Q1 2022 Silvergate Capital Corp Earnings Call
They constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
These include remarks about management's future expectations beliefs estimates plans and prospects.
Such statements are subject to a variety of risks uncertainties and other factors, including the COVID-19 pandemic that could cause actual results to differ materially from those indicated or implied by such statements.
Such risks and other factors are set forth in 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.
Thank you Hunter and good morning, everyone.
We started off 2022 on a strong note with first quarter net income available to common shareholders of $24 7 million, an increase of 94% compared to the first quarter of 2021.
This is a testament to the earnings power of our platform and continued progress on our strategic initiatives, which I will discuss further in a moment.
I am, particularly pleased with our first quarter results. When you consider that this was one of the most challenging periods for the broader crypto ecosystem since the beginning of the pandemic.
As we have done over the past few quarters, we continue to work with claim metrics to better understand how activity on the Silverglade exchange network or <unk>, our real time API enabled platform is correlated with a broader crypto industry.
According to their data in the first quarter, both bitcoin and Ethereum dollar trading volumes were down significantly.
Consistent with this data first quarter spend transfer volume of 142 billion declined 35% on a sequential basis and 15% compared to the first quarter of 2021.
Transaction revenue from digital currency customers of $8 $9 million increased year over year by 26%.
<unk> declined 4% sequentially.
As I've said before our growth trajectory won't always be linear.
That said, while sand volume was impacted by broader industry trends in the first quarter.
Remain encouraged by the continued growth we achieved in customers.
Then leverage commitments and average deposits.
The number of digital currency customers increased to 1503 in the first quarter an.
An increase of nearly 400 customers since the same quarter last year.
Our pipeline of potential new digital currency customers remains robust as we continue to benefit from the powerful network effects created by the fed.
Turning to sand leverage our bitcoin collateralized lending product.
Total approved commitments grew 88% to $1 1 billion.
Compared to $571 million at the end of the FERC the fourth quarter.
Last month, we announced the issuance of a $205 million and leveraged loan to macro strategy a subsidiary of micro strategy.
Demonstrating the use case for Sen leverage as a treasury management solution that will allow institutions to utilize their bitcoin to support and grow their business.
Sen leverage is still in the early stages of its evolution.
And we remain confident in our ability to grow this product over the long term, including through new innovative use cases like this one.
Importantly, Sen leverage has continued to perform as designed with zero losses to date and no forced liquidations.
Average deposits from digital currency customers also continued to grow during the first quarter, reaching a record $14 7 billion driven.
Driven by our customers that require the ability to move U S dollars in real time 24 hours a day seven days a week on the <unk>.
This compared to an average of $13 $3 billion during the fourth quarter and $6 $4 billion during the first quarter of 2021.
Now turning to our strategic initiatives.
As I've noted in the past many of our initiatives and product launches are borne out of solving problems for our customers.
We made two exciting announcements this quarter that helped advance our customer first approach.
First I'll touch on our stable coin infrastructure initiatives.
In January we announced that we had acquired select blockchain based payment technology assets from the DRAM growth further.
Further enhancing our existing stable coin infrastructure.
These intellectual property assets include development deployment and operations infrastructure and tools for running a blockchain based payment network designed to facilitate payments for both commerce and cross border Remittance importantly.
Importantly, the assets. We purchased include proprietary software elements that are critical to running a regulatory compliant stable coin network.
We see the potential for stable coins to become a meaningful payment rail for consumers and businesses around the globe.
As an insured depository institution Silverdale is uniquely positioned to leverage this technology under the evolving framework from Washington D C.
We know that our customers have a need for a U S. Dollar back stable coin that is regulated and highly scalable to further enable them to move money without barriers.
And as we announced on our fourth quarter earnings call. We are working to launch a stable coin in 2022.
We view this investment as an important milestone and the acquired assets bring us one step closer to achieving this goal by enhancing our already existing stable clean infrastructure.
Turning to euro cents.
In February we announced the expansion of the sand to enable customers to transfer euros in near real time 24 hours a day seven days a week.
Euro and was built using the same technology as the existing U S dollars and payment rails and enables customers to 10 euro to other silver gate customers with immediate access to funds.
We are excited to solve this need for our customers who can now move euros 24, seven on that then just as they do U S dollars.
Finally, I wanted to briefly touch on the JF Silver Gate Ventures fund.
Our joint investment vehicle with EGF capital focused on early stage startups that we announced during the fourth quarter of 2021.
