Q3 2021 Silvergate Capital Corp Earnings Call
Okay.
Good day and welcome to the Silver Gate Capital Corporation third quarter 2021 earnings Conference call.
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Please note. This event is being recorded I would now like to turn the conference over to Hunter stand back with Subrogate Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. We appreciate your participation in the Silver Gate Capital Corporation third quarter 2021 earnings call.
With me here today are Alan.
Our Chief Executive Officer, Tony Martino, our Chief Financial Officer.
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 November 2nd 2021.
Access to the replay is also available on.
On the Investor Relations section of our website.
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.
These include.
Remarks about management's future expectations beliefs estimates plans and prospects.
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.
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.
Silver gate had another great quarter.
Quarter I'm pleased to share that our quarterly pre tax income of $29 $4 million was the highest in silver gates history.
Driven by growth in our platform and our balance sheet.
Average deposits from digital currency customers continued to grow during the third quarter, reaching a record $11.2 billion.
Compared to an average of $9 $9 billion during the second quarter.
Which was driven by our customers who require the ability to move U S dollars in real time.
Four hours a day seven days a week using our API enabled proprietary silver gate exchange network or <unk>.
To that end the number.
Customers on the same platform expanded to 1305 this quarter.
An increase of more than 300 customers since the beginning of the year.
Our pipeline of potential new digital currency customers remains robust as we continued to benefit from the powerful network effects created by the <unk>.
Turning to sand leverage our bitcoin collateralized lending product.
It'll approved lines of credit grew 25% to $323 million compared to $259 million at the end of the second quarter.
Sen leverage continued to perform as designed.
Zero losses to date and.
No forced liquidations and we remain very confident in our ability to scale this product over the long term.
Turning briefly to slide four.
We have been working with coin metrics since early this year to better understand how sand activity is correlated to the broader industry.
A question we are often yeah.
According to their data, both bitcoin and Ethereum dollar trading volumes were down significantly in the third quarter and were highly correlated with trends on the <unk>.
Consistent with this data send transfer volume of $162 billion declined 32% on a sequential.
<unk> basis, but increased by 125 billion or 342% compared to the third quarter of 2020.
Similarly transaction revenue from digital currency customers of $8 $1 million was the second highest in our history and increased nearly 150%.
Compared to a year ago, reflecting continued strong demand for cash management and foreign currency exchange services.
Finally, before I turn it over to Tony I wanted to briefly discuss our stable coin infrastructure initiative.
Last quarter I detailed our new partnership with Dan.
We are not able to provide an update on timing of the launch today I remain incredibly.
Incredibly enthusiastic about silver gets position and ability to contribute to the growing stable coin ecosystem.
Over time, we believe stable coins have the potential to become a meaningful payment rail for customers around the world.
And.
Well as I said last quarter its important to keep in mind that we are still in the early innings of this exciting opportunity.
We continue to have an open dialogue with our regulators and look forward to keeping you updated on this initiative in the coming months.
I will now turn it over to Tony to discuss our financial results in more detail before we take your questions.
And oney.
Thank you Alan and good morning, everyone.
As seen on slide five silver gate once again reported the highest quarterly net income in our history with third quarter net income of $23 5 million or <unk> 88 per diluted share up from net income of 20.
$9 million or <unk> 80 per diluted share in the second quarter and up from net income of $7 1 million or <unk> 37 per diluted share for the third quarter of 2020.
The quarter over quarter increase was driven by both net interest income and noninterest income which benefited from security.
The point early in the quarter.
Even excluding this gain we still achieved record earnings this quarter.
Estimate to silver gates multiple levers for growth that Alan just mentioned.
We also saw slightly higher noninterest expense due to continued investments for strategic growth, including.
Salable point infrastructure as well as higher FDIC insurance expense, resulting from the rate of growth in the absolute level of our balance sheet.
In addition, our income tax rate this quarter increased to 20%.
Last quarter, the effective tax rate was lower due to significant tax benefits recognized.
<unk> stayed on the exercise of stock options.
Net interest income was up 24% compared to last quarter and up 99% compared to the same period last year.
Net interest margin, which I will discuss in more detail in a moment came in at $1 two 6%.
Our allowance.
For loan losses remained at $6 $9 million, representing 90 basis points relative to loans held for investment.
Turning to the next slide slide six deposits were $11 7 billion at September 30th 2021 and.
An increase from $11 4 billion.
At June 32021, driven by an increase in deposits from digital currency exchanges institutional investors and digital assets and other fintech related customers.
Noninterest bearing deposits totaled $11 $6 billion, representing more than 99% of total deposits at the end of the quarter.
<unk> as we continue to focus our deposit gathering strategy on digital currency customers.
Similar to last quarter, our weighted average cost of deposits for the quarter was essentially zero.
Turning to slide seven.
Net interest margin was 1.26% for the third quarter.
Compared to 1.16% in the second quarter and $3, one 9% for the third quarter of last year.
