Q1 2021 Silvergate Capital Corp Earnings Call
[music].
Good day and welcome to the Silver Gate Capital Corporation first quarter 2021 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
For todays presentation, there will be and opportunity to ask questions to ask a question. You May Press Star then one. Please note that this event is being recorded I would now like to turn the conference every too low and Scott at Investor Day, Subrogate Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. We appreciate your participation and the silver Grade Capital Corporation first quarter 2021 earnings call with me here today are Alan Lane, our Chief Executive Officer, Tony Martino, Our Chief Financial Officer, and Ben Reynolds, Our Chief strategy Officer, as a reminder, a telephonic replay.
Of this call will be available through 11, and 59 P. M. Eastern time on May four 2021 access to the replay is also available on the Investor Relations section of our website. Additionally.
Additionally, a slide deck to complement today's discussion is available on the IR section of our website.
Before we begin let me remind everyone that this call may contain certain statements that constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 for you.
These include remarks about management's future expectations beliefs estimates plans and prospects such statements are subject to a variety of risks uncertainties and other factors, including the COVID-19 pandemic that could cause actual results to differ materially from those indicated or implied by such statements such risk.
And other factors are set forth and our periodic and current reports filed with the Securities and 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 these additional information should not be considered in isolation or as a substitute for results prepared in accordance with U S. GAAP of.
A reconciliation of these non-GAAP measures for the most comparable GAAP measure can be found in our earnings release.
Now I'd like to turn the call over to Alan.
Thank you Lauren and good morning, everyone.
We started 2021 on a very strong note driven by growing demand for our digital currency solutions.
Word by the Silver exchange network for Sun.
And the first quarter activity on the Sun continued to grow at a record pace with nearly 167000 transactions and more than $166 billion and sand volumes up 84% on a sequential basis.
Transaction revenue from digital currency customers increased 87% from last quarter to $7 $1 million.
The number of customers on the same platform expanded to more than 1100, representing record sequential growth as we added 135, new customers during the quarter.
Importantly, our pipeline of potential new digital currency customers remains robust as we continue to benefit from the strong network effects created by the fed.
Last year, we introduced our collateralized lending product called San leverage through which institutional investors received U S dollar financing by entering into a loan agreement with silver gate.
And silver get uses this and to fund the loans.
We have seen a great deal of market demand and as of quarter, and we had approved lines of credit totaling $197 million.
Versus $83 million at the end of the year.
We are still on the early stages of scaling Sen leverage and at the end of March we announced that coinbase custody and fidelity digital assets will be two new custodians and holding the borrowers bitcoin of collateral and of segregated accounts.
We are very excited about these diverse partnerships and the additional partnerships to come as we create a network of custodians to provide our institutional investor clients with more choice and greater access to capital.
As more of institutional participants adopt digital currencies. We have also seen an influx of deposits from investors who require the ability to move U S dollars and real time 24 hours a day seven days of week.
Average deposits from digital currency customers in the first quarter grew by $3 8 billion.
The $6 4 billion.
Compared to an average of $2 $6 billion in the fourth quarter of 2020.
These continued significant deposit increases coupled with our plans for further strategic growth <unk>.
<unk> the expansion of Sen leverage, let us to launch and at the market or ATM equity offering in early March.
The ATM program allows silver gate to raise capital efficiently and only when needed to support our growth and to invest in the development of new products to stay on the forefront of the digital currency industry as evolution.
I remain incredibly excited about silver gates, future, which I will discuss further and a few moments.
After Tony walks you through our financial results.
Tony.
Thank you Alan and.
Good morning, everyone.
As seen on slide for silver.
Reported first quarter net income of $12 7 million for <unk>.
The <unk> five per diluted share.
Up from net income of $9 1 million or <unk> 47 per diluted share in the fourth quarter of 2020 and.
From net income of $4 4 million or 23 per diluted share for the first quarter of 2020.
The increase in both comparisons was primarily driven by revenue growth.
With an increase and digital currency related fee income.
We also saw higher noninterest expense due to increased investments for strategic growth and higher FDIC insurance expense caused by both the rate of growth and the absolute level of our balance sheet.
In addition, we of an income tax benefit of $1 $2 million for the quarter, which was driven by a $4 1 million for <unk>.
<unk> per share benefit from stock option exercises and the quarter.
Net interest income was up 5% compared to last quarter and up 49% compared to the same period last year.
Net interest margin, which I will discuss in more detail on the moment came in at 133%.
Our allowance for loan losses remained at $6 $9 million.
Representing 94 basis points relative to loans held for investment.
Turning to slide five.
Posits were $7 billion.
March 31 2021.
Significant increase from $5 2 billion of.
At December 31, 2020, driven.
Driven by an increase in deposits from the digital currency exchanges institutional investors and digital assets and other fintech related customers with elevated client activity evidenced by the record volume and transactions during the quarter.
As a reminder, our deposits from digital currency customers can fluctuate as our customers and this industry typically carry higher balances over the weekend.
Take advantage of the 24, 7% availability of the ascent.
Noninterest bearing deposits totaled $6 9 billion.
Representing approximately 98% of total deposits at the end of the quarter as we continue to focus on deposit gathering strategy on the digital currency customers.
As a result of our weighted average cost of deposits for the quarter was essentially zero.
Turning to slide six net interest margin was 133% for the first quarter compared to $2 eight 5% and the fourth quarter of 2020 and to eight 6% for the first quarter of last year.
