Q2 2021 Silvergate Capital Corp Earnings Call
Okay.
Good day and welcome to the Covid Good chapter of corporations second quarter earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pushing the star followed by zero of.
After today's presentation there'll be an opportunity to ask questions to answer. The question. You May Press Star then 1 on the Touchtone phone to withdraw your question. Please press Star then 2 please note. This event is being reported I would now like to turn the conference over to Hunterston back, which Subrogate index to the nation.
Please go ahead.
Okay.
Thank you operator, and good morning, everyone. We appreciate your participation in the Silver Gate Capital Corporation second 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 11.59 P. M. Eastern time on August 3rd 'twenty 'twenty 1.
Access to the replay is also available on the Investor Relations section of our website.
Additionally, the slide deck. The 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.
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 risks and other factors are set forth in our periodic and current reports filed with the Securities and Exchange Commission.
We do not undertake any duty to update such forward looking statements.
Now I would like to turn the call over to Alan.
Thank you Hunter and good morning, everyone.
I'm pleased to share of that silver gate had an outstanding second quarter.
We nearly doubled pretax income compared to the first quarter of 2021.
We announced our continued development of stable coin infrastructure, including an agreement to be the exclusive issuer of D. M. U S. The stable claims.
We continue the growth and leverage our U S dollar based bitcoin collateralized lending product.
And we completed the at the market equity offering that we launched in early March.
Our success continues to be driven by strong demand for our digital currency solutions powered by the silver Gate exchange network or set.
In the second quarter, the number of customers on the same platform expanded to 1002 hundreds of 24.
And our pipeline of potential new digital currency customers remains robust as we continued to benefit from the powerful network effects created by the <unk>.
We generated more than 200 of $39 billion of volume on the set a new record and an increase of 44 per cent compared to the first quarter.
We also continued to see elevated demand for cash management and foreign currency exchange services bolstered by our proprietary API, which allows our customers to seamlessly interact with us.
As a result transaction revenue from digital currency customers grew nearly 60% from last quarter to $11.3 million.
Turning to Sen leverage total approved lines of credit grew 32 per cent to $259 million compared to $197 million at the end of the first quarter.
Importantly, Sen leverage continued to perform as designed.
Despite the decline in the price of bitcoin during the quarter, we have experienced zero losses to date and no forced liquidations.
While I continue to be encouraged by the demand we are seeing from our customers. It's no surprise that the pace of new loan commitments slowed down given the pricing dynamics at play during the quarter.
As with any new product, we continue to look for opportunities to improve the design and benefits of Sen leverage to ensure we are meeting our customers' needs.
Over the long term I remain incredibly confident in the growth of Sen leverage.
As I discussed last quarter, we have seen an influx of deposits from our digital currency customers, who require the ability to move the U S dollars on the sand in real time 24 hours a day 7 days of week.
In the second quarter average deposits from digital currency customers grew by $3.5 billion to $9.9 billion driven by the record volume of we experience on the fed.
We are prudently deploying these deposits into interest, earning assets, including the purchase of $4.5 billion of both short and long duration securities during the quarter.
While ensuring we have ample liquidity to support our customers as they transact on the sand.
Going forward, we will continue to take a balanced approach and invest the the deposits into securities that balanced duration and returns.
Before I turn it over to Tony I am incredibly excited to share an update on the development of our stable coin infrastructure initiatives.
In May we announced our partnership with them to become the exclusive issuer of U S. Dollar back stable coins known as D. M U S D.
Designed to enable the conversion of Fiat in U S dollars to earn from the stable coin there of process known as minting and Bernie.
The stable coins can then be used by virtual assets service providers or of baths.
For a variety of use cases, including commerce between consumers and merchants as well as cross border payments.
Over time, we believe stable coins have the potential to become the meaningful payment rail for customers around the world.
That said, it's important to keep in mind that we are still in the very early innings and that novel products like this often require regulatory dialogue.
As the use cases for U S. Dollar back stable claims increase silver gate is well positioned to benefit from multiple levers for monetization.
First we will seek to earn transaction fees on minting and burning of the stable claims.
We'll earn yield on reserve deposits, while managing them in a capital efficient manner.
And third we will add of new category of customer to the sand for whom we will provide traditional banking services.
We believe silver gates future remains incredibly bright.
I will now turn it over to Tony to discuss our financial results in more detail before we take your questions Tony.
Tony.
Thank you Alan and good morning, everyone.
As seen on slide 4.
Silver Gate reported the highest quarterly net income in our history with second quarter net income of $29 million or 80 cents per diluted share.
Up from a net income of $12.7 million or <unk> 55 per diluted share in the first quarter and up from net income of $5.5 million or 29 cents per diluted share for the second quarter of 2020.
