Q2 2020 Silvergate Capital Corp Earnings Call
[music].
Good morning, and welcome to the.
Capital Corporation second quarter 2020 earnings conference call.
Today's presentation, all parties will be any listen only mode.
Following the presentation. The conference line will be open for questions with instructions the fall at that time.
As a reminder, this conference call is being recorded.
I would now like turn the call over you can't into buying Investor Relations for Silver Gate. Please go ahead. Thank you operator and good morning, everyone. We appreciate your participation in our second quarter 2020, or you'd call wouldn't here today are only our president and Chief Executive Officer, Tony Archie You know, our Chief financial Officer and bad.
Right now you VP in summer he thinks director of corporate at all.
As a reminder, a telephonic replay of this call will be available through water and 59 PM Eastern time on August 2020.
Access to the replay is also available on Investor Relations section of our website. Additionally, aside dr. complement today's discussion is available on the IR section of website before we begin what really near remind everyone that this call me contains certain statements that constitute forward looking statements within the meaning of the private securities.
Occasion Reform Act of 1990 fives.
You think you'd remarks about managing future execution gold leaf estimates plans and prospects.
Such statements are subject to a variety of where it by searching to you and other factors and putting the cold at 19 condemn act that could cause actual results could differ materially from both indicated or implied by such statements.
Such risks and other factors are set forth in our periodic and current reports filed with the Securities Exchange Commission.
We do not undertake any duty to update such forward looking statements. Additionally, during today's call we will discuss certain non-GAAP measures, which we believe are useful in evaluating our performance.
The presentation of the conditional information should not be considered in isolation or as a substitute for results prepared in accordance with U.S. GAAP.
Reconciliation of these non-GAAP measures most comparable GAAP measures can be found in our earnings release I could point I'll turn the call over to Alan.
Thank you Shannon and good morning, everyone.
On today's call will provide a brief update on how are we continue to manage our business during the pandemic before speaking at a high level to our results and the success, we've achieved growing the silver Gate exchange network, our digital currency global payments platform.
Tony will provide a more detailed review of our financial results and we'll then open the call for your questions.
We also have been rentals on the line, who will participate in the queue in a portion of the call.
I'd like to start by thanking our employees for their hard work and continued efforts. During this challenging time as the Kobin 19 pandemic continues to impact our country in the world.
The health and safety of our employees and customers is our priority as we work together during this time.
The pandemic has certainly changed the way in which we work in live with potentially lasting effects for the future.
Importantly, we have positioned silver gate as an industry innovator and leader in the digital banking space.
Which has enabled us to move quickly to a remote working environment, well seamlessly maintaining our operations and customer support.
Our commitment to our customers in our broader community. During this challenging time has not wavered.
As I touched upon during our first quarter earnings call Silver Gate had previously taken the necessary steps to prepare for a potential downturn, which included maintaining our strict underwriting standards and the conservative balance sheet.
The company's strong credit culture can be seen in our commercial and multifamily real estate portfolio, where loan to value ratio averaged 54%.
And in our single family residential real estate portfolio, where our loan to value ratio averaged 55% both at June Thirtyth 2020.
Which we believe provide silver gates significant protection, if the economy worked to worsen.
Additionally, we have been working with our borrowers and providing loan deferrals to those needing help in dealing with pandemic related economic weakness.
Through the second quarter, we have granted deferrals on loans, representing 17% of our outstanding loan balances and we're pleased to report 27% of those deferred loans have resumed payment as of July 15th.
Overall, we feel very confident with the credit profile of our loan and securities portfolios and believe that we're well positioned as we move into the second half of the year.
Additionally, we remain well capitalized with a total risk based capital ratio of 25.54% at June Thirtyth 2020.
And balance sheet liquidity of $1.2 billion in cash cash equivalents and investment securities available for sale at fair market value, which represented 49% of total assets.
This strong liquidity position combined with the strong credit pulled pork profile of our loan portfolio position silver gay to continue to be opportunistic through this period of dislocation.
Turning to slide four.
I'm very excited with the continued growth achieved in our digital currency platform during the second quarter.
We grew our net digital currency customers, 35% year over year to 881, while our pipeline of potential new digital currency customers remained very strong with over 200 prospects in the sales pipeline or in the midst of the onboarding process.
The true value of the sent to our growing customers coupled with the platforms competitive advantage and its network effect are validated in the sheer growth in U.S. dollar transfers over the second.
To 22.4 billion, an increase of 29% compared to the first quarter.
And up 160% compared to the same period in 2019.
This ties closely to the increase in send transactions, which totaled 40286 during the second quarter up significantly from 31405 handled in the first quarter of this year.