While we grew loans and the quarter the decline and NIM was driven by higher cash balances and our asset mix as a result of the significant deposit growth I just mentioned.
In addition securities yields were impacted by lower interest rates on new securities purchased during the quarter, reflecting the current interest rate environment.
Turning to the next slide slide seven noninterest income for the first quarter of 2021.
It's $8 $1 million and increase of $3 2 million.
For 67% from the prior quarter.
The current by the increase in fee income from digital currency customers non.
Noninterest income increased $3 2 million or 64% from the first quarter of 2020, driven by an increase in fee income from digital currency customers and higher mortgage warehouse fees.
Offset by lower gains on sales of securities extinguishment of debt and sale of loans.
And the first quarter digital currency of fee income was $7 $1 million up 87% sequentially and up 317% year over year as we continue to see increased transaction volume from our digital currency customers.
Turning to slide eight noninterest expense for the quarter was $19 $6 million of 2 million from the fourth quarter of 2020, and up $5 7 million compared to the first quarter of 2020.
The increase and both comparisons was driven by continued investments to drive our strategic growth initiatives as well as higher federal deposit insurance expense related to our significant deposit growth.
Turning to slide nine our.
And our securities portfolio totaled $1 7 billion.
With the yield of two point of eight.
Per cent for the first quarter up $780 million.
From a balance of $939 million at the end of the fourth quarter of 2020 with the corresponding yield of two for 3%.
Year over year Securities increased $750 million.
Our total loans at March 31, and 2021 from $1 $6 million.
Up $12 $9 million.
<unk>, 8% compared to the fourth quarter and up $511 2 million or nearly 46 per cent compared to the first quarter of 2020.
Loan balances continued to benefit from strong growth and some leverage as well as historically elevated mortgage warehouse balances.
Overall, the credit quality of our loan portfolio remains strong.
Nonperforming assets totaled $5 3 million or seven basis points relative to total assets at March 31, 2021 and <unk>.
Decrease from nine basis points relative to total assets at December 31, 2020.
On Slide 10, you can see a breakdown of the loan to value ratios for our commercial and multifamily real estate loans, along with our one to four family residential loans.
At the end of the first quarter of weighted average LTV was 53% and our commercial and multifamily portfolio and 54% and our one to four family of residential real estate portfolio.
As I've said in the past the levels at which we maintain our portfolios is key to supporting the amount of the allowance for loan losses.
Slide 11 provides more detailed view of our loan portfolio and an update on COVID-19 modifications.
We continue to work closely with our borrowers to provide support and the current environment.
On a case by case basis, we've provided commercial and wonder for family borrowers of payment deferral based on demonstrated need as of <unk>.
March 31 and 2021.
The vacations totaled $65 million or eight 9% of our total loans held for investment.
Before diving into our capital ratios on slide 12, I wanted to touch on the two equity offerings, we completed in 2021.
In January we completed an underwritten public offering of $4 5 million shares out of price of $63 per share.
With net proceeds to the company of $272 4 million after underwriting discounts and offering expenses.
As Allan previously mentioned, we then launched the $300 million aftermarket offering program at the beginning of March.
On March 11th we sold nearly one 3 million shares at an average price of $118 39 and.
Under the ATM program.
The transaction resulted in net proceeds of $151 1 million.
Now turning to our capital ratios.
Our tier one leverage ratio was 968% at the company level and nine 5% of the bank level with the bank ratio well in excess of the 5% minimum ratio to be.
The considered well capitalized under federal banking regulations.
Our total risk based capital ratio of 55 for 1%.
<unk> significantly compared to last quarter due to the increase in deposits.
Our loan to deposit ratio was 23, 2% at the end of the quarter.
As loan growth was more than offset by a significant increase in deposits during the quarter.
With that.
And I'd like to hand, it back to Alan for closing remarks.
Thanks, Tony.
Every day the digital currency industry is growing rapidly, which is an exciting opportunity for silver gate to continue to provide innovative solutions to our customers.
As you can see on slide 13, the network effects created by the San and create multiple avenues for growth from.
And from payments to lending the funding.
Silver gate remains well positioned to provide critical infrastructure for stable coin offerings. In addition to foreign currency exchange and cash management solutions for our digital currency deposit customers.
As I mentioned earlier, we continue to expand our sen leverage product, while creating a network of digital asset custody partners, providing our customers with additional choices and enhanced capital flexibility.
We are continuously working to expand our product offerings to provide solutions that our customers are asking for.
I believe we are and the early stages of a tremendous opportunity and the digital currency industry.
And I remain incredibly excited about our path forward.
I look forward to sharing additional updates on our strategic growth initiatives and the coming quarters.
And with that I would like to ask the operator to open the line for any questions operator.
And we will now begin the question and answer session.
Ask the question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two and.
And at this time, we will pause momentarily to assemble the roster.
And the first question today will come from Joseph Murphy with Canaccord. Please go ahead.
Hey, guys good morning.
Great to see some nice results here.
And we can kind of just first start on.
On the relationships with the fidelity and Coinbase and Noel and you mentioned there may be some possibility that there may be others in the marketplace and the.
Thank you and I think part of your competitive advantage here is your low cost of capital.
Relative to perhaps other lending solutions and the marketplace. I was wondering if you could kind of expand a little bit more on why these one of these partners.