The increase in NIM from prior quarter was driven by an increase in the proportion of securities compared to lower yielding interest, earning deposits and other banks.
Yield on securities decreased quarter over quarter.
Lower interest rates on new securities purchased throughout the second and third quarters, while yield on loans increased due to higher some leverage balances.
Turning to the next slide slide eight noninterest income for the third quarter of 2021 was $14 million, an increase of $1 9 million or.
Due till teen percent from the prior quarter, and an increase of $10 million or 254% from the third quarter of 2020.
The increase in the quarter over quarter comparison was driven by $5 $2 million gain on sale of securities, partially offset by a decrease in digital currency fee income due.
Or secrecy conditions that Alan described earlier.
The increase in year over year comparison was driven by continued growth in fee income from digital currency customers.
Turning to slide nine noninterest expense for the quarter was $22 3 million.
Up less than $1 million.
Due to the prior quarter and up $8 $2 million compared to the same quarter of last year.
Professional services increased year over year, driven by continued investments to drive strategic growth initiatives, including stable cornea infrastructure.
We also had higher federal deposit insurance expense related to our significant digital.
From a deposit growth.
Turning to slide 10, our securities portfolio totaled $7 $2 billion with a yield of one 2% for the third quarter.
Up over $1 billion from a balance of $6 $2 billion at the end of the second quarter with a corresponding yield of one.
Currency, 5%.
Year over year Securities increased $6 3 billion.
As I briefly mentioned before we Opportunistically sold some securities early in the quarter, which resulted in a gain on sale.
We will continue to take an active and balanced approach going forward and keep our objective.
Give a maintaining a high quality securities portfolio.
Our total loans at September 32021 were $1 6 billion up $140 million or 9% compared to the second quarter.
Driven by an increase in some leverage in mortgage warehouse balances partially.
Three set by decreases in our commercial real estate and single family residential real estate loan portfolios.
Note that the latter two portfolios are paying down as we are not originating new loans in these categories.
On a year over year basis, total loans were up $227 million or 17%.
Overall, the credit quality of our loan portfolio remained strong.
Nonperforming assets totaled $5 $8 million or five basis points relative to total assets at September 32021.
A decrease of one basis point from June 32021.
At the end of the third quarter, our weighted average LTV remained in the low to mid 50% range in our commercial and multifamily portfolio in one to four family 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 our allowance for loan losses.
Slide 11 provides a 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 as the economy recovers from the impact of the pandemic.
On a case by case basis, we provided commercial in one to four family borrowers are payment deferrals based on demonstrated.
Demonstrated need.
As of September 30th 2021, the majority of COVID-19 related deferred loans have returned to pain and only an immaterial amount of loans are still being deferred as a result. This is the last quarter, we intend to show this slide.
Before turning to our capital ratios let me.
Briefly discuss the detail of the preferred stock offering we completed in August during.
During the third quarter, we issued and sold 8 million depository shares of fixed rate Noncumulative perpetual series a preferred stock.
The gross proceeds of the offering were $200 million.
Net proceeds to.
The company were approximately $193 7 million after deducting underwriting discounts and operating expenses.
We will continue to evaluate opportunities to raise capital efficiently in order to support our strategic initiatives and remain on the forefront of the digital currency industry's evolution.
Now turning to our capital ratios on slide 12, our tier one leverage ratio was 871% at the company level and $8 two 4% 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.
Based capital ratio of 51% reflects the fact that a large proportion of our deposits are held in cash and high grade and highly liquid securities or.
Our loan to deposit ratio increased slightly to $13, 96% at the end of the quarter driven by the slight uptick in our loan portfolio during the quarter.
With that I would like to ask the operator to open the lineup for any questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
If at any time your question that's been addressed and you would like to withdraw your question. Please press Star then two.
In the interest of time, please limit yourself to one question and one follow up.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from Michael Perito with K B W. Please go ahead.
Good morning, guys. Thanks for taking my questions.
Good morning, Mike.
So two things I want to hit on I guess first just al I know you kind of said, probably what you're you're willing to say on.
Point update, but I'll try anyway.
Can you maybe just walk through what some of the.
Holdups might be specifically are we is it kind of.
Know your customer compliance angles that are of concern is it capital structure and how to leverage ratio could work around some of.
You know the deposits that are being held that can't really be deployed anywhere I mean, what are some of the main pressure points around the stable coin issued at her or hopefully worked out and in the near future and I guess do you think your banking charter will serve as a benefit to trying to answer those questions are or.
Or do you think it could serve as a detriment in terms of your capital requirements and things that that might make it harder to be competitive longer term and the issuance of the coins themselves.
Sure Mike I appreciate the question and.
I guess the way I would frame this if you.
But all of the news that has been coming out recently from.
From the federal regulators around the President's working group on stable coins.
That is really the guidance that I think we.
Everybody is looking for we believe that that debt.
Look at.