While our growth in new digital currency customers contributed to the strength in the quarter. We also believed that the customers' preferences to transact using our proprietary <unk> drove share gain for the center.
During the second quarter the price of decline was relatively stable and trading volumes declined by approximately 10%.
Well silver gates transaction volume increased 29%.
We believe this demonstrates the network effect of the center and the importance of being on our global payments platform.
It also speaks to the strong customer growth year to date as we have added 77 customers and continued to see strong demand.
Digital currency fee income was also strong rising 119% to $2.4 million as compared to the second quarter in 2019.
Demand for our cash management solutions foreign currency exchange services and deposit solutions drove more transaction activity from our digital currency customers in the quarter.
In fact, we experienced the highest volume of wire transfers ever as our Apiay enabled cash management services were used to buy more digital currency exchanges.
During our first quarter earnings call I spoke about the launch of San leverage.
This allows customers of silver gate to obtain U.S. dollar loans collateralized by bitcoin.
During the quarter, we had we approved an additional $10 million in these loans, bringing the total approvals to 22.5 million as of the ended the quarter.
Each of these loans have performed as agreed and we continue to believe that prudent underwriting combined with the unique capabilities of the sand to facilitate loan repayments 24 hours per day seven days, a week will enable silver gay to earn attractive risk adjusted returns as we expand the product offering through the second half.
For the year.
To conclude the value of the said and its competitive moat continues to rise as we drive further innovation and new product development that addresses the needs of our customers. This is a very exciting time for silver gate and I remain optimistic with had many opportunities that we have ahead.
With that I would now like to turn the call over to Tony for a more detailed review of our financial results.
Thank you Alan and good morning, everyone.
This morning as outlined on slide five.
Silver Gate reported second quarter net income of $5.5 million were 29 cents per diluted share.
Up from $4.4 million.23 per diluted share reported in the first quarter of 2020.
Our tangible book value per share increased to $14.36 at the end of the quarter up 19% compared to year ago.
Net interest income was up 4% over last quarter with net interest margin coming in at 3.14% up 28 basis points as we continue to decrease our total deposit costs.
Noninterest income was up 10% versus the first quarter of 2020.
Driven by an increase in both digital currency related fee income and securities gains while expenses were stable over the same period.
We increased our allowance for loan losses to $6.8 million, representing 85 basis points of loans held for investment.
Turning to slide six in the second quarter deposits were $1.7 billion, that's compared to $2 billion at the end of the first quarter of 2020.
Noninterest bearing deposits totaled $1.6 billion, representing 94% of our total deposits at June Thirtyth 2020.
The decrease in total deposits from the prior quarter reflects elevated levels of digital currency deposits in the first quarter.
Driven by Bitcoin volatility in March which resulted in an 184 million dollar decrease in the second quarter inline with our expectations as we discussed during the first quarter earnings call.
Still deposits from digital currency customers remain up $263 million year to date, representing an increase of 21% since year end.
Also attributing to the decrease in deposits, where the callable brokered Cds.
Each were issued beginning in the second quarter of 2019, that's part of a hedging strategy to fund fixed rate securities.
These callable brokered Cds were subsequently reduced during the first half of 2020 with non outstanding as of June Thirtyth 2020.
On an overall basis, our weighted average cost of deposits for the quarter was 37 basis points.
With a total of 35 basis points related to the cold and brokered Cds.
Out of the totaled 35 basis points seven basis points was related to the $1.2 million premium expense for calling a portion of the Cds with the remaining 28 basis points, resulting from the underlying all in cost of carrying the Cds throughout the quarter.
Turning to slide seven.
Our net interest margin was 3.14% for the second quarter.
Compared to 2.86% in the first quarter and 3.56% for the second quarter of 2019.
The second quarter increase was driven by a decrease in the interest expense due to a combination of lower rates lower brokered CD balances and a decrease in the impact of the accelerated premium expense associated with calling the remaining brokered certificates of deposits.
The sequential increase in net interest margin was partly offset by lower loan yields driven by our mortgage warehouse loans.
The net interest margin decreased from the second quarter of 2019 was primarily due to the impact of lower fed funds rate at LIBOR.
Partially mitigated by the impacts of calling callable brokered Cds, if it gets a deposit along with the benefit derived from the interest rate floors.
Now onto non interest income on slide eight.
Noninterest income for the second quarter of 2020 was $5.4 million.
An increase of $503000 compared to $4.9 million in the first quarter of 2000 twice.
And a 3.3 million dollar increase compared to $2.2 million in the second quarter of 2019.