The increase in both comparisons was primarily driven by revenue growth with an increase in digital currency related fee income as well as interest income from higher securities and 10 leverage balances.
We also saw higher noninterest expense due to continued investments for strategic growth.
Including stable coin infrastructure.
As well as higher FDIC insurance expense, resulting from the rate of growth and the absolute level of our balance sheet.
In addition of.
Our income tax rate was effectively zero.
Driven by a $5.5 million or 21 cent per share benefit related to stock based awards in the quarter.
Net interest income was up 32 per cent compared to last quarter and up 89% compared to the same period last year.
Net interest margin, which I will discuss in more detail in a moment.
And at 1.16 per cent.
Our allowance for loan losses remained at $6.9 million, representing 93 basis points relative to the loans held for investment.
Turning to the next slide slide 5.
Posits were $11.4 billion at June 30th 2021 of.
The significant increase from 7 billion at March 31, 2021.
Driven by an increase in deposits from digital currency exchanges institutional investors and digital assets and other fintech related customers with elevated client activity evidenced by the record setting volume during the quarter.
Noninterest bearing deposits totaled $11.3 billion, representing more than 99% of total deposits at the end of the quarter as we continue to focus our deposit gathering strategy on digital currency customers.
The move to last quarter of weighted average cost of deposits for the quarter was essentially zero.
Turning to slide 6 net interest margin was 1.16% from the second quarter compared to 1.33% in the first quarter and 3.14% for the second quarter of last year.
The decline of NIM from the prior quarter was driven by lower yields on recent securities purchases, while the decline from prior year was due to a higher proportion of lower yielding interest earning deposits in our asset mix.
As Alan mentioned, we invested $4.5 billion into both short and long duration securities during the quarter, which carry a lower yield as a result of the current interest rate environment.
Turning to the next slide slide 7 non.
Noninterest income from the second quarter 2000 of 21 was a record $12.1 million, an increase of $4 million or 49% from the prior quarter and an increase of $6.6 million or 122% from the second quarter of 2020.
The increase in both comparisons was driven by continued growth in fee income from digital currency customers.
In the second quarter digital currency fee income was $11.3 million up 59% sequentially and up 371% year over year.
As we continue to see increased volume on the Sun as.
As well as related demand for cash management, and the FX services from our digital currency customers.
Transaction fees from meeting and burning stable coins were immaterial this quarter, but as Alan mentioned, we are well positioned to benefit from the growing use cases for stable coins overtime.
Turning to slide 8.
Noninterest expense for the quarter was $21.5 million up less than $2 million from the prior quarter and up $7.5 million compared to the same quarter of last year.
The increase in both comparisons was driven by continued investments to drive of strategic growth initiatives, including stable quite infrastructure.
As well as higher federal deposit insurance expense related to our significant digital currency deposit growth.
Turning to slide 9 our securities portfolio totaled $6.2 billion with the yield of 1.35% from the second quarter.
$4.5 billion from the balance of $1.7 billion at the end of the first quarter with a corresponding yield of 2 points of your weight per cent.
Year over year Securities increased $5.2 billion.
During the quarter, we deployed a significant portion of our digital currency related deposit growth into both short and long duration securities, while ensuring we maintained ample liquidity to support our customers as they transact on the fed.
As Alan said earlier, we will continue to take a balanced approach going forward and cash.
Our objective of maintaining a high quality securities portfolio.
Our loans at June 30th.
2021, or $1.5 billion down $137 million or 8 per cent compared to the first quarter driven by a decrease in mortgage warehouse balances from peak levels.
The decline was partially offset by continued growth in some leverage.
On a year over year basis, total loans were up $373 million or 33%.
Overall, the credit quality of our loan portfolio remains strong.
Nonperforming assets totaled $7.5 million or 6 basis points relative to total assets at June 30th 2021 of.
A slight decrease from 7 basis points relative to total assets at March 31st 2021.
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 1 to 4 family residential loans.
At the end of the at the end of the second quarter, our weighted average LTV was 52% in our commercial and multifamily portfolio and 53% in our 1 to 4 family residential real estate portfolio.
As I've said in the past the levels of which we maintained our portfolios is key to supporting the amount of our allowance for loan losses.
Slide 11 provides a more detailed review of our loan portfolio and an update on COVID-19 modifications.
We continue to work closely with our borrowers to provide support of the economy recovers from the impact of the pandemic.
On a case by case basis, we have provided commercial in 1 to 4 family borrowers of payment deferral based on demonstrated need.
As of June 30th 2000 of 'twenty, 1 modifications totaled $23 million or 3.1 percentage of our total loans hopefully the ball spirit.
Before turning to our capital ratios on Slide 12, let me briefly discuss the details of the aftermarket or ATM equity offering, which we launched in March of the first quarter and completed during the second quarter.
