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:
- rising rates float all financial boats
- great efficiency ratios because of a ton of noninterest income from those crypto accounts
- nice growth vector due to those same accounts
- crypto play that isn’t completely crypto-dependent
- widening NIM as rates rise, plus they’ll likely find better ways to take advantage of those non-interest bearing deposits
- ROE upside as all of that happens.
Unfortunately, that’s why it sports a hefty price tag of 4 times book.