US bank Silvergate sinks to $1bn loss as crypto crisis takes a toll

Crypto-focused US bank Silvergate swung to a $1bn loss in the last three months of 2022, underscoring how the lender has been rocked by the collapse of crypto prices and implosion of exchange FTX.

The California-based bank reported a $1.05bn net loss for the fourth quarter, compared with a profit of $18.4mn in the same period a year earlier, and said it would slash its product offering and remove non-core customers in an attempt to cut costs.

Silvergate has pivoted from being a small community lender to a crypto-focused bank in recent years and played an important role in providing services to Sam Bankman-Fried’s now-collapsed crypto empire. The earnings reported on Tuesday underline the extent of the pressure facing the bank, amid plunging crypto prices and the bankruptcy of several large companies, including Bankman-Fried’s FTX and Alameda Research.

Silvergate said it fell to a full-year loss of $949mn in 2022, compared with a profit of $76mn in 2021. Analysts were expecting a full-year loss of $758mn, according to FactSet.

Customer deposits plunged by 52 per cent in the last three months of 2022 compared with the third quarter, totalling $6.3bn at the end of the year, as clients rushed to pull their funds during a “crisis of confidence” following the collapse of FTX.

“While we are taking decisive actions to navigate the current environment, our mission has not changed,” said Alan Lane, chief executive of Silvergate. “We believe in the digital asset industry,” he added.

The New York-listed bank said it was preparing for “a sustained period of lower deposits” and would be “offboarding certain non-core customers” and dropping some products in an attempt to cut costs.

Lane said Silvergate’s “digital asset custody and certain cash management services . . . can no longer be offered profitably”.

“Some of the products have become too costly or complex to continue offering,” said Ben Reynolds, president of Silvergate, adding that digital asset custody is a “very competitive space and difficult to differentiate yourself”.

Reynolds added that “over time you end up accumulating customer relationships that simply aren’t profitable” and that there are “significant compliance and operational costs associated with every customer that we serve” — costs that the bank is trying to trim.

Silvergate’s securities portfolio fell by nearly 50 per cent in the fourth quarter from the previous three months to $5.7bn. The bank said it sold $5.7bn in assets in the final three months of 2022 at a loss of $751mn as it raced to meet withdrawals and “to maintain a highly liquid balance sheet”. It also took an impairment charge of $135mn related to $1.7bn of assets it expects to sell in the first three months of this year.

Silvergate’s shares jumped 15 per cent by lunchtime trading. They had fallen sharply earlier this month after Silvergate disclosed the decline in deposits as part of a provisional earnings report, and are down about 12 per cent for 2023.

The bank is also facing scrutiny from US lawmakers. In December, senators, including Elizabeth Warren, wrote to Lane seeking clarity on Silvergate’s role in accepting customer deposits for Bankman-Fried’s firm Alameda Research, which the former billionaire has said were supposed to go to his FTX exchange.

“Silvergate appears to be at the centre of improper transfers of customer funds,” the senators wrote, adding that its involvement showed an “egregious failure”.

Silvergate in December defended its role in accepting deposits for Alameda, saying it conducted “extensive due diligence”.

The senators also questioned the role of Tyler Pearson, son-in-law of Silvergate’s chief executive, who is currently deputy chief risk officer at the bank.