During the second quarter, we issued 1.5 million shares of class a common stock under the ATM.
Bringing the total sold to 2.8 million shares at an average price of $107.38, resulting in net proceeds of $295 million.
We'll continue to evaluate opportunities to raise capital efficiency efficiently in order to support our strategic initiatives and remain on the forefront of the digital currency industry evolution.
Now turning to our capital ratios on slide 12.
Our tier 1 leverage ratio was 7.91% at the company level and 786% at the bank level.
With the bank ratio well in excess of the 5% minimum ratio to be considered well capitalized under federal banking regulations.
Our total risk based capital ratio of 48% reflects the fact that a large proportion of our deposits are held in cash and in high grade and highly liquid securities.
Our loan to deposit ratio declined 13.19% at the end of the quarter driven by the significant increase in deposits during the quarter.
With that.
I would like to ask the operator to open up the line for any questions operator.
Yeah.
I don't know kicking of the question and answer session.
Ask the question you May Press Star then 1 on your Touchtone phone.
We are using a speakerphone please pick up your handset before pressing the keys.
Any kind of the question hopefully.
We'd like to try the question right.
That's starting to leave.
Please limit yourself to 1 question and 1 follow up if you have further questions many of them.
The question Keith.
At the site, we will pause momentarily to assemble thereafter.
The first question comes from Joe.
That's the kind of client please go home.
Hey, guys. Good morning, great to see the continued momentum in the business here I was just wondering you know given some volatility in digital asset pricing how are you.
What you saw relative to the divergence and send transaction numbers of course.
The Sun transfer dollar numbers, because I think the transaction numbers were down a bit but the actual dollar volume was good and what you might have learned from the volatility we saw and then all of a follow up.
Yeah. Good morning, Joe Thanks for the question I'm going to turn it over to ban in just the second to give a little bit more color, but you're absolutely right in it if you step back and look at the at the volume.
In the broader crypto market and look at bitcoin in particular.
On on chain transaction volume number of transactions on the bitcoin blockchain really fell off towards the end of the quarter as well. So so we kind of the arm are mirroring that of the Sen transfers are mirroring what you're seeing there on the on the actual blockchain.
By the in terms of that divergence between the the.
The dollar transactions and the and the unit transactions all of the.
I've been to provide a little bit more color.
Thanks, Alan Good morning, Joe.
So yes as it relates to the the decrease in the number of the transactions. We believe that this is due to customers keeping more liquidity at silver gate in the form of deposits when they needed to execute their trading strategies, which led to larger dollar transfers per transaction, but a fewer number of overall transfers so to say this slightly differently.
No. It's really the combination of the market conditions and the deposit balances that customers were maintaining the made it so that they werent managing your capital allocations of trading venues are quite as closely. So you can think of that as you know before when capital was a little tighter perhaps they were making.
Let's say.
5 transfers per day, just to make sure that they had the appropriate amount of capital at the appropriate venue at the appropriate time and then as more.
As the price came down as Alan was explaining maybe.
Maybe instead of 5 transfers of day, they were doing 3 transfers of the day so.
Overall, we think it's just a temporary.
The outcome is a result of market conditions.
Makes sense for the next time span and then just maybe just 1 follow up answer on the leverage.
Yeah, good growth again this quarter.
I think you said that you know, perhaps there could be you know.
Maybe I know there was kind of a lot of demand there and so you know maybe with the pullback in in digital asset pricing I don't I don't know of stat as affected your ability to continue the ramp that the sun leverage.
Balances or.
Or perhaps where you know we're you know we're kind of finding a better middle ground in between supply and demand right now.
Yeah, Joe that's that's the.
That's a good observation, what what I would say on this and get all all I'm always ask Ben to provide a little bit more color of as he is a little bit closer to it.
But we're not really seeing a falloff in demand as it relates to our institutional investor clients. The discussions that we're having with them regarding the product, but it really is.
More of an issue of the of as you pointed out the market dynamics and the fact that with the prices coming down.
There there just has not been as much.
Recent demand for actual borrowing and therefore it also you know probably takes a little bit of a back burner.
You know in our customers' minds in terms of getting activated but Ben do you want to add any additional color to that.
Yeah, Yeah, so consistent with the prior comments, we know the in market conditions like this it takes time for our customers to optimize the amount of capital that they have in the system.
So we think that the right way to look at this is to compare it to traditional asset classes that are more mature.
And to consider what the needs of institutional investors are in that realm, and so when you do that you see that the need for prime brokerage and ultimately borrowing and lending services is greater than ever and traditional asset classes.
Similarly in those assets of different trading strategies come and go and margins compressed, but the the underlying need for greater capital efficiency doesn't go away.
And we don't expect it to go away in digital currencies, either and so.
We remain very very optimistic in the growth of ups and leverage going forward.