Have.
You know essentially we've designed the M.
A stable coin in conjunction with with the M that.
From our perspective.
Well, we'll address whatever.
And this comes out from the President's working group, but what I.
Is is that.
Our banking charter it will not.
We don't view it at the detriment, but just the opposite.
All of the the guidance that we're seeing so far well I shouldn't call it guidance, but all of the news we're seeing so far would seem to indicate.
I would that the regulators are looking to bring the U S dollar back stable coin.
Under the regulatory tend to if you will or under the federal.
Banking guidelines and we believe that silver gate is is really well positioned and in fact best positioned.
To to provide the.
All the things that you were touching on know your customer a BSA anti money laundering, as as you're well aware, Mike we've been banking the digital currency industry for eight years.
We have a very strong relationship with.
And <unk>.
And you know it would just it would be imprudent for us to to too.
<unk> rushed the launch right as the President's working group is theoretically going to come out with some guidance because we want to have an opportunity to tweak or adjust anything on the margin that might be necessary.
Prior to launch, but you know where we're waiting just like everybody else for that guidance to come out and you can rest assured as soon as it is under this out we'll adjust.
Accordingly, and and be out to the market.
Okay.
Helpful. Thanks, and then secondly, I wanted to just ask.
Picture.
Our regular sand and so you know obviously there was to step back and.
And activity this quarter 162 billion, which you guys called out was related to trading volume, but I guess.
So to try and put it to single here I mean, how should we think about it.
Your competitive positioning.
[noise] about today in the marketplace I mean on the one hand.
It seems like your product roadmap is the most advanced of the banks operating in this space, but on the other hand, you know you have competitors with larger balance sheet may be the ability to offer interest on deposit and and things of that nature I mean do you fine.
Those.
Turning to be eating into any of your advantage as.
As you try to continue to grow this business or do you feel that the the entirety of your product offering with the leveraged loans and some of the custodial partnerships, you have and and and what have you.
Still have a pretty good moat in terms of your sand network.
<unk> to be are we we believe that our our moat is as strong as ever and the and in fact I think.
You know if you look at the San activity in the third quarter and compare it to two the you know to the broader market data the on chain transaction.
Volumes, which which we pointed out on slide four of the presentation.
That would certainly suggest that that.
You know that silver gate is right in lockstep with with the broader market.
And.
As you know Mike we've been working for.
Actually for.
A couple of years now well probably three years since we launched the sand to to try to understand and try to find correlation between our sand volumes and.
And volumes in the broader market and as more data analytics.
As the.
<unk> analytics from the blockchain or are improved and refined I'm working with a.
A great team at coin coin metrics.
We have been able to to ascertain that that the bitcoin and ethereum volumes are really a good proxy for.
The data and volumes I do want to speak just briefly to.
To the part of your question regarding.
Our product suite.
One of the one of the great things about the silver Gate Exchange network. The platform that we've developed is the network effect and the fact that as we.
<unk> onboard customers and as we continue to add products and services you know those customers just become more and more sticky and the real.
Story here in the third quarter I think is the continued growth of Sen leverage and you know and.
Market that was you know if you look at the bitcoin.
This throughout.
And you look at the trading volumes as as you know we've shown from coin metrics you know the.
Fact that that we were able to grow deposits you.
You know maintain a high average deposit and then start to deploy those the power continued to deploy those deposits in San leverage.
We're just we couldn't.
Couldn't be more excited about where we're sen leverage is headed for the future and and.
You know, we we think that fee income again, while it was down from the from the second quarter. You know it was higher than the first quarter and if you look at and sand volumes.
First quarter to the third quarter, we will look at fee income.
First quarter to third quarter.
<unk> volumes were down just a little bit or our deposits are certainly up significantly and fee income is up as well. So we really feel like we're still hitting on all cylinders.
The next question will come from Ken Zerbe.
With Morgan Stanley. Please go ahead.
Alright, great. Thanks.
So first of all I'd say I love Slide four I think it definitely shows some pretty interesting trends, but I guess the question is just given the spot trading volume has declined so much in three Q right and obviously, that's tied to Sen leverage.
Sorry, it's tied to Sen transaction volumes seem presumably is also tied to fee income being down as much as it is this quarter ex the gains of course.
It just feels like you're you're clearly very tied.
Rightly or wrongly to the spot trading volume.
<unk> point in theory is there anything that you guys can do to.
Just help separate that out or sort of break that correlation a little bit more because I guess the alternative if you can't just suddenly we're all just looking at spot trading volumes to know whether or not youre going to have a good quarter.
Thank you.
Yeah Ken.
Thank you very much I'm going to turn it turn this over to ban in just a minute give give him a chance to weigh in here, but.
One thing that all.
If we zoom out a little bit and look at this at a high level.
We have.
As I mentioned previous.
So you know we have been banking this industry.
448 years.
And so we've certainly been through through you know kind of peaks and valleys.
In our.