The primary driver of the linked quarter increase was the 672000 dollar increase in digital currency related fee income.
Followed by a net 434000 dollar increase from gains on sale of securities and debt.
The linked quarter increase in fees was partially offset by the absence of any gain on sale of loans and lower service fees related to off balance sheet deposits.
The 3.3 million dollar increase of 152.3% compared to the year ago period was primarily due to the gain on sale of securities of $2.6 million and by 1.3 million dollar were 108.2% increase in digital currency related fee income.
Partially offset by 405000 dollar decrease in service fees related to off balance sheet deposits and a 212000 dollar decrease from gain on sale of loans.
Turning to slide nine noninterest expense for the second quarter of 2020 was $14 million relatively flat when compared to the first quarter of 2020.
And now versus $12.7 million in the second quarter of 2019.
The year over year increase was partly driven by head count growth related to our digital currency related business.
On to slide 10.
Our securities portfolio totaled $951 million with a yield of 2.67% for the second quarter.
Down $13 million from a balance of $964 million at the end of the first quarter of 2020.
With a corresponding yield of 2.70%.
Our securities portfolio.
When combined with our balance of cash and cash equivalents represented 49% of total assets as of the end of the second quarter.
In keeping with our strong liquidity position with a combined balance of $1.2 billion.
We maintained the same disciplined credit approach with our securities portfolio as we do with our loan portfolio.
In the second quarter, we sold $202 million of our commercial MBS and CMO securities and purchased $180 million a fixed rate municipal municipal bonds.
Which include a general obligation revenue or essential purpose bonds rated double a minus or higher.
Our remaining commercial NBS and CMO Securities are non agency with a 96% graded AAA.
Our total loans at June Thirtyth, 2000, $21.1 billion relatively unchanged in aggregate compared to the linked quarter and up 21% compared to the second quarter of 2019.
The increase from the prior year was driven by mortgage warehouse loans, which were up 69% in aggregate and send leverage loans, which are new in 2020.
Overall, the credit quality of our loan portfolio is strong.
As our nonperforming assets totaled $4.6 million, where 20 basis points of total assets at June Thirtyth 2020.
That is a decrease of $547000 from the $5.1 million in nonperforming assets or 22 basis points of total assets that we had at March 31 2020.
On slide 11, we've provided a detailed breakdown of our loan portfolio and an update on our Covidien 19 related loan modifications.
We've been working very closely with our borrowers to provide necessary support under the current circumstances.
As of June Thirtyth 2020, we had provided payment deferrals to 28 of our commercial real estate borrowers.
19 of our single family borrowers and two of our commercial and industrial borrowers were presenting an aggregate loan value of $137 million.
Our 17% of our total loan balance held for investment.
Out of the total modified loan balance of $137 million.
27% had resumed payments as of July 15th 2020.
On Slide 12, you can see a breakdown of the loan to value ratios for commercial and multifamily real estate loans, along with our one to four residential loans.
As Alan touched upon earlier, we manage the loan to value ratios on our real estate loans to relatively low to moderate levels, providing significant collateral protection from losses in the event of default.
At the end of the second quarter, our weighted average LTV was 55% in our one to four family residential real estate and 54% in our commercial and multifamily portfolio.
The levels at which we maintain or portfolios is key to supporting our levels for allowance for loan losses.
During the second quarter, we recorded a provision for loan losses of $222000, which compares to $367000 recorded in the 2021st quarter.
The level of our second quarter provision was based on modest increases in loans held for investment balances.
Silver gates, historically strong credit quality and minimal loan charge offs and was largely influenced by the loan by the low moderate to low loan to value margins in the company's commercial and multifamily real estate.
And single family residential real estate loans held for investment as evidenced by the weighted average loan to value ratios in the low to mid 50% range.
[laughter], although there is significant uncertainty in the current economic environment due to the impact of covert 19 pandemic. We believe that are relatively low loan to value ratios, along with only modest exposure to the retail and hospitality sectors provides lower probability of loss in the event of default in our portfolio.
Turning to slide 13, our tier one leverage ratio was 11.57% that the company level and 10.92% at the bank level.
With the bank ratio well it in excess of the 5% minimum ratio to be considered well capitalized under federal banking regulations.
Our total risk based capital ratio of 25.54% reflects the fact that a large proportion of our deposits are held in cash and high grade and highly liquid securities.
Our loan to deposit ratio was 66.75% at the ended the quarter.
An increase compared to 55.64% at the end of the first quarter as deposits decreased to two both lower digital currency deposits along with the reduction in callable brokered certificates of deposit.
With that I.
I would like to turn the call back to Alan for closing remarks.