We think that it was it was a good quarter as Alan mentioned the <unk>.
Product operated as designed and we didn't we didn't have any losses or even any forced liquidations. So overall, we feel really good about it.
That's great terrific results. Thanks, guys.
The next question comes from Michael the room.
Please go home.
Hey, Alan Ben Tony Good morning.
Good morning, Mike.
I wonder items, a couple of things I wanted to hit real quick just 1 on on the expense side.
I guess, just as we look out of near term here. It sounds like there's maybe some investments going on with building out stable coin infrastructure, especially with the expectation that D M.
What will come live at some point, but outside of you know growing FDIC insurance expense as deposits potentially continue to grow are there any other areas that we should be mindful of that you can see costs growing as you know the bank's revenues continue to grow.
Yeah, Tony do you want to go ahead and jump in and take that 1 share.
Sure Yeah, no absolutely. Thanks for the question Mike.
So yeah, you're you're you're absolutely right. The the investment in stable quite infrastructure is 1 of the drivers in our fees.
Mostly comes through.
This quarter in professional services.
The the FDIC insurance I will say that about 80% of that.
The expenses due to the rate of growth year over year.
So if you can think of of the balance sheet of stabilized the run rate would be.
Significantly lower but.
As we move forward I mean, you know we.
We would continue to invest.
In in in in head count that that would be probably where we would.
We would add technology coke and the like in terms of R&D and continued product development.
So that might result in the shift between.
External professional services fees and internalizing its of salaries employee benefits, but.
Maybe I'll wrap up by saying the scalability of the platform in terms of the traditional volumes that we see.
It is not contributing to the.
Necessarily increased costs. So you can see our our debit processing of communication costs are relatively stable.
Right now I mean, I guess asking the question of a little bit differently.
The efficiency ratio in the quarter was which was pretty low relative to where it's been.
I know you guys don't provide guidance on on that ratio in and it's not always totally relevant but theres really from an operating leverage standpoint at this point.
There should be continued leverage going forward is probably a fair assumption.
Yeah, but I mean, as you kind of alluded to in this last comment the the revenue dynamics are harder to predict so it's hard to put a number on the on the operating leverage because of that.
But certainly the revenue growth that we experienced in this quarter was not really driven by anything related to stable coin and so from that perspective. If you. If you kind of peeled out the expenses, which is probably what you're getting at.
A lot of that revenue growth is coming from our kind of core expense base, whereas.
Yeah, we use that revenue growth and we're investing in.
What are the next products to the ads revenue in the future. So it's it's difficult to answer with specific guidance, but definitely.
Definitely the revenue.
The implication has.
Probably a more meaningful impact on the operating leverage than some of the expense dynamics, which are a little bit smaller.
On a relative basis.
Got it.
And I know Alan you you probably provided as much as you could in your opening remarks, but just.
And I think I guess any.
In terms of the the.
The pilot for DM I mean is the hope still.
Before the end of the year the data.
It could potentially launch or is there anything else you can pre.
The us on that at this point.
Yeah, Mike It's a fair question and it's just it's just really difficult for us to to provide that.
I would direct the answer on it we're obviously diligently working on it.
And I think the way we phrase that in the past is that we'd be disappointed if we werent able to launch the pilot. This year. So that's consistent with the way you. Just asked the question you know that obviously gives us a lot of room here between now and year end.
You know, but you know where we're still.
Working hard on it and and incredibly excited about the you know not only the D M announcement of and that project, but just the overall.
Stable coin opportunity and we are we think that as the and Tony was just alluding to it a little bit.
And some of his comments you know we think it's the it's the next big Big thing for Silver Gate and <unk>.
And the but the bulk of the whole area of stable coin infrastructure, you've probably seen it's getting a lot of attention.
You know in the press.
And the in the regulatory circles, as well and and we're really excited to be of part of it.
Okay.
Thank you and then just lastly from me the total.
Customer growth for you guys on the digital currency side on the Sun has been pretty steady for a while now but it feels like the the growth rate has really kind of taken off of I guess, it's more of the kind of a structural question I mean is that more.
More aggressive sell efforts by you guys is that better communication of the potential usage of products to customers that and you know of higher take rate or I guess why why in the last few quarters here has that currency digital currency related fee growth rate taken off when obviously you guys have had tons of customers coming on the platform for quite some time now.
Yeah.
It's really if you think about adding.
Customers and the fact that you know when we onboard of customer.
You know, we they don't necessarily immediately start using all of our products and services. So you know maybe they are attracted by the San <unk>.
And you know they they come on board and then.
You know eventually we get them signed up for you know for 4 API wires or a C. H and then.
You know or maybe they are coming to us because of our ability to due to foreign currency exchange and so it's it's really you know growth in in each of those buckets and you know 1 of the things that I think it's it's important too to remember and you know we were saying there's a lot the first half of last year.
