LevelField Financial Inc. feels "cautiously optimistic" that its proposed acquisition of Burling Bank could be approved by regulators and closed in 2023, said Gene Grant II, chairman and CEO of LevelField.
On Feb. 1, Houston-based financial technology platform LevelField announced plans to acquire Chicago-based Burling Bank. LevelField is a cryptocurrency trading and custody platform mainly for high net worth individuals and smaller institutional investors, and with the bank acquisition, it aims to provide depository and lending services directly to crypto-savvy consumers, Grant said.
"What we see in the market today is banks are working with the fintechs and the fintechs then work with the ultimate consumer," Grant said in an interview. "We want to work with the ultimate consumer and give them the protection, safety and security, and trust of a chartered bank."
LevelField's ambition to become a cryptocurrency-friendly bank through a bank acquisition puts it at the intersection of several areas drawing intense scrutiny from regulators and lawmakers. Regulators have warned of the risks posed by banks' exposure to cryptocurrency assets, and the Federal Reserve Board on Jan 27 denied cryptocurrency bank Custodia Bank Inc.'s application to become a Fed member. Regulators probed the relationship between Farmington State Bank and collapsed cryptocurrency exchange FTX Trading Ltd., and the Washington-based community bank elected to cut ties with the digital asset vertical in January.
Regulators have also carefully weighed fintechs' eligibility to become a bank. In December, banking as a service provider BM Technologies Inc. and Seattle-based First Sound Bank terminated their merger agreement, citing a prolonged regulatory approval process.
Grant said LevelField is keenly aware of regulators' concerns about cryptocurrency banking. It has tried to address them in the application submitted to the Federal Reserve System on Jan. 31, which detailed a three-year plan of the combined entity to support its proposal to form a bank holding company.
"We've stripped out anything that we believe to be controversial from the business plan, so that they don't have to have any policy decisions," Grant said.
Attempt to address regulatory concerns
With Burling Bank, LevelField aims to build a platform for consumers to trade digital assets, take loans using cryptocurrency as part of the collateral, and earn crypto rewards via credit cards to be issued by Burling, Grant said. LevelField will keep Burling's traditional banking services, including the branch in Chicago, and plans to open three branches in the Houston; Austin, Texas; and Miami areas where there is an interest in digital assets, he added.
While bank regulators warned against the concentration risks of cryptocurrency assets in a joint statement Jan. 3, LevelField will ensure that loans related to digital assets never exceed 50% of total loans outstanding, Grant said. The branch network will offer such traditional products as mortgages, construction loans, and commercial and industrial loans.
For those loans using digital assets as collateral, borrowers must have an acceptable credit standing in the first place, and cryptocurrency will only be part of the collateral in addition to other assets, Grant said.
In any business line, the combined entity will not hold digital assets as principal on the bank's balance sheet, Grant said. LevelField wants to keep its cryptocurrency custody business and will hold the digital assets under custody in a separate trust division.
Economic drivers
The risks associated with the business were underscored when several crypto-friendly banks suffered deposit outflows or loan losses, particularly in the fourth quarter of 2022 due to business disruptions in the cryptocurrency segment. Some of those banks have paused issuing loans backed by bitcoin or ethereum to mitigate risks, including Silvergate Capital Corp., Signature Bank and Provident Bancorp Inc.
"I'm a shareholder of Silvergate and a big believer in their business model. I watched that drawdown and the fact that they managed to survive it," Grant said. Silvergate's total deposits from digital asset customers plummeted by 68% in the fourth quarter of 2022.
LevelField plans to take a different approach than Silvergate, which is focused on institutional investors and cryptocurrency companies. LevelField aims to bank with consumers directly, so the deposit flows would be more moderate, Grant said.
Still, the current price of bitcoin is less than 40% of its peak value in November 2021, indicating lowered interest from investors in this asset class. LevelField believes that even a slight return of interest back to the digital asset space would be all it needs to provide good returns to its shareholders.
"We don't need to be the largest player to provide a fantastic return to our shareholders. What we want to be is the safest and the most trusted player in this space," Grant said.
How the deal came about
Grant co-founded LevelField in 2018, with a vision to level the playing field between banks and fintechs. While many fintechs roll out banking products leveraging the charter from a bank partner, the partnership model has been running with banks shouldering many of the compliance costs, Grant said.
To be able to serve consumers directly, LevelField started searching for a bank to buy. It did initial due diligence on eight potential sellers in the past year, with PNC Capital Markets LLC being its adviser, Grant said.
It started the talks with Burling Bank in the third quarter of 2022 and found that it was a suitable target in part because the bank has already practiced lending in the digital asset vertical, Grant said.
"This is not a new activity for them. What we're doing is reshaping the activity a little bit," he said.
LevelField has been in the process of submitting applications to acquire the bank to the state of Illinois and the Federal Deposit Insurance Corp., Grant said. Burling Bank is not a member of the Fed and is regulated by the Illinois Department of Financial & Professional Regulation.
