Q4 2021 Silvergate Capital Corp Earnings Call
Good morning, Good afternoon, and welcome to today's soon forget capital Corporation fourth quarter and full year 'twenty 'twenty. One earnings conference call. My name is Ashley monopoly Rep rates are today, if you'd like to ask a question during the Q&A portion of today's COO, Jim Ritchie Sokha pressing star one on your side of thing keep out now.
I'll now hand, you over the hump to stand back to begin so Hunter. Please go ahead when you're ready.
Thank you operator, and good morning, everyone.
We appreciate your participation in the Silver Gate Capital Corporation fourth 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 February one 2022.
Access to the replay is also available 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.
Such statements are subject to a variety of risks uncertainties and other factors, including the COVID-19 pandemic.
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.
2021 was another year of significant growth and momentum for Silver Gate Capital Corporation.
We further position silver gate as a leader in the fast growing digital currency industry, demonstrating the strength of our business and our model.
Before I dive into our quarterly results.
I'd like to take a step back and reflect on some of our accomplishments over the past year.
First full year 2021 net income available to common shareholders of $75 $5 million nearly tripled compared to 2020 <unk>.
Driven by an increase in fee income to $35 $8 million.
And significant growth in our balance sheet.
We also saw a record demand from our customers that require the ability to move U S dollars and real time 24 hours a day seven days a week using our API enabled proprietary silver gate exchange network or scent.
Resulting in $787 billion of thin transfers in 2021.
Third we scaled sen leverage our bitcoin collateralized lending product to $571 million in commitments.
And announced partnerships with two additional digital asset custodians.
We continued to lay the groundwork for our stable coin infrastructure technology offering.
And finally, we completed four capital raises totaling $1.3 billion to support our record deposit growth.
As I've noted in the past our growth won't always be linear, but I'm incredibly proud of what we have been able to achieve over the past 12 months.
Now turning to our fourth quarter results.
The number of customers on the sand platform expanded to 1381 this quarter.
An increase of over 400 customers for 2020 one.
Our pipeline of potential new digital currency customers remains robust as we continued to benefit from the powerful network effects created by the fed.
Then transfer volume of $219 billion in the fourth quarter increased 35% on a sequential basis and 270% on an annual basis.
As we did last quarter, we continue to work with coin metrics to better understand how sand activity is correlated to the broader industry.
According to its data both bitcoin and Ethereum dollar trading volume increased in the fourth quarter and remained highly correlated with trends on the sand as you can see on slide five of our presentation.
Transaction revenue from digital currency customers of $9 $3 million in the fourth quarter increased nearly 146% compared to a year ago, reflecting continued strong demand for cash management and foreign currency exchange services.
Turning to Sen leverage.
Total approved lines of credit increased significantly from last quarter to $571 million compared to $323 million at the end of the third quarter.
The rapid growth of Sen leverage commitments demonstrates the products powerful use case and strong demand from our customers or our collateralized lending option to maximize their capital efficiency.
Additionally, Sen leverage continued to perform as designed with zero losses to date and no forced liquidations.
Driven by continued demand for the San average deposits from digital currency customers grew to $13 $3 billion. Another record compared to an average of $11.2 billion during the third quarter and $2 $6 billion during the same quarter last year.
Tony will discuss period end deposits further in a moment.
Finally, before I turn it over to Tony.
Wanted to briefly discuss some of our latest initiatives.
First in December we announced the launch of E. J F. Silver Gate Ventures fund, which is a joint investment vehicle focused on early stage startups, which are developing technologies that are poised for broad adoption in finance, including real time payments.
Digital assets and banking as a service.
In partnership with E. J F capital, we're excited about the opportunity to support entrepreneurs, who are shaping the future of the digital currency ecosystem, which will allow us to stay ahead of the curve as the next generation of products come to market.
Next I wanted to provide an update on our stable coin infrastructure initiatives.
Notably the report on stable coins issued by the President's working group in November confirms our belief that as an insured depository institution silver gate can play an important role as stable clients are brought within a federally regulated prudential framework.
We continue to believe that stable coins will become a meaningful payment rail for businesses and consumers around the world.
And silver gate is well positioned to deliver this product to our customers in 2022.
To this end during the fourth quarter, we updated our application with the New York DFS to form a limited purpose Trust company that we believe will allow us to hold U S. Dollar stable claim reserves in a capital efficient manner.