We're excited to announce the closing our first capital call with total fund capital commitments of $114 million subsequent to the quarter.
By supporting entrepreneurs, who are shaping the future of the digital currency ecosystem, we will stay on the cutting edge of the next generation of products coming to market and in turn continue to deliver more innovative products to our customers.
I'm proud of everything we accomplished in the first quarter and I am excited for what 2022.
I'll now turn it over to Tony to review, our financial results in more detail before we take your questions Tony.
Thank you Alan and good morning, everyone.
On slide five with our key financial results.
Reported first quarter net income available to common shareholders of $24 7 million or.
Were <unk> 79 per diluted common share compared to $10 4 million.
<unk> 66 per diluted share in the fourth quarter and up from $12 $7 million or <unk> 55 per diluted share in the first quarter of 2021.
Revenue of $59 9 million was up 22% compared to the fourth quarter and up 93% compared to the same quarter a year ago, driven by higher net interest income, which I will discuss in more detail later on.
Total assets of $15 8 billion.
Relatively stable to the prior quarter and increased to 104% compared to the first quarter of 2021.
Next on slide six.
Alan mentioned average digital currency deposits were $14 $7 billion in the quarter.
The year over year increase was driven by growth in deposits from digital currency exchanges institutional investors into galactic and other fintech related customers.
As in previous quarters.
Positive from digital currency customers can fluctuate as evidenced by high and low daily total digital currency deposit levels of $16 2 billion and $13 2 billion, respectively. During the quarter.
Similar to previous quarters, our weighted average cost of deposits for the quarter was essentially zero, reflecting our efficient digital currency deposit gathering strategy.
Turning to slide seven our securities portfolio totaled $12 2 billion.
With the yield of 123% for the first quarter up over $3 billion from a balance of $8 $6 billion at the end of the fourth quarter.
With a corresponding yield of one 4%.
Year over year Securities increased $10 5 billion.
We continue to take an active and measured approach to balance sheet management with an objective of maintaining a high quality securities portfolio.
Moving onto the loan portfolio.
As we continue to look for ways to focus on lines of businesses.
With strategic importance, we sold certain commercial real estate multifamily real estate and construction loans of approximately $151 million on a net basis.
After participating a portion of the loans.
This sale was the primary driver of total loans decreasing compared to the prior quarter.
As a result, the allowance for loan losses was $4 4 million.
Down $2 $5 million from the fourth quarter.
As we've said in the past, our real estate lending portfolios or paying down and we are not originating new loans in these categories.
On a year over year basis, total loans were up $55 million or 3% driven by increase in leverage and mortgage warehouse balances partially offset.
The sale of the real estate loans I just mentioned.
Net interest income was $50 $5 million in the first quarter, an increase of $12 3 million.
Compared to the fourth quarter, and $27 5 million compared to the first quarter of 2021.
Driven by higher Securities balances.
Net interest margin was 136 for the first quarter compared to $1. One one for the fourth quarter and $1 33 in the first quarter of last year.
The increase in NIM from the prior quarter was driven by higher securities balances and higher yields on recently purchased securities.
Last month, the federal reserve raised to fed funds interest rate by 25 basis points. We've also observed more pronounced increases further out on the yield curve.
Silver has been and continues to be well positioned for a rising rate environment.
As of March 31, 2020 to approximately 55% of our securities were floating rate.
Additionally, approximately 90% of our loan investments were floating rate.
And a substantial majority of our Sen leverage and mortgage warehouse loans are floating rate.
To give you a sense of our current interest rate sensitivity, assuming a static balance sheet.
Positive 25 basis point interest rate shock net interest income is estimated to increase approximately $23 million.
A month period.
Turning to slide eight.
Noninterest income for the first quarter of 2022 was $9 5 million.
A decrease of $1 6 million or 15% from the prior quarter.
And an increase of $1 4 million or.
Our 17% from the first quarter of 2021.
The decline in noninterest income on a sequential basis was primarily related to a loss on the sale of securities lower other income and a slight decrease.
Seven 4 million or four 4% in deposit related fees.
The year over year increase was a result of growth in fee income from tissue currency customers.
Slide nine shows noninterest expense for the quarter of $28 million.
Up $2 $4 million from the prior quarter and $8 4 million compared to the same quarter of last year.
As I mentioned earlier salaries and employee benefits and communications and data expenses increased driven by continued investments in our strategic growth initiatives.
Contributing to the increased noninterest expense during the quarter.