Chose to partner with you and.
And then kind of the larger opportunity here and how you think you'll be able to maybe fulfill what could be quite large demand from these partners relative to your bank model and and and being able to to stay well within your kind of regulatory guidelines and then maybe.
One of the quick follow up after that.
Sure. Thanks for the question, Joe and good morning.
So yeah, we are very excited about the partnerships with coinbase custody and fidelity digital assets.
And I've I've.
<unk> talked about this a little bit here recently, the fact of what we're really trying to do is create a network of custodians.
Our partnering with silver gate, and then partnering with our respective customers. So that our customers have more choice and and and essentially you know one of the biggest risks and and digital assets is when you're moving the digital asset because as you know because.
And is a digital bearer of assets and and so you know if you've got the year bitcoin and custody somewhere and you trust the that custodian and then you don't really want to move it from one custodian to another and so our vision for this is is that we will create a network of custodian.
And to offer our customers more choice so that if they've already chosen coinbase custody as their preferred.
You know there their preferred custodian partner or if they've chosen and fidelity or one of our first partners bitstamp or Anchorage, and you know and as you mentioned and as I mentioned earlier, we've got others and the pipeline our customers will not have to move their bitcoin.
In order to borrow against it. So it's these are again foundational building blocks. So that we can really ramp this up.
And you know the the the actual number growth in terms of the the Outstandings.
And the Outstandings are right on target, we're actually a little ahead of target.
I'd say.
Thanks for the ability to raise capital which gives us.
The opportunity to to grow a little bit more quickly.
But that's that's the vision and let me ask Ben if he has anything he wants to add to that before we move on to the next question.
Yeah. Thanks, Thanks, Alan and good morning, Joe and so for those that they may have missed it we we announced these partnerships with coinbase and fidelity during March and so those those came kind of late in the quarter and and we didn't really see additional commitments as related as part of those relationships.
And the first quarter.
But we are extremely excited about this next iteration of the product, which will allow our customers to post additional collateral within a 24 hour window, while ensuring the silver gate has possession of the bitcoin and the ability for liquidated if need be so the benefit of these relationships. The silver gate is it both coinbase and fidelity have a diverse group of the.
Existing customers that are long bitcoin.
And for leverage and may not be existing customers of silver gate. So it gives us another avenue to grow our customer base.
I think part of your question Joe was around framing the the opportunity and so one way that we look at that is the the total market value of bitcoin grew by approximately $500 billion. During the first quarter alone and at the same time, we're not aware of any significant new competitors that are willing to provide U S. Dollar funding the collateralized by day.
So while the asset values of bitcoin and the demand for leverage increased significantly the <unk>.
<unk> of U S dollars for funding of the leverage remained constant and so as Alan mentioned, where we're really excited about the opportunity going forward.
The last thing I'll say on this topic as debt as of quarter and.
We had less than 10% of our <unk>.
Existing 695 institutional investor customers.
We're utilizing the product and.
And we believe that almost all of them are still looking for more efficient capital.
And our next question will come from Michael Perito with <unk>. Please go ahead.
Hey, good morning, guys. Thanks for taking my questions.
Morning, Mike.
And I wanted to start on the balance sheet.
And I haven't over two thirds of you mean, the average earning assets and cash obviously doesn't seem like something that I imagine would be the case longer term I mean, I know you guys are conservative when levering these digital currency deposits as they come in but at the same time, you'll see and you guys raised the capital and.
Yes, I think your deposits for only one per cent of the dollars moved on an annualized basis on the sand and in the first quarter. So I mean, it doesn't seem like the deposit base is overly elevated on a weighted here. So I'm just curious if you could give us any update on her.
How you guys are thinking about the liquidity position of the bank and and and what we can expect in terms of timing and that is deployed and.
And I guess I'll start there and then and ask.
And just my follow up after.
Sure, let me touch a little bit on the on the loan portfolio of portion of the balance sheet and then I'll ask Tony to comment on the securities portfolio, but first you're.
You're absolutely right, Mike and I I mean, we would absolutely hope to grow the loan portfolio over time.
And I would say the primary area of growth what would be the area. We just talked about.
And answering the previous question around.
Looking at sand and sand leverage where we're really.
You know at a high level, we're looking to take these digital currency deposits and and redeploy them back into the into the crypto currency ecosystem.
And in order to do that we want to make sure that we have a diverse.
Group of partners with with whom we are spreading the risk if you will on on the.
On the digital asset custody front and then the other area, which we've been really pleased to see some growth there and over the last few quarters and our mortgage warehouse area, which as we've talked about in the past is a.
Very good complement to the potential of short duration on the deposit side.
You know it is very difficult to grow mortgage warehouse, because it's it's really more.
We're kind of at the whims of the refi market at this point.
But but we are you know where we're growing our on our.
Our commitment lines with existing customers and then adding customers there as well so those of the two areas that I think you can continue to expect growth would.
Would be Sen leverage and mortgage warehouse and let me ask Tony to comment on the securities portfolio.
Sure Thanks, Alan and good morning, Mike.
So as the.
As you may have alluded for us the high quality and flexibility are more important factors and then short term yields.
And you'll note 98 per cent of our portfolio of.
Our investment portfolio of integrated double AA or AAA.
So you know we we.
We've we've invested significantly over the quarter.
We are our portfolio has increased to about $1 7 billion.