<unk>.
And then we've just had so much explosive growth in the last couple of quarters that it's it's important to step back and just remember that none of these things are going to grow in the linear fashion.
We we really still believe we're in the very early innings of this entire digital transformation.
And we believe that the growth is going to continue to be lumpy that we will have surges in different areas.
You know the we believe the long term growth is absolutely up into the right and in each of the areas that that we report on but you know when you see 1.1 area 1 specific kpis, you'll get ahead of another 1.
It's just the function of the fact that we're really early.
In this overall transformation.
Talking about the the digital world not necessarily specific the silver gate and so depending on the nature of the of the particular clients that we've added this quarter or maybe last quarter that are finally coming on stream this quarter et cetera. So.
It's it's really hard to predict.
But we've seen no slowdown in the pipeline and the and so we believe we're just kind of continue to add customers and theyre going to continue to to to use the products and services that we're offering.
Great. Thank you guys for taking the questions appreciate it.
You bet.
As a quick reminder, please limit yourself to 1 question and 1 follow up.
The next question comes from my style of Costco with Compass point. Please go ahead.
Good morning, Alan Tony and Ben.
Good morning.
Question around loan growth and the strategy and kind of customers you're going after with Sen leverage I know right now it's focused on more of the institutional investor.
Cohort, but you know as the backdrop this quarter square took out alone for a portion of the state coin for Treasury purposes, Youre also starting to see bitcoin miners.
Gout breakpoint denominated loans, because they are predominantly equity finance.
So I guess the question is the first question is.
Have you considered expanding the customer base that you're going after you can still retain that.
Kind of stringent.
Risk protocol, but it seems like Theres, a lot more demand out there than the than just in the institutional investor base.
Yeah, Mike.
So the short answer is yes.
But I think it's important to step back and think about the strategy that that we're trying to to employ here. So we've absolutely entertain conversations with folks such as you just mentioned in terms of folks that are maybe long bitcoin that want to borrow against it.
And and that's certainly something because of of our Sen leverage product and the fact that silver gate has been in this ecosystem for 8 years and we've got a comfort level.
And we've got a product thats working.
We we could certainly go after that business.
But but what we're really trying to do is leverage the network effects of the sand and continue to press our advantage there.
With a scalable product as opposed to doing kind of 1 off loans that that might ultimately end up being.
Being somewhat commoditized and and really.
Kind of a race to the bottom in terms of someone coming in and San of Wall up you know if you're doing that loan it at 7% Oh, we'll do it at 6 you know and and and.
It's the same as with any type of loan product right and the and so.
Whenever we think about product and how we're how we're approaching the market we're thinking about it from a from the perspective of how do we continue to differentiate silver gate and and also continued to press the advantages that we have with the silver Gate exchange.
Work and I'll ask Ben if he has any additional comments on onset of leverage.
Yeah I mean.
I don't know if I can add much to that at the.
I think Alan covered a lot of ground there I guess the 1 thing is that we do we certainly are open to.
Other other opportunities and whether that means you know talking to an exchange about what their needs might be or 1 of these other providers.
Providers as you mentioned.
So for as an example, if if treasuries start adopting bitcoin on their balance sheet more than this need for.
For for financing could grow and that would be something that we would be we would be looking to consider but as Alan mentioned, we're always thinking about it through the lens of.
Is it scalable is it can we differentiate ourselves can we create that long term sustainable competitive advantage.
Understood. Okay. That's helpful and I know my I guess my follow up is on is on the regulatory landscape.
There is somewhat of a of an alphabet soup. If you will of of entities looking at stable points, whether it's static or F. Sock OCC Treasury. This week, we had the President's working group.
With an anticipated report here in the next few months.
It sounds like the M. Maybe.
I don't want to say on pause, but waiting for more regulatory clarity, who is the primary regulator or the <unk>.
Guys are looking at as far as stable coin.
Guidelines or whatnot and what's your expectation around the eventual regulation of stable point.
Yeah, that's it's a great observation, Mike and and.
So to directly answer your question.
We are a and FDIC insured.
California State chartered.
Member of the Federal Reserve.
So you know add to the alphabet soup, the California D. F T I the FDIC, obviously and then the federal reserve.
Now so those of the the regulators with with whom we interface directly but it wouldn't surprise you to hear that we've had conversations with.
With many of the other agencies.
As we are working on this on this dam project and you're absolutely right in terms of you know the alphabet soup of everybody's got an interest in this you know there there are some of them now interesting dynamics that play in the fact that there are already several existing <unk>.
Table coined the out there all of whom silver gate banks and the.
And so we have an interesting view into this ecosystem on behalf of our regulators even before considering the DM project and so we are fully engaged with all of the appropriate regulators that you would expect us to be and you know looking forward to 2.