Additionally, in the first quarter, we had $1 million provision for off balance sheet leverage commitments.
We will continue to make strategic investments over the year to support our growth and initiatives and as a result, we expect full year 2022 operating expenses to be.
In the range of approximately $130 million to $140 million, excluding any intangible amortization.
Finally, as Alan mentioned, we acquired select stable core assets from the PM group earlier this year.
We stated that as part of integrating the acquired assets into silver gets existing technology silver expects to incur approximately $30 million of costs in 2022.
As part of the transaction $8 4 million of transaction related costs were capitalized.
The remaining costs are built into our forecast that I referenced earlier.
Not be breaking them out going forward.
Overall this was a strong first quarter for silver gate and I look forward to continuing our growth during the rest of the beer.
With that I would like to ask the operator to open up the line for any questions operator.
Thank you.
Wonder if you'd like to ask a question today. Please press star followed by one on your telephone keypad now.
Participants to limit themselves to one question and one follow up per person. So we can get through the queue and good time stamp on your telephone keypad to ask a question.
Okay.
Our first question today comes from Dave Rochester from Compass point. Your line. Please go ahead.
Hey, good morning, guys.
I was just hoping to get an update on the stable coin initiative. How close you think you are already getting that approval.
Still gives you confidence youll do that this year and then once you get the approval I think you said you can issue stable quite fairly quickly do you already have your initial customers lined up and ready to launch at this point and then just.
Wondering how quickly you think those deposit flows and fees could start.
Hitting once the stable coins issued.
Yes, I appreciate the question, David and I'll turn it over to Ben and just a second to provide a little bit more detail, but in general we.
We feel like we're right on target.
There's a lot of work to do as.
As you know.
But the work continues.
And.
The one thing I do want to touch on quickly before Ben dived in and a little bit more.
Little bit more detail is as it relates to the deposit inflows in.
We've consistently said that when we do launch we're going to start with a pilot it'll be small and so we're not currently contemplating any significant move in deposits from the stable coin initiative in 2022.
Assuming we get the pilot launch later this year as planned.
That'll be a small controlled pilot with a handful of customers and we'll make sure everything is working well, but with that let me turn it over to Ben to provide a little bit more color.
Sure.
Thanks, Alan Yes, as Alan mentioned, we're excited about the prospect of launching our U S. Dollar back stable coin in 2022, using the DM blockchain.
But don't have any further update on timing.
As of right now.
We're in the process of defining the business model for them. So that we have the proper incentives across the payment network.
But we do think about future revenues in terms of transaction fees and the yield generated by the reserve.
I think thats consistent with what we've said previously and nothing has really changed there.
It is important to note that the characteristics of the DM blockchain related to reliability security and scalability make it ideal for payments and so our focus is really on getting this launched.
This year.
Part of that.
Involves figuring out how to manage the reserves.
In a way that is highly scalable.
And so we are continuing to make progress with our our application with the New York DFS to form a trust company.
In case that ends up being the best path for scaling of the reserves. So overall.
We're on track.
And feel good about about the position that we're in.
I appreciate that and then is that trust company just meant to.
House.
Material deposit growth that you don't feel like you would want to just add to the balance sheet immediately could that be like a reservoir for future deposit growth.
As you get larger as a capital base grows over time I'm just wondering how you think about that.
In relation to <unk>.
Deposit growth going forward.
Yes, it's kind of all of the above Dave.
We as I think you are aware, we started down this path of looking at setting up the separate Trust company a couple of years ago, we put a pause on it at the beginning of the pandemic.
Then with the work that we're doing with the DM groups beginning of last year.
We thought that it made sense for us to to to restart that process.
It is still a bit unclear been started off his comments about talking about the management of the reserves and.
There is still an open question.
Regarding whether the reserves.
The weather the deposits themselves the funds that come in that will be treated as deposits on our balance sheet.
And so to the extent that they are treated as deposits.
And if FDIC insurance applies et cetera.
That that could impact how we think about the reserve as well so.
Just charter is really about optionality.
And we've been pretty consistent in saying that we.
Would like this to be as capital efficient as possible.
And so again the trust charter is really about Optionality. So that we can think about moving some of the deposits off balance sheet.
Should we need to but that.
That will become clear as as we move through the rest of this year.
Our next question comes from Steven Alexopoulos from Jpmorgan. Steven. Please go ahead. Your line is open.
Hi, good morning, everyone.
Good morning.
