In general, most bank stocks have declined this year. But for the $2.6 billion financial firm Silvergate Capital (NYSE:SI), based in La Jolla, California, it has been a completely different story.
The bank conducted its initial public offering at the end of 2019 and for much of its public life traded between $13 and $16 per share. But at the end of September, the bank’s stock surged and (as of Dec. 9) trades for more than $40 per share. The stock has appreciated close to 200% in less than three months.
Let’s meet this relative newcomer to the public markets, and see what is driving the sharp increase in its stock price.
The crypto bank
There aren’t too many banks that really understand cryptocurrencies, but Silvergate is certainly one of them. The bank has actually been around for a while, but several years ago foresaw that cryptocurrencies such as bitcoin would one day be an investable asset.
As a result, the bank created its own digital currency payments system called the Silvergate Exchange Network (SEN). SEN essentially serves as the middleman between digital currency exchanges like Coinbase and institutional investors looking to trade crypto assets. The advantage is that SEN is a real-time payments network, meaning it can clear transfers instantly around the clock, 365 days a year. If you are using a normal bank to connect to a crypto exchange, transfers are only cleared during normal banking hours, which is not ideal for crypto assets that trade constantly. In October, SEN surpassed $100 billion in lifetime transfer volume.
SEN has been great for the bank because it has allowed the company to bring in tons of non-interest-bearing deposits, which are those that the bank doesn’t have to pay any interest on. That ultimately helps boost the bank’s overall margin. At the end of the third quarter, non-interest-bearing deposits made up 95% of Silvergate’s total deposits. To say that is absolutely outstanding would actually be a huge understatement. Most banks are happy to get 30% of total deposits from non-interest-bearing sources. Silvergate’s cost of deposits at the end of the third quarter was only 0.01%, which is again incredible even in this ultra-low interest-rate environment.
SEN also helps drive non-interest income through deposit fees on its digital currency customers. Non-interest income at the bank in the third quarter made up 17% of total revenue, which is very good for a bank as small as Silvergate.
Silvergate also recently completed a pilot program on another interesting crypto product called SEN Leverage. SEN Leverage is a commercial and industrial product that allows customers to obtain a loan in U.S. dollars that is collateralized by bitcoin. These are very attractive because…