Hum.
It was more weighted towards the end of the portfolio.
And.
About two thirds of that.
Those purchases were adjustable rate so.
And as I said and as Alan alluded to you know the the focus continues to be on diversification. Some leverage gives us a nice yields on the on the.
On the lending side.
It's balance with the securities.
But we've also kind of giving you an indication of the high low on the deposits.
And so we want to maintain a good liquidity profile.
Having said that we do have a lot of secondary liquidity borrowing capacity available so.
We do have opportunity to Hum.
To increase the investment portfolio.
And that and it's sort of and that is a it sounds like an ongoing process for me obviously the period and investment book like you said hit north of $1 seven and I mean, it's fair for us to think that that process has continued as the.
The.
For the last few weeks of transpired and and and I guess the reason I'm harping on and I was just because I mean, there's the I guess, there's a fine line right between conservatism and and leaving you know a lot of dollars on the table that can be readdress, the truck rolls et cetera. So just kind of curious if that process has continued as as it looks like it has towards the end of the first quarter based on the end of period balance sheet.
Yeah, Hi, Mike.
Oh, I'm, sorry, Tony let me jump back in here for for a second because you're absolutely right Mike we.
Our walking that line between conservatism and not wanting to leave money on the table, having said that I've been in this industry and the banking industry for 40 years and.
And.
You know we want to be.
Prudence and prudent doesn't doesn't mean, we're you know we're cowering here, but but if if and when rates start to rise and.
We want to make sure that we haven't stretched for yield and the right and lowest possible and interest rate environment.
And you know and in my career and and and so we are as the deposits as of the deposits grow and the and we are comfortable that they are stable and we're getting a good feel for the opportunity with Sen leverage with mortgage warehouse, we are stepping out in the investment portfolio and <unk>.
<unk> seen some of the results of that in the first quarter and that will continue and again, we're balancing between some adjustable rate securities and then going out.
For some longer term T and how to get a little bit of yield.
But always mindful of of the overall interest rate risk exposure on the balance sheet.
Very helpful. Thank you and at that point taken as well and island and so I appreciate the comments and Tony as well. It's just one last one for me and I was curious if you could give a little bit more color on the digital currency related fee growth was really strong in the quarter on.
See you guys add and a lot of customers of the pipeline seems the strongest it's been probably and the last few years from more customers can you maybe just break out a little bit more of what some of the bigger drivers of that increase where I'm curious if there's no is there any pick up or expected pick up from kind of the stable Quint payment stuff for you guys, who joined the board could potentially be additive to that as the year progresses here and the addition of.
Color there would be great. Thank you.
Yeah. Thanks, Thanks for pointing out the excuse me the growth and fee income because of that that's something that we've you know our team has has really been working hard on it and it's and it's great to see that coming to pass here.
And it is in the areas that we've historically mentioned the.
Biggest growth area on the cash management fees and as you can imagine and while we don't charge for San and so when you see that that explosive growth and sand transactions and.
You can anticipate that there's been a lot of movement.
You know in addition to the sand the.
Wires, and ACTH activity coming and going the.
In the first quarter of that has attributed to the growth and fee income, but we've also had strong growth and the foreign currency exchange area.
And then I will say that we haven't seen a lot of of growth and stable coin yet that is something that is.
The debt that we are working them.
Around the clock on with some pretty exciting opportunities and unfortunately, we're not in a position to share anything there.
At this time, but we do see the stable coin and the opportunity.
As an opportunity to significantly grow our fee income and the future.
Great. Thank you guys for taking my questions and I'll, let someone else jump in and I appreciate it.
Thanks, Mike.
And our next question will come from George Sutton with Craig Hallum. Please go ahead.
Thank you.
So with the 660 plus billion run rate for this network size I'm curious how you think of the growth. There are you do you look at it from a run rate perspective is as we look out for Q2 and Q3 and building from there and then as I look at your slide <unk>.
The team and I apologize for anybody who doesn't have that up but you sort of list the different opportunities for growth I'm curious and maybe this is the best question for Ben is what does this slide look like and six months.
Yeah, George good morning on before.
And I have been to comment on the second part of your question. There I I do just just want to say so on and what might be you might be referring to slide three for the first part of your question, which is that the.
Explosive growth in and Sen transfers and the fourth and the first quarter, which.
And it was 166 $1 billion in the in the first quarter and you know we.
We expect that that and ramp to continue so so where candidly not looking at it as a run rate.
Per se, but but as another stop on the journey and you know with with with more growth.
And part of the reason, we have confidence and saying that is because of the customers that we added during the first quarter, we added more customers and the first quarter of 2021, and then we've added and any other quarter and since the since we've been doing this business and and even with that our pipeline is.
As strong or stronger than it's been in the last year or so and and so there are just a lot more folks coming into this space.
And as you are aware from previous conversations that we've had it takes a while for the for these customers to two of them to get on boarded to those that are going to code to the API. So they can participate and the sand and so we just see that that growth that growth rate continuing and now let me turn it over to <unk>.
And for for the the question on Slide 13.
And so as Tony mentioned part of the increase in expenses during the quarter was caused by increases in the R&D costs.
And that we've had and associated with new products that we're planning to launch in the coming quarters, and we don't have any new products to announce today.
Launching new products for something that's the we see is of critical piece of our growth strategy.