We continue to have an open dialogue with our regulators and look forward to launching this product in the coming quarters.
I'm incredibly proud of all that we accomplished in 2021 and as we look forward to 2020 , two and beyond I am extremely excited about the opportunities and areas for growth that lie ahead.
I'll now turn it over to Tony to discuss our financial results in more detail before we take your questions.
Any.
Thank you Alan and good morning, everyone.
Starting on slide six silver gate reported fourth quarter net income available to common shareholders of $18 4 million or 66 cents per diluted common share.
<unk> to $23 5 million or <unk> 88 per diluted share in the third quarter and up from $9 1 million or <unk> 47 per diluted share in the fourth quarter of 2020.
The year over year growth was driven by both net interest income and noninterest income.
Net interest income on a taxable equivalent basis was up 3% compared to last quarter and up 80% compared to the same period last year net.
Net interest margin, which I will discuss in more detail in a moment came in at one point at 11%.
We continue to invest in our strategic growth initiatives, including the development of stable claim infrastructure, which resulted in an increase in noninterest expense during the quarter.
These deliberate investments in employee salaries and benefits and professional services will support our future growth.
In addition, our income tax rate this quarter was 9%.
This quarter the effective tax rate was lower due to higher tax benefits recognized upon the exercise of stock options and tax exempt income on municipal bonds.
On slide seven deposits were $14 3 billion at December 31, 2021.
An increase from $11 7 billion at.
At September 32021, driven by growth in deposits from digital currency exchanges institutional investors and digital assets and other fintech related customers.
As Alan mentioned average digital currency deposits were $13 3 billion in the quarter.
As a reminder, our deposits from digital currency customers can fluctuate as evidenced by the high and low daily total digital currency deposit levels of $16 billion and $10 2 billion.
Respectively during the quarter.
Noninterest bearing deposits totaled $14 2 billion.
Representing more than 99% of total deposits at the end of the quarter.
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 eight net interest margin was 111% for the fourth quarter compared to $1 two 6% in the third quarter and $2, 85% in the fourth quarter of last year.
The decrease in NIM from the prior quarter was driven by a higher proportion of cash and securities relative to total assets as well as a lower yield on securities purchases.
Yield on securities decreased quarter over quarter due to lower interest rates on new securities purchases throughout the third and fourth quarters.
On slide nine noninterest income for the fourth quarter of 2021 was $11 1 million.
Decrease of $3 million or 21% from the prior quarter and an increase of $6 2 million or 128% during the fourth quarter of 2020.
Fourth quarter digital currency fee income of $9 $3 million was the second highest in our history.
The decline in noninterest income on a sequential basis reflects the impact of a $5 $2 million gain on sale of securities in the third quarter.
Year over year increase was a result of continued growth in fee income from digital currency customers.
Slide 10 shows noninterest expense for the quarter of $25 7 million up $3 3 million from the prior quarter and up $8 million compared to the same quarter of last year.
As I mentioned earlier salaries and employee benefits and professional services expenses increased year over year.
Driven by continued investments to drive our strategic growth initiatives, including stable coin infrastructure.
Turning to slide 11, our securities portfolio totaled $8 $6 billion with a yield of 1.04% for the <unk>.
Fourth quarter up over $1 billion from a balance of $72 2 billion at the end of the third quarter and with corresponding yield of one 2%.
Year over year Securities increased $7 7 billion.
In the fourth quarter, we rebalanced the portfolio in part by selling approximately $1 billion.
Of longer duration fixed rate securities and purchasing $2 $7 billion of shorter duration fixed and variable rate securities.
To that end, we will continue to take an active and measured approach to balance sheet management going forward with an objective of managed of maintaining a high quality securities portfolio.
Our total loans at December 31, 2021 were $1 8 billion.
Up $152 3 million.
Or nine 4% compared to the third quarter driven by an increased in some leverage and mortgage warehouse balances, partially offset by decreases in our commercial real estate and single family real estate residential loan portfolios.
The latter two portfolios or paying down.
We are not originating new loans in these categories.
On a year over year basis, total loans were up $167 8 million or 10%.
Overall the COO.
Credit quality of our loan portfolio remains strong.
Nonperforming assets totaled $4 million.
Or three basis points relative to total assets at December 31, 2021.