Thank you Tony.
I'm very pleased with our second quarter results as they not only validate our strategy, but also the success that we are achieving growing the value and competitive mode of the sand.
Which clearly differentiate silver gate in the market.
Importantly, we have a long runway for growth as we continue to develop new products and services for our digital currency customers.
The response to our newest product offering send leverage has been very positive and we will continue to grow our bitcoin collateralized loans through the second half of the year.
We also see many opportunities to further enhance the value of our global payments platform.
And we'll continue to invest in new product development to drive innovation.
To conclude I remain confident in the credit quality of our loan portfolio and Im pleased with how it has performed through the second quarter, which demonstrates our conservative credit culture and general risk aversion.
While the economic outlook is uncertain given the resurgence of cobot 19 in many parts of the country.
We remain well capitalized and are in a position of strength if opportunities present themselves given the current dislocation in the market.
We remain focused on maintaining the safety and health of our employees and we hope that everyone. On this call remained safe as well.
Thank you again for your time today.
And with that I'd like to ask the operator to open up the lines for any questions.
Operator.
Thank you will now be conducting a question and answer session.
Like that's the question.
One on your telephone keypad confirmation.
Your line of in the question can.
You May Prestart too if you like you have your questions then they can.
The graph and then maybe necessary to pick up your hands.
Keith one moment please state your question.
Right.
Hi, Joe.
With Canaccord. Please proceed with your question.
Hey, guys. Good morning glad to see the good results here I was wondering.
First of all on the second.
Is there is there any.
Kind of idea that you want to provide to us relative to continue expansion of the loan book and what we might expect to see in the second half you know relative to two the Sun leverage product and then all the follow up.
Sure. Joe This is Alan Thanks for thanks for the question I'm going to turn it over to ban and ask him to talk a little bit more about San leverage.
What I'll just say at the outset is kind of what I, what I closed with which is that that we are very bullish on on this opportunity and we think that we're very well positioned to for the second half of the year. The pilot has been going just as we had hoped.
And I'll turn it over to ban for a little bit more color then.
Thanks Alan.
So Joe if you.
If you look at our.
Our growth in institutional.
Investor clients to 566.
When you think about.
Providing these lines of credit somewhere between say one in $10 million apiece.
You can see you know a potential for a very very large business. Nonetheless, as we think about scaling the product we know from our customers that demand is strong, but we were only going to grow it as fast as we can underwrite it appropriately and that takes time and performance results.
So as Alan said, we're not really looking to provide guidance on that but we'll be looking to grow it.
In a prudent way.
Okay. That's helpful and that means just maybe a quick follow up on that.
With the with the loan book today, what did you learn maybe just from a curiosity standpoint.
In managing that loan book and.
You know how how its.
To sum up some of the leavers there relative to operating that loan book.
Sure Joe all that all aspects you. Just go ahead and continue with that question and I may come back with a wrap up on event.
Thank you.
So we know that we know that our customers demand Barry depending on what their true what their particular straight trading strategy is what they're going to be using the proceeds for and what's going on in the digital currency markets. So it's not simply a product that is used for you know to lever a long position.
It's also used to execute trading strategies and so depending on what's going on in the digital currency markets. We see things such as you know balance fluctuations happen, but that's part of that's part of the design of the product and one of the reasons that how does the names on leverage.
Is because it let you know it uses the sand in order to make loan draws and repayments and those can happen 24 hours a day a seven days a week, we know that that's a feature that are our customers want.
And the response from them.
And from our our service partners a bit stamping anchorage has been very possible.
And let me yeah. Thanks, Thanks, Ben and just a couple more thoughts Joe one of the things when you think about the different strict trading strategies has been was mentioning the difference trading strategies that are our customers might employ.
When the volume in Bitcoin goes down you know across across the industry and the volatility goes down as well oftentimes. Our you know what we've experienced so far is that perhaps the demand for leverage you know wayne's as well and so we have actually.
Being.
Send leveraged loans rise and fall during the quarter as the volatility in the volume went down a little bit having said that it's been a great opportunity for us to continue to build out the platform and its been Jeff touched on adding a second service partner with Anchorage during the quarter has a lot.
Got us too.
To expand the offering two additional customers and we look to continue to not only offer this product to our growing customer base of institutional investors, but to continue to add additional service partners as well.
Okay, Great. That's helpful. And then maybe just one more I know I think about a week ago the control of the currency.
The public is something that up you know national banks could start to cost to the some crypto was wondering if if you had any comments on that and and what that could mean moving forward. Thanks a lot.