And we're really focused on adding value for our customers by creating products that solve problems for them and on a sustainable competitive advantage for us, which means you wont see us spending millions of dollars and capex to build solutions that already exist and the marketplace, but instead, we will build upon our existing platform.
Of which 10 is a key piece of that to create new solutions for customers that the solve their pain points.
It's important to note that the last quarter.
We announced our cost to the offering which we usually see is a foundational piece of infrastructure that's required to scale, our lending and stable kind of initiatives. So today, just as a reminder, silver gate provides.
Each of the for regulated U S based stable quaint issuers with 24, seven mint and burn capabilities over the Sun.
And that's a critical piece of infrastructure.
For the nature of of Commerce, and Pamer payments. So we'll look to expand those those capabilities.
In the coming.
Quarters, and and remain excited about the the incredible opportunity in front of us to transform our payments and the role of the Sun can play and that so.
When you when you look at the at Slide 13.
We have some you know some pretty significant.
Areas of potential growth, there and so I wouldn't say that there's anything to add to it at this point, but we think that the Tam associated with several of those opportunities is quite significant and enough to keep us busy for.
For the rest of the year.
Great. One other quick question, if I could you added 135 customers, which is up nicely I'm curious what investments you're making too.
The continued to increase the potential number.
It looks like you've never suffered for.
From the demand side from what we can tell it's really the ability to bring those customers on board. So I'm just curious how much expansion and capacity you're building there.
Yeah.
Yeah George.
We we really we don't have a bottleneck.
And back in 2017 for those on the call that we're following on this fall and get back then.
No. We we absolutely during that last crypto bull market and.
And you know there are pipeline a lot of our prospective customers were calling it a waiting list that that does not happen.
And in this environment, we are of very strong team, we can onboard customers as quickly as they can.
Get us the the information.
It is this is and institutional offering so it's a little bit different than than of consumer platform. You know there there are different standards for for banking institutions.
And and so as quickly as they can get us the information and we have invested in technology.
You know there's fully electronic.
The folks the folks can apply on the website, obviously, we don't have branches.
Upload the necessary after the documents we've got you know a sandbox for the API that they can actually start playing with before they even and you know.
Show up to two open and account. So so we've got the people and the technology to to expand the customer base as as quickly as as they show up so that's a that's not a bottleneck at all.
And then have I missed anything and.
And that area.
No I think thats nothing to add on my part.
Thanks, Scott Yeah, you bet.
And our next question will come from David <unk> with Wedbush Securities. Please go ahead.
Hi, Thanks, a couple of questions for you I guess, starting with the follow up on the Securities portfolio. You mentioned that two thirds of the purchases were adjustable rates, which I'm assuming we're at lower yields are you able to share you know what.
But what securities yields youre, putting them on the books at.
Yeah I'll go ahead and.
Net let Tony address that one and thanks Tony.
Yeah. Thanks, so thanks for the question do.
Yes no.
Mhm.
In terms of the securities portfolio.
On the references.
At year and about half of our portfolio was fixed rate half of it was variable rate.
And.
From what I won't comment on individual securities, but the the.
The majority of the Securities or agency mortgage backed securities. So.
I think the could give you kind of a good sense of what the yield would be.
And as Alan said in the previous comments I mean, we're.
Yeah.
The timing is a factor here and.
In terms of yeah.
How much you're going to invest in and in a period of time. So we we are.
And where we're looking across the yield curve and.
And you are planning accordingly.
So hopefully that answered the question sufficiently.
Great. Thanks, and and then moving on to send leverage of follow up there you mentioned about Ben mentioned about less than 10% of the 695 institutions are currently taking advantage of of that product how much how does the pipeline and look for Sen leverage and where do you think that 10% could.
Go in terms of indications of interest from your customer base.
Yeah.
I think Dan mentioned, we've got a pretty strong strong pipeline I don't know Ben if if you want to take that any further.
Yeah. So I mean, one of the thing you know when you when you look at the industry as of as a whole.
Prime brokerage and just the the supply of U S dollars for for funding of leverage.
<unk> is really constrained and and at a time when.
And the asset classes growth growing significantly so.
And the institutional investors that we serve truly are on institutions and as they trade other asset classes, they are using leverage and in multiple different ways and and so it's just so early and and you know from talking with our customers.
Almost all of them are looking for greater capital efficiency and looking for.
The leverage of of some type.
And so it's hard to estimate David like what that what that could go to.
Is it 50% is it 80% is at 95 per cent.
You know, it's hard to it's hard to say, but but from the the conversations that we're having we think it's you know 80% or or or higher.
And so we're going to we're going to look to continue to roll it out and are in a prudent way.
As we have thus far.
Great. Thanks for that and then my last question is more of a big picture question, just on the competitive environment and our.
Are you hearing of any new entrants and whether large or small kind of considering getting into the space are on the cusp of getting into the space and what are you doing to improve your moat.
If that occurs.
Yeah, you know, we we occasionally hear of banks that are interested and coming in and of the space. Having said that I've also participated in a couple of Webinars and where.
People are presenting on your folks and the industry are presenting the banks and the.
And I can tell you it seems like it's still pretty far away in terms of the most bankers understanding of the space and so I think there is still a pretty big GAAP.
So we're not seeing.
A lot of new entrants and David I would say that our our.
Out of the damage is and remains the the Sen and you know that the the network effect of that that that the Sen provides.
