Silvergate Shares As 3Q Deposits For Banks To Retreat To Crypto Exchanges

Shares of Silvergate Capital fell 15% in morning trade after the bank reported a drop in deposits and depression on its payments network.

Deposits came in at $13.2 billion, up 13.5% from a year ago. The bank’s digital asset customers grew to 1,677 in the quarter, despite the slowdown in the crypto market. The reduced deposits reflect depressed crypto trading volume and possibly a shift away from digital assets by institutional investors. Average digital-asset customer deposits fell to $12 billion, down from $13 billion in Q2.

Silvergate’s net income came in at $43.3 million, beating analysts’ estimates, up 84 percent from last year’s third quarter, according to data from Bloomberg. Earnings per share fell to $1.28 on an adjusted basis used by Wall Street, missing forecasts of $1.40.

“I don’t think it’s going to be a surprise to anyone who’s been looking at what’s been going on in the third quarter that volumes are going down the way they are,” Mark Palmer said. “I think it’s encouraging to see the company welcoming new customers, even though the company has a selective approach to acquiring customers and the pipeline remains strong,” said BTIG Managing Director.

Shares of Silvergate were down $60, at $10.68, after 10 a.m. in New York. “When I look at this stock transaction from a valuation perspective and look at the company’s long-term prospects, I can conclude that this is a very attractive situation,” says Palmer.

The company’s net interest margin rose to 2.31% in Q3, up from 1.96% in the previous quarter. Most of Silvergate’s deposit accounts are non-interest-bearing, so Federal Reserve interest rate hikes have boosted yields on the bank’s short-term, floating-rate bonds without increasing the cost.

Silvergate’s payments network posted a 41 percent decline from the second quarter, to $112.6 billion. The network is mostly used to support crypto client accounts with US-dollar pegged stablecoins, such as FTX or Coinbase. “The volume on Silvergate’s Exchange Network (SEN) compared to the overall industry this quarter, we are confident in the platform’s power and expansion opportunities in the network,” Silvergate CEO Alan Lane said in a statement.

On the earnings call, Lane announced the unfortunate delay of the company’s planned stablecoin launch this year. The company did not provide an updated timeline. In January, the bank bought the abandoned DEM project for $182 million. Lane assured listeners that the delay was more related to regulatory uncertainty than technological issues.

“When we got the technology earlier this year, it was ready to go,” Lane said. “He’s working with regulators and policy makers to get this right. We still feel very strongly that we are in a better position than any other bank out there to launch a regulated, safe and sound dollar on the blockchain.

Today, stablecoins are primarily used as an outlet into the crypto ecosystem. Silvergate notes that stablecoins could be used as a new form of everyday payment and could be particularly useful in e-commerce.

“What’s clear to regulators and policymakers is that leveraging technology for payments is a huge opportunity that truly relieves today’s $150 billion,” Silvergate chief strategy officer Ben Reynolds said on the call. “What does the nature of these discussions actually look like at this scale?”

The bank’s bitcoin-backed lending product, SEN Leverage, rose to $1.5 billion, compared to $1.4 billion in the previous quarter. Wells Fargo says bitcoin price down 57% year-to-date
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Analyst Jared Shaw is skeptical of cryptocurrency-backed loans in the short term. “Obviously, with bitcoin price pressure, people are going to have to provide more collateral for that loan,” Shaw says. “I think it’s delayed and understated for that overall service use case.”

In the year In 2013, Silvergate became the first bank to target crypto companies as commercial clients. Today, it serves as the pipeline behind much of the crypto economy, facilitating the conversion of dollars into digital assets for clients like currency. In addition, Silvergate offers institutional escrow services, offers bitcoin-backed loans and operates its own real-time payment network. Silvergate banks for the biggest companies in crypto including FTX, Coinbase, Kraken, Gemini and Circle.

This article was updated on Oct. 18 to include comments from the company’s earnings call.