And our.
Our growth, having said that Geoff.
Generally growth has been up into the right.
And as we pointed out.
We've now crossed over 1300 customers added 300 customers. This year. So so we are in a growing industry with a growing customer base and a growing suite of products and so.
While we certainly.
And have a high correlation to spot trading volumes as we've indicated here in the presentation and as you just pointed out.
We believe that all of that is generally going to be growing up into the right.
In the coming months.
Quarters years.
And as we continue to add additional products and services we.
Certainly we will continue to to grab more and more income.
But let me turn it over to Ben to see if he wants to add any additional color there.
Yeah. Thanks for the question Ken.
Yes, I mean, just I think building on what Alan just said.
Another use case for them.
Will a stable coins.
And you know today, we bank.
Each of the four regulated stable coins that are that are in the market and we know that our customers use the sen.
In order to maintain burn stable coins 24 hours a day seven days a week and so you know as we've talked about in the past.
And in this case.
Today for stable coins is really around trading.
But as we're seeing more and more that use cases, moving towards commerce and remittance and so.
I just as Alan said the goal here is to add products.
Continue to leverage our capabilities of the <unk>.
That you serve serve our customers solve problems for them and.
And continue to grow our share.
As Alan explained.
Alright, no I understood. Thank you and then maybe just my second question can you just address deposit growth, obviously, you've come off of two or three very very.
Good quarters, and this quarter deposit growth was a lot more stable.
Then it has been in recently I know one of your competitors just posted I think it was like 12% digital deposit growth for three Q and you guys posted something far less can you just help us understand like why they might be correct.
You don't have to address them, but I'm trying to understand what the dynamics are in your portfolio of maybe why deposit growth was muted desert was thank you.
Sure.
So.
When you look at the the benefits that the Sen provides.
We need to step back and look at.
What are we really trying to accomplish what what what problem do we solve for our customers and the the problem or the service to to make it a positive statement is a is a 24.
Four seven on ramp an off ramp to the digital currency ecosystem.
And so in order to to provide that you know and what does that do it reduces <unk>.
Banking friction reduces counterparty risk increases capital efficiency and so we.
We really strive to work with our customers to make sure that that that they have.
Access to liquidity.
On our platform 24 hours a day seven days a week and so we actively work with our with our large exchange customers are large OTC desks to make sure that they.
They have enough deposits on the platform, but not more than enough.
You know two to handle the 24 seven nature of this ecosystem and we actively encourage our customers. If if if volumes are down okay. So.
You know and obviously volumes.
<unk> were down.
In the third quarter and they have capital sitting there idle.
And they they were looking for something else you know they are looking for earnings on on that capital than we encourage them to take the excess.
And and and put it somewhere else now having said that we were just.
Now ramping back up our own off balance sheet levers. So that we can sweep deposits off balance sheet.
You know so that our customers can can earn a yield on their excess deposits that was something that we had done back in 2017, and 18, and then that need had kind.
Kind of gone away, but now as more capital has come into the system and we're going to start to see these peaks and valleys.
You know what we want to do is make sure that our customers have enough capital on this and to transact 24, 7% and if they have if they have excess that they want to earn yield on.
Sean we don't pay interest on these deposits, but we're happy to help them find.
An alternative solution so that they can earn interest on the excess.
Our next question will come from Joseph <unk> with Canaccord. Please go ahead.
Hey, guys. Good morning, Nice results just wanted to look at quarter, two a slightly different lens. So we saw some decoupling, obviously this quarter transaction volumes down sequentially, but.
Deposit growth up sequentially.
Net income up sequentially so is that.
That you know when you look at it you know at the business is that.
Is that you know theoretically sustainable in kind of a a more down trading quarter.
Given the levers in the business.
And then you know kind of what did you learn you know in the quarter.
Given that decoupling.
Yes, good morning, Joe. Thank you for for those observations and I I think.
You know what.
What we kind of re learned is something that that.
That we've experienced in the past, which is when volumes decline, we don't generally see.
A corresponding decline in our deposits this was certainly true.
Now I'm going to compare to the crypto winter, we're certainly not in a in another quote unquote crypto winter in fact.
I think the summer was kind of a pause that refreshes as we were heading here into the continuation of this bull.
Market, but what we saw in 2017 and 18 was was a massive run up in deposits during that last Bull run and then as things calm down.
Did not we did not see a corresponding decline in deposits and that is again it goes back to what I was saying in.
Previously our customers want to maintain liquidity on our platform to take advantage of trading opportunities and they they don't look at this as a flash in the Pan They look at this just the way we do that this digital asset. This digital currency market is here to stay its not going away and so they're going to maintain.
Deposits on our platform in.
In order to take advantage of the opportunities that that they see and then on top of that as we continue to add customers as we've discussed in the past, there's there's a natural kind of lag between when we add a customer.
And then when.
When they get their funding.
And start using the sand et cetera. So so we kind of see a little bit of a you know anywhere from.