And every time, we add of customer you know, we had 135 customers and the first quarter and.
And not only do each of those new entrants get incredible value from participating in the sand, but adding them also creates incremental value for every other network participants who is already on the site and then as we add things likes and leverage.
We started a couple of years ago, adding foreign currency exchange and then adding Sen Sen leverage to provide additional products.
And at our customers are using in conjunction with this and it just makes them that much stickier.
And so I don't I can't think of of better mode than than the network effect and.
Creating a network of custodians for sand leverage will just be a further deepening of that moat because once you're on the sand and.
And you've got the ability to move U S. Dollars 24, seven and then you also have the ability to borrow them and keep your bitcoin at your custodian of choice.
I think that's just going to be and it and incredibly.
Strong and deep moat.
Great. Thanks very much.
Thank you for the questions.
And our next question will come from Mike del Grosso with Compass point. Please go ahead.
Good morning, Congrats on a nice quarter Mike.
And my question is around slide 13, and some of the stable coin deposits and infrastructure.
If I look at the total market cap of stable coin the outstanding quarter over quarter. It looks like they grew a bit faster than your digital currency deposit growth this quarter.
And is there a portion of that market you're going after all of or can you provide some color perhaps on some of the market segmentation from a deposit standpoint.
Yeah, Mike that's a very good observation and I really appreciate that question because it allows us to to emphasize.
And where we are participating in this in the stable coin opportunity and that is on the transactional side and and going back to my answer to the previous question the the sand network.
And the ability for our customers to buy and sell stable coins and importantly for the issuers of those stable coins to mint and burn stable coins 24 hours a day seven days of week via the Silver Gate API, We mentioned earlier that the silver gate is the transactional bank for <unk>.
All of the U S regulated stable coin the issuers, which is U S. D C issued by circle and Coinbase.
And then you also have the Pax dollar of the Gemini dollar and true USD all of them are sand participants all of them Mint and burn their dollar tokens with the silver gate API and the Subrogate exchange network and.
What we aren't doing is is we are not seeking to hold the billions of dollars and excess deposits that are the reserves for those stable coins, we're not seeking to hold those on our balance sheet and the and to tie this back to some of the questions that we've had around our net interest.
The margin and against the yields and eat you now and then.
And the large cash balances if we we're also trying to be the reserve bank for those.
For those U S dollars backing the stable coins, our balance sheet could be double or triple the size of that it is now.
But were in the lowest interest rate environment in my lifetime, and there's not a lot of places that you can go to earn yield on that excess cash and other than some of the areas that that were already in the ER and that we're growing such of Sen leverage and and so this is just the long winded way of saying that.
We do not want to be the reserve bank for those deposits, we're providing critical infrastructure and we're happy to let our customers see.
Seek other partners.
Partners, if you will to hold those balances and earn interest on them because of the stable coin issue or something that might not be.
Obvious to everybody is the fact that and the stable client issuers are.
In order to have a viable business, they actually need to earn interest in it and in many ways, they're like a bank, but without a license right and and so they need of banking partner, but what they're attempting to do is earn interest on those deposits and.
And we don't pay interest we are primarily the transactional bank and so let me pause there and but before going on further and see if that answered your question or if you have the follow up.
No. That's really helpful. I think there wasn't the announcement this morning and so from from.
From one of the stable point issuers and so it's helpful to know that maybe those those arent exclusive relationships and that youre targeting more of the the transactional nature. So that's that's one of them.
That's helpful color My follow up is on a broader a broader question on.
On digital currencies and Commerce I mean, this morning, we got and announcement of Paypal, noting the bitcoin purchases will now be enabled on venmo and so I mean from my seat that's a pretty significant milestone in terms of broader adoption.
I think we can all understand the relationship between your institutional invest for customers and the exchanges and how the Sen provides value there, but could you briefly outline what the role of silver Agate is and help me understand how silver again plays into some of the the interactions on these payment platforms make some of these announcements how the silver agate fit.
And.
And and potentially enable enabling commerce.
Yeah, I'm I'm and I ask Ben to jump in here on that and just the second but out of high level and let me just say that first of all I did see that announcements from from Venmo and the and as you know that was that was anticipated and that's.
The next step, but you know.
All of those institutional players who are providing the ability for their customers to buy bitcoin and they need the source that bitcoin somewhere.
And and they're likely going to need to source that through somebody who is already a sand participants and so while we're not facing off directly against the consumers. It's it's quite often that we are in fact on in.
And the chain, enabling of institutional players to participate in the ecosystem D of the sand and all of that then if he wants to comment and give a couple of examples.
Yeah, I think one of the key distinctions is that you know when you you know I think the majority of people that are buying bitcoin today are looking at it as digital gold or as an asset class as opposed to a payment rail and some of that has to do with just the intrinsic nature of bitcoin the.
The bitcoin blockchain the the speed that it takes to update transactions the cost on that.
And at the two to use the the bitcoin blockchain and also the sort of lack of stability and in the value and so.
And silver gate, where big Bitcoin believers and and have been for for a long time and completely believing that use case separately, though from that you have the emergence of stable coins or central bank digital currencies, which are really talking about you know in most cases U S dollars on of blockchain and so.
And so that's the and those are.
That rail does provide some of the things that bitcoin doesn't in terms of stability potentially speed to update and then also the cost of on chain transactions and so we think that the both use cases.