Bringing the pilot to market just as soon as we possibly can.
Okay. Thank you.
Yeah.
Thanks for the questions Mike.
The next question comes from their names, but.
And then Clarke can you just kind of home.
Hey, guys congratulations on a nice quarter and thank you for taking my questions. This morning.
You bet. Thanks Lou.
Yeah I wanted to ask a follow up on just the D. M relationship I was wondering if there are any details you could share around the monetization of the met burn fees that you expect to collect on the volume and then maybe secondarily a higher level question. How are you thinking about the international opportunity for the product and do you have the capability of the sports stable coins in other jurisdictions.
Sections in currencies and are there any partnerships that you would need to implement those.
Yeah, Ben do you want to go ahead and jump in and take some of that and then we can tag team that if he likes.
Yeah perfect.
So I will so you know a couple of the use cases that we're focused on.
With stable Queens in general is for Commerce, and remittance and so when you think about the unit economics for those services, they're very transactional focused in margins today are very high. So we think that there's an opportunity for silver gate to participate in those unit economics.
While also reducing the cost of the transaction for the end user because the underlying technology is just more efficient and there's there's fewer intermediaries. So as Alan highlighted when we think about monetizing stable point efforts, we're really focused on charging transactional fees first and foremost.
There is also we believe an opportunity to manage the the underlying reserve the BACS those.
The those dollars that are on the blockchain.
By providing.
The.
Management of the reserve and more of an off balance sheet.
Manner and then the the third way is to provide more traditional banking services to what we believe is a very attractive.
Active new new customer segment. So then.
Shifting to kind of the what does this look like internationally, obviously remittance is a significant use case.
And we're we're excited about that the <unk>.
Western there is sort of what does it look like on the other side in terms of now someone in a foreign country has dollars on the blockchain is there.
Another bank or the money service business that can move those dollars from the blockchain into you know the.
The the native currency in that in that area.
And so theres still a lot to figure out.
As you alluded to you can imagine a world, where theres euros on of blockchain and yet on a blockchain and the.
Theoretically the conversion between dollars and euros could happen.
By smart contracts and so maybe that's the answer.
Last thing I'll say is we're pretty excited about the work that we've been doing in the FX over the last couple of years setting up those those relationships with likeminded banks around the globe. So that we can hold.
The foreign currencies.
And you know its probably <unk>.
Certainly probably too early.
To.
Provide any guidance on when that could happen or what is the what it'll look like but just in general the technology enables.
So much in terms of of reducing friction and and freeing up capital. So overall.
We're very excited about it.
But I'll kick it back to Alan.
Yeah, great. Thanks, Ben I don't think I can add anything to that so let's let's keep moving so we can get to everybody's questions.
Yeah I appreciate it and then I guess just a follow up on the deposit balances. This quarter I think you added a handful of new crypto currency exchanges and it seems like the average deposits for client increase a decent amount of kind of wondering where are you, saying in the client base I would've thought you were fairly a fairly penetrated already so you know what is the deposit growth look like in terms.
Of the growth from new customers versus existing customers.
Yeah.
Yeah, I can just answer that of at a high level and say that you know.
There isn't a direct correlation between the the clients that we added and the deposit growth per client. If you will it's it really is you know Ben was talking earlier about.
The fact that that many of our clients, we're probably carrying larger balances larger cash balances and then perhaps doing fewer sand transactions, but higher dollar transactions et cetera. So all of those dynamics are at play well and and and so you know it's.
It's it's probably more likely that some of our existing exchanges.
We're holding larger balances at period end versus.
Some of some new crypto currency exchange that you know that that brought in a ton of excess deposits.
Got it makes sense I appreciate you taking all my questions.
You bet. Thank you.
Yeah.
The next question comes from David <unk>.
But of course the purity. Please go ahead.
Hi, Thanks, I had a follow up on D. M. Specifically on the economics to silver gate back in May when the partnership was announced it sounded like you guys were still in negotiations with the D. M Association I was wondering if there was any update or more clarity on.
What sort of.
Level of basis points, you're going to get on the many current fees and then similarly, the economics you mentioned earlier about.
Earning a yield on the reserve deposits I was wondering how much of a revenue share.
<unk> will have to share with the D. M Association have those details it's been figured out yet.
Yeah, we we have not shared any of those those details yet and it's it's just unfortunately still premature at this time.
Got it and then a follow up to that question you mentioned about how stable coins is the next big thing for Silver Gate, where you simply referring to D M or was that of reference to business beyond the D. M partnership.
Yeah, it's it's.
Really what what what I was trying to say there David is is that.
This this whole stable coin.
The is is really and you know and the fact by the way that it that it's getting so much regulatory attention not only in the U S, but around the world.