Sure. This is Alan again, I'll I'll take that one so we were very pleased and excited to see that announcement I will say that we weren't surprised certainly surprised by you know by just the fact that the announcement happened when it happened but in terms of.
The legal Permissibility for a bank to provide custody of digital assets. That's that's a view that we have shared with with our regulators for quite some time now and in fact, if a bank was not permitted to provide custody services that would really call into question.
And our ability to to provide lending services to begin with because one of the things that we've touched on for the last couple of years is that in order for us to safely land against this asset we absolutely have to have the ability to cut to get whether were cut studying the asset ourselves or or doing.
That through a third party service providers, such as we are within leverage so our our own regulators the California DBO.
Has been onboard with this concept as well as that San Francisco Federal Reserve.
For quite some time as it relates to our ability to custody the digital asset for purposes of of securing the collateral for lending and so it's great to see that affirmative announcement from the RCC.
Great. Thanks, so much does.
You bet thanks for the questions.
Thank you question comes from the line of Michael Perito with KBW. Please proceed with your question.
Hey, guys good morning.
Well Mike.
I had a few things I want wanted to touch on his first just on the.
And that the ongoing relationship between new customers and deposit balances you know I think you guys laid out pretty clearly the dynamics that impacted the deposit decreased in the quarter, but as we move forward here I want any change to how we should be thinking about deposit balances of new customers to come on into.
How hot since that initial kind of deployment any updates on what the trends have looked like do you expect some type of snap back in deposits in the third quarter or is it too early to tell any thoughts there great.
Sure Mike Great questions and this is Alan I'll I'll touch on it to start with and the one thing that I would remind everybody about is that when we report on our deposit levels at quarter end there at a snapshot a specific point in time and.
We this this platform the sand enables our customers to efficiently move money 24 hours a day seven days, a week 365 days, a year and and that by its very nature creates some volatility in the deposit balances, having said that because of our are close to one thing.
<unk> customers in aggregate, we see fairly stable deposit balances, but when you're looking and comparing a quarter end number.
The one thing that I would also encourage you to do is also look at average balances across the quarter and while we don't disclose average balances specific to our our cryptocurrency clients. What we do is we show our noninterest bearing deposits.
On average and what you'll see is that even though our deposits might have been down quarter over quarter number. One there is still up over 250 million a year to date. So on a year to date basis comparing to December 31st we're still up fairly significantly and even on a quarter over quarter basis, the average deposits.
On average noninterest bearing deposits were up $176 million and and so that that's just kind of a big picture overview and I'll ask banned the comment a little bit on the second part of your question, which is like the ongoing customer growth and and and how we view deposits coming in from from new customers.
Thanks, Alan so.
You know, we do a as Alan mentioned earlier comments, we do have a strong pipeline of.
Over 200 prospects that are looking to onboard with us it's a little difficult to estimate.
What that's going to look like in the second half because.
Oh, you know it is somewhat contingent on what goes on in the digital currency markets.
Over the weekend the pricing decline when over 10000, and what we've seen historically is that as the you know as the value of the market total market cap expands the number of investors that are looking to put money work to work expands as well and so as those customers are happy.
In researching the asset class and then deciding to to jump in they quickly turned to the sand as the way to settle those transactions and so and so it's you know it's hard to estimate it but we think that we think the demand will be strong in the in the second half as as evidenced by the pipeline. The other thing I would say on the topic is.
That.
Obviously, we're in a zero interest rate environment and historically when we've seen you know kind of significant outflows. It was you know there were competitors that we're we're offering or to pay interest on these deposits and obviously silverdale doesn't do that and so.
We don't see that that pressure coming in the second half of the year either.
Great very helpful. Thank you guys and kind of on that point on the euro rate environment I noticed that you guys. So some security again start building a little municipal bond portfolio. Just was curious any color you can give us a little bit more color I think that that's not something you guys have largely kind of built put into the investment bomb booked at least.
In a material way in the past I'm, just curious probably any any thoughts there.
Hey, Mike before Sherman.
I'm sorry, Tony before you answer that question I, just wanted to comment specifically on them unique because you're absolutely right Mike at Silver Gate, we have not historically had a muni portfolio, although in our respective backgrounds. In you know specifically in my background over the years I've at just about every other bank of it.
Ever been at a muni.
You know Muni investment portfolio, a portion of the portfolio in munis has always been part of the strategy and as Tony will I'm sure share and with some of our our prepared comments as well there there was a great opportunity with some dislocation in the beauty market right at the second.
Half of the first quarter and bleeding over into the first half of the second quarter.