One to two quarter kind of ramp up between when we add a customer and when we ultimately see.
The the they're full deposit capability hitting the sand.
And so this just gives US you know.
Talk about re learning it just proves out the fact that while trading volumes declined you saw the deposits hold steady and actually grow a little bit.
And and it allows us it gives us confidence.
To continue to invest those excess deposits.
Which again takes us right back to the great opportunity that we see with Sen leverage.
And to be able to put out that that incremental deposit growth into higher yielding assets and you know and the fact that that that we built this.
This infrastructure of of digital asset custodians, so that our customers can can have confidence that they can borrow against their bitcoin, while holding the bitcoin collateral with one of our custodial partners. Just gives US you know a lot of optimism for for the future of that product.
That's great and you know in the in the last few months from some other digital asked that players that have been providing yield on quote unquote.
They're not really savings accounts, because they are not banks they have gotten some regulatory scrutiny on those yield bearing.
Bearing accounts that they're providing to customers.
But given your bank charter I think you would see less regulatory scrutiny on that kind of product. If you know what I'm talking about and I'm. Just wondering if you see that as a as a business opportunity at this point or.
It.
It doesn't kind of fit in the roadmap at this point thanks Alan.
Yeah, Joe that's that again, a really good observation and we've certainly many of those folks that are seeing some regulatory pushback are customers of ours.
And have you now have.
Products, but you know one of the primary differences as you're pointing out between their business models and our business model is that we are.
A federally a state chartered federally regulated financial institution.
And so we could certainly if if we.
Have great too.
We could start taking folks taking their deposits in and paying them interest.
But we we have our own source of funding, which is the deposits from from this ecosystem a lot of those those other platforms don't.
Theyre not bank so they don't.
We want they don't have a low cost deposit source.
And so where we're really focused is on.
You've probably heard this this term, but this pristine collateral with bitcoin as as a digital bear asset and I've I've said on these calls and in other venues.
Don't have you know in the past that we believe that that this sen leverage bitcoin collateralized lending could be some of the best lending we've ever done because the collateral is a bearer asset that we have possession of when we when we lend against it.
And it's in any market.
That's trades 24 hours a day seven days a week.
So we feel really good about the collateral we feel really good about our or our ability to to sell the collateral if need be having said that as I pointed out in my opening remarks. This morning.
Sen leverage platform is absolutely working.
As designed with with no losses, no forced liquidations.
And so again, you know and and the risk adjusted returns on this or you know or.
In a zero interest rate world.
We just you know again, we view this as a great opportunity and we don't feel like we need to deviate and start.
Working at some of the other platforms are doing out there providing yield on an unstable coins et cetera.
We think our platform and the way we're designing it with the ability to take low cost deposits and put them out in.
In San leverage.
And other short duration assets.
You know two to two <unk>.
T V.
You know a fair.
Balanced risk. Adjusted return is is is the best way for us to to provide a return for our shareholders.
Doing well <unk> next question will come from George Sutton with Craig Hallum. Please go ahead.
Good morning. This is Adam on for George Thanks for taking my questions. I was hoping you could dive a little bit deeper on Sen leverage.
Specifically is there anything in your outlook in terms of how you.
See an expanding over the next year or if theres any milestones stones or goals you could speak to.
Yeah, I'm I'm sensitive to the fact that I've been doing all the talking here and I've got Tony and Ben here with me.
So I'm going to again turn it over to Ben and just a second.
But just.
At a high level, what I would say is is that.
When we first launched the program when we came out of the pilot.
We we mentioned you know and we've reinforced the fact that that we're thinking about are you in the short term kind of concentration levels.
Not to exceed our capital base and you know the good news is here as is as we've been raising capital along the way here as we've been growing so that that gives us an opportunity to continue to grow that book.
And as as you saw in the quarter, we had some nice growth, but let me turn it over to Ben for a little bit more color.
Color commentary.
Yeah, So I mean, we've.
We've already mentioned it but I think it's notable that commitments grew by $64 million in the quarter and Outstandings grew by $51 million at.
At a time when trading volumes were down industry wide by about 43% and the.
Average price of bitcoin during the quarter was.
It was down about $5000. So given those headwinds we feel good about the growth in the quarter.
And maybe importantly, we still have less than 10% of our customers that are using the product.
So you can see the incredible growth that we have there the.
The other thing that's worth noting is that we haven't had to compromise on the yields that we're charging or the loan.
Loan to value ratios that we're offering.
Two customers.
Maybe the last comment here is that.
We did marathon digital which is a customer of ours made an announcement on October 1st.
We had agreed to provide them with a $100 million line of credit.
Obviously, that's not.
Not included in the in the third quarter number.
And we've talked about.
Quint miners as a potential user of some leverage in the past.
In this particular case marathon wants to hold bitcoin on their balance sheet. So it really looks more like the corporate treasury use case than it does financing mining equipment.
