We are in the thick of earnings season, and stocks have surprised investors both up and down following their announcements.
One stock that crushed earnings this quarter was Silvergate Capital (SI 2.50%), beating estimates by 73%. The bank, which focuses on serving cryptocurrency customers, is uniquely positioned for the economic backdrop we're experiencing. While the bank benefits when cryptocurrency volumes go up, it also does well when interest rates rise -- as they did in the first quarter.
Cryptocurrency volumes plummeted during the quarter
Silvergate Capital Chief Executive Officer Alan Lane described the first quarter as "one of the most challenging periods for the broader crypto ecosystem." Lane is referring to the collapse in trading volumes in Bitcoin and Ethereum during the quarter.
One aspect of Silvergate's business that has investors cautious is how the company would perform when the volumes on cryptocurrencies fell. According to Be[In]Crypto Research, investor interest in cryptocurrencies was down drastically in the first quarter, and trading volumes declined 60% from the first quarter of last year.
Image source: Getty Images.
The Silvergate Exchange Network (SEN) had transfer volume of $142 billion in the first quarter, down 35% from the last quarter and down 15% from the first quarter of last year. The SEN is Silvergate's payments network that allows customers to transfer U.S. dollars between different cryptocurrency exchanges like Coinbase and Bitstamp.
One area of the business that continued to see growth was the SEN Leverage product. SEN Leverage is Silvergate's lending product, allowing institutions to take out loans while using their Bitcoin as collateral. This product enables companies to leverage their Bitcoin and expand their businesses. During the quarter, Silvergate issued a $205 million SEN Leverage loan to MacroStrategy, a subsidiary of MicroStrategy.
Data source: Silvergate Capital. Chart by author.
Silvergate still put up stellar numbers
The bank had a stellar quarter considering the drop in cryptocurrency volumes. Digital currency customers grew to 1,503 during the quarter, up 400 from last year. And net income was $24.7 million, up 94% from last year.
One aspect where Silvergate Capital crushed it was on net interest income. Being a bank, Silvergate Capital earns interest on the loans held on its books. However, it's different from other banks because it doesn't have many interest-bearing deposits.
While other banks have checking or savings accounts on which they must pay interest, Silvergate doesn't. Instead, 99% of deposits held by Silvergate don't earn interest. This means an uptick in interest rates benefits Silvergate more than others because interest earned grows while the interest paid out is minimal.
In the first quarter, net interest income came in at $50.5 million, up $12.3 million from the fourth quarter and up $27.5 million from the first quarter last year. A big driver of this growth is its loans, with 90% of loans held for investment having floating interest rates -- making the bank is very sensitive to interest rates. A positive 25 basis point rise would increase net interest income by $23 million over the next year.
| Change in Interest Rates | Percent Change in Net Interest Income for a Change in Interest Rates |
|---|---|
| -1% | -21.6% |
| 0% | 0% |
| 1% | 59.7% |
| 2% | 124% |
| 3% | 189.2% |
Data source: Silvergate Capital 2021 10-K filing.
Silvergate is well positioned to take advantage of rising interest rates. And it also continues to innovate with its stablecoin infrastructure initiative and expanding its SEN to the euro -- two moves that should power its new phase of growth.