Decrease from five basis points relative to total assets at September 32021.
Before moving onto our capital ratios, let me briefly discuss the details of the equity offering we completed in December .
During the fourth quarter, we issued and sold nearly 4 million shares of class a common stock.
The gross proceeds of the offering were $552 million in net proceeds to the company were approximately $533 million after deducting underwriting discounts and offering expenses.
This marked our fourth equity raise of the year aligning with our goal of effectively capitalizing the business and continuing to execute on our growth initiatives.
Going forward, we will continue to evaluate opportunities to raise capital efficiently.
Order to remain on the forefront of the digital currency industry evolution.
Now looking at our capital ratios on slide 12, our tier one leverage ratio was 11, 7% at the company level and 10, 49% 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 56% reflects the fact that a large proportion of our deposits are held in cash.
In high grade and highly liquid securities.
Our loan to deposit ratio decreased to 12, 46% at the end of the quarter driven by the growth in our deposits during the quarter.
Overall 2021 was an exciting year for silver Kate and I look forward to continuing our growth in 2022 and beyond.
With that I.
I'd like to ask the operator to open the line for any questions operator.
Yeah.
Thank you as a reminder, that star one to ask a question we would ask participants to limit themselves to one question and one follow up each that we made process. The whole Q you may re queue for further questions.
Star one on your keypad and our first question today is from Dave Rochester from Compass point. Please go ahead.
Hey, good morning, guys.
Just a quick one.
One on.
The limited purpose Trust company did you guys mentioned what are you expecting for the timing of finalizing that and what kind of feedback are you expecting you can potentially capture from those deposits that you can hold on that.
Yeah I appreciate those questions. Dave So we don't have good visibility on timing at this point what I can tell you is is that if you go all the way back to our.
You know our prospectus when we went public we had disclosed there that that we were working with the New York DFS on a limited purpose Trust company in.
In support of <unk>.
Of our stable coin thoughts and and you know with the onset of the pandemic a couple of years ago, and then the ongoing evolution of the stable coin initiative, we had put that that on hold.
That being the trust company application, but now as we're seeing some clarity around how the.
President's working group report came out addressing stable coin.
And banks ability to participate in stable coined as as we've.
<unk> been saying all along we felt that it was time to Reengage with the New York DFS and so we've done that we've updated our application.
That went in in the fourth quarter and where.
That's part of the strategy of thinking about how we will manage the reserves.
For the L, a which would essentially be the the incoming deposits that would be supporting the stable coin. So we're not yet ready to talk about fee income opportunities.
What the timing is etc, but suffice it to say that that we're optimistic that that we are going to be able to launch something here in 2022, and I'm, having the New York DFS Trust charter is a key part of that strategy.
Great appreciate the color there maybe just switching to.
The pipeline of new customers it sounds like that's really strong over 300.
Was just curious just looking back at prior.
Prior decks.
It seems that the pipeline is generally been over 200.
You've added 120 accounts in <unk> around 80% and <unk> about the same number in <unk> was just curious how long does it take to actually onboard these accounts.
What's the conversion rate of that pipeline and then maybe if you could just talk about customer attrition, if youre actually seeing any.
Just to try to put them all together and understand the growth in customers per quarter that'd be great.
Sure you know what.
I'll I'll go ahead and hand, it over to Ben to address those those questions I appreciate it.
Yes, thanks for the thanks for the question and you're absolutely right. We saw incredible demand during the quarter for four new accounts.
Both from new customers and existing customers the numbers that we report are from.
Or from new customers.
And yes, we're really seeing strong growth in the institutional investor category.
And.
And really strong growth for the entire year. So when you look at the number as of the end of last year were just under one.
1000 clients and as at the end of the quarter, we were close to <unk> thousand 500, So we added over 400.
Customers during the quarter.
Sorry during the year rather.
And from a base of 1000 up to 2500, which we think really speaks to the benefit that our customers see from the same platform.
The other thing I'll say on this topic is.
I was looking the other day, we implemented salesforce to help this process a few years back it was over two years ago and I was looking at the total number of leads that we had received through that channel and it was it was over 10000.
So what that shows you is just the incredible incredible sort of demand.
Four.
For our products.
And really that.
So that that number of 300 that you referenced really does point to those are qualified leads those are folks that we believe will onboard and ultimately become.
Customers of ours.