Equipment and so for us this loan.
The others that.
Where theyre bitcoin as collateral we take possession of the bitcoin and we hold it through through one of our custodial partners. So.
As as Alan mentioned.
We think that there's just a tremendous growth ahead.
That said, we're going to we're going to roll it out and continue to roll it out in a in a prudent way.
How do we do with with all products.
That's helpful. Thank you and then final question for me I know that you're limited in what you can talk about with respect to <unk>, but.
Stacy.
This book announced this morning that selected coinbase as a customer partner for Novi and they'll be using the Pax dollar for that obviously there is some benefit there with working with tax on the Minton burner enablement, but I'd be curious to know if there's any other work you're doing that's adjacent to the DM pilots or is this potentially an extension.
<unk> of that work as well in Europe.
In your view.
Yeah, It's a it's a fair question and were certainly.
We're certainly working closely with with them and with Paxil paxos.
You you you know it was one of our very first customers.
In this you know in this initiative going all the way back to 2014, or 15, and and so as as they worked with novae to bring this pilot out we've we've certainly.
<unk> been involved in supporting them in that effort.
As to.
The broader launch.
There.
We only know what we're not inside at Facebook are inside it nobody so we only know what they what they say publicly. So there's you know they've you know, but what I think David Marcus you reiterated this morning was was that.
This is a pilot for them to test you know all.
All of their all their connectivity et cetera, but they still intend to to.
But today Amazon is that you know as soon as that comes out and unfortunately, as we said at the outset, we really can't.
Can't say anymore at this point about you know about.
The D M opportunity.
Our next question will come from will Nance with Goldman Sachs. Please go ahead.
Hey, guys. Good morning, Thanks for squeezing me in here.
Good morning will.
Maybe I can maybe I can kick off on on some of the balance sheet dynamics and the deposit reinvestment.
They you did throughout the quarter I, just wanted to get a sense for kind of destination mix of the balance sheet. Just hypothetically. If if deposits are kind of flat from here or is this roughly the next kind of securities and cash that you guys are looking to achieve for a given level of deposits is there more room to do on the deposit reinvestment.
Estimate that could.
Could lead to further uplifting kind of earning asset yields over the last couple of quarters.
Sure well I think I'll I'll go ahead, and give Tony a chance to to address the question I just the only thing that I want to say before that it is.
As you know I'm I'm you know, while we don't provide guidance as you know, but you know I I wouldn't want anybody to misconstrue anything that I've said, so far to suggest that deposits are going to be flat from here you know I mean.
Certainly yeah, Yeah, you know in the end and so I.
I guess the question is you know if if if you zoom out again and look at at the ramp over the life of our you know over the last three quarters obviously.
We played catch up a little bit in terms of deploying the deposits as we you know as we confirm that they were sticky.
Thank the the solid average.
As deposit growth.
The fact that you know when and if you look in and look at the high and low and maybe Tony can address this a little bit.
But you know the fact that that are that you know we saw a little bit less volatility between the high and the low also gave us confidence to and gives.
This confidence to continue to deploy the deposits, but let me not to steal any more Tony's Thunder Tony.
Yeah, no. Thanks, Alan and thanks for the question will so I would say a couple of things first our philosophy and our approach to the securities portfolio Hasnt really changed so we.
We will continue to prioritize asset quality.
Preservation of liquidity and.
<unk>.
When you look at the securities portfolio.
We've said in prior quarter, you know, we kind of targeted a 50 50 mix between fixed rate and adjustable rate and so the adjustable rate portion of the portfolio gives us a lot of flexibility.
When you, particularly when you combine it with cash.
There is.
Clearly.
There's clearly room there.
To touch on Alan's comment on the deposits when you look at the high and low.
In the second.
Second quarter.
High end low relative to the average was.
In round numbers closer to 25% on either side of the average whereas in this quarter.
It was closer was a tighter band.
Let's say plus or minus 10%. So that also clearly gives us.
Confidence that.
That that that we continue to see flexibility and opportunity.
To invest.
In terms of.
In terms of.
The asset side of the balance sheet.
Yes.
Got it thanks for that.
Yeah totally appreciate my bet is more just asking what proportions on the balance sheet.
Using flat as a as a kind of a strawman argument for how.
How you guys would look to invest and they get a level of deposits I. Appreciate that and then my follow up question would just be on some leverage and some of the some of the stuff that's been coming out of Basel Committee around capital.
Capital risk.
Weightings on crypto exposures on the balance sheet.
Do you guys think about the likelihood of capital requirements for things like San Library, and other kind of crypto exposures, increasing and maybe you could touch on sort of off balance sheet.
Vehicles that you could use percent leverage if there's been any progress on what those might look.
Look like.
Sure. Those are those are great follow up question as well and so on the on the Basel front.
For those not familiar with that.
There was a proposal that was floated a couple of quarters ago.
That that would suggest that that.
