Tier 1 leverage ratio


I’m looking at some regional banks. In the course of collecting operating and financial metrics, I noticed a newly traded bank with some odd numbers. The bank is Silvergate Capital (SI). They had a public offering in 2021. Their Tier 1 Risk-weighted capital ratio is 50.8%, remarkably low leverage. ROE is low but reasonably strong (9.77%) despite the low leverage.

Then I noticed that their capital ratios are strangely inconsistent. Here’s their latest 10-Q:


On page 28, they show:
Tier 1 leverage ratio 8.71%
Tier 1 risk-weighted capital ratio 50.8%
CET1 capital ratio 40.98%
Total risk-weighted capital ratio 51.13%

That huge drop to 8.71% for the Tier 1 leverage ratio is surprisingly large. The most likely explanation is some large off-balance sheet assets, correct?

Yet, when you search the Q for off-balance sheet items you find a relatively small list:

On page 25, note 8:

unfunded lines of credit; $93.13 MM
letters of credit: $484,000.00

So, less than $94MM in off-balance sheet items for a bank with almost $13B in total assets on their balance sheet.

What could explain such a large difference between the Tier 1 leverage ratio and risk-weighted capital ratios?


Is it related to the amount of stock they floated? Looks like they floated another $750MM of stock and it is sitting on the Balance Sheet right now?

I don’t think so, I think it’s bitcoin related. Silvergate is a crypto bank that accepts deposits in bitcoin and facilitates $USD transactions between counterparties backed by bitcoin deposits. I wonder if some percentage of their deposit base (the crypto) is being differentially recognized in the two ratios.

They cite one reason for the follow-on offering was to supplement regulatory capital levels:

In January, 2021, the Company completed its underwritten public offering of 4.6 million shares of Class A common stock at a price of $63.00 per share. The aggregate gross proceeds of the offering were approximately $287.5 million, before discounts and expenses. The Company intends to use the net proceeds from the offering to further supplement the regulatory capital levels of the Company and the Bank and for other general corporate purposes, which may include providing capital to support the Company’s growth organically or through strategic acquisitions, and other growth initiatives, including the Bank’s SEN Leverage lending product, discussed below, custody and other digital asset services.

This is on page 4 of the 10-K.


I think I’m getting a better grip. It is crypto related in a sense. But it’s not direct. Silvergate is one of the few banks that deals in cryptocurrency banking. As a result their deposits are large and growing at a very fast rate. As a consequence of the high ratio of deposits to equity, they’re actually fairly highly levered (8.71%; the Tier 1 leverage ratio).

The nature of those deposits has additional consequences. They are growing fast quarter to quarter. There is also some uncertainty with regard to their turnover (they are non-interest bearing accounts held by institutional traders and crypto exchanges). Because of that, funds have been invested very conservatively. The balance sheet carries a lot of government agency backed securities and substantial cash equivalents. So, the reason for the huge gulf between the Tier 1 leverage and Tier 1 risk-weighted capital ratios is just that the bank holds such a conservative asset structure. It’s heavily levered, but very conservatively levered. I think, LoL.

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I was reading about that in the 10-Q…

Seems like it’d be difficult to ‘bank’ other peoples’ crypto, because in the periods when crypto is rising it’d be very difficult to own a different asset…

I believe the Lion’s share of those accounts are trading accounts. They provide liquidity in $USD 24-7 to a lot of institutional investors.

It’s an interesting bank. I was screening the mid-size to large regionals for something of interest, ranking them by P/B, ROE, NIM, Efficiency ratio and 2yr Book value growth. Silvergate is very expensive (P/B of almost 4) but had rapid growth and an excellent efficiency ratio. Low enough to rival very small banks actually. They are top quartile for both growth rate and efficiency.

When I looked at capitalization, the ratios seemed to tell very different stories. The T1 leverage ratio showed relatively high leverage, while the T1 risk-weighted ratio actually looked really overcapitalized. Confusing. The other perplexing item was a somewhat mediocre net interest margin (NIM).

That low NIM makes some sense though, when you consider the large cash position and very conservative asset structure. They may have a huge pool of free capital with all those non-interest bearing deposits, but they aren’t earning much on that capital because it hasn’t been effectively deployed yet. The same issue on underperforming assets weighs on their ROE (9.77%) which is bottom quartile for the top 72 banks by market cap. But these are things that should improve as they find a way to deploy those deposits.

So, there are a lot of potential positive levers for Silvergate:

  1. rising rates float all financial boats
  2. great efficiency ratios because of a ton of noninterest income from those crypto accounts
  3. nice growth vector due to those same accounts
  4. crypto play that isn’t completely crypto-dependent
  5. widening NIM as rates rise, plus they’ll likely find better ways to take advantage of those non-interest bearing deposits
  6. ROE upside as all of that happens.

Unfortunately, that’s why it sports a hefty price tag of 4 times book.

So… that didn’t go well!

(I had no idea SI was about to report, but I saw the headline come across seekingalpha.com this morning and recognized it.)

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Ouch. Glad it’s just interesting, and not a holding! It’s down almost 20% at this point. It’s getting killed like a tech stock. Even more shocking is that if you look at its chart, it’s a fairly normal day. It swings wildly. Doesn’t look like a bank at all.

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Well, who knows how long it’ll take to prove out their reserves model for all this crypto related stuff? Are they prepared for the kinds of extreme confluence of conditions, you know? So far crypto moves in the same directions/magnitudes as the stock markets, despite the intentions that it not…