Silvergate Bank added 46 crypto customers in the first quarter and saw fee income and deposits increase from those customers because of “Black Thursday,” according to its earnings report released before market open on Wednesday.
“The increase in total deposits from the prior quarter was driven by an increase in deposit levels from our digital currency customers who maintained excess capital with Silvergate as a result of the dislocation taking place in the digital currency markets during March,” the bank wrote in its earnings release.
The publicly traded La Jolla, Calif.-based bank is one of the few U.S. banks willing to serve crypto-related businesses and has most of its deposits from the crypto sector.
The bank went public on the New York Stock Exchange under the trading symbol SI in November. With $2.3 billion in total assets, it’s less than 1% the size of JPMorgan Chase’s $3.1 trillion in assets.
The bank now has 850 digital currency customers, including 61 exchanges, 541 institutional investors and 248 other customers. The largest customer segment increase was in institutional investors, which increased by 32. The bank also claims to have more than 200 prospective clients in its pipeline.
Deposits from digital currency customers increased by 35% to around $1.7 billion, making up the majority of the bank’s total $2 billion deposits. Other deposits at the bank decreased by around 45%.
Average balance of deposits was up by only $100 million while deposits for period end were up $400 million, because of institutional investors putting more cash back into their accounts, CEO Alan Lane said on an earnings call Wednesday.
The bank’s cost of deposits continued to rise from .84% in the fourth quarter of 2019 to .87% in the first quarter of 2020. This is around the average for mid-cap commercial banks and is up from the first quarter of 2019 when the cost of deposits was .08%.
Fee income from digital currency customers increased by more than $300,000. In an earnings call, Lane said that each of the fees for the bank remained flat or increased this past quarter. Last quarter fee income and deposits dropped, even while the bank was adding more customers.
The bank’s net income was $4.4 million, up by 22% from last quarter but down 53% from the same time last year.
The bank’s Silvergate Exchange Network (SEN) handled 31,405 transactions in the first quarter compared to 14,400 transactions in fourth quarter of 2019. This was more than triple what the number of transactions were on the SEN a year ago. SEN’s volume increased by $7.8 billion to $17.4 billion total in the first quarter.
The network allows commercial customers to instantly move U.S. dollars between different crypto exchanges and remains open on nights and weekends, unlike traditional markets.
The bank plans to add more products to the SEN in the future, including a bitcoin-on-margin lending feature called SEN Leverage which is currently in pilot mode. The bank has approved $12.5 million in bitcoin collateralized loans so far and plans to roll out the product in 2020.
In the earnings call, Lane said the bank continues to explore product options around crypto custody and settlement. In response to analyst questions, Lane also said the bank is exploring whether or not it should play a “more active role” in the stablecoin space, beyond just offering basic banking services to stablecoin issuers.
In answer to a question about how Silvergate might benefit from the launch of Libra, Silvergate executive vice president of corporate development Ben Reynolds said that the bank offers cash management products for quickly transferring fiat to stablecoin.
“I think it’s fair to characterize this as we’re investigating it and keeping our options open in working with all stablecoin participants,” he added.
The bank also kept a high risk-based capital ratio – total capital to risk-based assets – in the first quarter, staying around 26% where other banks are normally around 12% to 14%, said Mike Perito, a bank stock analyst at investment firm Keefe, Bruyette & Woods.
The bank also established a referral partnership with Seacoast Commerce Bank in National City, Calif., for customers seeking assistance under the U.S. government’s Paycheck Protection Program. Neither Silvergate nor Seacoast broke out how many, if any, of Silvergate’s crypto clients applied for PPP loans.
Silvergate also increased its provision for loan losses to $400,000, compared to no provision for the fourth quarter of 2019. While the bank serves the crypto industry on the deposit side, it turns those deposits into interest-bearing deposits at other banks, investment securities and loans.
Like many traditional banks, Silvergate’s largest segment of loans are made up of commercial real estate and one- to four-family real estate loans. Because of the bank’s low loan-to-value margins and its low exposure to the hospitality and retail space, none of its modified loans have been considered troubled debt under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, Lane said.
Silvergate holds a fiscally conservative position so it can focus on building out products for the crypto sector, he added.
“While the outlook of the economy remains uncertain, our first-quarter results clearly demonstrate the steps we have taken to prepare for a digital world,” Lane said.
Update (April 29, 20:58 UTC): New information from Silvergate’s earnings call has been added to the piece.
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