Assets that banks hold on their balance sheet crypto.
Crypto assets would be subject to a much higher risk weighted capital treatment.
And when you do the math on that.
You know it would essentially require banks to whole dollar for dollar you know a dollar of capital.
Every dollar of exposure that they have the crypto asset that you know first thing is that as a proposal or it's a basel proposal.
That would need to first be.
Finalized and then it would have to be adopted by the U S regulatory agencies and you know find its way into our regs, so with all that being said.
And if that was to happen.
As we pointed out if it's dollar for dollar that you know we've already set our own.
Risk framework and for the time being for the near future.
We don't intend to take our on balance sheet exposure.
Two.
A level that would be higher than our capital base. So so we would theoretically be in compliance anyway, because most of the rest of our balance sheet is you know is is on a such a such a low risk weighted basis.
As to then and you know how do we continue to grow them you know if if.
Two are theoretically limited to one times capital well that that is the off balance sheet that you're that you're referring to and while we don't have anything to announce today we are actively.
Working with with folks to to come up with structures for what that might look like and and this gives us.
The opportunity as we've said in the past to think about this as more of an of a loan origination platform and an asset management opportunity, where we could continue to originate and service these loans.
But but yet lay off some of the balance sheet risk to two other.
We are the other partners and in a yield starved world, you know, especially as bitcoin becomes more mainstream.
You have things like E. T F that was just launched today.
We feel really confident that that theyre going to be folks that are looking for yield.
That are going to be good partners for us in that regard.
And that's that's just another reason why we're so bullish on the same leverage opportunity.
Our next question will come from Dave Rochester, with Compass point. Please go ahead.
Hey, good morning, guys.
On a desk on the client growth front.
You guys continued to report a pretty robust pipeline of new accounts in the Onboarding process was just wondering if there were any lumpy adds tell me that you can think of off the top of your head that might move the needle.
Sort of stand out in your mind or would you say you you're generally already bank the largest players in the space and the additions coming in today are general.
I only smaller players.
Yeah, that's a that's a great question and obviously you know Dave we don't provide guidance.
And.
But even if we did it it's really hard it's really hard to predict because there are so many new potential entrants coming into.
It's one of the beautiful things about.
Being in this ecosystem is is that as as additional institutional interest you know comment.
That interest turns into action.
We regularly see new folks hit our pipeline that weren't even.
The state radar before but I'm going to turn it over an abandoned them see if he has any additional commentary that you know that he wants to provide along those lines.
Yeah. So I guess just to anchor we have added about 300, new customers this year.
And the pipeline remains robust at about.
On our 100 <unk>.
Prospective clients and when we say prospective clients those are those aren't just leads.
There's quite a few customers or prospects that we turned down pretty quickly still that are that are kind of coming through the front door. So we feel good about that that 200 customer number and our ability to continue to grow from there.
And then as Alan mentioned, it's really kind of hard for us to predict who then the next large entrant into crypto.
Might end up being but because of the sudden network.
Spokes, usually end up coming to us.
And you know we.
We explain to them the same network.
Ultimately what the what the benefit of that is if they haven't heard from the other participants already but.
And then beyond that I think as we you know as we continue to focus on the growth and stable coins and their usage for commerce and remittance.
Really opens up.
A whole new category of.
And of customers. If you will that are really focused on.
Payments and platforms. So.
So overall, we feel good about the growth prospects there.
Great.
All right that I was just curious you know over over time have you seen.
The onboarding process.
<unk>.
Maybe go more smoothly or have you been able to shorten the timeframe that you are able to bring on new customers or does it just vary across.
The customers, depending on where they are coming from just curious is that processes.
Accelerated.
Accelerated over time.
Yes, we have a pretty.
Efficient.
Customer on boarding process, we certainly.
Earlier in this initiative.
We have some times when.
We can't we commented on this probably early when we were public the fact that.
You know some of our customers used to refer to our.
We call that our pipeline they called it a waiting list. This is back in the 2017 and 18 run up.
But you know with with some of the technology tools, we've implemented with Salesforce with the you know with our customers' ability to to you know.
Do the the full process online.
It really just depends on what on whether they're ready.
The what what we need from a new customer in order to onboard them is is pretty straightforward and it's pretty standard.
And so so the only difference.
The difference is that that that come into the onboarding.
It.
Would depend on the level of technological integration that our customers are looking to do which even that is is is pretty seamless.
Folks can can get on our website and get into the API sandbox and test things up so it really just depends on their engineering resources.
<unk> priorities that they have on their end.
But but we have not suffered at all nor I nor have our customer suffered from from the ability to you know to get on boarded and and and get go out get going just as quickly as as as their priorities allow.
Our next question will come from David <unk> with Wedbush Securities. Please go ahead.
Hi, Thanks, a couple questions. The first one is a follow up question on the novae announcement of using the Pax dollar I was wondering to what extent does this jeopardize the economics to silver gade from DM.