So prices were down sharply in the first quarter, but you still had strong growth in new digital currency customers I know I've asked this before but it's the volatility crypto prices, having any impact on the pace of institutional adoption and maybe said another way do you think you would have added even more customers.
The prices have trended higher over the past few quarters.
Yes.
That's a fair question I would.
The quick answer is no.
Part of the reason I would answer the question that way Steve is because.
The institutional clients.
The institutions that are coming into this space. It takes quite a bit of work for for institutions to get through all of their own internal.
<unk>.
Everything that they need to do on their end in order to get.
Approval to invest in the digital assets and then setup.
The necessary controls on their end et cetera opening.
[noise] accounted silver gate is one component getting the.
The API integrations with them.
Obviously, an important component and so there are quite a bit of lead time.
I would actually say most of the institutional investors that.
I talk with especially if they're looking at this as a new asset class looking at it with much more of a long term view.
Really look at the at the price pullbacks as opportunities.
So.
I would have.
If it was within their control to move more quickly I would almost answered the question.
The opposite in that when prices are down.
There should be a flood of new entrants because they're like okay now.
Missed it before and now I'm going to buy the dip, but it just doesn't really happen.
That way because of the lead time that's involved.
Got it.
Okay. That's helpful.
And then on Sen leverage have you started providing this product to other banks, yet and maybe what is the appetite there. Thanks.
Yes that is something that that we are in active dialogue.
With with a handful of banks.
And Steve what I think you're referring to is our ability to participate.
Participate these loans out.
In some type of its indication, which will allow us to grow the portfolio larger than what we might be comfortable holding on our balance sheet. So we are not currently participating any loans.
But we are in active dialogue with a handful of banks and I would expect that thats something that youll see later this year as well.
The next question comes from we have announced that Goldman Sachs. Your line is open. Please go ahead.
Hey, guys. Good morning, I appreciate all of the color you guys provided this quarter as it relates to the securities and loan portfolio and interest rate sensitivity and hats off to the team for keeping the portfolio short ahead of this move in rates I know that was a big focus just wanted to gauge your appetite around duration extension. If we were to fast forward a year from now on.
Short term rates, there is something like 150 basis points higher.
At that point.
At what point would you consider locking in some of the benefits of higher short term rates and just given the nature of the deposit base how much of an opportunity do you see to remix towards more fixed rate assets. Once we get through some of these rate increases.
Yes.
Yes, I'm going to turn the call over that question, well Im going to turn it over to Tony to talk a little bit about how we think about managing the balance sheet, but but the short answer is that.
We continue to prioritize liquidity for our customers.
And that that is not rate dependent it is really more of a focus of the fact that our customers are primarily banking with us because of the benefits of the sand and the $24 seven nature.
Of the of the platform that we provide and so that that drives us.
To keep things on the shorter end as you've mentioned.
But clearly we did put some additional cash to work during the quarter and I'll turn it over to Tony to provide a little bit more color.
Yeah.
Yeah, Thanks, Alan and thanks for the question and Youre right. Your observation is absolutely right. We purchased approximately $4 6 billion in securities during the quarter and we didn't.
We didn't change.
Our effective duration on the portfolio relative to year end.
So we did we did stay short as is evidenced.
The ratio of floating rate to fixed rate.
I think.
As we think about things going forward I mean, it remains to be seen I don't want to commit to where we're going to we're going to.
Shift the portfolio I will say when you look at the ratio of or the proportion of of our securities investments.
Stayed pretty consistent.
In terms of the buckets and as Alan said.
We prioritize liquidity so one of the consistent points here is.
65% of portfolio was was USA agency backed securities.
And then a good chunk.
In.
Tax exempt municipal bonds of high quality and and.
Good diversification so.
We will continue to prioritize quality and liquidity.
Going forward and as we've indicated.
We stand to benefit significantly from.
From asset sensitivity.
Got it Super helpful. I appreciate all the color and then just one on the client acquisition I'm wondering if you could talk about the kind of the profile of the incoming client base and maybe some like a cohort perspective, what the deposit relationships are looking like for the new customers that you're onboarding.
You guys saw a nice acceleration in new client Onboarding this quarter, how long does it take to bring over the associated deposits how much in deposits do you generally expect and when you look at kind of growth outlook can.
Can we think about can.
Can we think about some kind of relationship between the increases in customers, yielding an increase in deposits going forward.
Yes.
Yes, well, let me turn it over to Ben to.
To provide some additional color on that question.
Yeah. Thanks for the question well so when we look at our three buckets of customers digital currency exchanges institutional investors and other customers.