Will exist and are still early and we see this massive opportunity of.
Enabling dollars on of blockchain and ultimately doing that through the silver gate exchange networks through the $24 seven and <unk>.
Burn capabilities that are that are necessary in order to really.
Make that make.
Make that grow and so while you look at the growth in stable coins during during the quarter really over the last year really the stable coin use case. So far is really focused on on trading on defy and those types of things and it's really just starting to scratch the surface as it relates to commerce.
And we think that there's just a massive opportunity.
Broadly as it relates to blockchain based payments.
And for silver and day to play a huge rolling on.
Understood that's helpful and I guess my my last one and then I'll hop back in the queue.
A bit of a follow up on capital allocation I mean, you've added.
You know one point, nearly one 8 billion quarter over quarter and digital currency deposits and while we saw the cash on the balance sheet tick up.
You know I think about one 4 billion quarter over quarter.
What are some of the factors that we should look at or that you're considering you know as it relates to.
Getting more comfortable putting that into the securities or loans book.
Going forward I understand you mentioned there was something some conservativism this quarter, but and this is is that relationship between deposit growth and cash you would you anticipate that that holding or or any color additional color. There would be helpful. Thank you.
Yeah, I I would not expect that that the cash balance would would stay at the level that debt youre seeing it.
And it's not that we don't have the comfort and putting the cash out it's it goes back to what.
What I was saying earlier just in terms of I'm trying to be prudent about where we put it and you know one of the things that I should also say is it is that yeah. You know I mean, we we we could go out and load up on on longer duration securities at higher yields and and kind of juice the the.
On the short term earnings, but but we really are and have always been focused on and on building a sustainable platform focused on the long term.
And and the as the as we see the the demand and our ability to meet the demand per cent of leverage as we continue to grow the mortgage warehouse pipeline.
We will we will calibrate the excess debt, we have over and above the loan demand and seek to put it out and and higher yielding securities.
Always with the mind mindset going back to the tying this back for the answer for the first question regarding stable claims and the 24 seven nature of the sand and just the fact that.
Our customers on a on the sand are really counting on us to to have a very liquid platform.
And the ability for them to move dollars 24 hours a day seven days of week.
And so part of the reason, we see a growth in deposits is because as the bitcoin ecosystem expand more and more customers are wanting to keep dollars and their account and silver gates. So they can take advantage of trading opportunities on nights and weekends and so all of that gets calibrated and how we manage our our liquidity and.
And I'm very confident over time that that debt will be generating a nice net interest income.
And in addition to the the growing fee income base that you know that that we're enjoying.
Understood. Thank you.
Thanks for the questions Mike.
And our next question will come from Eugene <unk> with Barclays. Please go ahead.
Good morning.
I wanted to take another stab on the liquidity reinvestment and the ER and the bit of a different way than we discussed earlier and.
Namely how much of the recent digital currency related the positive flows you think are sticky enough that you can begin moving them.
Into securities and loans at this point.
Yeah.
Eugene and we really look at it a slightly different way the way we look at it is is not so much how much of the most recent deposits are sticky enough, but rather how much liquidity do we need to maintain for our growing customer base.
And and therefore, then what.
What is the excess over and above that so its of it. It's just a slightly different way of saying the same thing, but you know.
Suffice it to say that that when we experienced the rapid.
The growth in the fourth quarter and you know, we werent sure how sticky that was going to be.
The fact that we've added another 135 customers and Theyre all of you know and various stages of joining the sand and the fact that we've had on ongoing deposit growth through the first quarter and I'm sure. It's not lost on you Eugene.
You know you've you've probably already done the math, but if you know if the if our.
If our average deposits continued to grow.
You know in the and the first.
The first quarter, what does that mean for you you know we've we've we've mentioned the high and the low and that's one of the ways that we look to calibrate this is.
Is is what is the low point and what is the high point and then what is the average we've we started to share that.
With the broader community. So that you can get a little bit better insight into how we're thinking about managing on.
Our liquidity going forward.
Got it and the C.
Talk about your high watermark of $8 billion through February and your ATM disclosures can you share with us.
You're on a trajectory through March of that Oh.
Maintained.
Yeah, I think I'll I'll ask Tony to comment on the specifics, but I think we actually disclosed and the earnings release that our are our high for the quarter was eight point for which which would indicate that.
That continued to grow but Tony do you want to do you want to just refresh all of those numbers for for Eugene.
Yeah, No that's correct so it would be.
I mean, the average of does the currency deposits for $6 4 billion the lowest for six of the high was eight point for us.
Oh and indicated.
Got it thank you and the.
And now just the more of a risk management the quell.
Sure.
And I've gotten a lot of interest from investors on that given the debt.
We saw a bitcoin drop of about 15%.
During the weekend.
Can you talk to how Oh, and if there were any margin calls the result of the and collateral liquidation.
And how your risk management system was able to.
Handle it and then and also what about your capacity to handle the physician liquidations and the market as you grow as the portfolio grows larger.
Yeah of Eugene and that's a great question and the and I'll ask band the comment.
And a little bit more of the specifics, but first just just to frame. This for you I think you may recall that that we typically start our our ltvs on Sen leverage and you know the 75% range and then we would typically have a collateral coverage.
On more margin call. It if you will in the 75 to 80 per cent range and so just based on that math alone a 15% drawdown over the weekend, even if our customers were at the maximum of the LTV would would not have have initiated a margin call.