That allowed us to to build that portfolio, while at the same time, reducing our aggregate risk in commercial real estate. When we think about both the CMBS bonds in the poor in the securities portfolio as well as our loan book in CRT and so with that Tony.
I'll hand, it over to you.
Thanks, Alan Yep, Thanks, Mike for your questions. So as as Alan mentioned I mean it.
We did we had started to invest in the.
The tax exempt municipal bonds right right at the end of the first quarter.
Kept rolling that in particularly in April.
We did see good opportunity.
To pick up high quality strong yields in terms of average life very similar.
So the bonds that we sold.
But in selling some of the CMBS, we we specifically divested of Oh, some of the CMBS and had a little bit more.
Hospitality.
Retail exposure, so I think for us it does it really as you can see from the slide it does it change. The overall makeup in terms of fixed to floating in our portfolio.
But it did help to to contribute to some of the NIM.
Preservation because obviously.
The floating rate securities had had NIM compression in the quarter.
HM the I think the other thing to add since since we're on the topic and them is.
As.
As as we outlined we called the rest of the brokered Cds.
So I just wanted to point out in our.
In our cost of funds, but <unk> million to impact or about five cents a share.
Was from writing off for the from the acceleration of the premium cost on those deposits. So.
So that so that's that's a story there.
That's helpful color and then I guess, just you know the tax rate going for now.
In quarter after a decent run rates given the ongoing presence of that municipal portfolio on the positive impact they'll have to the overall tax rate.
That's correct Mike so.
Yes, so as you see in our in our.
Press release, we've we reporting on tax effective basis, the tax rate effective tax rate second quarter is right around 25%.
Is that that changes completely driven by the Texas again bonds and those bonds as I indicated mostly came in April so.
So the impact was there for almost the entire quarters. So that's that's a good.
Got it Couldnt Uh huh.
Good good 19.4, it for for look it's actually going forward.
Okay, and then one last <unk> man and I'll jump out it's just on on the digital Eastside Alan or Ben.
You know you talk about kind of the pot piece of customer pipeline, the new customers, but can you give us maybe an updated thoughts on how you're viewing the digital growth as we move forward here.
Maybe near term and longer term.
Sure Ben do you want to take that one.
Sure So yeah, Mike we.
Consistent with Alans comments, we saw really significant growth in cash management services during the quarter as as exchanges.
Continued to on onboard our Apiay solution and so you know, including our highest number of of wire transfers ever and so we know we know that those apiay integrations that we have with exchanges are really sticky and asked transact transaction volumes in the ecosystem as a whole increase.
We should benefit from that from that as well and so.
No I think it's it's been a part of.
The story for some time, we're focused on on growing fee income from the platform. We've got a sticky group of customers Oh love using our services and so we'll continue to.
Expand that in a in the quarters ahead.
Okay, but there's no reason to is a you know in terms of any kind of near term volatility or things that we should be mindful of I mean, it sounds like the expectation in the hope is that a customer filled and activity bell fees continue to build that maybe oversimplification, but is that fair.
Yeah. Mike. This is now I think I I don't think that's an oversimplification I think that's exactly right I think the way we the way we continue to look at this is is that we benefit from what we've referred to in the past is kind of that triple growth curve of of a growing industry I agree.
Going customer base, and then adding additional products and services and its Ben just mentioned with with volumes continuing to two to hit all time highs.
We don't see any any reason to think that are our growth in fee income will slow down.
Excellent.
Thank you guys very much I appreciate it and say well.
Thank you Mike you do.
Thank you want.
I Wonder if you like that the question. Please press star one on your telephone keypad your participant speaker equipment, maybe necessary to pick up your hands that before passing the tacky. Our next question comes in a line and you didn't quite men with Barclays. Please proceed with your question.
Hi, Good morning. Thank you for taking my question I wanted to follow up on the a interest income discussion looks like your net interest margin came in right around your expectations for the quarter.
When it and then well so when putting together all of the recent actions, including adding to the municipal Securities book and calling broker Cds what does the NIM will look like are going to the third quarter in terms of the run rate.
Yeah. Good morning, Eugene Thanks for the question I think Tony's ready to a to feel that one Tony you want to ticket.
Thanks, [laughter], thanks, all Thats, a huge and good morning, So I think yes.
Providing specific guidance, but thanks for pointing out you know how we had unit coming in as I said as you can see we took a lot of.
Decisive action once again I'm very early in the second quarter.
Although the market kind of stabilize so in some respects the.
The NIM story going forward is gonna be much simpler than it has been for the first half a year given that we've called all the brokered Cds.
We repositioned our our securities portfolio. So I I would say, there's you know going looking out to the second half of the year. There is there's both headwinds and tailwinds without giving specific guidance out there there there.
