Silvergate Capital (SI) Delivers
Silvergate Capital (SI) reported Q1 2022 results yesterday morning and held a conference call later in the day. Digesting the results took some time but at a high level the trends are very solid, despite a somewhat messy quarter for crypto markets. Here are the main bullet points:
- Net income of $27.4 million was up 116% from a year ago and up 28% from Q4 2021.
- EPS of $0.79 was up 44% from $0.55 a year ago and up 20% from $0.66 in Q4 2021. EPS was way above consensus of $0.45.
- The EPS beat was driven by lower costs, higher net interest income and lower credit costs.
- Net interest income (NII) was up 25 basis points (bps) versus +6 bps expected, to 1.36%, driven by shifting earning asset mix into securities instead of low yielding cash.
- This should be the beginning of a NII “lift off” cycle as Silvergate holds 55% of securities in floating-rate investments (duration under three years) and nearly 100% of deposits are in non-interest-bearing accounts (i.e. they basically cost nothing).
- Management says a +25 bps move will add $23 million to NII over a 12-month period.
- New 2022 consensus EPS estimates are likely to settle materially higher, rising from around $3.33 to $3.75.
- Crypto markets were terrible in Q1 but digital currency customers grew by 122 (76 added in the previous quarter) to 1,503.
- SEN transfers dropped 35% to $142.3 billion, an indication of the weak crypto market in Q1.
- SEN leverage commitments jumped 88% over Q4 2021 to $1.07 billion.
- The recent SEN leverage commitment with Microstrategy (MSTR) could be a drop in the bucket given how much bitcoin the company holds.
- Loan growth was about flat, reflecting wind down of real estate and construction loans.
- Stablecoin initiative continues, though management was evasive on timing given regulatory stuff still needs to be worked out, as does the business model specifics for scaling a stablecoin. They say the goal is to have a pilot program up and running in 2022. I’m skeptical as seems like a lot is out of management’s control (regulators hold the cards). Still, big picture a stablecoin could be huge; just don’t let expectations get ahead of reality. Acquired Diem assets are becoming part of the overall stablecoin initiative.
- SI stock trades at a discount and is way cheaper than crypto-related stocks. SI also still has massive leverage to rising rates (though this will reverse course at some point when rates are set to fall. But that’s likely a ways off).
- BUY below 150