So generally the conversion rates are really high on that kind of pipeline that you guys talked about.
That's right that's right yeah.
And in terms of how long it takes to onboard customers. These days is that time shrunk.
Over time or in.
Roughly what is it today on average.
Yes, so we.
So we don't disclose the actual amount of time that it takes and what I would tell you is we have our customers in three different categories exchanges institutional investors and other customers in.
In each category takes a different amount of time.
On board based on the due diligence that we did we have to do before we onboard a client.
Institutional Investor category is probably the fastest.
Just given the nature of of what Theyre doing and the fact that there they tend to be investing.
Their own capital.
So we have.
I would say that we have optimized for for that process at.
At the same time.
We understand that this was a this was a compliance first initiative back in 2014.
And the last thing that we want to do is is take shortcuts in terms of who's a customer of silver gating who's able to use our platform.
So we're maintaining the integrity of that evaluation and at the same time onboarding customers as fast as we can.
Okay.
The next question is from David <unk> from Wedbush, David. Please go ahead.
Hi, Thanks, I have a follow.
Follow up on the stable quaint initiative.
Is it looking like D. M may not happen could you talk about your distribution strategy related to the stable coin initiatives. If you were to go about it on your own.
Yeah, Good morning, David.
So.
The way, we're thinking about stable coins.
Hasn't changed that that being that we view the opportunity you know and again just to step back and level set the existing.
Stable coin market is there primarily in service of digital currency trading and where we view the opportunity in the future is really around commerce and remittance.
And in order to to really get the distribution.
For that use case, we do anticipate that that we will be working with many of our existing customers.
But adding new customers who have them.
You know already established retail distribution channels, and so without talking specifically about DIAM and just zooming out a little bit and thinking about the strategy that really hasn't changed we intend to to be the issuer of E U.
S dollar back stable coin and we would expect that the distribution for that stable coin would largely happened through our existing customers as well as as new new potential customers that have retail distribution.
Great. Thanks for that and if and I've got been getting this question from investors. If if fed sponsored CBD C were to come to market to what extent would that lower the Tam for for private stable coins.
Yeah.
So certainly.
Yes, a U S.
If the U S. CBD C is is launched and it is a direct to consumer direct to retail C. D. D. C. Then that would essentially be competing with with any other existing.
Or proposed stable coin out there.
I guess the question that we ask ourselves and we've been thinking about this for a long time as you know.
Is it likely that the U S is going to issue a stable coin directly to retail or is it more likely that we're not going to see them.
You know a disruption of the two tier banking system and that rather.
Anything that that the U S might contemplate would potentially be issued by the community banking ecosystem and in which case I don't think there's anybody better positioned than silver gate to participate in that so so we don't view it we're not concerned about it at all.
Where we're sitting here.
No ready to launch something in 2022.
And you know the fed is still talking about what it might look like and even with some of your own power recent comments about the proposed report that's going to come out in the coming weeks as these recently said.
He's also indicated that that report is not going to be you know, it's not going to be there their views on how to do this but rather it's gonna be posing questions and it's going to be opened up for comment. So so not dissimilar to the fed now.
<unk> project that has been ongoing for years.
I think any.
U S D.
The BDC is likely years away.
Yeah.
The next question comes from Michael Perito from <unk> like who please go ahead.
Hey, Alan then Tony Good morning.
Sure.
Sure.
Just to start.
Curious if you guys would be willing to provide some some broad commentary around.
Some further commentary rather around your growth outlook for your business in 2022, I mean, it seems like there's a few dynamics that that people are kind of wrestling with right higher interest rates falling crypto values on the underlying asset crypto assets that is but it seems like you're exiting the year with pretty.
Strong momentum or a higher pipeline.
So you know realizing it's challenging to know what the crypto market will do 2022, I'm curious if you guys could provide just a little bit more context around how you view the silver good growth opportunity in 2022.
Given what you know today.
Sure, Let me start and then I'll kick it over to Ben to see if he has any further color that he would like to share.
But I think your observations Mike are spot on in that we ended 2021, probably.
With a with a stronger outlook you know across.
Across the different products that we offer them a stronger outlook than then within we've ended any prior year. If you think about our pipeline for for users of the sand as Ben was just talking about a few minutes ago. If you think about the growth of Sen leverage.
And that product just starting to hit its stride.