<unk> seen the most amount of growth in the institutional investor category.
In terms of number of customers.
It's really difficult to forecast kind of what the deposits look like for that group because they are so market dependent.
Overall in the quarter, we saw deposits from that institutional investor groups being down.
Similar to the way the usage of the sand was down and again that has to do with.
Low low trading volumes low low price volatility and the price and the <unk>.
Underlying market moving down.
We also saw growth in the other customer segments.
In both number of customers and in deposits.
Lot of that has to do with the broader.
Investment in the crypto ecosystem, so that as a reminder, those other customers include <unk>.
Software developers protocol creators.
Minors, and whatnot and so as venture capital money moves into that segment and I think people are familiar with the amount of money that's been raised by different funds and those funds putting that money to work.
That segment continues to continues to grow and.
And we think that that will continue.
This year as more money gets deployed.
The digital currency exchanges are kind of our most consistent.
<unk>.
And there we know that they are dependent on market conditions as well so.
Really difficult to answer your question just given what's going on in the underlying.
But we're excited about the customer growth, we're excited about the pipeline and we think that.
As the as the market matures.
Posits will will continue to grow.
Even though that's that's.
Not necessarily that the metric that were.
But we're most focused on.
The next question comes from Steve Moss from B Riley Securities. Steve. Please go ahead. Your line is open.
Good morning.
Maybe just starting with the euro cent here just wondering if you guys could give any color as to the contribution to activity. This quarter, if it had any meaningful impact here.
Yeah, I'll go ahead and take that.
Candidly, Steve it didn't have any significant impact in the first quarter.
And that is again.
Exactly as designed.
When I say as designed.
I am referring to the way we launched product.
We even with something like Euro cents.
When we turn that on we start with a handful of customers, we're making connections for them.
To other customers on the platform, we're wanting to make sure that it's that it's working well before before the broader rollout. So so that rollout is ongoing.
And this isn't just a really strong example of what we've said consistently over the years, which is our new product launches are very much driven by.
By customer need by by helping our customers solve problems remove friction and this is something that I think we may have even talked about in the past on some of these calls the fact that a couple of years ago, our customers were saying to US Hey, we love this and for the U S dollar.
It would be great. If we could have the sand for for the Euro and then for other foreign currencies as well and so.
This is something that will just further.
Further enhance our relationships with our existing customers and then also provide one more tool for us too.
To grow our customer base internationally.
Okay. That's helpful. And then one question for Tony here.
On the Securities portfolio could you remind me of what the effective duration was.
March 31st of all year, and then second question in terms of the second part is just in terms of the appetite for additional health.
Health and maturity additions to the portfolio how are you thinking about balancing out between PFS and HTM.
Okay.
Yes, sure so our effective duration.
Both at quarter end.
Last year it was.
Just below three.
And in terms of kind of the HTM I mean, we did we did move.
We did move some securities or reclassified some securities to held to maturity.
About $1 billion five securities would move to HTM to be aimed quarter and then we purchased.
T bills, which were designated as held to maturity.
On purchase.
Yes.
The ratio of held to maturity just over 20% I'd say, we're comfortable at that level.
We.
The reclassification has had minimal impact on our liquidity profile.
Yes.
And.
Hopefully.
Hopefully the move in the long end of the yield curve is muted going forward, but having.
Having said that.
The reclassification doesn't really.
<unk>.
The big impact on us so.
We're comfortable with the move we made.
Not sure where we're going to go from here.
The next question is from Joseph Murphy from Canaccord. Your line is open. Please go ahead.
Hey, guys. Good morning, Great results, great to see all the progress on so many fronts, maybe we could just talk about the loan to macro strategy.
Obviously, a little bit different that it's kind of a treasury management.
Our strategy versus.
A.
Our trading strategy by institutions.
It's a pretty big chunk I think relative to some of your other customers over there I was wondering if you drill down a little bit and maybe.
Maybe some of the.
Risk parameters you use here if there was any difference in this loan versus some of the others now a quick follow up.
Yeah, Joe Thanks, Thanks for the question, Yes, we are.
We're very excited about this this new use case.
For our bitcoin collateralized lending and.
When we first launched it a couple of years ago.
In a pilot in January of 2020.
The quote unquote Treasury use case wasn't even on our radar.
Primarily.
Sen leverage as you know was originally designed to facilitate liquidity for traders.
Hence the tight integration with the exchanges and the ability to liquidate $24 seven.
Et cetera.