Just points to the fact that it is a much more efficient way to move.
Fiat currencies and real time 24 hours a day 7 days of week. So it has the potential to disrupt.
All of the normal payment channels and I think that that's why there's so much interest and attention on it and if you think about where the existing use cases for stable coins are it is really around crypto currency trading that's what you've seen with tether.
And that's what you've seen with the other U S. Dollar back the stable coin projects, they've been primarily crypto currency trading although circle has certainly.
<unk> been working on penetrating more of the commercial.
Merchant written you know remittance use cases, and that's really where we see the the broader opportunity is is in in remittance.
You know and you know cross border payments commercial use.
Use cases, and then for silver gate, the opportunity to potentially manage the reserve, which is a different opportunity from what we've done so far but as Ben mentioned in his last commentary.
Really thinking about doing that.
The in an efficient off balance sheet mechanism. So that it's it's it's capital efficient.
Thanks very much.
You bet thanks for the questions.
The next question comes from George Sutton of Craig came from please go ahead.
Thank you guys I just have 1 question I was most enthused by the massive volume that.
You had on the Sun network this quarter and I'm curious as you think about that massive volume and as we continue to learn more and more about the ecosystem and different players within it there seems to be a lot of different use cases, you could evolve to either buy versus build to start to Jen.
<unk> more income off of that network can you just discuss the buy versus build and just conceptually how you're thinking about building. This out over the next 24 months.
Yeah, George Thanks for for that question, it's a great opportunity to talk about how we think about.
Potential acquisition opportunities and band of a really good job of articulating our strategy. There. So Ben would you like to see the answer Jordan's question.
Yeah. Thanks, Yeah. So you know, we're we're constantly kind of on the lookout for ways that we can make the sand.
Better and by better we mean more useful for our customers and so.
When we think about.
No buy versus build it starts by looking at our kind of our own core competencies and what silver gates. Good at and what are the core competencies that we don't have and so when we think about when we think about acquisitions, we really think about them from the product lens and in terms of what products could we take and plug into the center to ultimate.
The create a better experience for our customers, which likely means greater capital efficiency.
Improved liquidity for the for the exchanges and so that's something that we're.
We're always thinking about in terms of you know you kind of the first part of your question George really sort of hinted at kind of monetization of the sand and the volume that's over there and it really you know we've always maintained of long term focus in terms of how we think about the sand and the the various iterations of it and.
That's what sort of ultimately got or 1 of the things that got us to our focus on stable coin infrastructure. When you think about the conversion from Fiat currencies in the digital currencies.
That's ultimately you know essentially what the sand does its just the the U S dollar leg of it but but you really you know about 24.7 programmatic API enabled solution is really what makes us the transactional bank for the U. The 4 U S regulated stable coins and we continued to see growth in transaction volume from the.
Stable coin projects.
During the quarter so.
Anyway, so that that's sort of how we think about it at the high level. We don't have we don't have anything to announce today per se, but.
But a lot of things that we're that we're working on.
Thanks, Ben earlier in the call you mentioned that you were proud of the results that you saw this quarter and I would just say from my perspective, you absolutely should be given the environment congratulations.
Thanks, George I appreciate that.
The next question comes from engaging closely with Barclays. Please go ahead.
Good morning.
I wanted to drill down on the capital a bit if I can.
Looking at your capital levels of the tier 1 leverage just under 8% are you contemplating raising more balance sheet growth capital or just waiting it out to see where the deposit balances of mode. While the stock price has taken the hit of late in the may not be the right time to raise capital today.
Hi, Eugene.
It's a fair question and.
We.
We're constantly looking at our capital needs of our anticipated growth and you know trying to make sure that that that were being capital efficient while at the same time, providing us with the with enough runway to support the growth that we anticipate.
But as the as we've mentioned here a couple of times in a couple of different context. We're also looking at you.
You know off balance sheet mechanisms to 2 of them.
To take on some of that growth that might come for instance from a stable coin project.
Such as the M and and the and so you can rest assured that that we're constantly looking at at what our needs are.
We feel very comfortable.
Where we ended the quarter end.
So very pleased with the 2 capital raises that we've been able to complete this year, so far and.
We don't have anything immediately to announced today regarding any future plans, but.
That's that's probably enough.
Color.
It was probably doesn't surprise you.
Thank you.
Actually so when you mentioned the the off balance sheet the opportunities that it was actually my follow up wanted to see if you can give us a little bit more color on how you were anticipating managing day on reserves.
You mean that there will be of pretty significant of dollar volume.
Yes.
Specifically with off balance sheet.
Yeah.
Ben or Tony to 1 of you guys want to jump in on that 1.
Yeah.
Can start so.
To to really get to the the heart of your question Eugene you have to look at the.
