next two years.”5
As it turned out, though, Nelnet Bank wound up receiving additional capital contributions from its parent company of $30 million over the course of 2022.
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Note that call report data is for only a bank and its consolidated subsidiaries. It does not take into account any operations of the bank’s parent company or any affiliates that are not subsidiaries of the bank. For Varo this does not really matter much, as it conducts substantially all of its operations through the bank. This is more important for Square Financial Services and Nelnet Bank, however. The results discussed later in this post are not consolidated results for Block or for Nelnet, Inc. as a whole. In each case, those results are scheduled to be released in February.
For example, salaries and employee benefits for 2022 as a whole were $120.4 million, compared to $94.2 million in 2021. As noted elsewhere in this post, the company conducted significant layoffs in the second of half 2022, so all else equal full-year 2023 expenses on salaries and benefits should be expected to be lower.
This is on the very last page of the call report (the “Optional Narrative Statement” that most banks choose to skip, but which Varo to its credit provides).
Based on data through the end 2022, the following ILC applications are still pending with the FDIC. (First date of submission in parentheses, although certain of these were later withdrawn and re-filed.)
Rakuten Bank (June 2019)
GM Financial Bank (December 2020)
Thrivent Bank (February 2021)
Ameriprise Bank (conversion from federal savings bank) (June 2021)
Ford Credit Bank (July 2022)
This “pledged deposit” is a reference to a different condition imposed by the FDIC, as explained in the 10-K:
Prior to Nelnet Bank’s launch of operations, Nelnet Bank, Nelnet, Inc. (the parent), and Michael S. Dunlap (Nelnet, Inc.’s controlling shareholder) entered into a Capital and Liquidity Maintenance Agreement and a Parent Company Agreement with the FDIC in connection with Nelnet, Inc.’s role as a source of financial strength for Nelnet Bank.
As part of the Capital and Liquidity Maintenance Agreement, Nelnet, Inc. is obligated to (i) contribute capital to Nelnet Bank for it to maintain capital levels that meet FDIC requirements for a “well capitalized” bank, including a leverage ratio of capital to total assets of at least 12 percent; (ii) provide and maintain an irrevocable asset liquidity takeout commitment for the benefit of Nelnet Bank in an amount equal to the greater of either 10 percent of Nelnet Bank’s total assets or such additional amount as agreed to by Nelnet Bank and Nelnet, Inc.; (iii) provide additional liquidity to Nelnet Bank in such amount and duration as may be necessary for Nelnet Bank to meet its ongoing liquidity obligations; and (iv) establish and maintain a pledged deposit of $40.0 million with Nelnet Bank.