But as the asset has matured.
Saw the announcements.
In late.
Right at the beginning of the fourth quarter of 2021.
That we had made alone.
To marathon digital for.
Which is a bitcoin mining company.
And then here in the first quarter of this year the loan to macro strategy, which shows two additional use cases.
For for this product and.
Youre, absolutely right its a larger loan to macro strategy.
It's also.
Anyone who has followed.
Micro strategies evolution here over the last couple of years knows that they've they've gone out and they've put a lot of bitcoin on their balance sheet.
They do not want to see that bitcoin liquidated under any circumstance and so.
They are a public company as well so while we typically don't disclose terms.
For individual customers.
As a public company did provide some disclosure around the loan to value et cetera.
And it was a much lower loan to value.
Our starting point of 25%.
Or the other way to say it is as the collateral coverage ratio started at four times.
For a $200 million loan they pledged $800 million worth of bitcoin.
It provides an awful lot of cushion for for the.
The potential volatility in the price of bitcoin.
And then because of that higher.
Coverage ratio.
It's a lower risk loan to us as well and thats reflected in the in the yield.
And so.
Having said all of that we would love to make those kind of loans. So anybody else out there listening to this call who have bitcoin on their balance sheet.
It's a great time to be a bitcoin banker and we'd be happy to entertain more opportunities.
Well I think some of these miners island still have some good hurdles on their balance sheet and they're growing every month, so maybe there'll be some more customers coming your way on that so that's good.
There you go just maybe just one more relative to DM.
It does sound like Theres progress there do you have a feel on regulatory oversight on any customers here like for example, if your pilot with a payment sky.
No.
Electronic payments platform.
It would be using your approved unregulated.
Stable coin, what what do you think the regulators or going to have to get comfortable with with those.
Customers of yours here or is it really just you. Thanks a lot.
Yes, there is.
We'll certainly be thoughtful.
About the customers that we launched the pilot with <unk>.
For the very reasons that that you just highlighted.
Having said that we are already as <unk>.
Everyone on this call knows.
We are already working with with many of the <unk>.
Essentially all of the cryptocurrency exchanges.
And many of them are lifting.
Multiple stable coin trading pairs.
And then we're also banking many of the.
Digital first retail platforms.
And facilitating their ability to buy and sell bitcoin on behalf of their customers and so all of the regulatory compliance requirements that that are in existence for us to interface with a digital platform, who has who is working with consumers.
To facilitate buying and selling of digital assets, if that same regulatory framework that will be applied to the purchase and sale of a stable coin there will absolutely be.
Concerns about consumer protection those were all things that we were working on together with the DM Association at this time last year.
Under the first iteration of our potential issuance of a stable coin.
We're confident that we understand what regulatory compliance requirements are going to be applied we're confident as Ben mentioned in some of his remarks.
At the.
That the platform that the protocol that the assets that we purchased.
Platform that we intend to launch will satisfy all of the consumer compliance as well as broader regulatory compliance.
Rules and regulations that are going to apply to this activity. So.
We're very excited about getting this thing launched later this year.
And we are working feverishly.
Towards that goal.
The next question comes from Michael Perito of <unk>. Please go ahead. Your line is open.
Yeah.
Hey, guys. Good morning, Thanks for taking the questions.
Hey, Mike.
Just two clarification questions one.
I was wondering if you guys could you spend a minute on kind of the deposits and the overall cost of the deposits, which obviously as Tony mentioned are zero today and I believe are expected to be your for the near future, but you've seen some of your we've seen some of your competitors in this space talk about betas in this space that are higher than.
I think the key differences you guys are holding more operational funds versus anything in excess of that but I was wondering if you guys could you spend a minute maybe just breaking that out and just longer term why you guys have such a high degree of confidence that the funds on your balance sheet remains euro would be great. If you guys could spend a minute.
Yeah.
Yes, Mike.
What you're getting at is really.
It really highlights the difference between.
Silver gate and the the ascend platform.
First as any other.
Bank that that might be open for business.
Accepting deposits in this ecosystem.
And the real difference is as we've said is around providing 24, seven 365 days a year access to liquidity.
And just to restate it.
The crypto currency markets.
Trade 24 hours a day seven days a week around the globe, they never sleep and.
The traditional banking rails are only open.
Monday through Friday end to end so.
If you are an institutional investor or an exchange trading. This asset class then you need to have U S dollars or euros or other Fiat currencies on the platform. There is no credit per se. There is no prime brokerage in this.