You know if you think about the opportunity that we see for the for stable coin.
So so we could not be more bullish on on what our opportunities are for the future, but as I've also consistently said.
This is not an initiative that is going to be just straight up into the right.
There we've experienced volatility we've been doing this as you know for eight years mm wave.
Some people are comparing the end of 2021 to the end of 2017, I don't really see that at all you know because because of the fact that we've ended on such a strong note and you know it's it's like you know you have these these point in time measurement at the end of quarters, but if you look at the <unk>.
Growing stream of of of the opportunity in the pipeline.
We're really excited.
And do you have any additional color that you wanted to add on any of those topics.
Yeah. Thanks, Alan so in terms of the market I mean.
When you look at the underlying.
In the fourth quarter, you really had sort of a tale of two quarters.
In the sense that October and November were really white hot in the crypto markets and then December really fell off at the end of November .
It's only one measure.
We have a much more diverse business than this but if you just look at the price of bitcoin as of the end of November .
It was about 67000.
And we finished the year bitcoin finished the year at 47000, so that's a that's a pretty significant drawdown in.
In the span of one months and so when we look at sort of the average metrics for for.
For the quarter with deposits at.
At 14 at average deposits of $13 2 billion.
Compared to even the second quarter.
Which was average deposits were $9 9 billion in a quarter that had incredible sand volume.
That tells us that while there is volatility in the underlying.
Our platform is continuing to grow the deposits on platform are continuing to grow the sand usage is is up the fee income was up so when we really go back to our key performance indicators and we'd look at that sort of what happened in the fourth quarter.
Even though there was volatility in the underlying to Alan's point, we couldn't have finished and in sort of a better place as we think about 2022 and beyond.
Okay.
Thanks for that and then and then just secondly, you know I know you guys don't provide earnings guidance, particularly around growth, but it feels like the conviction around.
The rate of expense and investment, but also the positioning of the balance sheet for higher short term rates are are two things that are a bit more I guess for lack of a better way of putting it in your control and you know it sounds like in the quarter. You guys took some actions maybe even enhance your positioning for higher rates further in I'd be curious if accurate.
Just provide some some general thoughts on expense growth and the potential benefit to margin from higher rates in 2022, as we move forward.
Yeah, Mike I'll go ahead and ask Tony to jump in here in just a second but just.
Give him a second to get off mute.
No we are absolutely continuing to invest in the infrastructure to support the launch of a stable coin in 2022.
And you know as you pointed out and as we shared in our in our press release.
And in our comments, we actually also.
We did sell some longer duration securities during the quarter.
Two to better to what we believe is a better positioning for for what is likely a rising rate environment here in 2022, but.
I'll turn it over to Tony now.
Yes, good good morning, Mike.
Most definitely in the securities portfolio.
Yes.
The securities that we sold us as.
I indicated in my prepared remarks, we're primarily longer duration.
Fixed rate assets.
Any.
Primarily mortgage backed securities.
And so in that category you can you can just see from the press release.
Based on the rate decrease in that category that we shifted.
To shorter duration to be positioned for for moving rates at the same time, we continue to add to the portfolio.
There was an increase in the tax exempt muni bond portfolio. So we feel we're in a really.
A really good place.
Entering.
Entering 2022.
From this perspective, particularly when you look at the cash balance.
In combination with the securities portfolio.
And then from an expense perspective.
There's obviously a lag effect on the impact of the hiring that we did.
During the third and fourth quarters so.
From a mathematical perspective.
There'll be some continued impact.
On the expense line.
But as again as we said in our.
As Alan just mentioned.
Not only are are continuing to invest in our strategic growth initiatives, but we've also.
Added.
So our foundational layer to support to.
To support.
The scale of our operations.
So.
So those would be my comments on both.
Balance sheet positioning on expenses. Thanks for the question.
The next question comes from Steven Alexopoulos from Jpmorgan Steven. Please go ahead.
Hey, good morning, everyone.
I wanted to just one as art.
Alan I want to follow up first on the digital currency customers. So I don't know if you saw it or not but signature reported this morning, and there are new client ads. If you look at that and they increased fairly sharply over the past few quarters, whereas for you guys that trend was flat sort of down over the past few quarters. They were reported 139, new client adds and you guys are 76.
What do you see why or why are you not seeing a similar increase.
They're saying I would've expected at least keep pace with new client answers what they reported this morning.