And and you know we still.
Have had no losses and this in this portfolio, we've we've not had.
Any significant hiccups, but let me ask ASP and if he wants to comment any further.
Yeah, and one of the one of the considerations from not just of a growth perspective, but also from a risk management perspective is the use of multiple custodians and so in addition to anchorage and and Bitstamp, We now have coinbase and fidelity and one of the factors that we look at there is you know how deep are.
The order books on those different on the different platforms, and what sort of access to the market makers that they have and so.
And and another factor there is that we're only making loans on on bitcoin because it is the.
The most liquid market and so.
And so we have a number of those different controls in place and we do a thorough evaluation of each of those partners before we before we launch the these types of programs.
But as Alan mentioned, we really we haven't had any and.
Any liquidations to date and and feel good about and overall got it and do you have for customer specific level of look through and terms of difference of custodians of let's say if for one customer is using multiple custodians to.
Borrow on margin from from you.
The outflow of Linzess.
The single customer for.
The way.
Got it yeah. So we do.
So we do we do look at we do look at it on a on a custodian and by custodian basis, and and we make sure that the.
Whatever the loan amount and is that we have the appropriate.
On a on a particular out of particular partner that we have the sufficient collateral at that partner to the liquidated if need be so we're not really doing any cross margining across exchanges are of different partners.
And it really is on like on a case by case basis, where the appropriate amount of collateral is at the appropriate custodian and that has the the the loan that's underway.
Understood and then for one last one if I may.
On the capturing the stable coin and opportunity for minting and burning transactions. What did you what do you view of your ultimate balance sheet side for silver gate to be able to effectively compete with the larger players that are currently servicing.
The corporate customers Oh.
Through the typical GDS platforms, and who will eventually move into the stable corn space to follow these customers.
We're moving money cross border.
Yeah.
I'm not sure of that I understand the question.
And so we've talked about the fact that and that our state you know that our primary raw and the stable coin ecosystem is and the minting and burning so not sure I understand the question and so.
The question I guess is the lets say of their corporate customers today the other.
And are moving and it was at 10 and $15 billion and one shot the.
From one country to another and the are currently using our global transaction services corporate partners.
And if they were to move the stable coin for these kind of transactions.
How big of a.
The transaction are you able to support the with your balance sheet, the and do you need the sizeable balance sheet for a minute and Bernie.
No, we do not need of sizeable balance sheet, because we're not holding those those reserves and and let me make sure of that.
I think you understand the Eugene and so forgive me if if.
If what I say is obvious but a corporate a large corporate customer doing a transaction like you're describing that would happen on the blockchain and the in these open permissionless stable coin protocols.
So they would already own the stable coin if they wanted to mint it.
Through one of our partners and we would absolutely have the ability to do that.
But but the moving of of the stable coin for.
One party to another.
And is not a you know it's not of U S. Fiat lag those deposits can be sitting and reserve somewhere and the transaction actually takes place on the blockchain.
Got it alright, thank you.
You bet thanks for the questions.
And our next question will come from Joseph Murphy with Canaccord. Please go ahead.
And they were jumbo perhaps your line is muted.
Sorry about that guys. Just a quick just a quick follow up circling back to coinbase and fidelity.
And can explain for I mean, neither one of those companies as of financial slouch by any means, but clearly day and as you and you know as you were commenting Allen.
It sounds like there may be more partnerships coming down the Pike, obviously, the sun and the network effect is a positive.
The driver for distribution of of Sen leverage and the like but.
From a financial standpoint, you know maybe it would be interesting to go a little bit more on your cost of capital compare to those companies and.
And then not providing debt service directly and instead partnering with you. Thanks.
Yeah. So that's of great question and and.
We probably haven't done a good job of making this this point strongly enough, but back to some of the questions earlier about what are we going to do with all of these all of these deposits.
The fact of the matter is these these large or financial players. They arent banks right. So they don't have deposits. They have a lot of customers and there are a lot of customers. So on bitcoin and other digital assets.
For whom they are providing custodial services, but if if they want to lend our U S dollars, if if their customers want to borrow they absolutely need a source of dollars and this band has has talked about this and you know in terms of the fact that there's this massive demand.
For U S dollar borrowing against digital assets and.
And that demand is only going to continue to grow as more and more players come in come into the space and this is just another reason why we're so bullish on the Sen leverage opportunity because not only do we have a strong pipeline and are we adding partners but.
But as more of institutional players come into the space.
There's a natural need for for true for.
For for converting some of those digital assets back into the U S dollars and those players I'm, even the sophisticated financial institutions as you're pointing out like coinbase and.
And fidelity, they they need to partner with a financial institution that that has funding that has deposits and.
With our.
With our technology positioning and the space and the large deposit network that we have.
We just think it's a natural fit and it and it seems to be playing out that way.
Thanks, very much on them.
You bet thanks for the questions.
And this will conclude our question and answer session I'd like to turn the conference back over to Ellen Wang for any closing remarks.
Alright. Thank you Paul before we wrap up I just want to thank our customers for trusting us with your business. It is truly a pleasure to serve you and all.
Don't want to give a shout out to the silver gate team for a great quarter and.
And finally for those still hanging on and thanks to everyone. On this call for your continued interest and silver gate and for your ongoing support we look forward to speaking with you again soon have a great day everybody.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines of at this time.
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