In this ecosystem, while the ecosystem.
It continues to develop there is still a big gap between.
The way institutions trade every other asset class that they are used to trading versus crypto currencies and that primary difference is the need for $4 or Fiat currency on the platform in order to trade and and the primary way that that ecosystem does.
That is by having an account at silver gate and being connected across our network. It really is a network effect that two sided network of exchanges and institutional investors and then.
That's a long winded wind up Mike to say that therefore.
As interest rates change, we don't really see significant changes in behavior.
We are we are prioritizing liquidity for our customers.
And this is this is understood coming in and then.
With ongoing dialogue, which is.
If a customer has excess deposits on our platform that they don't need for trading and they desire to earn a return on those funds then we actually encourage them to take those funds to other banks that are willing to pay interest in those.
Other banks are doing traditional banking things and they are using those deposits in their lending activities et cetera.
We have a different strategy.
And it is one that our customers are very reliant on our ability to provide that 'twenty seven liquidity and therefore.
We don't we don't see a time when we will pay interest on these deposits.
And we want to be an efficient.
$24, seven and access to capital.
That's perfect. Thank you and then for my follow up.
On capital.
Not necessarily the most relevant ratio for you guys, but obviously the tangible common equity ratio took took a hit this quarter to leverage was down with the average asset is growing but still looks pretty strong and I was wondering if you could just refresh us on where you guys stand on the capital planning process. It would seem like if stable points aren't expected to have an impact you should have enough for the near future here, but.
Would love some thoughts there as well.
Alright.
Yes, Mike I think youre exactly right in that given my earlier comments.
Around the fact that.
We don't expect the stable coin initiative to generate.
Outside deposits.
When when we initially launch.
We don't.
Have a current need for capital having said that.
We maintain active dialogue and we keep our finger on the pulse of what's going on in the capital markets.
So that we can act, if if and when we need to but.
We're pretty comfortable with where our capital ratios sit today.
And even with the with the rise in rates and the.
The hit to <unk>.
We still have very strong capital ratios here.
As we as we head into the second quarter.
The next question comes from George Sutton of Craig Hallum. George. Please go ahead. Your line is open.
Thank you one of the key takeaways coming out of the midpoint conference was the Lightning network and <unk>.
A number of folks building on top of that.
And maybe Ben this is a good question for you. If we look forward a year or so can you just talk about lightning network use cases relative to.
Use case.
Set as you see it.
Yes, George Thanks for the thanks for the question.
I think it's probably no surprise to anyone that were big.
Big Bitcoiners here at Silver Gate, and ultimately believe in the.
The use case for for Bitcoin and so.
We're fans of the Lightning network as well and we certainly see the the application for that.
We do think that it's us.
Slightly different use case than than the U S dollar back stable coin.
The U S dollar back stable coin is obviously stable because it's pegged to the dollar and so as people are making payments whether that be domestically.
As they are buying things from merchants or if it's sending money overseas that where it's a U S dollar friendly territory.
We absolutely think that the U S dollar back stable coin.
Has.
There is a massive opportunity to sort of reshape the way payments exist today.
That said, we absolutely think that bitcoin and the lightning network can will coexist.
And as there is.
Actions that maybe won't exposure more exposure to bitcoin then they went to the U S dollar.
Then making payments over the lightning network using bitcoin.
It's fantastic.
I think what's important to note is that in both scenarios, we think that silver gain is well positioned.
To benefit from that obviously if people are using bitcoin.
Sure.
<unk> payments.
Then that increases its usability and overall its value and sort of the market that exists.
For bitcoin as a as a store value and in addition to payments. So we're excited about about lightening. We're excited about the firms that are innovating around it.
And.
And we see those those two payment rails co existing going forward.
Great perspective, one other question relative to <unk>, you've talked about being encouraged by the outreach you've gotten from Dia members.
There is a lot of discussion that we hear of partners moving in and out can you just give us an updated thought process on the <unk>.
The interest level in the ecosystem as you see it.
Yes.
Let me jump back in.
Ben Let me just jump in quickly with a clarifying statement.
And.
I just wanted to make sure that everybody knows that again, we did not acquire.
<unk>.
Association, nor any of the relationships with the DM Association members I think everybody knows that but when we talk about.
Former DM members potentially being interested and that's where I'd like Ben Ben to provide a little color I just want to be really clear that.
And this is important as as as we work with all of our different constituents and that what we are setting up were absolutely using the technology, we intend to use the technology very similar to the way it was contemplated.