He is going to be continued yield pressure on mortgage warehouse lending.
As as we see higher volume kind of come for me in the conforming agency type mortgage space, which are typically lower yielding and nonconforming.
Mortgages, but on the other hand.
We do have the benefit of having called older brokered Cds and so therefore, we don't have the carry cost so going forward. So I'd say you know you've got you've got kind of offsetting headwinds and tailwinds there.
As we look forward.
Thank you that's a pretty informative appreciate it.
So wanted to get your take on the competitive environment than the Oh servicing that digital currency clients banking them.
Especially with JP Morgan entering this space and now okay see giving the okay on causing the digital currency, how does that impact the your positioning in the space.
Sure Eugene This is now and that's a great question and you know, we actually view the announcement of JP Morgan coming into the space as as a huge positive to the industry and as a validation of our strategy and as we've discussed internally and also just.
Skus with others outside of Silver Gate, you know, we've we've anticipated competition for some time and there's certainly a view that if none of the other major financial institutions ever come into this space. It could really call into question the the viability the law.
Long term viability of this strategy. So so we believe it's very positive.
And specific to JP Morgans announcement, what what we know from I'm talking with our customers and with others in the in the industry you know they've they've announced they're providing banking services to two to two clients ours. You know to two exchanges that are also clients of silver gate that being coin dates in German.
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Those are two of the longest standing boast regulated exchanges in the space and you know it's also our understanding that it took quite a bit of time for a four JP Morgan to get comfortable with them and so I think.
That's just speaks again to to the diligence to the immaturity of of the ecosystem and we know for a factor that our exchange partners desire to have multiple banking relationships and you know as you can see from the results in the quarter.
You know we didn't see any any direct impact from that announcement, we've continued to grow and you know we we welcome additional entrance into the space and then as far as you'll see see announcements and providing custody you know, it's one thing too for the regulators to come out and say that.
Yes that is legally permissible, it's quite another thing to to spin up at a custody service for digital assets and one of the primary differences here and it's it's at times a difference that is lost on folks is that with bitcoin it and other crypto currencies the.
These are bearer instruments, so the the custody regimen that needs to be put in place to safely.
Store, a bare instrument is quite a bit different especially at a bear a digital bear instrument is quite a bit different than the existing custody solutions that exist in the traditional financial markets and and so those that had been working on this for awhile and you know there there are certainly a plethora.
For a of digital currency custodian that had been working on this I think there very well positioned and banks that have been working with them for quite some time, such a silver gate are equally well positioned and so you know once again, we view it as a very positive news and and we are.
You know we continue to focus on on providing solutions for our customers. So you know you won't you shouldn't expect it to see silver gate immediately went out and say hey, we're providing custody for digital assets come on come all rather you'll see us continue to do what we've been doing in the past, which is very thoughtfully providing solutions for our cut.
Customers that they're asking for such a sand leverage which utilizes a custody solution for digital assets.
Thank you and the can you touch on your tie up with the Anchorage on sound leverage and I think they're actually providing lee custody for that right and also what do we think what do you think about in terms of the revenue sharing or growth opportunity there.
Sure I'll ask band to go ahead and touch on on the partnership with Anchorage Ben.
Thanks, I Eugene Yeah. So you know the so these are for each of these borrowers silver gate goes through an underwriting process to make sure that we're comfortable with the credit.
Anchorage for their part is responsible for you know safely and securing custody that the the bitcoin as Allen was as Allen was talking about but then also monitoring the value of a that collateral relative to our loan and Ah interacting with the customer on.
There their loan draws and their their repayments and so you know silverglade services the loan.
And silver Silvernail in Anchorage team worked closely with each other to make sure that the customer experiences is fantastic and so you know it's a it's another example of you know kind of a deep integration with a with a partner in that in the digital currency industry and in order to get to that point.
We had to do significant vendor due diligence on them and also work to make sure that these apia eyes were integrated so that the the asset ER and the loan drops can happen 24 hours a day seven days a week.
Thank you appreciate it.
Thank you and final question our final question.
Ryan Todd.
Please proceed with your question.
Hi, good morning, Thanks for taking my question.
So over the last three months, we've seen significant pace of developments are just across banking and servicing the digital asset industry at large.
Whether that's.
A number of acquisitions or new product launches by players looking to move into say full prime offerings last week's actually see interpretive letter.
If you addressed the letter and JP Morgan moving into service claim isn't Gemini, but I'm wondering if you could.
Walk us through your thoughts around.
Some of these players moving into full prime offerings, and how that might impact.