How the reserves are held or the held in cash or the whole held in U S. Treasuries and what are the instruments that are actually backing those those stable coin of reserves and when you look at a lot of the other projects out there, it's not really clear necessarily what the reserve is is being held in and so in a world where you're holding reserve.
In cash or U S treasuries we.
We believe that there's better ways to hold those assets off balance sheet and of capital efficient way with less of the capital requirement than you would have if you were to hold them on the balance sheet of of sort of silver gate proper and so.
We have more work to do there and really can't provide too much more detail than that but that's how that's how we're thinking about it and it really comes down to the nature of those assets and in the liabilities and then ultimately the capital that's required in order to.
In order to support those right.
So in a sense of the structure of it would be similar to what you had before.
Where you would some of these 2 off balance sheet vehicles of share of the yield with the D M or other stable Glenn insurers is that does that a fair assumption.
Yeah, I don't think we have anything to share today in terms of of how the yield will be shared between participants, but you know.
The initial idea is that the the reserve would be held on balance sheet and obviously in that situation silver gatewood would be earning the reserve on the or any of the yield on the on the reserve itself, but really what we're focused on here is the scale and if you go kind of all the way back to the and there's a few different reasons that you might.
Have a structure like this if you go back all the way from the President's working group.
Statement on stable coins from December they talked about this concept of a bankruptcy remote.
And which obviously has a different construct and then for our bank and FDIC insurance and receivership and so there's a lot of different things to try to figure out there but.
But ultimately it's about striking the right balance between protecting the holders of the stable coins, making.
Making sure that the reserve is invested in the appropriate assets and then making sure that it's appropriately.
<unk> said that you don't have any outside forces.
Got it thank you.
This is very helpful. I appreciate you taking my questions.
You bet. Thanks, you can sort of thing.
The next question comes from Ryan Todd with the blockade.
Please go ahead.
Good morning, Thanks for taking my question.
So I think most of my questions have been answered, but I guess 1 on competition that comes up a lot. So I guess you know continuing from last year. You know we've seen a growing number of legacy payment providers and networks make strategic moves into servicing the there's lots of industry.
Whether that's like this offering AP is for banks to enable crypto purchases Mastercard out of an announcement today of a circle to enable kept the settlement.
I'm just wondering if you can comment on how you still view the current state of the network effects of the Sun.
Specifically I'm on your corporate non crypto exchange customers amid this growing interest from traditional legacy payment providers. Thanks.
Yeah, Good morning, Ryan.
So on the on the subject of competition in general 1 of the things that that we've said consistently is is that the this is a growing ecosystem.
And and if it's going to turn into if it's ultimately going to be what we all believe and hope. It can be then then they're absolutely needs all of the significant players need to come in and so the announcement that you just referenced today with with Mastercard and circle, which follows the.
You know of visa circle announcement et cetera.
And there are so many of the announcements and I can tell you as an industry participant for 8 years I love seeing this because it just shows that despite the ups and downs the of the price. This is here to stay and silver gate is in a really unique position to continue to benefit from from from all of this growth.
Specific to 2 of the.
Then we don't really see these types of announcements of ads as having any negative impact on what we do specifically because of our.
Our use case here with the sand.
Is specific to providing liquidity capital efficiency, reducing the the banking friction for exchanges and institutional investors.
And the all of the other use cases that are that are coming in you know, we'll we'll participate where we see an opportunity with the intersection of the sand such as you know I mentioned earlier, providing foreign currency exchange because of lot of our institutional investors.
Are actually non U S based entities and and so providing them foreign currency exchange. So they don't need to leave the sand in order to complete their their transactions.
And then the stable coin opportunity, which we've talked about is is another complement to the Sen Sen leverage is another complement to the sand. So so everything is in furtherance of this network effect and essentially.
Continuing to to solve problems for our customers. So that so that we're making them more efficient and that's what keeps that pipeline coming of new of new prospects in and Onboarding of new customers.
Great really helpful color, thanks, and congrats on the quarter.
Thank you Ryan.
This concludes our question and answer session I would like to kind of the country's back over to Alan range for any closing remarks.
Alright, Thank you very much operator, and I want to once again I want to thank everybody for for your participation. Thanks for all of the great questions and I want of I always wanted to do a shout out before we lose everybody to the incredible team at Silver Gate, who show up every day literally 24 months.
$703.65 to to help solve problems for our customers.
We just see a tremendous opportunity to continue to provide innovative solutions for our digital currency customers and we've.
We've talked a little bit about D. I'm on this call. It's I think it's just 1 example of the exciting path forward for silver gate and the digital currency industry, and we look forward to sharing of some updates on our strategic growth initiatives in the coming quarters. So I hope everybody has a great day. Thank you.
This concludes the kind of trying to thank you for attending today's presentation. You may now disconnect.
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