UPDATE (Jan. 29, 20:59 UTC): Updated with information from Silvergate’s earnings call and comments from a banking analyst.

Silvergate Bank, one of the few U.S. banks serving crypto-related businesses, added more crypto clients in the fourth quarter of 2019 but saw deposits and fee income from those clients drop as institutional investors trade less during a relatively stable bitcoin market.

The La Jolla, Calif.-based bank, which went public on the New York Stock Exchange under the trading symbol SI in November, released its earnings report before market open on Wednesday. It was the company’s first official earnings call as a publicly-traded company and revealed the ups and downs of serving the crypto sector.

Silvergate’s earnings report lists a 4 percent decrease in deposits from the digital currency industry despite the addition of 48 crypto clients. The commercial bank’s overall deposits decreased by 1.8 percent in the same quarter (Silvergate also serves non-crypto businesses). Around 74 percent of the bank’s $1.8 billion deposits were non-interest bearing.

Silvergate's crypto customer count now tops 800. (Chart via Silvergate earnings presentation)

Deposits lagged most among institutional investors who have less interest in trading while bitcoin is in a bear market and doesn’t have a lot of daily volatility.

“We don’t pay interest on these deposits, so we experience outflows during times when the opportunity to make outsized returns on trading declines a bit,” Silvergate CEO Alan Lane said in an earnings call Wednesday morning. “That’s why we focus on just continuing to add customers, knowing that when the market comes back and they want to trade their assets, the best way to do that is by putting deposits at Silvergate.”

Client growth

Lane attributed the new client growth to the Silvergate Exchange Network (SEN), which allows commercial customers to instantly move U.S. dollars between different crypto exchanges. SEN transactions topped 14,400 in the fourth quarter, a 17 percent increase from Q3 2019. This is the highest that SEN transactions have ever been, despite the daily average price of bitcoin declining from Q3 to Q4, Ben Reynolds, Silvergate’s director of corporate development said.

The cost of deposits for the bank, which holds $2.1 billion in assets, increased from 0.5 percent to 0.84 percent. For scale, average deposit costs for small mid-cap commercial banks are normally around 0.75 to 1.25 percent, said KBW analyst Mike Perito.

Silvergate earned $1.4 million in fee income from its crypto customers, down 12.5 percent from $1.6 million last quarter because of a lag in foreign exchange fees. The bank’s fee income is mostly made up of foreign exchange transactions, cash management products such as wires and ACH and send fees for digital currency clients.

The bank added 11 digital currency exchanges (including over-the-counter trading desks), 21 institutional investors and 16 crypto businesses (i.e. mining operations or crypto application companies). Lane noted in the call that there are more than 200 future crypto customers in the bank’s review and onboarding pipeline.

Silvergate’s net income decreased by around 45 percent, from $6.6 million in the third quarter to $3.6 million. It’s net interest margin also dropped from 3.39 percent to 2.97 percent quarter-over-quarter. The bank’s largest expenses came from salaries and employee benefits, which increased in the fourth quarter by nearly 6 percent to $8.7 million.

In response to analysts questions, Lane said that the bank has yet to make a strong correlation between the price or volatility of bitcoin and deposit levels.

“Other banks have mentioned their intention to come into the space and are offering customers some yield,” Lane said. Metropolitan Commercial Bank in New York seems to have felt the same pressure of new crypto banking entrants, with its deposits dropping by half over the course of 2019.

Fee income from crypto customers dipped in the fourth quarter. (Chart via Silvergate earnings presentation)

Long road

In 2013, Silvergate pivoted from traditional commercial banking to serving the cryptocurrency community as a rich resource of non-interest bearing deposits. The bank then converts these deposits into interest-bearing deposits at other banks, investment securities and loans.

Earlier this month, Silvergate launched the SEN Leverage product in pilot mode, which allows proprietary traders to put up bitcoin as collateral for fiat loans that they can then use to buy more bitcoin, similar to margin lending in the traditional markets.

When analysts inquired about the cost of underwriting SEN Leverage loans because of the volatility of the underlying collateral asset, Lane said the institutional investors that will be using the product can add more USD as collateral or pay down the loan at any time through the SEN network.

“The institutional investor has more access to funds,” KBW’s Perito said. “For example, a hedge fund client of Silvergate might only be putting 15 percent of their cash into the digital currency niche and 85 percent of their money in other areas. They have access to cash much more than retail investors buying bitcoin with their savings account money.”

Silvergate also made its first hire directly from the crypto industry, bringing on former Blockstream exec Benjamin Richman as director of digital currency.