Silvergate Bank added $586 million in new deposits from firms and individuals in the cryptocurrency industry in the third quarter of 2020, according to an earnings report released before market-open on Monday.
This growth was around half of competitor Signature Bank’s increase of $1 billion in deposits from digital asset companies, but it’s the largest deposit increase Silvergate has seen since the bitcoin bull market in Q4 2017 when the bank saw quarter-over-quarter deposit growth of $835 million.
On an earnings call Monday, Silvergate executives credited the growth to strong price appreciation, the adoption of bitcoin as an investable asset class by corporate treasuries, and significant new funding from venture capital firms.
Only 5% of Silvergate’s third quarter deposits were interest bearing, demonstrating the rich source of low-cost deposits that the crypto industry offers the bank.
On the call, Silvergate CEO Alan Lane also pointed out that digital currency deposits are volatile week-to-week and month-to-month and can’t be invested in longer-term assets. Indeed, some of the assets fund Silvergate’s mortgage warehouse business, where the average duration of loans is less than two weeks.
The bank’s fee income for digital currency customers increased by nearly 40% to $3.3 million with more than 68,000 transactions on the Silvergate Exchange Network, a fiat on-ramp for bitcoin markets. The $36 billion that was transferred over the SEN in the third quarter 2020 exceeded the $32 billion that went over the payments network for the full year 2019.
“While the Fed’s zero interest rate policy will be a headwind for many, Silvergate has an exciting growth engine in the SEN,” Lane said. “We believe that as more fintech firms and corporate treasuries announce their investments in bitcoin, the ecosystem as a whole will continue to expand.”
The bank added 47 new digital currency clients, bringing its total customer base from the industry up to 928. It also has 200 cryptocurrency clients in the pipeline or onboarding process, Lane said.
The majority of new customers – 33, Silvergate reported – were institutional investors. According to Lane, however, deposit increases from cryptocurrency customers were around even across customer segments.
The bank also saw a $13 million increase in its bitcoin-backed fiat loans, called SEN Leverage, up to $35.5 million in the third quarter. The bank also announced that SEN Leverage is out of pilot mode and ready to be offered at scale.
“It’s hard to say how big SEN Leverage could become,” said Ben Reynolds, executive vice president of corporate development at Silvergate Bank. “We believe that prudent underwriting, combined with the unique capabilities of the SEN to make loan advances 24 hours a day, seven days a week will enable us to grow the product in the coming quarters.”
From a regulatory capital point of view, the loans are 100% risk-weighted, said Silvergate CFO Tony Martino, meaning the loans are fully collateralized.
In the event that demand for bitcoin-backed fiat loans from Silvergate becomes more than what the bank is comfortable with, Lane said there are partners the bank will work with to cover the borrower demand. In this case, SEN Leverage would become a fee income opportunity as the bank lays off portions of the balance sheet to other lenders, he added.
“We’ve got just under 600 institutional investor clients,” Lane added. “Let’s assume that every single one of them wanted a SEN Leverage loan. That’s $300 million right there. Some of them will want more. It probably wouldn’t be efficient to do much less than that.”
The bank also continues to be fairly conservative in its capital and leverage ratios. Its risk-based asset ratio – total capital to risk-based assets – is around 25%, compared to 12% to 14% at other banks. Its leverage ratio – or the measure of a bank’s core capital to its total assets – is around 11%, against a more typical (and more risky) 9% or 9.5% at its peers.
Update (Oct. 26, 21:52 UTC): More information from the Silvergate earnings call has been added to this post.