And the D M market opportunity essentially cut in half if both DM and packs of the packs dollar is available and the new V wallet or is the corporate sponsorship of D. M strong enough to ensure it's the dominant coin and the novae wallet.
Yeah David.
Is that that's a great question, obviously, we don't know the answer to that question.
What I would say is you know first of all paxos as is is.
A great company with a great product and we're very happy to support the Pax dollar and and all of the activities.
You know that we support for taxes.
That.
Ultimately the market will will will decide right you know one of the things we've talked about in the past is.
Why did we.
Choose to work with with a D. M. For instance, as opposed to launching our own stable coin and it really comes down to distribution.
And.
So.
The answer to your question will be.
It will be market, driven and it will depend on.
Which which platform, which distribution wins and you.
You know I I.
I think over the long term.
I'm.
And I'm not sure there's there's going to be room for for you know for a half a dozen U S. Dollar back stable coins I think there there will be.
There will be some consolidation there are certainly some folks that have a head start.
But but the use case.
Or has been around crypto currency trading and the real opportunity is around remittance.
Sumer.
Consumer to merchant payments et cetera, and.
So I think we're still really early and it's really hard to.
To answer the question.
Question the way you framed it.
Yeah fair enough. Thanks for those comments and then.
My follow up question is.
Related to you commented earlier about marathon digital colding than the $100 million facility, which is quite sizable relative to the existing loans outstanding.
4% leverage can you talk about the opportunity and potential loan demand from other big coin miners, how big is this opportunity.
Yeah. That's that's a great question and we think the opportunity is huge.
Which kind of gets us.
Back to you.
You know one of the other questions that came up here a few minutes ago around.
Potential off balance sheet.
Vehicles for us to to continue to originate and service. These these loans you know, let me say at the outset that.
You know that that.
Use case, and I think Ben really described it well as kind of the corporate Treasury use case as opposed to the trading use case with just again shows kind of the evolution of this ecosystem right. When we first launched the pilot for Sen leverage.
Almost two years ago now the primary use case was was.
Was around traders those who were looking to.
Pledged their bitcoin as collateral to buy more bitcoin trading scenario, but we're seeing the maturation of the spacing and corporate treasuries.
Miners are the most obvious example companies that are mining.
[noise] bitcoin want to hold the bitcoin.
But want to continue to reinvest in plant and equipment and and so we'll take their bitcoin as collateral.
<unk> alone, but it is a line of credit.
And so you know what we don't know is how much of that though these lines of credit will actually be utilized.
But we want to be ready to handle the demand.
Because the the bitcoin mining use case is only one of of potential many corporate treasury use cases, as more and more corporate treasuries put bitcoin on their balance sheet. So so you know this is one of the reasons. We just we're so excited.
Cited that you know that we saw this opportunity early and that we've been working on it.
Literally since for for over two years since since the second quarter of 2019, when we first started to develop.
The Sen leverage product.
Our next question is a follow up from Ken Zerbe with Morgan Stanley. Please go ahead.
Alright, great. Thanks, just one quick follow up I know you don't provide guidance totally fine, but there's definitely been a lot of sort of interest and activity around bitcoin going from I don't know call. It 40 something thousand dollars.
Up to $60000 all really around the first couple of weeks of October.
Are you able to comment about.
Actually you know the trading volumes that you've seen over the over the last couple of weeks.
Thanks.
Yeah, Ken it's a it's a fair question.
And Unfortunately, we don't provide any kind of a you know mid mid quarter update unless you know unless its required disclosure as we've done in the past.
When when we've gone out to the capital markets et cetera. So.
But what what I can point you to.
At least there's a partial answer to your question is is I'm. Just just you know if you're a slide four of the earnings presentation, which is the correlation between spot volume spot trading volumes.
And Sen activity.
If in fact that correlation holds.
It is true then.
Then.
I think folks can just look at.
At at at that kind of mid quarter in and say well gosh things or if things are down. So you know silver gets probably flat or if things are up you know maybe.
You know, maybe silver gates up but it's.
It's not guidance.
It's a correlation that's not 100% right you know I mean I you know Ben did some work on this and I know we're short on time, so I won't turn it back over to him here, but you know we've there is a high correlation, but but it's not 100%. So unfortunately, that's the best we can do at this point.
Alright, thank you.
This concludes our question and answer session I would like to turn the conference back over to Alan Lane for any closing remarks.
Great. Thanks, Matt.
Yeah, and thank you everybody for your participation I'm incredibly proud of our great results, which are a testament to the continued hardware hard work of the entire.
Silver gate team.
And as you can see we built a diverse earnings stream with multiple growth levers and looking ahead, we continue to see tremendous opportunity to provide innovative solutions for our digital currency customers I look forward to sharing additional updates on our strategic growth initiatives in the coming quarters. We appreciate all of your support and.
And I've said this before but it's a great time to be a bitcoin banker. Thank you everybody have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.