Yeah, It's you know.
We don't obviously, we don't have any visibility into what their numbers are who.
Who they're adding what types of customers et cetera. All I can tell you is is that.
As bandwidth sharing in his comments a few minutes ago, our pipeline is as strong as ever.
And.
We're adding customers at a really healthy clip and and so you.
The other thing and I don't I don't think been touched on this.
Comment on the fact that we don't really share like how long it takes to onboard a customer et cetera, but it also depends on the on the type of customers that we're adding.
It's very easy to add a a non san user.
Somebody that would be in the other bucket for instance that you know, it's a little bit.
You know it takes a little bit longer to add an institutional investor and then it takes quite a bit longer to add an exchange and so.
You know, it's it's it's possibly mix, but all.
I'll ask Ben to comment if he has any additional color but.
I did see there their earnings report this morning.
But certainly I I have no concerns whatsoever about our business and the growth that we're seeing and and the demand that we're seeing for for the silver get exchange network, Dan do you want to add any color.
Yeah. So you know that's I think that's exactly right. When we have this incredible inbound that I was talking about and one of the questions. We ask ourselves is what is this customer going to bring to the network. What are the products that they're going to use at silver gate, because it actually is possible, especially.
In this industry that you add customers that aren't accretive to the platform and aren't accretive to the products that you're offering and whatnot. So.
It's almost.
Don't want to say its profitability per customer because it's it's deeper than that but we're very strategic in terms of who we look at to add the risk that they may or may not bring on the platform and ultimately how they're going to use our services. So it's it is there is more to it than just adding customers for the sake of adding.
Customers.
Mhm.
Ben if I could follow up so you had indicated October November were White Hot and then December activity trailed off quite a bit in terms I know David asked about converting the pipeline, but you know what we're all wondering is is the price of crypto has come down quite a bit and might struggle as rates go up is that impacting the institutions.
And their desire willingness to adopt crypto right and go on the platform.
Yeah.
Yeah I appreciate the question and the quick answer is no not at all I mean.
When when we win.
When we talk about institutional investors.
Are truly the best.
<unk> firms that are out there that are raising capital from Lps and have developed a thesis as it relates to crypto.
And so I think everyone understands that there's going to be volatility in the underlying.
But when you just look at the amount of capital on investment that's going into the space.
We couldnt be more excited about the opportunities that we're seeing and what the pipeline looks like so.
Really that difference between October November and December December trading volumes were down the price was down the basis trade went away. So there were a number of headwinds in December but in terms of the long term thesis for crypto in the long term growth opportunity for silver gate.
We couldnt be more more excited about about that what that looks like.
The next question is from Joseph Guffey from Canaccord. Your line is open.
Hey, guys. Good morning, just start we'd drill down a little on the Sun leverage it looked like.
That that loan book grew pretty nicely sequentially is just wondering if you could provide some more color there relative to what was that a function of.
You're feeling better on the risk management side.
Versus.
What might be the demand outlook, there and then I have a quick follow up.
Yeah.
Yeah, Joe really appreciate that that question.
It is absolutely not any change in our kind of like risk outlook. If you will are feeling more comfortable.
We're just as comfortable today as as we've been all year with with our risk management on the Sen leverage book and it really is more of the as you asked the question, it's really more of the the ongoing and increasing demand from our customers.
For a better capital efficiency for four AV access to U S dollars.
By borrowing against their bitcoin and and and so this is one of the things that that we were really excited about for 2022 is that even though as you pointed out we had very strong sequential growth.
We have.
We have quite a healthy pipeline on the Sen leverage book as well, we haven't been disclosing.
Pipeline on Sen leverage because its a little.
So it would just be difficult.
Some of our borrowers are smaller and they might only borrow $5 million and then on the other side you might see a mining companies such as <unk>.
It was announced at the beginning of the fourth quarter of last year.
When when we made $100 million went on to.
To a mining company and so.
The bottom line is we.
We think this is going to continue to grow in 2022.
And it's it's one of the reasons, we've we've been confident to continue to add capital to support the growth not only on the on the deposit side and the number of customers, but also on the Sen leverage book.
Okay. That's helpful. Thanks, Alan and then just as a follow up just wondering if we could get kind of an update I know you signed a couple of pretty large kind of.
Sure.
Partnership or strategic deals with fidelity digital assets and coinbase.
