Silvergate Bank continued to add a steady drip of cryptocurrency customers in the second quarter and its portfolio of bitcoin-collateralized loans nearly doubled, dwarfing the growth of its traditional real estate loan book.
According to its latest earnings report, released Monday morning, the bank’s vanilla loans – about $1.1 billion of the type of assets George Bailey would have recognized – increased by only 0.1% from the first quarter. Bitcoin-collateralized loans through the bank’s SEN Leverage product surged 88% in the same period, to $22.5 million. The bank continues to have a steady pipeline of more than 200 customers waiting to be onboarded, Silvergate CEO Alan Lane said on an earnings call Monday.
“It’s a great time to be a bitcoin banker,” Lane said. The publicly traded, La Jolla, Calif.-based bank is one of the few U.S. banks willing to openly serve crypto-related businesses and gets most of its deposits from the crypto sector. Each of the SEN Leverage loans has performed according to the bank’s expectations, Lane said.
In response to analysts’ questions, Silvergate EVP of Corporate Development Ben Reynolds projected that SEN Leverage’s growth would be dominated by institutional customers taking out credit lines from anywhere between $1 million to $10 million. While Silvergate is tempering SEN Leverage growth by the speed at which it can safely underwrite the loans, the customer demand for the product, which is part of the Silvergate Exchange Network (SEN). is strong, Reynolds added. The bank went public on the New York Stock Exchange in November. With $2.34 billion in total assets, Silvergate is less than 1% the size of JPMorgan Chase.
Despite outpacing growth in the bank’s traditional loan book, the bitcoin-collateralized loans have a long way to go before they affect the bank’s net interest income (NII), or profit from loans. “If you assume 7% yield on the $22 million, it suggests less than 3% of NII as it stands today,” Mike Perito, a bank stock analyst at investment bank Keefe, Bruyette & Wood, said in an emailed statement. The SEN Leverage product is used for many kinds of trading strategies, beyond just a long position, Reynolds said. Demand for bitcoin-backed loans tends to decrease as the market becomes less volatile.
The crypto space continues to be a rich source of non-interesting bearing deposits for the bank: $1.6 billion, or 94% of total deposits, comes from the sector. While deposits decreased from calling outstanding brokered certificates of deposit (CDs) and from a decrease of deposits from digital currency customers, the latter category now makes up 90% of total deposits, up from 84% in the first quarter.
As a result, the bank’s cost of deposits dipped to 0.37%, from 0.87% in the first quarter. Crypto firms’ deposits are an attractive source of funding for Silvergate because they don’t pay interest, whereas brokered deposits are expensive because they need high rates to attract investors. The bank signed on 31 new crypto firms in the second quarter. Out of its digital currency client growth, 25 were new institutional investors, three were crypto exchanges (including ErisX), and another three were in the miscellaneous bucket. Deposits across all customer types decreased in the second quarter.
For the second half of 2020, Martino said he expects interest in the SEN from institutional investors to increase given bitcoin’s recent rise above $10,000, and does not expect to see Silvergate’s rivals continue to bid aggressively for deposit business in a zero-interest-rate environment. Activity on the SEN increased by 28% since last quarter to more than 40,000 transactions, Lane said. The volume running over the SEN increased by 29% quarter-over-quarter to $22.4 billion, a 160% increase from the same period last year.
Silvergate reaped $2.4 million in fee income from digital currency customers, a 41% increase from first quarter 2020 and the largest quarterly increase the bank has had so far from this revenue source. Silvergate CFO Antonio Martino noted the bank saw the highest volume of wire transfers ever as more crypto exchanges used the bank’s cash management products.
Crypto banking competition
Even with the Office of the Comptroller of the Currency (OCC) announcing that nationally chartered U.S. banks can now custody crypto, building out custody services for digital assets is different from building out custody products for the existing financial market, Lane added.
Even though the California Department of Business Oversight and the San Francisco Federal Reserve has been OK with banks safeguarding digital assets for some time, state-chartered Silvergate has no plans to jump into crypto custody anytime soon, the CEO said. In June, Silvergate partnered with crypto custodian Anchorage to custody assets for SEN Leverage customers.
While Silvergate hasn’t announced any crypto prime brokerage plans, it is focused on ways in which it can help reduce the friction on the digital asset side of trades as it’s done for the fiat side through the SEN, Reynolds said. The bank is considering building new products, forming new partnerships and even targeted acquisitions in the field of digital asset settlement. The most prime brokerage-esque product the bank is focused on now is offering lines of credit, Lane said. “What prime brokerage means for the digital currency industry is still being developed,” he added.
In response to an analyst’s question about JPMorgan Chase banking Coinbase and Gemini, Lane said Silvergate had anticipated that competition would come into the space for some time. “We know for a fact that our exchange partners desire to have multiple banking relationships,” he said. “As you can see from the results in the quarter, we didn’t see any direct impact from the [JPMorgan] announcement. We continue to grow.”