Calculus OCA the core growth opportunities there are the intermediate term. Thanks.
Sure morning, Ryan. Thanks, Thanks for the question. So yeah. We've you know I've we've discussed.
At length. This move into what everyone refers to as prime brokerage, which obviously prime brokerage is very well defined and understood into traditional financial markets, but what prime brokerage means for the for the digital currency industry is it still I think being developed and.
And I've been asked band to comment I'm in a little bit more detail in just a minute, but the one thing that that we believe is that one of the strongest components of a prime brokerage offering is that ability to provide credit or leverage and.
So that's where we have been focused obviously for quite some time with the announcement of the pilot with bit stand back in January which had been in.
In the works for awhile and so our approach to the prime brokerage solution. If you will has has been to focus on.
That that key component of of providing leverage and been would you like to add anything to that.
Yeah. Thanks, Alan so consistent with comments, we've made previously around custody and settlement, we remain committed to finding ways to solve problems for our customers. We know that customers today love using the sand from the dollar side of the trade and we remain committed to finding ways to reduce friction and create capital.
Fission see for the digital asset side as well some of the options that were considering include development of new products strategic partnerships and potentially acquisitions of existing infrastructure providers. Some of those criteria that we're using to evaluate those opportunities include demand, we're seeing from our customers I consider.
Operation of our own capabilities and the profitability, we think that could be achieved by pursuing those options.
In addition, we don't have any announcement to make today, but as we've talked about on on previous calls and and even in our asked one. This is an area where we continue to remain remain focused to figure out how we're going to solving customer problems.
Got it and then a quick follow up if I may specifically on the FCC letter or how are you thinking about custody opportunities and you talked about a partnership with anchorage around some leverage.
I'm wondering if you can provide any color around.
Around.
Okay. Its latest near trust custody application.
And then could there be you mentioned.
Central opportunities for acquisitions wondering if that falls in line with looking at custody capabilities.
Yeah, Ryan this is Alan great Great question and.
You know when when you touch on the.
On the trust application and we go back to some of my earlier comments regarding the regulatory landscape and the fact that Weve believed for some time that a federally regulated and insured institution can in fact capacity the digital asset.
You know.
Weve as you touched on you know we've been working within New York DFS for quite some time, but as I mentioned earlier, we've also been in dialogue with our own banking regulators in California, and with the Federal reserve and so triangulating the regulatory landscape.
And that approval process combined with what is the real market opportunity and there's been a general belief in this industry that custody is kind of a race to zero in terms of revenue opportunity, but that custody is definitely a eight.
Core piece of infrastructure that is necessary to provide other financial services, such as prime brokerage and to and so are as Ben Jeff. Jeff mentioned, we continue to look for ways to solve problems for our customers in the most efficient way possible for them as well as for silver gate.
And to to provide attractive risk adjusted returns for our shareholders and that may into future look like developing something ourselves. It may look to you know like you know acquiring technology or acquiring other companies. We're open to all of those possibilities, but we don't have any.
Nothing to announce today, we are continuing to press forward on the send leverage offering and one important point that all all make on onset and leverage, especially with the addition of Anchorage is with those two partners as the first two of what we hope to be many service.
Partners in the future you have to slightly different approaches to send leverage in the case a bit stamp. Obviously there is there an exchange that they run their own order book. So that's a very tight integration within exchange with the ability to liquidate collateral via their own order book, whereas with anchors.
Page there more of a traditional custodian, but but with the ability to I'm you know through different market, making arrangements with the ability to two very quickly.
You know liquidate collateral as well and so we're pushing forward on both of those types of offerings with with the hope that to the extent to our customers want to hold their bitcoin with bit stamp or anchorage or with one of the the other many service providers out there, we'll we'll be able to <unk>.
To provide leverage for them regarding you know regardless of their of their custody choice.
Got it okay. That's it for me congrats on the corridor and then hope everyone says.
Thanks Ryan.
Thank you will see I never question and answer session I'd like to turn the call back over to Mr. Lane for any closing remarks.
Alright, Thank you very much operator, and I want to again. Thank thank all of you for your questions. Thank you for your participation in this call for your interest in silver gate.
Once again I just want to thank our employees you know our silver gate employees as with everybody else around the world have had the dealing with you know quite a bit of dislocation. The silver gate team is on it and continuing to provide a round the clock around the world service to our customer.
Thank you for our customers for all of your support and I hope everybody stay safe out there and I'll just close was saying that's a great time to be a bitcoin banker. Thank you very much for your interest and have a great day everybody.
Thank you. This concludes todays teleconference. You may disconnect. Your life time. Thank you for your participation have a wonderful day.