And that kind of custody side I was wondering.
What's the update there how are those relationships are evolving and how are they contribute into the business. Thanks a lot.
Yeah appreciate that question as well.
'cause we are seeing.
The network effect on the on the custodial side working just as we had hoped.
And we we are we are fully engaged with all of our partners all of our Sen leverage partners and we don't have we don't have a favorite if you will.
You know it really is all about customer.
Choice, allowing our customers to choose.
And in many cases, they've already made the choice.
That they are comfortable holding their bitcoin and custody at at.
At Coinbase did I or at fidelity or at Anchorage are a bit stamping and and so we've got integrations with with all of those folks and and so when are when a prospect comes to us and wants to borrow the one thing. They don't have to do is move their bitcoin because they've lie.
<unk> already got it with one of those partners and and so you know, we we arent disclosing how much we have with each one but but rest assured that that we have outstanding loans.
That are collateralized by bitcoin that is held at each one of those custodians.
The next question is from will Nance from Goldman Sachs will your line is open.
Hey, guys. Good morning, I. Appreciate you taking my questions. Most of my questions. I think have been asked and answered at this point, but I I wanted to go ahead and drill in on the securities portfolio again.
In response to an earlier question.
I think the biggest delta versus expectations. This quarter came from the lower securities yield and on the repositioning of the book that you guys have done I was hoping to understand a little bit better about kind of relative tradeoff between current income in future income and so you.
I think you've talked about roughly a 50 50 mix of kind of fixed and floating rate securities and that Bob correct me, if I'm wrong, there, but maybe just post the repositioning could you give us an update on how much of that book is composed of floating rate securities in short duration T bells, just to give us a sense for how much the yield might benefit as interest rates go up.
Yeah, well I'm going to ask Tony to comment on your question in a little bit more detail, but one of the things that I that I just wanted to double click on when Tony was addressing this question a few minutes ago.
He talked about the fact that.
Most of the securities that we sold were mortgage backed securities.
But yet we are still adding to the muni portfolio and so one of the things that I just wanted to kind of highlight is the fact that you know.
It's not so much that that we've changed our strategy around fixed versus floating but in the context of the fixed portfolio. We are thinking about.
How the different.
Investment portfolio sectors, how they react to rising rates.
And what the potential mark to market on those are.
And so we.
We're focused on earnings we're also focused on capital preservation and I'm thinking.
About the ultimate Mark on the portfolio.
If rates were to rise rapidly.
And so with that though let me turn it over to Tony to ask him to comment a little bit more on the details of your question.
Yeah. Thanks, Alan just yes, and just to I guess add to my previous comment.
As much as.
That we had sold.
Some of the securities.
So the mortgage backed securities we actually added more mortgage backed securities than we sold so so.
Primary buckets of where we did add investment in the quarter.
The.
The largest.
Increase was in mortgage backed securities followed by municipal bonds. So.
Hum.
Had it not bidding for the $1 $1 billion of sales our securities book, what it would have approached $10 billion. So.
Yes.
As Alan said, we look at all the sub sectors, but our philosophy really hasn't changed.
We remain flexible and we think.
We're in a good position heading into Q1.
Clearly as I indicated.
<unk> before in the taxable Securities book.
The duration.
Has been reduced overall and so.
Last quarter I did comment on a 50 50 mix between floating and fixed and it's definitely skewed to more adjustable rate this quarter.
I won't quote a number because that.
That is continually changing.
And it could continue to change.
Pending on what we do so hopefully that provides.
Additional color.
Yeah, that's super helpful. I appreciate it and then I guess the second one I guess, maybe for Ben I think if I think back a couple of quarters ago. When you know crypto prices were down pretty significantly I think you guys actually saw really robust deposit growth and I think you gave some commentary around clients being a little bit more inefficient with how much how much balances.
Keep on this and just wondering if you guys were.
You know towards the end of the quarter and into the into the beginning of the first quarter have you guys seen similar types of trends of people kind of being in more of like a risk off mode and holding more cash than the Sen and can we think about that as being a potential offset if if you we do see lower equip their trading activity drives kind of lower end transfers in that quarter.
Yeah. So.
Without without providing any guidance in terms of what we think deposits are going to do.
We know that.
There's a couple of.