But who we work with weather.
Whether or not they were former <unk> members.
Is really up to us to.
Two to determine as we move forward. So been once you go ahead.
Because that'll sound like I'm throwing cold water on it but it's but it's really more of just the.
The perspective.
As we launch something.
Who we might be launching what so Ben.
Yes, thanks for the clarification Allen So yes, when you look at the former members of the DM Association 26 companies that are there.
Number of those firms were already custom.
Customers of silver gate, even before we started working with <unk> and.
And we have had ongoing dialogue with a number a number of the.
Former members of the association that are.
They're not subrogate customers.
Said, we've been really encouraged by the conversations that we've had with our existing.
Column Crypto native customers. These are firms, whether they are exchanges or in the other category gaming firms and social impact firms. These are folks that are crypto native and.
And just kind of get the usage of stable coin for payments and moving value around the globe.
And so it's very possible that when we launch we end up launching with.
Sort of an existing silver need customer thats been a customer for a while and kind of just understands the space.
So overall, having very positive conversations with folks.
Across the <unk>.
Crypto and payments ecosystem, and just really encouraged by that.
Their interest in participating in this and all of that said that doesn't change I think what we've said before around this being a pilot.
Starting relatively small and growing it from from there that's still absolutely the plan.
We will be strategic about the partners that we ultimately end up launching with.
Thanks for the question.
Today's question comes from David <unk> from Wedbush Securities. David Your line is it can please go ahead.
Hi, Thanks for taking the questions and we can pick up right, where we left off with the stable quaint initiative I found it intriguing your comments during the quarter that you could white label product has this strategy of white labeling it increased interest from consumer brands that may want to partner with silver gate rather.
Then you going with a self branded stable coin and as white labeling this product the game changer in the stable coin in this industry.
Yeah.
Ben do you want to take that question.
Yeah, Yeah happy to do it. Thanks for the question, Dave I think that in the minds of let's just say platforms that are thinking about issuing stable coins.
<unk> is still kind of first and foremost in their in their minds and so.
Sure.
The technology of obviously important because they want to make sure that it's reliable and secure and scalable and we think that the DM blockchain all of those things.
But ultimately I think there is still is an open question around regulation.
And a lot of these platforms.
Feel like they need to sort of answer that that question sort of first as it relates to white labeling it.
What we've said is we're certainly open to.
Two that we would we would be we would love to continue to have conversations with platforms that are thinking about doing that.
No.
No preconceived ideas of calling it a silver gate dollar or or anything like that and we're actually going through a naming branding exercise at the moment.
So I think we're probably in the very early stages.
Those conversations as you.
As you described it and then.
And we'll we'll figure it out sort of as we go.
But excited about the underlying technology and what we think that we can do there and certainly the potential of white labeling our stable coin.
It's certainly a possibility given the technology that we acquired in the payments platform that we acquired.
Very helpful. Thanks for that and then follow up on the macro strategy loan of $205 million I imagine the appetite from macro strategy for ascend leverage product could be much higher given they have several billion dollars of bitcoin on the balance sheet. The question is is the 200.
$5 million, a test case before expanding the relationship further how could this relationship evolve and grow over time.
Yes, David it's a it's a fair question.
We have not had any conversations to date about expanding the.
The relationship further.
But never say never and that would be as it relates to your particular question on that customer as well as any other customer that that might hold a lot of bitcoin on their balance sheet.
As we move through time.
I've.
Consistently said that I believe this is some of the best lending.
That we've ever done at silver gate.
And it's because of the combination of all of the things that we've that we've talked about as it relates to our ability to have control of the asset.
Control of the collateral while we have dollars outstanding against it.
Our ability to liquidate that collateral very quickly if we need to in a market that trades 24 hours a day seven days a week so.
We could not be more excited about this this new use case.
For for lending against Bitcoin that then.
That business is that corporations are holding.
As part of their treasury.
We have no further questions. So I'll hand back to the management team for any closing remarks.
Alright, Thank you Adam well.
I just want to reiterate how proud we are of the strong results this quarter.
Which were made possible by our customers and the hard work of everyone at Silver Gate, we just have a great team and I want to give a shout out to the team here as we're wrapping up the call as we move through the rest of 2022, we're excited to continue executing against our multiple growth levers.
And continuing to provide innovative solutions for our customers and we look forward to sharing additional updates with you in the coming quarters. Thanks, everybody for your time and hope you have a great day.
This concludes today's call. Thank you very much for you.