Areas of deposit growth for Us I mean first of all is just the new customers. This year. We added 400 customers. We've got a pipeline of 300 customers and so we know that as we continue to add customers.
We're gonna grow.
But then we do.
Do as the.
As the <unk> grows and Thats been network effect gets gets bigger there's even more venues for our customers to be able to trade with if you will.
And so we are seeing them keep more deposits.
With us more capital with us on a on a per customer basis really kind of across the board.
And we believe that that's because they don't want to they don't want to Miss out on on trading opportunities like we've talked about in the past some of our customers. They don't really care. If the underlying is going up or going down theyre really looking for volume and volatility and and so you know.
And that's one segment, we've got the retail segment, we've got the stable coin segment.
And so we really do have a diverse group of customers that are that are using the fan.
And as we've talked about I mean, we think that deposits are going to continue to grow.
It's not going to be it's not going to be linear as we've as we've said all along.
But we do believe that.
As we add customers and whatnot that that deposits on platform will continue to grow despite market conditions.
The next question is Steve Moss from B Riley Securities Steve. Please go ahead.
Good morning, maybe just following up on the send network pipeline.
Kind of curious here just if you could give color around maybe the mix and the size of customers that you guys see in the 300 plus number.
Yeah, Steve This is al and I will jump back in.
We don't we don't typically disclose the types of customers and the size of that that are in the pipeline.
But I can just tell you generally there.
Is it just kind of.
Go back to a comment that Ben made earlier.
The largest area of growth in demand that we've seen here of late is in the institutional investor side and.
So and just if you think think about the lot of the law of large numbers and the fan.
Fact that they are likely not as many exchanges out there we pretty much have penetrated the crypto currency exchange market not to say that we don't you know that we want to add any but it's it's it's probably more likely that we would see.
<unk> growth in the institutional Investor bucket and then in the other bucket as well.
Okay.
Thanks, Elena and then just in terms of maybe tying out the investment Securities book, a little further or kind of curious if you could give any maybe end of period color around end of period yields for the taxable Securities book.
Yeah, I don't have that level of detail on Tony do you want to do you have any comment on matters. So we just do that on a follow up.
I think we do that in a follow up.
Alright.
Thank you very much guys good quarter.
Thank you Steve.
Yeah.
Final question today is from George Sutton from Craig Hallum. George Please go ahead.
Hi, guys I'll finish up with a big picture question.
<unk> had a very conservatively managed balance sheet, you've raised a lot of capital I'm, just curious what the governors to putting that capital.
To work.
Relatively quickly or in what any accelerants that you see potentially out there that could accelerate the use of that capital.
Yeah, George I appreciate the question.
Haven't had much of a chance to talk about the capital that we raised in the fourth quarter, which which.
You know as as we've touched on briefly.
Was really.
Both in support of our or our growth throughout the year as well as thinking ahead to 2022 and.
As we've talked about stable coin as we've talked about <unk> leverage.
And it's been just touched on we absolutely believe that that our deposits are going to continue to grow.
We've we've just tried.
Tried to be prudent capital managers thinking about you know the fact that that we want to have enough dry powder to take advantage of growth opportunities whether that comes through acquisition whether that comes through organic growth.
The launch of the stable coin initiative that that that we're hoping to be able to bring to market in 2020 to thinking about managing those those reserves.
Because deposits would likely increase.
You know as a result of that initiative.
So we don't have any further guidance that we can give at this point other than to say that.
We believe that we will be able to effectively deploy that capital.
And where.
We feel that we're in very good in a very good spot here with ending the year with such strong capital ratios as we contemplate the growth initiatives for 2022.
I will leave it there thanks guys.
Alright, thank you.
And ice cream.
Operator.
Yeah. Thank you very much I I I was just realizing you said this was going to be the last question. So.
Anyway appreciate everybody's questions appreciate it.
Your support throughout the year, we're incredibly proud of our 2021 results, which are a testament to the continued hard work of the entire silver gate team.
We've built a diverse earnings stream with multiple growth levers and looking ahead to 2022 and beyond we continue to see tremendous opportunity to provide innovative solutions for our digital currency customers. We're looking forward to sharing additional updates on our strategic growth initiatives in the coming quarters and once again. Thank you for for your your time and your support.
Sure.
Have a great day.
Ladies and gentlemen, this concludes today's call. Thank you very much for your attendance you may now disconnect your lines.
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